Category: Tax Law

Mountain of Relief for Small Businesses – Now an Avalanche of Fraud

Over a year ago, we reported on the Employee Retention Credit (ERC) included in the CARES Act providing $80 billion dollars to encourage employers to retain employees at the height of the COVID-19 pandemic in early 2020. The driving principle for Congressional adoption of the incentive was to help pandemic-impaired businesses and tax-exempts to retain jobs and trigger job creation.

Many employers were and are confused as to qualification requirements and application procedures. Consequently, many of those employers who may qualify ignored participation in the program … one of considerable financial significance. The 2020 credit can be as much as $5,000 per employee … the 2021 credit up to $21,000 per employee.

Notably, for employers that have not yet applied, the ERC can be claimed for three years after the filing date of the original payroll returns. 

The lack of understanding by employers regarding application procedures and administrative burdens coupled with the sheer dollar amount of potential tax credits triggered an open invitation for fraudsters … a caution we shared earlier this year.

As we reported, the IRS chimed in on abuses by third-party “advisors” for blasting ads on radio and the internet hyping ERC refunds. The agency’s concern was underscored by including ERC fraudsters in its annual Dirty Dozen summary.

Fueled by aggressive third-party marketing to ineligible applicants, the IRS was deluged with new ERC claims …  a substantial share of which are unqualified.

In mid-September, the IRS issued the following notice regarding processing ERC claims.

To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros, aggressive marketing to ineligible applicants highlights unacceptable risk to businesses and the tax system. 

Moratorium on processing of new claims through year’s end will allow IRS to add more safeguards to prevent future abuse, protect businesses from predatory tactics; IRS working with Justice Department to pursue fraud fueled by aggressive marketing. 

IRS Commissioner Danny Werfel ordered the immediate moratorium, following growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.

The IRS continues to work previously filed ERC claims received prior to the moratorium but emphasizes that payouts for these claims will be at a slower pace due to the detailed compliance reviews

IRS Commissioner Danny Werfel said, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in.”

He continued, “In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.”

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Learn About $1 Billion in Tax Relief
2023 Tax Rebate Plus, Increased Standard Deduction 

If You Receive a Check from the Commonwealth of Virginia …  
Here’s the Reason Why!

Virginia 2023 State Budget Approved

Six months overdue, the Virginia budget was finally approved by lawmakers on Wednesday, September 6,
2023. The compromise budget legislation is the result of lawmakers, urged by Governor Youngkin, returning to
the negotiation table after months of deadlock. The politically divided Virginia General Assembly approved the
long-delayed budget … voting in an unusually fast-paced special session.

Gov. Glenn Youngkin said “I appreciate the hard work of the General Assembly and our budget conferees to
send a budget to my desk,”. “While the process took longer than needed, more than $1 billion in tax relief is on
the way to Virginia veterans, working families and businesses.” 

“I’m really pleased with the budget we have before us today. The negotiations have been very intense and very
extended. But the outcome is both fair and balanced towards the priorities of both the House and the Senate,”
said Democratic Sen. Janet Howell of Fairfax County, who co-chairs the Senate Finance and Appropriations
Committee.

House Appropriations Chairman Barry Knight, R-81st District, said it was a “bipartisan, bicameral compromise,”
Republican Sen. Steve Newman called it “as fiscally responsible a bill as I’ve ever seen.”

The budget was forwarded to Governor Youngkin’s desk for review pending his final signature. Consistent with
the shared consensus among lawmakers, he signed the budget on Thursday, September 14, 2023, without any
requests for revisions or amendments.

Two Significant “Wins” for Virginia Taxpayers 

Number 1 – Tax Rebates:  
Included in the budget is about $1.05 Billion in tax reductions for eligible Virginians in the form of one-time tax rebates. Qualifying individual taxpayers will receive $200 … joint filers, $400. Virginia issued similar rebates for the 2022 tax year, sometimes referred to as “stimulus checks” … returning massive budget surpluses to eligible residents.

Taxable or not? … That is an obvious next question. Most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes. As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds for the 2023 tax year, according to the IRS.

That said, there could be some exceptions particularly in cases where taxpayers itemized deductions. As ever, be sure to consult a trusted tax professional before you file your 2023 federal income tax return.

