2021 Tax Filing Starts February 12

Tax filing season officially starts for individuals on Friday, February 12th, when the IRS begins accepting and processing 2020 income tax returns. Ordinarily, tax filing starts in the third week of January. However, with all the last-minute tax changes in 2020, including a second round of Economic Impact Payments, the IRS needed extra time to update its systems.  

The IRS has already started begun accepting business returns and individual returns from taxpayers who are eligible to use IRS Free File partners (https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free). The IRS anticipates that nine out of ten taxpayers will receive their refund within 21 days of filing electronically if there are no issues with the tax return.

The IRS has five tips to avoid having issues with your return:

  • There is no extension of the April 15 tax filing deadline. If you need more time to file, you can extend filing until October 15, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. But remember, it’s an extension of time to file, not to pay. Pay any taxes due with the extension request, no later than April 15.
  • Taxpayers are urged to file returns electronically as soon as they have the 2020 tax documentation that they need. Filing early is a good idea for several reasons. First, processing volumes are lower at the IRS and state tax agencies, resulting in faster refunds. Filing early also gets ahead of potential scammers filing a fraudulent tax return with a valid tax ID. 
  • Returns involving the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) need additional processing time to help the IRS stop fraudulent refunds and claims from being issued to identity thieves. By law, refunds for EITC and ACTC taxpayers cannot be issued before mid-February. Because the IRS isn’t processing returns until February 12, their refunds should start arriving in the first week of March.
  • Electronic tax refunds and payments are the safest and fastest method for financial transactions with federal and state tax agencies. Your tax preparer can usually set them up using authorized tax software. Tax agency websites include links for payments via bank account or credit card. However, these sites don’t have a refund option.
  • Advance stimulus payments, a.k.a. Economic Impact Payments, do not reduce a taxpayer’s refund or payment due for 2020. Eligible taxpayers who received less than the maximum stimulus payment amount could claim the Recovery Rebate Credit and increase her or his 2020 federal income tax refund. Anyone who received the maximum amount does not need to include any information about the payment when filing.

The IRS begins accepting and processing 2020 income tax returns on February 12, about three weeks later than usual because of last-minute tax law changes passed in December. Taxpayers who want a smooth tax filing experience should follow these five IRS tips.

IRS Expands Identity Theft Protection Program

Identity theft has existed for almost as long we we’ve had identities. Back in the Old Days, identity theft involved paper and the U.S. mail. The Internet and other online tools made identity theft faster and more wide-spread. Several year ago, when scammers hit taxpayers hard by stealing their IDs and filing fraudulent tax returns, the IRS reacted by starting an Identity Protection Program. Taxpayers who report an identity theft issue are issued an Identity Protection Personal Identification Number (IP-PIN) for filing her or his federal tax return.

With identity theft getting worse all the time, the IRS is rolling out a voluntary nation-wide IP-PIN Program for taxpayers to get identity theft protection before falling victim to an identity thief. After several years of piloting the program in different parts of the country to make sure it works as intended, the IRS is expanding the program nation-wide effective now.

How does the IP-PIN Program work? Here are six things you need to know:

  • The (IP PIN) is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  • Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected. A paper return must be filed. That return will go through additional scrutiny for fraud.
  • An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  • This is a voluntary program. Taxpayers who want IRS assistance with identity theft protection must pass a rigorous identity verification process. Spouses and dependents are eligible for an IP PIN if she or he can also pass the identity verification process.
  • Current tax-related identity theft victims who have been receiving IP PINs via mail will experience no change.
  • There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is one option taxpayers can use to protect her or his identity from theft and fraudulent tax filings. For taxpayers that do want to use the program, the IRS offers more information and instructions here – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Form 1099 Tax Filing Deadline

