Businesses may receive notices about information returns that don’t match IRS records

The IRS has begun mailing notices to businesses, financial institutions and other payers that filed certain returns with information that doesn’t match the agency’s records.

These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number (TIN), have an incorrect name or have a combination of both.

Each notice has a list of persons who received payments from the business with identified TIN issues.

If you receive one of these notices, you need to compare the accounts listed on the notice with your records and correct or update your records, if necessary. This can also include correcting backup withholding on payments made to payees.

Which returns are involved?

Businesses, financial institutions and other payers are required to file with the IRS various information returns reporting certain payments they make to independent contractors, customers and others. These information returns include:

  • Form 1099-B, Proceeds from Broker and Barter Exchange Transactions,
  • Form 1099-DIV, Dividends and Distributions,
  • Form 1099-INT, Interest Income,
  • Form 1099-K, Payment Card and Third-Party Network Transactions,
  • Form 1099-MISC, Miscellaneous Income,
  • Form 1099-NEC, Nonemployee Compensation, and
  • Form W-2G, Certain Gambling Winnings.

Do you have backup withholding responsibilities?

The CP2100 and CP2100A notices also inform recipients that they’re responsible for backup withholding. Payments reported on the information returns listed above are subject to backup withholding if:

  • The payer doesn’t have the payee’s TIN when making payments that are required to be reported.
  • The individual receiving payments doesn’t certify his or her TIN as required.
  • The IRS notifies the payer that the individual receiving payments furnished an incorrect TIN.
  • The IRS notifies the payer that the individual receiving payments didn’t report all interest and dividends on his or her tax return.

Do you have to report payments to independent contractors?

By January first of the following year, payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report certain payments made to recipients. If the following four conditions are met, you must generally report payments as nonemployee compensation:

  • You made a payment to someone who isn’t your employee,
  • You made a payment for services in the course of your trade or business,
  • You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
  • You made payments to a recipient of at least $600 during the year.

Contact us if you receive a CP2100 or CP2100A notice from the IRS or if you have questions about filing Form 1099-NEC. We can help you stay in compliance with all rules.


Want to turn a hobby into a business? Watch out for the tax rules

Like many people, you may have dreamed of turning a hobby into a regular business. You won’t have any tax headaches if your new business is profitable. But what if the new enterprise consistently generates losses (your deductions exceed income) and you claim them on your tax return? You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby — an activity not engaged in for profit — rather than a business. Then you’ll be unable to deduct losses.

By contrast, if the new enterprise isn’t affected by the hobby loss rules because it’s profitable, all otherwise allowable expenses are deductible on Schedule C, even if they exceed income from the enterprise.

Note: Before 2018, deductible hobby expenses had to be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 2018 through 2025, deductible hobby expenses are effectively wiped out from 2018 through 2025.

Avoiding a hobby designation

There are two ways to avoid the hobby loss rules:

  1. Show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing or racing horses).
  2. Run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.

How can you prove you have a profit-making objective? You should run the venture in a businesslike manner. The IRS and the courts will look at the following factors:

  • How you run the activity,
  • Your expertise in the area (and your advisors’ expertise),
  • The time and effort you expend in the enterprise,
  • Whether there’s an expectation that the assets used in the activity will rise in value,
  • Your success in carrying on other activities,
  • Your history of income or loss in the activity,
  • The amount of any occasional profits earned,
  • Your financial status, and
  • Whether the activity involves elements of personal pleasure or recreation.

Recent court case

In one U.S. Tax Court case, a married couple’s miniature donkey breeding activity was found to be conducted with a profit motive. The IRS had earlier determined it was a hobby and the couple was liable for taxes and penalties for the two tax years in which they claimed losses of more than $130,000. However, the court found the couple had a business plan, kept separate records and conducted the activity in a businesslike manner. The court stated they were “engaged in the breeding activity with an actual and honest objective of making a profit.” (TC Memo 2021-140)

Contact us for more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do to avoid a tax challenge.


When inheriting money, be aware of “income in respect of a decedent” issues

Once a relatively obscure concept, “income in respect of a decedent” (IRD) may create a surprising tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there may be ways to minimize or even eliminate the IRD tax bite.

Basic rules

For the most part, property you inherit isn’t included in your income for tax purposes. Items that are IRD, however, do have to be included in your income, although you may also be entitled to an IRD deduction on account of them.

What’s IRD? It is income that the decedent (the person from whom you inherit the property) would have taken into income on his or her final income tax return except that death interceded. One common IRD item is the decedent’s last paycheck, received after death. It would have normally been included in the decedent’s income on the final income tax return. However, since the decedent’s tax year closed as of the date of death, it wasn’t included. As an item of IRD, it’s taxed as income to whomever does receive it (the estate or another individual). Not just the final paycheck, but any compensation-related benefits paid after death, such as accrued vacation pay or voluntary employer benefit payments, will be IRD to the recipient.

