Tax Newsletter – August 2023

IRS Spring Regulatory Agenda Includes Three Final and Several Proposed Regulations Expected in December

Issue 1: IRS Spring Regulatory Agenda Includes Three Final and Several Proposed Regulations Expected in December

The Office of Information and Regulatory Affairs (OIRA) has released the Spring 2023 Regulatory Agenda . The Treasury Department has moved the release dates to December 2023 for three expected final regulations and listed over ten proposed regulations coming soon of interest to payroll practitioners.

Final Rules Expected

De Minimis Error Exception to Penalties for Failure to Correct Information Returns or Furnish Correct Payee Statements (RIN: 1545-BN59).
Recapture of COVID-19 Tax Credits (RIN: 1545-BQ08).
Application of the Employer Shared Responsibility & Certain Nondiscrimination Rules to HRAs and Other Account-Based Group Health Plans Integrated with Individual Health Insurance Coverage or Medicare (RIN: 1545-BP17).

Proposed Regulations Scheduled

Client Letter: Know the Signs of an Employee Retention Credit Scam-For Your Information No Infringement Intended

Checkpoint has produced a Client Letter (Knowing the Signs of an Employee Retention Credit (ERC) Scam) to provide guidance regarding how to identify ERC schemes and what to do if a business has fallen prey to an ERC mill. The IRS recently identified ERC scams as the #1 worst tax scam of the 2023 Dirty Dozen List and the IRS is urging tax practitioners to communicate with clients regarding this issue.

Dear Client,

If it sounds too good to be true, it probably is. The IRS has sounded the alarm repeatedly regarding a scam involving the Employee Retention Credit (ERC). Third parties have been aggressively promoting that businesses may be eligible for the ERC when they are not.

The ERC is a refundable tax credit that was introduced during the COVID-19 pandemic to provide an incentive to employers to keep employees on the payroll during a government shutdown or significant decline in gross receipts. The ERC was available to eligible employers for qualified wages paid after March 12, 2020, and before October 1, 2021 (with an exception for recovery start-up businesses through December 31, 2021).

The eligibility requirements, applicable time periods, and dollar limitations changed several times due to the passage of various federal legislation thereby claiming the ERC is far more complex than these ERC schemes make out.

Perhaps you have heard advertisements, phone calls or text messages claiming your business is eligible for the ERC and claim the application process is "easy." These third parties will then charge large upfront fees or charge a fee based on a percentage of the refund amount the ERC generated. However, these ERC scams lie about eligibility requirements and your business will not only need to return the refund and amend employment tax returns but may be subject to penalties and interest.

If you would like to discuss the ERC, please reach out and we can work together to determine if you truly qualify for the credit. If you have claimed the ERC through a third party, please contact us so that we can help you resolve any possible underpayment or erroneous refund that occurred.

Sincerely,

Learn the Warning Signs of Employee Retention Credit Scams

Businesses and tax-exempt organizations should watch out for telltale signs of misleading claims involving the Employee Retention Credit. Scammers and unscrupulous promoters continue to run aggressive broadcast advertising, direct mail solicitations and online promotions for the credit. Many of these ads wildly misrepresent and exaggerate who can qualify for the ERC, which is sometimes also called ERTC or the Employee Retention Tax Credit.

Anyone who improperly claims the ERC will have to pay it back, possibly with penalties and interest. The IRS does not want that to happen. Employers should know what the credit is and who qualifies and be on the lookout for the warning signs of a scam. And they should rely on the advice of a trusted tax professional, not aggressive marketing or unsolicited proposals.

About the ERC
The ERC is a refundable COVID-era tax credit designed for employers that kept paying employees while shut down because of a COVID-19 related government order or that had a requisite decline in gross receipts during the eligibility periods. The credit can be claimed only by eligible businesses and tax-exempt organizations that had employees during specific time periods.

Anyone considering claiming the ERC should carefully review the specific eligibility requirements at IRS.gov/erc.

Eligible employers who need help claiming the credit should work with a trusted tax professional.

Warning signs of an ERC scam include:

Unsolicited calls or advertisements mentioning an “easy application process.”
Statements that the promoter or company can determine ERC eligibility within minutes or before any discussion of the employer’s tax situation. The Employee Retention Credit is a complex credit that requires careful review before applying.
Large upfront fees to claim the credit.
Fees based on a percentage of the refund amount of ERC claimed.
Promoters telling businesses to claim the ERC because they have nothing to lose. Those who improperly receive the credit could have to repay it – along with substantial interest and penalties.
Promoters telling businesses to ignore the advice of their trusted tax professional.

