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IRS CHANGES MIND ABOUT $600 REPORTING THRESHOLD FROM VENMO, PAYPAL, & OTHER THIRD PARTY NETWORKS.

December 23, 2022 Howard Tax Prep LLC

Here in our Chicago south loop tax preparation office, and our Homewood Illinois tax preparation office, we have heard from many people that were afraid of the IRS’s pending requirement of having platforms such as Venmo, Cashapp, PayPal, etc. start reporting transactions over $600 that the user received. In addition to platforms reporting, many people were afraid that their Zelle transactions would also be reported to the IRS; however, Zelle transactions are considered bank to bank transactions, so Zelle did not have a requirement to report. After much confusion, and protest, the IRS announced on December 23, 2022 that they will “delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K.”

To give you a little history, prior to the American Rescue Plan of 2021, third party network providers were required to issue a 1099-K once a user reached $20,000, or 200 transactions. The reporting only applied to goods and services transactions, not for things like paying your family & friends for dinner, sending gifts, etc. Once the American Rescue plan was passed, the threshold amounts were lowered to $600 as a way to catch tax cheats, or as the IRS likes to put it to “encourage voluntary tax compliance.” Now that you understand how the reporting threshold came to be, let’s talk about the change that the IRS announced on December 23, 2022.

Per IRS issue 2002-226 “The IRS released guidance today outlining that calendar year 2022 will be a transition period for implementation of the lowered threshold reporting for third-party settlement organizations (TPSOs) including Venmo, PayPal and CashApp that would have generated Form 1099-Ks for taxpayers. “The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”¹

“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”²

IRS issue 2002-226 also states “the change under the law is hugely important because tax compliance is higher when amounts are subject to information reporting, like the Form 1099-K. However, the IRS noted it must be managed carefully to help ensure that 1099-Ks are only issued to taxpayers who should receive them. In addition, it’s important that taxpayers understand what to do as a result of this reporting, and tax preparers and software providers have the information they need to assist taxpayers. Additional details on the delay will be available in the near future along with additional information to help taxpayers and the industry. For taxpayers who may have already received a 1099-K as a result of the statutory changes, the IRS is working rapidly to provide instructions and clarity so that taxpayers understand what to do.”³

Although the IRS is not requiring the reporting at the $600 threshold, you are still REQUIRED TO REPORT ALL INCOME RECEIVED from your side gig, hustle, small business, sole proprietorship etc. In our article from July 2022, we discuss the ways the IRS can find out if you’re hiding income from them.

Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now at https://howardtaxprep.com/documents-needed-to-file.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

References

Business Taxes, Family Taxes, General Information, General Tax Topics, notary, Self Employed, signing agent, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction

IRS says that some PPP (Paycheck Protection Program) loans that were forgiven improperly, are taxable.

September 22, 2022 Howard Tax Prep LLC

Photo by RODNAE Productions on Pexels.com

The IRS recently issued guidance addressing improper forgiveness of a Paycheck Protection Program loan (PPP loan).

To summarize, the guidance says that if a taxpayers PPP loan is forgiven based upon lies, or leaving things out (misrepresentations or omissions) the taxpayer cannot exclude the forgiven loan income from taxation; basically, you will have to pay taxes on the loan amount that you received.

According to the IRS, while many small business owners were entitled to receive the loan (and properly claimed the PPP loan forgiveness), there are many taxpayers who weren’t eligible for the loan, or loan forgiveness. Some taxpayers lied to receive the PPP loan funds, while other’s spent the loan proceeds on ineligible items.

Per IRS Issue Number IR-2022-162: “Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if the loan recipient meets three conditions.

1 – The loan recipient was eligible to receive the PPP loan. An eligible loan recipient:

is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity;
was in business on or before February 15, 2020; and
had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.

2 – The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.

3 – The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

If the 3 conditions above are met, then under the PPP loan program the forgiven portion is excluded from income. If the conditions are not met, then the amount of the loan proceeds that were forgiven but do not meet the conditions must be included in income and any additional income tax must be paid.”

Per IRS Issue Number IR-2022-162: “Taxpayers who inappropriately received forgiveness of their PPP loans are encouraged to take steps to come into compliance by, for example, filing amended returns that include forgiven loan proceed amounts in income.” In essence, if you know that you lied about how you spent the PPP (paycheck protection program) funds, take the lie back by amending (changing) your tax return to reflect the truth.

