IRS Expands Voice Bot Options for Faster Service

If you’ve tried to call the IRS, you know that “fast service” is not what you are likely to experience. News articles and feeds are full of nightmare anecdotes of being on hold with the IRS, often being cut off before getting through to a real person. Even the Taxpayer Advocate doesn’t have much good to say about IRS phone response rates. They recently reported that only one out of ten calls make it to an agent.

The IRS is under pressure from you and the Taxpayer Advocate to do something about these abysmal response rates. Increased staffing isn’t a viable option, given the tight U.S. labor market and the average age of IRS employees – forty-five percent of IRS workers are within a few years of retirement. So, they are expanding the use of technology, including voice bot options. 

The IRS started using voice bots on many of its toll-free lines in January, enabling taxpayers with simple payment or notice questions to get what they need quickly and avoid waiting. Last week, the Internal Revenue Service announced expanded voice bot options to help eligible taxpayers easily set up or modify a payment plan while avoiding a long wait on hold. 

Voice bots run on software powered by artificial intelligence, which enables a caller to navigate an interactive voice response. Eligible taxpayers who call the Automated Collection System (ACS) and Accounts Management toll-free lines can authenticate or verify their identities through a personal identification number (PIN) creation process. Setting up a PIN is easy using your most recent IRS bill and some basic personal information to complete the process.

Additional voice bot service enhancements will be offered in 2022 to allow authenticated taxpayers with established or newly created PINs to get account and return transcripts, payment histories, and current balances owed. Voice bots can help people who call the Economic Impact Payment (EIP) toll-free line with answers to frequently asked questions. The IRS also added voice bots for the Advance Child Tax Credit toll-free line in February to provide similar assistance to callers who need help reconciling the credits on their 2021 tax return.

Want answers from the IRS with less wait time? Check out more details about your eligibility for IRS expanded voice bot options to avoid long wait times on hold. Live IRS agents are terrifically helpful and nice, but there are fewer of them to serve taxpayers. That makes a voice bot sound like a great option.

IRS Adjusts 2022 Standard Mileage Rates

Gas prices have spiked dramatically since late in 2021, when the IRS announced the standard mileage rates for 2022. The standard rate per mile is determined each year by the IRS based on data about the cost of operating and maintaining a vehicle. Businesses depend on the IRS mileage rate guidelines for deducting vehicle expenses and for reimbursing employees for their personal vehicle use. Individuals may also use the IRS rates to calculate the deductible portion of using their vehicle for medical or moving transportation purposes.

The IRS follows the news just like you do. So, in response to the jump in gas prices, the IRS decided to increase the 2022 standard mileage rates mid-year. Starting July 1, the adjusted 2022 standard mileage rates are:

  • 62.5 cents per mile driven for business use, up 4 cents from the January to June 2022 rate
  • 22 cents per mile driven for medical or moving purposes, up 4 cents from the January to June 2022 rate

The IRS mileage rate changes are optional. However, it makes no sense to use the lower rates for business expense deductions. Businesses who do not raise the rate for employee reimbursements will probably have some very unhappy workers to contend with. 

The 14 cents per mile rate for using a vehicle for charitable purposes stays the same. The charitable rate is set by statute, so it doesn’t change. Another thing hasn’t changed – whether you deduct the standard rate or actual expenses, you must track your miles driven during the year. Most people base their mileage deduction on the standard rate because it’s easier and often results in a larger deduction amount. 

Using the standard mileage rate can really add up to a substantial tax deduction. Remember that you always have the option of calculating the actual costs of using your vehicle and deducting the higher of the two options. No matter which of the two expense methods you choose, you must track your overall mileage driven during the year, and track the miles by category (e.g., business and personal).

Taking vehicle deductions for business, charitable, or medical purposes involves a lot of tracking, but the effort can be worth it. You can use mileage tracking apps to help. Once you get your tracking system down, you’ll see that those mileage deductions can add up and reduce the bottom line on your taxes. And, starting July 1, 2022, those mileage deductions will add up even more quickly.