These promoters may lie about eligibility requirements. In addition, anyone using these promoter’s services could be at risk of someone trying to steal their identity or use their information to take a cut of the improperly claimed credit.

How the promoters lure victims
The IRS continues to see a variety of ways that promoters can lure businesses, non-profit groups and others into applying for the credit.

Aggressive marketing. ERC ads are appearing almost everywhere, including radio, television and online as well as phone calls and text messages.

Direct mailing. Some ERC promoters are sending letters to taxpayers from non-existent groups like the “Department of Employee Retention Credit.” Scammers will create these letters to look like official IRS correspondence or an official government mailing with language urging immediate action.

Leaving out key details. Third-party promoters of the ERC often do not accurately explain eligibility requirements or how to calculate the credit. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances. In addition, many promoters don’t tell employers that they can’t claim the ERC on wages that they reported as payroll costs if they received Paycheck Protection Program loan forgiveness.

IRS Commissioner Signals New Phase of Employee Retention Credit Work; with Backlog Eliminated, Additional Procedures Will be Put in Place to Deal with Growing Fraud Risk

With the Internal Revenue Service making substantial progress in the ongoing effort related to the Employee Retention Credit claims, Commissioner Danny Werfel said the agency has entered a new phase of increasing scrutiny on dubious submissions while renewing consumer warnings against aggressive marketing.

Speaking Tuesday at a special roundtable session of tax professionals in Atlanta, Werfel noted the IRS has shifted efforts after successfully clearing the backlog of valid Employee Retention Credits (ERC) claims. Now, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.

Werfel told a group of tax professionals dealing with fall-out from aggressive ERC claims that the IRS has increased audit and criminal investigation work on these claims, both on the promoters as well as those businesses filing dubious claims.

The Employee Retention Credit, also sometimes called the Employee Retention Tax Credit or ERTC, is a tax credit enacted to help businesses during the pandemic that was subsequently amended three times by Congress. Many businesses legitimately apply for the credit, but aggressive marketing has overshadowed the program. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and Dec. 31, 2021.

Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.

“The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit,” Werfel said. “A terrible scenario is unfolding that hurts everyone involved -- except the promoters.”

The IRS continues to urge businesses, tax-exempt organizations and others considering applying for this credit to carefully review the official requirements for this limited program before applying. In the meantime, the IRS continues to intensify compliance activities involving ERC claims.

With more than 2.5 million claims coming in since the program was enacted, IRS claims processing slowed due to the complexity of the amended returns. The IRS has made substantial progress on these claims this year, with 99 % of claims approximately three months old as of mid-July.

The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

To help tax professionals and others, the IRS continues to provide additional legal clarity around ERC rules. On July 20, the IRS issued a legal advice memorandum applying the statutory requirements to five different scenarios. The memorandum highlighted that employers experiencing supply chain disruptions qualify for ERC only if they had to suspend their business operations because their suppliers were unable to provide critical goods or materials due to a government order that caused the supplier to suspend its operations. Contrary to advice given by unscrupulous preparers, this guidance makes clear that supply chain disruptions do not qualify an employer for the credit unless they are due to a government order.

Warning Signs of Aggressive ERC Marketing
There are important tips that people should be wary of involving the Employee Retention Credit. Warning signs to watch out for include:

Unsolicited calls or advertisements mentioning an “easy application process.”
Statements that the promoter or company can determine ERC eligibility within minutes.
Large upfront fees to claim the credit.
Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
Preparers refusing to sign the ERC return being filed by the business, exposing just the taxpayer claiming the credit to risk.
Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.

How the Promoters Lure Victims
The IRS continues to see a variety of ways that promoters can lure businesses, tax-exempt groups and others into applying for the credit.

Aggressive marketing. This can be seen in countless places, including radio, television and online as well as phone calls and text messages.
Direct mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the "Department of Employee Retention Credit." These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action.
Leaving out key details. Third-party promoters of the ERC often don't accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer's individual circumstances.
For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
Also, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business' federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.
Payroll Protection Program participation. In addition, many of these promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs to obtain Paycheck Protection Program loan forgiveness.