IRS Commissioner Chuck Retting said: “This action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers are paying their fair share of taxes.” “We want to make sure that those who are abusing such programs are held accountable, and we will be considering all available treatment and penalty streams to address the abuses.”

If you, or someone you know had a person “do your PPP loan” (complete the application, and get you the funds), and you need assistance with amending your tax return, please reach out to us for assistance.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth. Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Business Taxes, Family Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction

HIDING INCOME FROM THE IRS? HOW WILL THEY FIND OUT?

July 26, 2022 Howard Tax Prep LLC

In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have not filed taxes in years, and they want to know how the IRS knows how much income they have receive. So how does the IRS know when a small business owner is POTENTIALLY hiding income? The IRS has many methods to detect the underreporting of income such as: taxpayer interviews, income probes, Indirect methods, accounting records; QuickBooks files, cash expenditures, bank deposits, net worth, and more; however, this article will be covering a method called the vertical analysis.

The vertical analysis method identifies the differences between gross income, and net profit reported by the business owner, and the industry standards gross income and net profit. In plain English, the IRS compares what businesses owners say their profit is in relation to expenses, to what other people in the same industry say their profit is in relation to expenses. So what data, or statistics does the IRS use to create the comparison? The IRS uses a website called Bizstats.

Information in Bizstats expresses expense categories as a percentage of revenue. Per the IRS “Potential underreporting of income which equals 10% or more of the reported income should be resolved with the taxpayer’s assistance.”

To give an example, let’s say that we have a caterer that reports $65,000 in gross sales, and $50,000 in expenses, leaving them with a profit of $15,000. The caterer’s expenses to sales ratio is 77% ($50,000 in cost to make sales (expenses)/revenue brought in.) If the industry standard is 60%, the IRS might believe that the taxpayer is hiding an additional $18,333 in revenue (50,000/60%=$83,333. $83,333-$65,000=$18,333).

So who is Bizstats? Per their website, “BizStats is owned and operated by Bizminer of Camp Hill, PA, a leader in online data analysis since 1998. Bizminer also publishes more than 9 million local and national industry statistical reports at its own web site at www.bizminer.com” Bizstats has business statistics and financial ratios for Sole proprietors, Corporations, S-Corporations, & Partnerships.

Where does Bizstats get it’s information? Per their website, Bizstats get it’s data from “the latest available IRS financial information in a useful, readable format.”

What are some drawbacks to Bizstats data? Bizstats are only available for 1 year, and the information is typically 3 years old. At the time of publication, the current stats were showing data from 2017.

How can I protect myself from a vertical analysis?

#1 Always report the GROSS income generated in your business. An accounting mistake that we often see in our Chicago South Loop tax preparation office, is that people don’t do bookkeeping, so instead of reporting their gross receipts, they report gross income less returns, refunds, etc. in the gross receipts area, which is not correct. Gross receipts are gross receipts, and you account for returns in a separate line item.

#2. Invoice clients, or keep copies of receipts if you’re in a business that doesn’t use invoicing.

#3. NEVER COMMINGLE YOUR FUNDS. Your business income and expenses need to be kept separate

P.S. For wealth building and tax reduction tips, please join Howard Tax Prep LLC newsletter!

Business Taxes, Family Taxes, General Information, General Tax Topics, notary, Self Employed, signing agent, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

Two Ways to Fix Tax Return Mistakes Before the IRS Discovers Them

July 2, 2021 Howard Tax Prep LLC

In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have made an error (or errors) on their tax return. The tax law is complicated and constantly changing, so it’s easy to make a small, or large error that causes you to:

1.) underpay your tax, leaving you open to IRS penalties, or
2.) overpay your tax, meaning you gave a gift to the government.

However, if you made an error on your tax return, don’t worry; there’s good news: you can undo your mistake! Here’s even better news: there are two special ways to fix your incorrect tax return that will save you from paying more to the IRS than you would otherwise. We’ll tell you all about them in this article. —there are two easy ways to fix it:

A superseding return
A qualified amended return

A superseding return is an amended or corrected return filed on or before the original or extended due date. The IRS considers the changes on a superseding return to be part of your original return.