IRS “Dirty Dozen” Top Tax Scams for 2022

The IRS works hard every year to communicate new or prevalent illegal schemes perpetrated by scammers against millions of taxpayers. Last week, the IRS announced its “Dirty Dozen” Top Tax Scams for 2022 with a warning about four financial arrangements that tax authorities have found to be abusive. The IRS urges taxpayers to think twice before putting their money into transactions that could be aggressively promoted scams that are on the IRS’ law enforcement radar screen.

The four potential-scam financial arrangements sound legit; many scams do because they are a twisted version of true scenarios. These transactions are complicated and sophisticated, and they are promoted by slick-sounding “financial advisors”. So, how do you identify “Dirty Dozen” scam transactions that the IRS is warning taxpayers about? Here are some clues:

  1. Charitable Remainder Annuity Trust (CRAT) Used to Eliminate Taxable Gain

This transaction transfers appreciated property to a CRAT and taxpayers improperly claim the transfer of the appreciated assets. This action gives those assets a step-up in basis to fair market value as if they had been sold to the trust. The CRAT then sells the property but does not recognize a gain due to the claimed step-up in basis. The CRAT then uses the proceeds to purchase a single premium immediate annuity for which the beneficiary misapplies the tax rules by reporting only a small portion of the annuity income.

  1. Foreign Pension Arrangements Misusing Tax Treaty

U.S. citizens or residents make contributions to certain foreign individual retirement arrangements in a foreign country with a tax treaty to avoid U.S. tax. The individual typically lacks a local connection to the country, and local law allows contributions in a form other than cash or does not limit the amount of contributions. By asserting the foreign arrangement is a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer improperly claims a tax exemption from U.S. income tax.

  1. Puerto Rican and Other Foreign Captive Insurance 

In these transactions, U.S owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner has a financial interest. The U.S.-based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation.

  1. Monetized Installment Sales

This involves the inappropriate use of the installment sale rules by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans. The seller enters into a contract to sell appreciated property for cash and then purports to sell the same property to an intermediary in return for an installment note. The intermediary then “sells” the property and receives the cash purchase price. In a series of related steps, the seller receives an amount equivalent to the sales price in the form of an unsecured loan.

Don’t get caught by one of the IRS “Dirty Dozen”, including transactions that could be aggressively promoted scams. Read about how to identify and avoid the Top Tax Scams for 2022 at https://www.irs.gov/newsroom/irs-warns-taxpayers-of-dirty-dozen-tax-scams-for-2022.

Business Financial Records

More than 500,000 small businesses are born every year, according to the Small Business Administration (SBA). Many of those new businesses have the same questions: How do I keep my business finances straight? When should I start keeping financial records? What tools should I use to manage it all? 

Business owners must get control over and understand their finances and make good financial decisions to sustain their business. On top of that, the IRS expects businesses to keep financial records to substantiate the income and expense information reported on income tax returns. 

Here are three steps to help businesses keep financial records:

  1. Segregate Business and Personal Finances 

Open a separate business account to avoid commingling personal and business funds. Don’t wait – open the account as soon as possible. If you can, do it before incurring any business expenses. Apply for a business credit card to avoid putting business expenses on your personal credit card. Separating personal and business finances provides a transparent view of your business progress.

  1. Track All Financial Activity

Maintain a record of all business income and expenses in real-time, or at least monthly. Expenses should be tracked by category, so you know where your funds are going. The IRS does not specify a particular system or format for business records, only that your records are accurate, complete, and provide enough detail to identify the date, amount, and business purpose. Computer software packages purchased online or in retail stores can be very helpful, easy to use, and require very little knowledge of bookkeeping and accounting.

  1. Plan and Monitor

Even without a formal budget, you need to plan for monthly and annual income and expenses. Having a plan for your finances helps to prioritize your business activities and provides a baseline to monitor your progress using your financial records. Didn’t meet your plan? Don’t see it as a failure; it’s an opportunity to assess and adjust your activities.

Every business is different, but they all have one thing in common – they can’t make good decisions without getting control over and understanding their finances. Keeping financial records is essential. Paying a qualified and experienced professional to help with recordkeeping is a great option. But if that’s not in your budget, taking these three steps will help you feel confident about your financial records and to satisfy the IRS.

