Tax Newsletter - September 2022

Issue 1: COVID tax relief: IRS provides broad-based penalty relief for certain 2019 and 2020 returns due to the pandemic; $1.2 billion in penalties being refunded to 1.6 million taxpayers

To help struggling taxpayers affected by the COVID-19 pandemic, the Internal Revenue Service issued Notice 2022-36,which provides penalty relief to most people and businesses who file certain 2019 or 2020 returns late.

The IRS is also taking an additional step to help those who paid these penalties already. Nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in refunds or credits. Many of these payments will be completed by the end of September.

Besides providing relief to both individuals and businesses impacted by the pandemic, this step is designed to allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.

The relief applies to the failure to file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to forms in both the Form 1040 and 1120 series, as well as others listed in Notice 2022-36. 

To qualify for this relief, any eligible income tax return must be filed on or before Sept. 30, 2022.

In addition, the IRS is providing penalty relief to banks, employers and other businesses required to file various information returns, such as those in the 1099 series. To qualify for relief, the notice states that eligible 2019 returns must have been filed by Aug. 1, 2020, and eligible 2020 returns must have been filed by Aug. 1, 2021.

Because both of these deadlines fell on a weekend, a 2019 return will still be considered timely for purposes of relief provided under the notice if it was filed by Aug. 3, 2020, and a 2020 return will be considered timely for purposes of relief provided under the notice if it was filed by Aug. 2, 2021. The notice provides details on the information returns that are eligible for relief.

The notice also provides details on relief for filers of various international information returns, such as those reporting transactions with foreign trusts, receipt of foreign gifts, and ownership interests in foreign corporations. To qualify for this relief, any eligible tax return must be filed on or before Sept. 30, 2022.

Relief is automatic; most of $1.2 billion in refunds delivered to eligible taxpayers by next month

Penalty relief is automatic. This means that eligible taxpayers need not apply for it. If already assessed, penalties will be abated. If already paid, the taxpayer will receive a credit or refund.

As a result, nearly 1.6 million taxpayers who already paid the penalty are receiving refunds totaling more than $1.2 billion. Most eligible taxpayers will receive their refunds by the end of September.

Penalty relief is not available in some situations, such as where a fraudulent return was filed, where the penalties are part of an accepted offer in compromise or a closing agreement, or where the penalties were finally determined by a court. For details, see Notice 2022-36, available on IRS.gov.

This relief is limited to the penalties that the notice specifically states are eligible for relief. Other penalties, such as the failure to pay penalty, are not eligible. But for these ineligible penalties, taxpayers may use existing penalty relief procedures, such as applying for relief under the reasonable cause criteria or the First Time Abate program.

Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service, has its origin in what was known as the Horse Act of 1884.

• Individuals were claiming losses from the Civil War.
• Representatives were inflating claims, to more than the total value of horses lost in the war.
• Congress authorized Treasury to regulate those representatives.
• Treasury agents were given guidance in this new role in the form of circulars, which in 1921 were consolidated into one document, Circular 230.

The document includes the rules, regulations, provisions, and procedures governing the ethical conduct and discipline of those who practice before the IRS.

Circular 230 was last revised in 2014, and during the past eight years many changes in tax law and the tax profession has occurred.

The IRS Office of Professional Responsibility (OPR) is charged with overseeing and enforcing the elements of Circular 230. OPR is responsible for interpreting and applying the regulations in Circular 230 governing practice before the IRS. OPR is solely responsible for overseeing practitioner conduct and discipline and is independent from other IRS functions.

In November 2020, Treasury's 2020-2021 priority guidance plan included updating Circular 230. The director of OPR, Sharyn Fisk, asked for comments from the professional community regarding suggested changes to Circular 230. This was an opportunity for practitioners and the organizations they are involved with to participate in facilitating the ongoing applicability and effectiveness of Circular 230.