It’s barely the middle of January and the first tax filing deadline is already upon us at the end of this month. Businesses, nonprofits, and other entities may make payments that must be reported on IRS Form 1099. In general, Form 1099 must be completed and filed for each person to whom $600 or more was paid during the year for rents, non-employee income payments, prizes and awards, and other payments defined by the IRS at https://www.irs.gov/forms-pubs/about-form-1099-misc

Here are four tips to meet the Form 1099 Tax Filing Deadline:

  • Payments are reported on either Form 1099-MISC (miscellaneous), or on the new Form 1099-NEC (non-employee compensation) that was implemented beginning with the 2020 tax year. Which form to use depends on the type of payment recipient. For more information about Forms 1099-MISC and 1099-NEC and their instructions, go to IRS.gov/Form1099MISC or IRS.gov/Form1099NEC.
  • The due date for filing Form 1099 1099-MISC and 1099-NEC is January 31st for the calendar year ending December 31st. The former 30-day automated extended filing deadline was eliminated in 2016.
  • Form 1099 reporting does not apply to personal payments, only payments made as part of a business, nonprofit, trusts of qualified pension or profit-sharing plans of employers. One exception to this is payments of legal fees to attorneys. 
  • Some payments do not have to be reported on Form 1099, although they may be taxable to the recipient. For example, in general, payments to a C or S corporation, payments of rent to real estate agents or property managers, and business travel allowances paid to employees are not reportable on Form 1099. 

If you make payments as part of your business, nonprofit, trusts of qualified pension or profit-sharing plans of employers, your first tax filing deadline for 2021 could be coming up. Use these four tips to see if payments that you made in 2020 need to be reported to the IRS by January 31st. Need more details? The IRS has them for you at https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return

New IRS Standard Mileage Rates for 2021

Last week, I filled my Honda’s gas tank for the first time since July. My situation might be extreme, but overall car usage has been down since the beginning of the pandemic in March 2020. No matter how much or how little you use your personal vehicle, you could qualify for a tax deduction if you drive for business, charitable, medical, or moving purposes. How much you can deduct and how you report the expense depends on your situation. 

Every year, the IRS issues the new standard mileage rates based on the average actual cost per mile to operate a vehicle. The average cost per mile is calculated to include fuel, maintenance, insurance, and depreciation. The IRS recently issued the new standard mileage rates for 2021. 

Beginning on January 1, 2021, the standard mileage rates were either reduced due to lower fuel prices or stayed the same due to statutory constraints. Here are the details:

  • 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020
  • 16 cents per mile driven for medical purposes, down 1 cent from 2020
  • 14 cents per mile driven in service of charitable organizations, set by statute, and remaining unchanged from prior years
  • 16 cents per mile driven by members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station, down 1 cent from 2020

Even at the lower rates, the standard mileage can really add up. You also have the option of calculating the actual costs of using your vehicle instead of using the standard mileage rates. Qualified deductible vehicle expenses can total the greater of actual expenses or a standard rate. 

Most people choose to use the standard rate because it’s easier and usually results in a larger deduction amount. Both expense deduction options are based on the number of miles driven during the calendar year. You must track your mileage by usage type for each vehicle no matter which method you use.

Taking vehicle deductions for qualified business, charitable, medical, or moving purposes involves a lot of tracking, but the effort can be worth it. There are apps you can put on your phone to help. Once you get your mile tracking process down, you’ll see that those deductions can add up and reduce the bottom line on your tax bill.

IRS Notices Resume for the Holidays

Just in time for the holidays, the IRS announced that it will resume issuing “balance due” notices to taxpayers. IRS Notices to taxpayers who have unpaid tax balances were suspended temporarily in early May due to the COVID-19 pandemic that created incredible delays in receiving and processing IRS mail. The IRS feels that their mailroom is caught up now and that all payments that taxpayers mailed in have been processed. So, they decided to re-start notifying taxpayers of their unpaid taxes, plus interest and penalties, of course.