To report ERC abuse, submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers. People should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. NOTE: When I tried to download form it was unavailable, perhaps it has been pulled for revisions, I would try at a later date.

Mail:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405
Fax: 877-477-9135

Additional Information: IRS Updates Employee Retention Credit FAQs

Final Regs Issued Related to Recapture of Certain Excess Employment Tax Credits under COVID-19

Crypto Exchange on the Hook to Comply with IRS Summons, Court Orders

Client Update: Employment Tax Considerations When Hiring Parents or Children

Business owners need to consider things besides family dynamics when hiring their parents or children. One of those things is employment taxes.

Generally, payments made for services rendered to a child by a parent's business or to a parent from a child's business are subject to income tax withholding. But these payments may or may not be subject to employment taxes depending on who is the employer and the age of the child.

Child works for parent. When a child works for a parent's sole proprietorship or a partnership in which each partner is the child's parent:

Payments for the child's services are subject to income tax withholding. But, payments for the services of a child under age 18 are not subject to social security and Medicare taxes, while payments to a child over age 18 are.
Payments for the services of a child under age 21 are not subject to Federal Unemployment Tax (FUTA). Payments to children over 20 are.

In all other circumstances, i.e., the child works for the parent's corporation, nonparental partnership or estate, the employer treats the child's wages like those of any other employee.

Parents working for their children. The tax situation changes when a parent works for their child's sole proprietorship. In this case, payments for the parent's services are subject to income, social security and Medicare tax, but are not subject to FUTA tax.

In other situations, the child's entity treats the parent's wages like those of any other employee.

Parent's performing nonbusiness services. Need childcare? Hire your parent. Payments for services of a parent are not subject to social security and Medicare taxes, unless the payments are for domestic services and each of the following apply:

The child hires their parent to take care of a child or stepchild (grandchild) living in the child's home,
The child cannot care for the grandchild (or step-grandchild) for at least four continuous weeks due to a mental or physical condition, and
The grandchild (or step-grandchild) is under age 18 or requires adult care for at least four continuous weeks due to a mental or physical condition.

Note. This means a child's payments to a parent for childcare that enables the child to work are not subject to social security and Medicare taxes.

Payments for a parent's personal services are not subject to FUTA.

IRS Warns of Scam Refund Mailings

The Latest Information on Filing Amended Returns: By: National Association of Tax Professionals

IRS Anticipates E-Filing for Amended Employment Tax Returns in 2024

IRS Releases Updated Publication on Establishing Reasonable Cause for Missing and Incorrect Taxpayer Identification Numbers

Issue 11: IRS Releases Updated Publication on Establishing Reasonable Cause for Missing and Incorrect Taxpayer Identification Numbers

The IRS has updated IRS Publication 1586 (Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs).

The objectives of the publication are to:

(1) provide general information needed to avoid penalties for information return documents that are filed with missing or incorrect taxpayer identification numbers (TINs);

(2) describe the actions that must be taken or should have been taken to solicit (request) a TIN; and

(3) explain the requirements for establishing reasonable cause.

Reasonable cause. To support that the failure to include a correct TIN was due to reasonable cause and not willful neglect, filers must establish that they "acted in a responsible manner" both before and after the failure occurred and that: (a) there were significant mitigating factors (for example, an established history of filing information returns with correct TINs), or (b) the failure was due to events beyond the filer's control (for example, actions of the payee or any other person).

What's new? The penalty amounts in the publication have been updated to reflect annual inflation adjustments. Penalties may be assessed for information returns that are:

filed with a missing/incorrect TIN (or other incorrect information),
filed late,
filed on paper when electronic filing is required (incorrect media), (iv) filed in an incorrect format, or
any combination of the above.

The publication notes that final regulations were promulgated providing an automatic extension for minimum essential coverage providers to furnish individual statements about such coverage and also provide an alternate method for furnishing those statements when the individual shared responsibility payment is zero. Rules relating to reporting by applicable large employers on health insurance coverage offered under employer-sponsored plans, was effective March 8, 2023.

TIGTA Publishes Semiannual Report to Congress

Minnesota Announces Process for One-Time Tax Rebates

The Minnesota Department of Revenue has announced the process to send 2.4 million one-time tax rebate payments to Minnesotans. This rebate was part of the historic 2023 One Minnesota Budget, signed into law by Governor Tim Walz on May 24, 2023. (News release, Minn. Dept. Rev., 07/10/2023.)