Some of the suggestions provided by the AICPA and others included:

• Scope of OPR's authority: In 2014, the rulings in Loving, 742 F.3d 1013 (D.C. Cir. 2014), and Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014), determined that Treasury did not have the authority to apply Circular 230 to tax return preparation. The result is that several sections need to be updated or modified to be consistent with this finding. In addition, Treasury should continue to evaluate federally authorized tax practitioners' tax preparation and planning when determining their suitability to practice before the IRS.
• Section 10.20, Information to Be Furnished: The digital age has increased the volume of scanned and electronic documents. This section should be updated to address practitioners' conduct regarding documents they receive that are the property of their client. While documents received in tax compliance and tax consulting engagements are generally not subject to privilege from disclosure, the comment recommends considering that practitioners would not have the authority to provide those documents to the IRS without the taxpayer's permission unless they are legally compelled to do so.
• Section 10.21, Knowledge of Client's Omission: The AICPA recommends Circular 230 clarify a practitioner's duty to a former client regarding subsequent events or changes in laws after termination of the client engagement.
• Section 10.22, Diligence as to Accuracy: The recommendation is to make Sections 10.22, Diligence as to Accuracy; 10.34, Standards with Respect to Tax Returns and Documents, Affidavits and Other Papers; and 10.37, Requirements for Written Advice, mutually consistent regarding reliance on third parties. In many situations, the third party is independent and therefore beyond the reach of the practitioner's supervision and training.
• Section 10.28, Return of Client's Records: The letter recommends updating this section to reflect electronic filing, versus paper filing, of tax documents. Additionally, the circular should better define client records and distinguish them from practitioner workpapers and specify a time limit to comply after receiving a request to return client records.
• Section 10.29, Conflicting Interests: The letter recommends providing a de minimis exemption for owners of less than 5% or 10% of a passthrough entity from being considered an adverse party in a conflict of interest. The increasing popularity of using tiered passthrough entities as investment structures makes identification and resolution of conflicts too difficult in such instances.in addition, a recommendation is to limit the lookback period used to determine who is a client affected by a conflict.
• Sections 10.50, Sanctions, and 10.51, Incompetence and Disreputable Conduct: The recommendation is to evaluate Sections 10.50 and 10.51 for consistency of terminology and application and to clarify when a monetary penalty applies.
• Additionally, the AICPA recommends addressing how the decision in Sexton v. Hawkins, 2:13-cv-00893-RFB-VCF (D. Nev. 3/17/17), affects practitioner sanctions.
• Section 10.64, Answer; Default: The recommendation is to update this section to include electronic signatures.
• Circular 230 does not currently directly address confidentiality, privacy, data protection, or record retention. It should include broad general requirements for ethical conduct in these areas.
• Another recommendation is to include frequently asked questions to broadly address ethical conduct.

The Security Summit partners unveiled a special new sample security plan designed to help tax professionals, especially those with smaller practices, protect their data and information.

The special plan, called a Written Information Security Plan or WISP, is outlined in a 29-page document that's been worked on by members of the Security Summit, including tax professionals, software and industry partners, representatives from state tax groups and the IRS.

Federal law requires all professional tax preparers to create and implement a data security plan. The Security Summit group – a public-private partnership between the IRS, states and the nation's tax industry – has noticed that some tax professionals continue to struggle with developing a written security plan.

In response to this need, the Summit – led by the Tax Professionals Working Group – has spent months developing a special sample document that allows tax professionals to quickly set their focus in developing their own written security plans.

There are many aspects to running a successful business in the tax preparation industry, including reviewing tax law changes, learning software updates and managing and training staff. One often overlooked but critical component is creating a WISP.

Security issues for a tax professional can be daunting. The Summit team worked to make this document as easy to use as possible, including special sections to help tax professionals get to the information they need.

A security plan should be appropriate to the company's size, scope of activities, complexity and the sensitivity of the customer data it handles. There is no one-size-fits-all WISP. For example, a sole practitioner can use a more abbreviated and simplified plan than a 10-partner accounting firm, which is reflected in the new sample WISP from the Security Summit group.

Once completed, tax professionals should keep their WISP in a format that others can easily read, such as PDF or Word. Making the WISP available to employees for training purposes is encouraged. Storing a copy offsite or in the cloud is a recommended best practice in the event of a natural disaster.