Here’s what to know if you get an IRS Notice about unpaid tax balances:

Why the IRS sends Notices
The IRS sends Notices to taxpayers who have a balance due, or who the IRS hasn’t heard from them after a prior contact. IRS Notices explain why the amount is due and what the taxpayer’s options are. The urgency of each Notice escalates if prior Notices are ignored, up to placing a lien on assets or property. IRS Notices are usually multiple pages long and tedious to read, but they contain a lot of valuable information about the issue. So, read carefully.

How to Respond
IRS Notices generally require a response by a specific date. There are two main reasons you’ll want to meet that deadline – to minimize the accrual of additional interest and penalty charges, and to preserve your appeal rights if you don’t agree. If the information that the IRS has on file doesn’t match the information you reported on your tax return, you may need to complete the Notice Response Form and provide more documents to support the return. If you made a mistake, you need to pay up.

Payment Options
Taxpayers who are unable to pay are encouraged to consider available payment options to stop penalties and interest from continuing to accrue. Taxpayers who were impacted by the pandemic or other circumstances may qualify for relief from penalties due to reasonable cause if they made an effort to follow the rules, but were unable to pay the tax due because of circumstances beyond their control. Taxpayers should call the toll-free number on their notice to request penalty relief due to reasonable cause.

Whatever the Notice says or how you respond, be sure to keep copies of all the Notices, your responses, and any support documents in your tax records. You might need to refer to them later.

Getting an IRS Notice shouldn’t ruin your holidays. Knowing why you got a Notice, how to respond and your payment options will get you back to trimming the tree before you know it. Need more details? The IRS has them for you at https://www.irs.gov/individuals/understanding-your-irs-notice-or-letter.

Your Chances of an IRS Audit

Few words strike fear in the hearts of taxpayers like “IRS audit.” People would rather do almost anything other than get an audit notice from the IRS. But what does an IRS audit really mean? What are your chances of an IRS audit? What happens after you are selected for an audit?

An IRS audit can indicate a problem, or not. Basically, an IRS audit is a review of a taxpayer’s tax return and financial documents to determine that income and deductions are reported correctly according to the tax laws. The IRS Deputy Commissioner for Services and Enforcement recently issued the full report of audit actions by income levels. If you’re not up for all the details, here are a few basics about your chances of an IRS audit and what happens if you are selected: 

  • Why is a taxpayer selected for an audit?

Selection for an audit does not always suggest a problem. It can mean that something on a return does not fit a “norm” for similar returns. The IRS also audits returns where information on a return does not match what is reported by a third party, such as interest from a bank account. The IRS could also select a return when performing a “related examination” of business partners or investors whose returns were selected for audit.

  • How does the IRS notify taxpayers of an audit?

Taxpayers are contacted initially by regular mail from the IRS that she or he has been selected for an audit. The IRS notice provides all contact information and instructions, as well as an explanation of the items on the return that do not match or that require additional documentation. All IRS notices include a deadline to reply. Opening and replying on time is an important part of the audit process.

  • How does the IRS conduct an audit?

The IRS manages audits either by mail or through an in-person interview to review the related financial records. In-person interviews could be virtual during COVID-19. Usually, interviews are conducted at an IRS office or at the taxpayer’s home, place of business, or accountant’s office. Mail audit notices will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions.

  • How far back can the IRS go to audit my return?

Generally, the IRS can include returns filed within the last three years in an audit. If they identify a substantial error, they could add additional years, but not usually more than the last six years. The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly, most audits will be of returns filed within the last two years.

Your chances of an IRS audit are not easy to determine. An IRS audit can indicate a problem, or not. Either way, it’s good to know why you were selected, what could happen next, and how the audit is conducted. No matter what, make sure that you open the IRS notice when it arrives, read all the instructions, and reply by the due date. 

Tax “To Do” List for Closing a Business

Data from Yelp Inc., the online reviewer, shows that more than 80,000 businesses permanently closed from March 1st to July 25th of this year. About 800 small businesses filed for Chapter 11 bankruptcy from mid-February to July 31st, according to the American Bankruptcy Institute. They estimate that total bankruptcies in 2020 could be up 36% from last year.