Other common IRD items include pension benefits and amounts in a decedent’s individual retirement accounts (IRAs) at death as well as a decedent’s share of partnership income up to the date of death. If you receive these IRD items, they’re included in your income.

The IRD deduction

Although IRD must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that’s caused by having the IRD items subject to the decedent’s estate tax as well as the recipient’s income tax.

To calculate the IRD deduction, the decedent’s executor may have to be contacted for information. The deduction is determined as follows:

  • First, you must take the “net value” of all IRD items included in the decedent’s estate. The net value is the total value of the IRD items in the estate, reduced by any deductions in respect of the decedent. These are items which are the converse of IRD: items the decedent would have deducted on the final income tax return, but for death’s intervening.
  • Next you determine how much of the federal estate tax was due to this net IRD by calculating what the estate tax bill would have been without it. Your deduction is then the percentage of the tax that your portion of the IRD items represents.

In the following example, the top estate tax rate of 40% is used. Example: At Tom’s death, $50,000 of IRD items were included in his gross estate, $10,000 of which were paid to Alex. There were also $3,000 of deductions in respect of a decedent, for a net value of $47,000. Had the estate been $47,000 less, the estate tax bill would have been $18,800 less. Alex will include in income the $10,000 of IRD received. If Alex itemizes deductions, Alex may also deduct $3,760, which is 20% (10,000/50,000) of $18,800.

We can help

If you inherit property that could be considered IRD, consult with us for assistance in managing the tax consequences.

© 2022


Plan ahead for the 3.8% Net Investment Income Tax

High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact.

The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds:

  • $250,000 for married taxpayers filing jointly and surviving spouses,
  • $125,000 for married taxpayers filing separately,
  • $200,000 for unmarried taxpayers and heads of household.

The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you.

Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities.

There are many types of income that are exempt from the NIIT. For example, tax-exempt interest and the excluded gain from the sale of your main home aren’t subject to the tax. Distributions from qualified retirement plans aren’t subject to the NIIT. Wages and self-employment income also aren’t subject to the NIIT, though they may be subject to a different Medicare surtax.

It’s important to remember the NIIT applies only if you have net investment income and your MAGI exceeds the applicable thresholds above. But by following strategies, you may be able to minimize net investment income.

Investment choices 

If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT.

Dividend-paying stocks are taxed more heavily as a result of the NIIT. The maximum income tax rate on qualified dividends is 20%, but the rate becomes 23.8% with the NIIT.

As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gain from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gain won’t be subject to the NIIT until the stock is sold and 2) capital gains can be offset by capital losses, which isn’t the case with dividends.

Qualified plans 

Because distributions from qualified retirement plans are exempt from the NIIT, upper-income taxpayers with some control over their situations (such as small business owners) might want to make greater use of qualified plans.

These are only a couple of strategies you may be able to employ. You also may be able to make moves related to charitable donations, passive activities and rental income that may allow you to minimize the NIIT. If you’re subject to the tax, you should include it in your tax planning. Consult with us for tax-planning strategies.

© 2021


Still have questions after you file your tax return?

Still have questions after you file your tax return?

Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.

Are you wondering when you will receive your refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

Which tax records can you throw away now? 

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2017 and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

If you overlooked claiming a tax break, can you still collect a refund for it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

Year-round tax help

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long.

© 2021


Take advantage of a “stepped-up basis” when you inherit property

If you’re planning your estate, or you’ve recently inherited
assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

Fair market value rules

Under the fair market value basis rules (also known as the
“step-up and step-down” rules), an heir receives a basis in inherited property
equal to its date-of-death value. So, for example, if your grandfather bought
ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the
basis is stepped up to $5 million in the hands of your grandfather’s heirs —
and all of that gain escapes federal income tax forever.

The fair market value basis rules apply to inherited property
that’s includible in the deceased’s gross estate, and those rules also apply to
property inherited from foreign persons who aren’t subject to U.S. estate tax.
It doesn’t matter if a federal estate tax return is filed. The rules apply to
the inherited
portion of property owned by the inheriting taxpayer jointly with the deceased,
but not the portion of jointly held property that the inheriting taxpayer owned
before his or her inheritance. The fair market value basis rules also don’t
apply to reinvestments of estate assets by fiduciaries.

Step up, step down or carryover

It’s crucial for you to understand the fair market value basis
rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandfather decides
to make a gift of the stock during his lifetime (rather than passing it on when
he dies), the “step-up” in basis (from $500 to $5 million) would be lost.
Property that has gone up in value acquired by gift is subject to the
“carryover” basis rules. That means the person receiving the gift takes the
same basis the donor had in it (just $500), plus a portion of any gift tax the
donor pays on the gift.