A qualified amended return is an amended return that you file after the due date of the return (including extensions) and before the earliest of several events, but most likely when the IRS contacts you with respect to an examination of the return. If you file a qualified amended return, you avoid the 20 percent accuracy-related penalty on that mistake.

Superseding Return Example

You file a joint Form 1040 tax return electronically on February 21, 2022, for tax year 2021, but you later decide you want to file a separate return. Since the joint-filing election is irrevocable, on or before April 15, 2022 (which is the unextended due date for your 2021 Form 1040), you must file a superseding return to undo the joint election.

IRS electronic filing rules for amended returns do not permit you to file this superseding return electronically, because you are changing your filing status (from married, filing jointly, to married, filing separately). That being said, your only other option is to use “snail mail.” Using a paper return via snail mail, you’ll submit either:

1.) A second original Form 1040 return using the married-filing-separately filing status, or
2.) An amended Form 1040X showing the change from joint to separate filing status.
Be sure to write “SUPERSEDING RETURN – IRM 21.6.7.4.10” in red at the top of page 1 of either Form 1040 or Form 1040X.

Qualified Amended Return Example

You realize your return preparer left a $30,000 IRA distribution off your 2019 tax return. Ouch!
Let’s assume you are in the 32 percent tax bracket and had no federal income tax withholding on the distribution: you owe an additional $9,600 in federal income tax on your 2019 tax return due to this distribution.

If you file an amended return before the IRS contacts you about the missing income, then it’s a qualified amended return, and you avoid $1,920 (20percent of $9,600) in audit penalties.

If you don’t file the amended return, and if the IRS contacts you about the missing income, the IRS will propose the $1,920 penalty. You may be able to request penalty relief, but you’ll have to make your case, and the facts may or may not be on your side.

In both circumstances, you’ll also pay interest on the $9,600 back to July 15, 2020 (the COVID-19-postponed 2019 Form 1040 due date). Of course, the earlier you pay the tax, the less interest you’ll accrue. You’ll pay less interest with a qualified amended return because you’re paying the tax sooner.

Business Taxes, Family Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

What is the unpardonable sin in an IRS audit?

October 18, 2020 Howard Tax Prep LLC

Here in our Chicago South Loop Tax Preparation Office, we help clients that have been audited, and we help resolve tax debt. Suppose for a moment that you are one of our clients, and that you’ve just received that lovely letter from the IRS telling you that you are the subject of an IRS audit.

What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?

Think of the record people most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be.

Red-Flag Record for the IRS Examiner

Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too.

This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.

The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.

Do as the Tax Form Says

As a one-owner or husband-and-wife-owned business, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:

Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
List your total business/investment miles on each vehicle.
List your total commuting miles on each vehicle.
List your total personal miles on each vehicle.

IRS Form 4562 has columns for answers to the above questions for up to six vehicles used by either a sole proprietor or an owner of more than 5 percent of a corporation, a partnership, or another entity.

The mileage log (we strongly recommend MILE IQ) is the record of proof that you need to use for your answers to the tax form questions.

Do What the Audit Would Require

Above, we said to do as the IRS form says. For additional clarification, it is good to know what information the IRS, in a correspondence audit, requires you to provide related to that tax form:

Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
Send copies of logbooks and other records to support the business mileage claimed.
Provide a copy of your appointment book or calendar of business activities for the year.
If you are claiming actual expenses, provide copies of paid bills, invoices, and canceled checks for automobile expenses. These would include gas, oil, tires, repairs, insurance, interest, tags, taxes, parking fees, and tolls.
Send a copy of the bill of sale or other verification to establish your basis in the vehicle, including the trade-in of another vehicle.

Note that the IRS is looking for

a match of the repair bill odometer reading with the mileage in your logbook;
a match of the inspection slip odometer reading with the mileage in your logbook;
the mileage between repair stops, to see whether that ties in with your claimed mileage; and
a business purpose that ties in with your appointment book or other calendar of business activities.

Takeaways

If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day.

The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. We have seen dozens and dozens of IRS audits end favorably and quickly upon presentation of a good mileage log.

On the other hand, a bad mileage log can turn your IRS examiner into an 800-pound gorilla.

Think of it this way: your mileage log (we strongly recommend MILE IQ) gives you the choice to get in and out of the IRS audit quickly and with your wallet or to spend time with an 800-pound gorilla.

References

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