The IRS has help for new (and not-do-new) businesses to keep their financial records. Here’s the link to why you need to keep records – https://www.irs.gov/businesses/small-businesses-self-employed/why-should-i-keep-records. Here’s the link for assistance on how to keep those records – https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping.

Business or Hobby?

Do you have income from a freelance activity that you think of as a business? Are you reporting tax losses from a freelance activity on your individual income tax return? Will the IRS consider your freelance work a business and allow your loss deductions, or a hobby and disallow those losses? Like many other tax questions, the answers are “it depends.” 

The IRS can contend that money-losing freelance activities are hobbies rather than businesses, and that you cannot deduct tax losses. However, if you can show a profit motive for your freelance activity, even if you have tax losses, you can classify that activity as a business for tax purposes and deduct any business losses to offset other taxable income that you have.

Determining if your hobby has grown into a business can be confusing. Also, some businesses, like artists or actors, can experience losses over several years when they are trying to make a profit. To help avoid confusion, the IRS established factors to consider when determining whether a freelance activity is a business or hobby. These factors include:

  1. Conducting the activity in a business-like manner by keeping good records and seeking profit-making strategies
  1. Promoting your business cause by joining professional organizations and participating in networking or marketing events
  1. Keeping a calendar of activities and financial records
  1. Following business regulations in your area and professional standards for your profession
  1. Spending enough time to substantiate that the activity is a business and not a hobby
  1. Having the expectation of asset appreciation, such as with rental real estate
  1. Demonstrating success in other ventures, indicating business acumen
  1. Reporting a history of up-and-down income from the activity and losses caused by unusual events
  1. Indicating that you can afford to absorb ongoing hobby losses because of significant income from other sources

Determining if your hobby has grown into a business can be confusing. Will the IRS consider your freelance work a business and allow your loss deductions to offset other taxable income? It depends. To help avoid confusion about your freelance activity, the IRS established a number of factors to help you figure it out. You can learn more details at https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax-purposes.

Taxes and the Gig Economy

Smartphones and apps make it easier than ever for people to find freelance work, or “gigs,” through online marketplaces. Apps can make it easy to get work for pay, but gig workers may not understand all the tax obligations of the money that they earn. Most gig workers don’t realize that they will be classified as an independent contractor, responsible for taxes, insurance, and other financial obligations that employers usually take care of. 

The gig economy was growing even before COVID-19; but now it’s booming because of even more gigs that are lined up via an app, or digital platform. Examples include:

  • Driving a car for booked rides or deliveries, such as Uber and Uber Eats.
  • Renting out property or part of it, such as on Airbnb.
  • Running errands or complete tasks, such as TaskRabbit.
  • Selling goods online, like on eBay. 

It all sounds great. Digital platforms matching workers with customers. Instead of the customer directly paying the worker, the customer pays the platform, and the platform pays the worker. What many gig workers don’t realize is that after the work is done and they are paid, they are on their own to report income and pay income taxes. 

Digital platforms are supposed to issue a year-end income report to workers (i.e., on IRS Form 1099-K or 1099-NEC/MISC). Whether they get a 1099 form or not, workers that earn income via a digital platform are required to maintain financial records and report all income on her or his income tax return, just like any other freelance worker. 

Knowing about the tax obligations for gig workers is vital. Income from gig work is taxable, regardless of whether workers receive information returns or not. Gig workers also need to know about the business expenses they can deduct to reduce their taxable business income. 

Keeping up with the tax rules is a growing issue as the gig economy grows. The IRS wants gig workers to be informed, so they launched a Gig Economy Tax Center to help gig workers find information about tax filing requirements, quarterly estimated income tax payments, and deductible business expenses. https://www.irs.gov/businesses/gig-economy-tax-center. They even produced a video to break it down for you –  https://www.irsvideos.gov/Individual/PayingTaxes/UnderstandingTheGigEconomy.

The gig economy is growing. Gig workers need to know about tax obligations that employers usually take care of. The IRS knows that gig workers are on their own to report income and pay income taxes, so they put all the necessary information in the Gig Economy Tax Center. Check it out so you’re not surprised when you file your taxes next year.

Bookkeeper Expectations

You started your own business because you are an expert in your field, not to keep the books. As a business owner, you should spend your time managing your business and serving your customers, not keeping financial records and running financial reports. Plus, you might not have the expertise to keep up the books accurately, completely, or efficiently. 