A “step-down” occurs if someone dies owning property that has
declined in value. In that case, the basis is lowered to the date-of-death
value. Proper planning calls for seeking to avoid this loss of basis. Giving
the property away before death won’t preserve the basis. That’s because when
property that has gone down in value is the subject of a gift, the person
receiving the gift must take the date of gift value as his basis (for purposes
of determining his or her loss on a later sale). Therefore, a good strategy for
property that has declined in value is for the owner to sell it before death so
he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For
example, in some cases, a deceased person’s executor may be able to make an
alternate valuation election. Contact us for tax assistance when estate
planning or after receiving an inheritance.

© 2020


Conduct a “paycheck checkup” to make sure your withholding is adequate

Did you recently file your federal tax return and were surprised
to find you owed money? You might want to change your withholding so that this
doesn’t happen next year. You might even want to do that if you got a big
refund. Receiving a tax refund essentially means you’re giving the government
an interest-free loan.

Withholding changes

In 2018, the IRS updated the withholding tables that indicate
how much employers should hold back from their employees’ paychecks. In
general, the amount withheld was reduced. This was done to reflect changes
under the Tax Cuts and Jobs Act — including an increase in the standard
deduction, suspension of personal exemptions and changes in tax rates.

The tables may have provided the correct amount of tax
withholding for some individuals, but they might have caused other taxpayers to
not have enough money withheld to pay their ultimate tax liabilities.

Review and possibly adjust

The IRS is advising taxpayers to review their tax situations for
this year and adjust withholding, if appropriate.

The tax agency has a withholding calculator to assist you in
conducting a paycheck checkup. The calculator reflects tax law changes in areas
such as available itemized deductions, the increased child credit, the new
dependent credit and the repeal of dependent exemptions. You can access the IRS
calculator here: https://bit.ly/2OqnUod.

Changes may be needed if…

There are some situations when you should check your
withholding. In addition to tax law changes, the IRS recommends that you
perform a checkup if you:

  • Adjusted your withholding in 2019, especially in the
    middle or later part of the year,
  • Owed additional tax when you filed your 2019 return,
  • Received a refund that was smaller or larger than
    expected,
  • Got married or divorced, had a child or adopted one,
  • Purchased a home, or
  • Had changes in income.

You can modify your withholding at any time during the year, or
even multiple times within a year. To do so, you simply submit a new Form W-4
to your employer. Changes typically go into effect several weeks after a new
Form W-4 is submitted. (For estimated tax payments, you can make adjustments
each time quarterly estimated payments are due. The next payments are due on
July 15 and September 15.)

Good time to plan ahead

There’s still time to remedy any shortfalls to minimize taxes
due for 2020, as well as any penalties and interest. Contact us if you have any
questions or need assistance. We can help you determine if you need to adjust
your withholding.

© 2020


What qualifies as a “coronavirus-related distribution” from a retirement plan?

As you may have heard, the Coronavirus Aid, Relief and Economic Security
(CARES) Act allows “qualified” people to take certain “coronavirus-related
distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a
coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible
retirement plan before you reach age 59½, you must pay a 10% early withdrawal
tax. This is in addition to any tax you may owe on the income from the
withdrawal. There are several exceptions to the general rule. For example, you
don’t owe the additional 10% tax if you become totally and permanently disabled
or if you use the money to pay qualified higher education costs or medical
expenses

New exception

Under the CARES Act, you can take up to $100,000 in
coronavirus-related distributions made from an eligible retirement plan between
January 1 and December 30, 2020. These coronavirus-related distributions aren’t
subject to the 10% additional tax that otherwise generally applies to
distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included
in income in installments over a three-year period, and you have three years to
repay it to an IRA or plan. If you recontribute the distribution back into your
IRA or plan within three years of the withdrawal date, you can treat the
withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies
to take a coronavirus-related distribution. A qualified individual is someone
who:

  • Is diagnosed (or whose spouse or dependent is
    diagnosed) with COVID-19 after taking a test approved by the Centers for
    Disease Control and Prevention (including a test authorized under the
    Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result
    of certain events. To qualify under this test, the individual (or his or
    her spouse or member of his or her household sharing his or her principal
    residence) must:

    • Be quarantined, be furloughed or laid off, or have
      work hours reduced due to COVID-19;
    • Be unable to work due to a lack of childcare because
      of COVID-19;
    • Experience a business that he or she owns or operates
      due to COVID-19 close or have reduced hours;
    • Have pay or self-employment income reduced because of
      COVID-19; or
    • Have a job offer rescinded or start date for a job
      delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone —
to take retirement plan distributions under the new exception. If you decide to
take advantage of it, be sure to keep good records to show that you qualify. Be
careful: You’ll be taxed on the coronavirus-related distribution amount that
you don’t recontribute within the three-year window. But you won’t have to
worry about owing the 10% early withdrawal penalty if you’re under 59½. Other
rules and restrictions apply. Contact us if you have questions or need
assistance.