Number 2 – Increased Standard Deduction:  
The Virginia standard deduction is increased for the 2024 and 2025 tax years. Single filers will enjoy a $500 bump in their standard deduction … from $8,000 to $8,500. Joint filers will benefit from a $1,000 increase … to $17,000 from current $16,000.

10,000 Feet View of Other Budget Provisions

• Sales tax holiday reinstated; 
• $645 million in aid for K-12 public education; 
• Fund behavioral health initiatives including new crisis-receiving centers and stabilization units; 
• $200 million in new resources for economic development-related site acquisitions; 
• $62.5 million in additional funding for college financial aid; 
• $12.3 million for the Virginia Employment Commission to help address the unemployment appeals backlog and support call centers; 
• $250,000 to establish a Department of Corrections ombudsman within the state’s watchdog agency;  
• State Corporation Commission to continue a widely supported reinsurance program that reduced premiums this year. 

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“The difference between the 2022 and 2023 filing seasons … like night and day,”
– Erin M. Collins

You, or one or more people you know, suffered through the 2022 tax filing season … refund and return processing delays, correspondence processing holdups, and difficulty reaching the IRS by phone.

The Good News! 

National Taxpayer Advocate Erin M. Collins released her statutorily mandated  2024 Objectives Report to Congress. She wrote in her introduction to the report, “In submitting this report, I’m finally able to deliver some good news: The taxpayer experience vastly improved during the 2023 filing season. The difference between the 2022 and 2023 filing seasons was like night and day.”

Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Its mission is to be the “voice of taxpayers” to ensure that every taxpayer is treated fairly and understands their rights. TAS efforts are based on four priorities:

1. Help taxpayers with problems they can’t resolve with the IRS.
2. Understand your issues as a taxpayer and assure you that we’re here to help you.
3. Protect taxpayers’ rights.
4. Recommend changes to Congress to help prevent future problems.

“What a Difference a Year Makes” – Positive Progress

Here are two specific examples of enhanced taxpayer services rendered by the IRS in 2023 as presented in the TAS 2024 Objectives Report to Congress: 

Processing of original tax returns. 

• For the week ending April 22, 2023, the IRS had 2.6 million unprocessed individual and business tax returns, compared to 13.3 million as of the same date in 2022, a reduction of 80%.

Telephone service. 

• In 2022, the IRS answered 10% of the 7.5 million calls it received, keeping each caller on hold for an average of 29 minutes. In 2023, the IRS answered 35% of the 32 million calls it received, keeping each caller on hold for an average of eight minutes.

Click Here for more details.

Fraud & Identity Theft – Effect on Processing Times

Business processing delays are largely attributed to Employee Retention Credit (ERC) claims. The ERC is a refundable tax credit authorized by Congress to encourage employers to retain employees during the C-19 pandemic. The IRS has received a significant number of fraudulent claims … serious enough to warrant inclusion of the offenses on its “Dirty Dozen” list of tax scams.

The result for processing times is impacted by submission of amended returns by businesses. At the end of May, the backlog of ERC claims was estimated at 800,000 with more forms arriving daily.

“The influx of fraudulent claims has put the IRS between a rock and a hard place,” Collins wrote. “If the IRS pays out claims quickly without taking the time to review them individually, it will be making some payments to individuals potentially engaged in fraud. If it takes the time to review claims individually, legitimate businesses who need the funds Congress authorized to help them stay afloat may not receive them in time.”

Click here for more info on fraudulent ERC advisors.

Victims of identity theft have suffered from particularly long and frustrating delays. The average cycle time for Identity Theft Victim Assistance cases closed in April 2023 was 436 days … nearly 15 months … about three months longer than the 362-day cycle time for cases closed in April 2022.

Conclusions & Recommendations 

“Despite these areas of relative weakness,” the report says, “the big picture shows taxpayers had a much easier time reaching the IRS this filing season, reducing the need for repeat calls and lengthy wait times – a welcome relief for millions of taxpayers.”

Notwithstanding these improvements, the report confirms the IRS is still behind in processing amended tax returns and taxpayer correspondence. Typically, employees in the IRS’s Accounts Management function perform two roles – they answer telephone calls, and they process taxpayer correspondence, amended returns, and other cases.

The report says the IRS was much more effective in answering taxpayer calls this year, “but [that] could only be accomplished by prioritizing the phones over other IRS operations, and it resulted in greater delays in the processing of paper correspondence.”