President Biden, Vice President Harris, and the U.S. Department of Education have announced a three-part plan to help working and middle-class federal student loan borrowers’ transition back to regular payment as pandemic-related support expires. This plan includes loan forgiveness of up to $20,000. To be notified when the process has officially opened, sign up at the Department of Education subscription page. You'll have until Dec. 31, 2023 to apply.

Part 1. Final extension of the student loan repayment pauses

Due to the economic challenges created by the pandemic, the Biden-Harris Administration has extended the student loan repayment pause a number of times. Because of this, no one with a federally held loan has had to pay a single dollar in loan payments since President Biden took office.

To ensure a smooth transition to repayment and prevent unnecessary defaults, the Biden-Harris Administration will extend the pause a final time through December 31, 2022, with payments resuming in January 2023.

Frequently Asked Questions:

Do I need to do anything to extend my student loan pause through the end of the year?

• No. The extended pause will occur automatically.

Part 2. Providing targeted debt relief to low- and middle-income families

To smooth the transition back to repayment and help borrowers at highest risk of delinquencies or default once payments resume, the U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households.

In addition, borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. This is because of time-limited changes that waive certain eligibility criteria in the PSLF program. These temporary changes expire on October 31, 2022. For more information on eligibility and requirements, go to PSLF.gov.

Frequently Asked Questions:

How do I know if I am eligible for debt cancellation?

• To be eligible, your annual income must have fallen below $125,000 (for individuals) or $250,000 (for married couples or heads of households)
• If you received a Pell Grant in college and meet the income threshold, you will be eligible for up to $20,000 in debt cancellation.
• If you did not receive a Pell Grant in college and meet the income threshold, you will be eligible for up to $10,000 in debt cancellation.

What does the “up to” in “up to $20,000” or “up to $10,000” mean?

• Your relief is capped at the amount of your outstanding debt.
• For example: If you are eligible for $20,000 in debt relief, but have a balance of $15,000 remaining, you will only receive $15,000 in relief.

What do I need to do in order to receive loan forgiveness?

• Nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the U.S. Department of Education.
• If the U.S. Department of Education doesn't have your income data, the Administration will launch a simple application which will be available by early October.
• If you would like to be notified when the application is open, please sign up at the Department of Education subscription page.
• Once a borrower completes the application, they can expect relief within 4-6 weeks.
• We encourage everyone who is eligible to file the application, but there are 8 million people for whom we have data and who will get the relief automatically.
• Borrowers are advised to apply before November 15^th in order to receive relief before the payment pause expires on December 31, 2022.
• The Department of Education will continue to process applications as they are received, even after the pause expires on December 31, 2022.

What is the Public Service Loan Forgiveness Program?

• The Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on your federal student loans after 120 payments working full-time for federal, state, Tribal, or local government; military; or a qualifying non-profit.
• Temporary changes, ending on Oct. 31, 2022, provide flexibility that makes it easier than ever to receive forgiveness by allowing borrowers to receive credit for past periods of repayment that would otherwise not qualify for PSLF.
• Enrollments on or after Nov. 1, 2022 will not be eligible for this treatment. We encourage borrowers to sign up today. Visit PSLF.gov to learn more and apply.

Part 3. Make the student loan system more manageable for current and future borrowers

Income-based repayment plans have long existed within the U.S. Department of Education. However, the Biden-Harris Administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.

The rule would:

• Require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans. This is down from the 10% available under the most recent income-driven repayment plan.
• Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level - about the annual equivalent of a $15 minimum wage for a single borrower - will have to make a monthly payment.
• Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
• Cover the borrower's unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower's loan balance will grow as long as they make their monthly payments - even when that monthly payment is $0 because their income is low.

The Biden-Harris Administration is working to quickly implement improvements to student loans. Check back to this page for updates on progress. If you'd like to be the first to know, sign up for email updates from the U.S. Department of Education.

Issue 13: Applicable Federal Rates for September 2022, Rev. Rul. 2022-17

REV. RUL. 2022-17 TABLE 5

Rate Under Section 7520 for September 2022 Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 3.60%