Rebate amount. Under the 2023 One Minnesota Budget, the rebate is equal to $520 for a married couple filing a joint return and $260 for a single filer, head of household, or married taxpayer filing a separate return.

Eligibility for rebate. A taxpayer is eligible for the rebate if the taxpayer meets all of the following requirements:

The taxpayer was a Minnesota resident for part or all of 2021.
The taxpayer filed one of the following returns by December 31, 2022: a 2021 Form M1 (Minnesota Individual Income Tax) or a 2021 Form M1PR (Homestead Credit Refund (for Homeowners) and Renter’s Property Tax Refund).
The taxpayer's 2021 adjusted gross income (Line 1 of Form M1 or Form M1PR) was: $150,000 or less for married joint filers or $75,000 or less for all other filers and
The taxpayer was not claimed as a dependent on someone else's 2021 Minnesota income tax return.
Taxpayers who died before January 1, 2023, are not eligible for the rebate.

No application needed. Taxpayers will not apply for this rebate payment. The Department will use tax year 2021 individual income tax or property tax refund returns to determine eligibility and distribute these tax rebate payments in the early fall. Eligible recipients who have not changed their address or banking information from what was on their 2021 income tax or property tax refund returns do not need to take any action.

For such taxpayers, the Department will deposit the refund to the recipient's bank account or mail a check to the address on the recipient's 2021 return.

Taxpayers who are eligible for the rebate and need to update their address or bank information should visit a new online portal at taxrebate.mn.gov to update that information before 5:00 pm CST on Friday, July 28, 2023.

Taxpayers who exceeded the income limits or who did not file a 2021 do not qualify for this tax refund payment.

Rebate payments. Eligible recipients of the one-time tax rebate can expect to get their rebate payment in the early fall.

Post-Release Changes to Forms W-2 and W-2c Highlight E-Filing Requirements

Werfel Announces Upcoming Expansions to In-person, Online Services – IR 2023-126 and IR 2023-127

Three months following the conclusion of this year's tax filing season, the IRS provided an update on how it has been, and plans to, implement funding from the Inflation Reduction Act (PL 117-169) to expand taxpayer assistance and online capabilities.

During that time, Taxpayer Assistance Centers (TACs) were either shut down or understaffed, leading to "record low levels of service" underscored by paltry call center phone response rates and staggering paper return backlogs.

Among new announcements made during the call was a "special series of events" called Community Assistance Visits, which will function as temporary TACs in select areas of the country with underserved communities of considerable distance from the nearest permanent TAC location. The first Community Assistance Visit was held in Paris, Texas, "more than 90 miles from the closest IRS office," according to Werfel.

Seven other locations have already been picked for future visits: Alpena, Michigan; Hastings, Nebraska; Twin Falls, Idaho; Juneau, Alaska; Lihue, Hawaii; Baker City, Oregon; and Gallup, New Mexico. Werfel also said that since the enactment of the inflation bill, the IRS has opened 35 permanent TACs since last August, nine of which were established in the past three months. He said the IRS' goal is "meeting taxpayers where they are."

"In the next five years, taxpayers will be able to securely file all documents and respond to all notices online, as well as securely access and download their data and account history," said Werfel. "This will simplify and streamline the tax process for millions of taxpayers."

By the end of fiscal 2023, taxpayers will be able to validate bank accounts in their online individual IRS accounts. Secure messaging, live chat, and a virtual assistant are other features coming to individual accounts.

For professional accounts, also by the end of fiscal 2023 the IRS is implementing account authorization management and payment viewing. Live chat and two-way messaging is coming sometime in fiscal 2024. Finally, "the IRS is launching the business online account and enabling businesses to view outstanding balances, make payments online, and conduct a business tax check," Werfel said. "Business Online Account will initially be available for sole proprietors by the end of fiscal year 2023."

Other projects are in the works for the next tax filing season, including "homepage updates, filing fees and content updates, and more intuitive global site navigation," according to Werfel. Further, in tax season 2024, third-party transmitters and software developers will be able to bulk transmit "hundreds of thousands" of Forms 1099 to the IRS Information Return Intake System, or IRIS, which was first rolled out this January.

What this edition covers