Closing a business is a tough decision. It’s painful. It also creates a long “To Do” List, including final tax responsibilities. Figuring out everything that needs to be done can be confusing. Fortunately, the IRS recently launched a redesigned webpage to help business owners and self-employed individuals navigate federal tax steps when closing a business.

The IRS’ “Closing a Business” webpage has explanations, instructions, links, and forms for:

  • Filing a Final Return and Related Forms

You must file a final return for the year you close your business. The type of return you file and related forms you need will depend on the type of business you have (e.g., sole proprietor or partnership). 

  • Take Care of Your Employees

If you have employees, you must pay them any final wages owed, make final federal tax deposits, and report employment taxes. You must also provide an IRS Form W-2, Wage and Tax Statement, to each employee. 

  1. Pay the Tax You Owe

Whether it’s by check or online, all taxes must be paid in full. 

  • Report Payments to Contract Workers

If you have paid any unincorporated contractors at least $600 during the calendar year in which you close your business, you must report those payments.

  • Cancel Your EIN and Close Your IRS Business Account

The employer identification number (EIN) assigned to your business is the permanent federal taxpayer identification number for that business. The IRS will not close your business account until you have filed all necessary returns and paid all taxes.

  • Keep Your Records

How long you need to keep your business records, such as employment tax records, depends on the document. Generally, tax records should be kept for four years and copies of tax returns should be kept permanently.

The IRS’ “Closing a Business” webpage outlines the steps needed to close a business and help take care of any employees. No matter the business type, information on this page https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business helps business owners and self-employed individuals understand what to do after making the tough decision to shut down.

Taxes and Your Subchapter S Corporation

Whenever I get a “run” of client calls about a specific topic, I assume that the Tax Universe is telling me to blog about it. Lately, that topic has been the tax rules for business owners who have elected to operate as a Subchapter S Corporation (Sub S). Business owners often form an LLC to protect their personal assets. An LLC can be operated for tax purposes in one of several ways, including the election to operate for tax purposes as a Sub S. That election has some advantages, but it adds more complexity as well.

If your business operates for tax purposes as a Sub S, or you are thinking about forming one, here are a few things to know:

  • Qualification – To qualify for Sub S status, the business must be a corporation that has between one and 100 shareholders who are domestic individuals, certain trusts, or estates. A Sub S can only have one class of stock. The corporation must have legal formation documents, an operating agreement, a separate tax ID, and documented shareholder meetings. 
  • Avoid Double Taxation – Sub S Corporations pass corporate income, losses, deductions, and credits through to their shareholders for tax purposes. However, there are a few exceptions when a Sub S is responsible for tax, such as built-in gains and passive income. Shareholders of a Sub S report their pro rata share of income and losses on their personal tax returns, subject to tax at the shareholder’s individual income tax rates. 
  • Shareholder Compensation – Sub S Corporations must pay reasonable compensation in the form of wages to a shareholder-employee if that the employee provides services to the corporation. Wages are reported on a W-2 and are subject to employment taxes. Net profits or losses from operations are reported on a Form K-1 and treated as non-wage distributions, which are not subject to employment taxes. 
  • Limited Losses – The fact that a shareholder receives a K-1 reflecting a loss does not mean that the shareholder is automatically entitled to deduct the loss. She or he must first have adequate stock and/or debt basis to claim that deduction. Each shareholder is responsible for tracking her/his own basis. Loss deduction amounts also depend on at-risk and passive activity loss limitations. 

These are just a few of the things to know when operating your business as a Sub S for tax purposes. There are a lot of rules on this topic, so visit https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations and the “Related Topics” links on the right to get more details, instructions, forms, and all the other stuff you’ll need. Like I said, electing to operate as a Subchapter S Corporation has some complexities, so make sure you do your homework before getting started. Or think about consulting a qualified tax professional.