© 2020


Some people are required to return Economic Impact Payments that were sent erroneously

The IRS and the U.S. Treasury had disbursed 160.4 million
Economic Impact Payments (EIPs) as of May 31, 2020, according to a new report.
These are the payments being sent to eligible individuals in response to the
economic threats caused by COVID-19. The U.S. Government Accountability Office
(GAO) reports that $269.3 billion of EIPs have already been sent through a
combination of electronic transfers to bank accounts, paper checks and prepaid
debit cards.

Eligible individuals receive $1,200 or $2,400 for a married
couple filing a joint return. Individuals may also receive up to an additional
$500 for each qualifying child. Those with adjusted gross income over a
threshold receive a reduced amount.

Deceased individuals

However, the IRS says some payments were sent erroneously and
should be returned. For example, the tax agency says an EIP made to someone who
died before receipt of the payment should be returned. Instructions for
returning the payment can be found here: https://bit.ly/31ioZ8W

The entire EIP should be returned unless it was made to joint
filers and one spouse hadn’t died before receipt. In that case, you only need
to return the EIP portion made to the decedent. This amount is $1,200 unless
your adjusted gross income exceeded $150,000. If you cannot deposit the payment
because it was issued to both spouses and one spouse is deceased, return the
check as described in the link above. Once the IRS receives and processes your
returned payment, an EIP will be reissued.

The GAO report states that almost 1.1 million payments totaling
nearly $1.4 billion had been sent to deceased individuals, as of April 30,
2020. However, these figures don’t “reflect returned checks or rejected direct
deposits, the amount of which IRS and the Treasury are still determining.”

In addition, the IRS states that EIPs sent to incarcerated
individuals should be returned.

Payments that don’t have to be returned

The IRS notes on its website that some people receiving an
erroneous payment don’t have to return it. For example, if a child’s parents
who aren’t married to each other both get an additional $500 for the same qualifying
child, one of them isn’t required to pay it back.

But each parent should keep Notice 1444, which the IRS will mail
to them within 15 days after the EIP is made, with their 2020 tax records.

Some individuals still waiting

Be aware that the government is still sending out EIPs. If you
believe you’re eligible for one but haven’t received it, you will be able to
claim your payment when you file your 2020 tax return.

If you need the payment sooner, you can call the IRS EIP line at
800-919-9835 but the Treasury Department notes that “call volumes are high, so
call times may be longer than anticipated.”

© 2020


After you file your tax return: 3 issues to consider

The tax filing deadline for 2019 tax returns has been extended
until July 15 this year, due to the COVID-19 pandemic. After your 2019 tax
return has been successfully filed with the IRS, there may still be some issues
to bear in mind. Here are three considerations.

1. Some tax records can now be thrown away

You should keep tax records related to your return for as long
as the IRS can audit your return or assess additional taxes. In general, the
statute of limitations is three years after you file your return. So you can
generally get rid of most records related to tax returns for 2016 and earlier
years. (If you filed an extension for your 2016 return, hold on to your records
until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for
taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer.
For example, keep the actual tax returns indefinitely, so you can prove to the
IRS that you filed a legitimate return. (There’s no statute of limitations for
an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated
with them until you’ve depleted the account and reported the last withdrawal on
your tax return, plus three (or six) years. And retain records related to real
estate or investments for as long as you own the asset, plus at least three
years after you sell it and report the sale on your tax return. (You can keep
these records for six years if you want to be extra safe.)

2. You can check up on your refund

The IRS has an online tool that can tell you the status of your
refund. Go to irs.gov and click on “Get Your Refund Status” to find out about
yours. You’ll need your Social Security number, filing status and the exact
refund amount.

3. You can file an amended return if you
forgot to report something

In general, you can file an amended tax return and claim a
refund within three years after the date you filed your original return or
within two years of the date you paid the tax, whichever is later. So for a
2019 tax return that you file on July 15, 2020, you can generally file an
amended return until July 15, 2023.

However, there are a few opportunities when you have longer to
file an amended return. For example, the statute of limitations for bad debts
is longer than the usual three-year time limit for most items on your tax
return. In general, you can amend your tax return to claim a bad debt for seven
years from the due date of the tax return for the year that the debt became
worthless.

We can help

Contact us if you have questions about tax record retention,
your refund or filing an amended return. We’re not just available at tax filing
time — we’re here all year!

© 2020