Collins wrote … “to achieve and sustain transformational improvement over the longer term, the IRS must focus like a laser beam on IT”. In the report, Collins’ office urged the IRS to focus its efforts on modernizing outdated technology meant to improve the taxpayer experience. That is possible because of the additional $20 billion in funding that the IRS is budgeted to receive.

Collins’ IT to-do list includes:

• Robust online accounts for taxpayers that are comparable to accounts provided by banks and other financial institutions;
• Allowing all taxpayers to e-file tax returns;
• Allowing taxpayers to receive and submit responses to information requests electronically in all interactions with the IRS; and
• Replacing its 60 discrete case management systems that have limited ability to communicate with each other with an integrated, Service-wide system.

“But with adequate funding, leadership prioritization, and appropriate oversight from Congress, I believe the IRS will make considerable progress in the next three to five years in helping taxpayers comply with their tax obligations as painlessly as possible,” Collins wrote.

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.

Taxpayers, Businesses & Tax Professionals Be Aware

IRS Commissioner Danny Werfel sums up the threat: “Scammers are coming up with new ways all the time to try to steal information from taxpayers. People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams. And people should always remember to be wary if a tax deal sounds too good to be true.”

It’s key to observe Werfel’s alert and watch out for these scams throughout the year. While many of these schemes peak as people prepare their tax returns during tax season, fraudsters remain active throughout the year seeking to steal money, personal information, data and more.

Each year, the IRS has been rolling out its list of the Dirty Dozen… a catalog of the most common tax scams, classic cons and sophisticated avoidance schemes to minimize taxes. Here’s the Dirty Dozen” summary for 2023. Click on the link for more detail on any of the following.

1. Employee Retention Credit claims
2. Phishing and smishing
3. Online account help from third-party scammers
4. False Fuel Tax Credit claims
5. Fake charities
6. Unscrupulous tax return preparers
7. Social media: Fraudulent form filing and bad advice
8. Spearphishing and cybersecurity for tax professionals
9. Offer in Compromise mills
10. Schemes aimed at high-income filers
11. Bogus tax avoidance strategies
12. Schemes with international elements

Have Immediate Questions or Concerns?

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The IRS Listened and Postponed Implementation

Let’s start with some history and definition of the issues. IRS Form 1099-K is an information form typically provided to freelancers or small business owners who receive payments of income from a client via a third-party payment system. Third-party settlement organizations generally include banks or other organizations (e.g., Venmo, PayPal, or Cash App) that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer … often identified as self-employment income.

Prior to passage of the American Rescue Plan Act (ARPA) of 2021, third-party settlement organizations were not required to file Form 1099-K to payees with 200 or fewer transactions during the calendar year with aggregate payments of $20,000 or less. The ARPA amended the minimum payment amount to $600, for one or more transactions beginning in 2022.

Apparently, this revision was prompted by the convenience of Venmo, PayPal, or Cash App which resulted in many individuals paying personal expenses as well as payments associated with goods and services with these apps.

Unless the account or payment is designated as personal, it will trigger a reporting requirement if the annual amount exceeds $600. The person receiving the funds could receive a Form 1099-K, and the IRS will expect to see that income reported on his or her tax return. Payments incorrectly classified as business (goods or services) will trigger a Form 1099-K as well.

The new $600 minimum triggered widespread criticism. Lowering the threshold from $20,000 to $600 substantially increases the number of Forms 1099-K that will be issued. Additionally, the revision lacked clear guidance from the IRS which generated more taxpayer confusion. Those concerns coupled with the existing IRS backlog and impact on the upcoming filing season caused stakeholders to urge the IRS to postpone the implementation of the new reporting requirements.

Happily, The IRS responded in Notice 2023-10 to delay lowering the threshold for Form 1099-K reporting by a year. The $20,000 and 200 transactions thresholds remain in place through December 31, 2023.

The IRS emphasized the lower reporting threshold (any number of transactions totaling $600) remains in effect for calendar years starting after December 31, 2022. This one-year delay does not apply to any of the other Form 1099-K rules not modified by the ARPA.

Taxpayers should continue to track and report their taxable income from all sources electronic and others. When using electronic payment systems, such as PayPal, Venmo, and Cash App, make sure personal payments like gifts or reimbursements to friends are properly classified as an amount paid for something other than goods or services.

Have Immediate Questions or Concerns?

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