Between a lack of time and expertise, business owners can wind up with inaccurate accounting records that lead to expensive mistakes. Outsourcing the bookkeeping to a qualified professional saves business owners time and adds value. Bookkeepers provide accurate and up-to-date financial information and frees up business owners’ time to grow sales and serve customers.

Engaging a bookkeeper also means setting expectations to make sure that she or he provides the financial information you need to make informed business decisions. Setting these four expectations will give you a leg up on getting the bookkeeper services you need:

  1. Standard Tasks

Clarify the tasks and deliverables that will meet your needs, such as keeping accounting records up-to-date, ensuring information is categorized correctly, and reconciling financial activity. Establish a schedule for monthly financial statements and other reporting needed to manage your business.

  1. Two-Way Communication

If your requests or processes are not understood, a bookkeeper must be willing to ask for clarification or help. Communication is critical; it is better for your bookkeeper to ask questions rather than guessing or keeping quiet. Good bookkeepers manage day-to-day issues and know when to escalate an issue to you.

  1. Technical Proficiency

A 21st-century bookkeeper can conduct most, if not all, of your financial business electronically. That includes accessing bank statements, paying bills, and sending financial reports. Your bookkeeper should be proactive about securely using technology. It will save both of you time and reduce human error.

  1. Critical Thinking

You need someone who can focus on the details and on the big picture, understand how they work together, and apply the “sniff test” to make sure financial information is reasonable given your type of business. She or he must be a problem solver, assessing information and developing solutions using her perspective and expertise. 

 

You didn’t start your own business to keep the books. And you might not have the expertise to keep up accurate books that can be used to make informed business decisions. Doing you own books not only takes away from your customers, but you could also wind up with inaccurate accounting records that lead to expensive mistakes. Outsourcing the bookkeeping to a qualified professional saves business owners time and adds value. Setting these four bookkeeper expectations are a great start to getting the bookkeeper services that you need.

Prepare for Next Tax Season Now

You are probably still stinging from the pain of filing your 2021 income tax return. That pain might have been sharper if you had to pay when you filed. The memory of that pain could be just the incentive you need to start preparing for next tax season now. Starting to prepare for next tax season now reduces stress and gives you time to implement tax planning strategies early in the year.

Whether you file your own tax returns or engage a tax professional, these three tips will help you prepare for next tax season now:

 

  1. Check Withholdings and Estimated Payments

Did you owe a lot when filing your 2021 returns, or did you get a big refund? Either way it turned out for you, the IRS has online tools to help make sure that your tax withholdings or estimated payments will cover your anticipated tax liability. Employees who earn wages should use information at this link to verify that their tax withholdings are sufficient https://www.irs.gov/individuals/tax-withholding-estimator. Taxpayers with investment, self-employment or other non-wage income should use this link to figure out their quarterly estimated tax payments due in April, June, September, and January https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

  1. Organize Tax Documents

Use your 2021 tax return to identify documents that you’ll need to accumulate in preparation for next tax season. Start printing the charitable donation letters and real estate tax bills to cut the delay when the 1099s and W-2s are released or mailed to you. As life events happen in 2022, such as buying a home, starting a business, or changing your marital status, check into how the event impacts your taxes. You might need a tax professional to help you plan for and understand the tax impacts of life changes.

  1. Pending Tax Changes 

The last two tax filing seasons involved reporting some unusual information that was related to pandemic tax changes, like the expanded Advance Child Tax Credit and Economic Impact Payments. As of today, no tax law changes are pending; however, you never know. Keep an eye on the news for any announcements indicating that a law is about to pass and see if it could impact next year’s tax reporting. Keep in mind that a reporting change could happen even if the change does not impact your tax liability, 

If the pain of filing your 2021 income tax return is still stinging, these tips to prepare for next tax season now are just what you need. Preparing now not only reduces stress; the earlier in the year you start, the more time you have to implement tax planning strategies. Whether you file your own tax returns or engage a tax professional, checking your withholdings and estimates, organizing you tax documents, and being aware of tax law changes will go a long way to help you prepare for next tax season now.