Tax News & Views Online Account Oatmeal Muffin Roundup

IRS’s Online Accounts Get Partnership and S Corp Upgrades - Jonathan Curry, Tax Notes ($):

Partners and S corp shareholders can now use the IRS’s online tool to download business tax transcripts and review the business’s name on file and balance due, the agency announced December 18. Online business account access for other types of businesses and roles is coming soon, according to the IRS website. The agency first rolled out in early October the business online accounts for sole proprietors who file business tax returns using an employer identification number.

The business online accounts had limited functionality when they were first enabled. At that time, sole proprietorships could only check to see if their business was compliant, review their business’s name and address on file with the IRS, and grant access to others in their business. Already, the IRS has expanded its offerings for sole proprietors, enabling them to view business tax records and select digital notices, as well as register for clean energy credits if eligible.

IRS expands business tax account access to S corporations, partnerships; adds ability to view business tax transcripts - IRS. "Individual partners and individual shareholders will be able to access business tax account information once they have filed a business return with the Schedule K-1 and it is processed by the IRS. To access business tax account, individuals must have a Schedule K-1 for a minimum of one year during the 2019-2022 period on file. They will only be able to view information for the year(s) they have a Schedule K-1 on file. New businesses won't have access until a business return is submitted, processed, and on file with the IRS."

Penalty Relief Finalized For Minor Errors In Payee Statements - Kat Lucero, Law360 Tax Authority ($):

Taxpayers who unwittingly report small errors in their information returns and payee statements can find relief from civil penalties for providing the wrong information under final regulations released Monday by the Internal Revenue Service.

The regulations provide a safe harbor for returns and statements with de minimis errors, meaning wrong dollar amounts that don't exceed $100 or, for amounts of tax withheld, $25. The rules also offer clarification meant to help securities brokers avoid inconsistencies in basis reporting, which was a concern raised during the public comment period.

IRS Deems Maine Energy Relief Payments Exempt From Federal Tax - Benjamin Valdez, Tax Notes ($). "The $450 checks, sent to Maine taxpayers under a bill (L.D. 3) enacted earlier this year to provide relief from high energy prices, qualify as disaster relief payments under IRC section 139(b)(4), IRS acting Chief Counsel William Paul said in a December 15 letter to Department of Administrative and Financial Services Commissioner Kirsten Figueroa."

Texas Franchise and Property Tax Relief- Melissa Menter, Eide Bailly:

Businesses with Texas activity under the gross receipts or tax liability thresholds (commonly known as the “no tax due threshold”) no longer need to file a no tax due report.

The bill also increases the gross receipts threshold from $1 million to $2.47 million. These changes are effective for franchise tax reports originally due on or after January 1, 2024.

Note that taxable entities with annualized total revenues less than or equal to the no tax due threshold must still file a Public Information Report or Ownership Information Report.

Senator presses IRS on scam victims being hit with big tax bills - Michael Laris, Washington Post:

Brazil approves a major tax reform overhaul that Lula says will ‘facilitate investment’ - Eléanore hughes, AP via The Hill:

The tax reform will merge the five main levies into two value-added taxes: one federal and another to be shared between states and municipalities.

Brazil has had a reputation of one of the tax systems with the greatest compliance burden on businesses.

Related: Eide Bailly International Business Structuring. 

Markets Are Rallying. How to Make the Most of Them. - Laura Saunders, Wall Street Journal:

Now, many bondholdings remain in the red, despite the market’s rally since mid-October. For the three years ended Nov. 30, the cumulative loss in price for both corporate and intermediate core bond funds is about 20%, according to Morningstar Direct. (Bond prices, which exclude income payouts, are a better measure of investors’ gains or losses for tax purposes than total returns.) 

The good news is that these losses have a silver lining. As with losses on stocks, investors can use them to reduce taxes on their investment gains if the bonds or bond funds are held in taxable accounts rather than tax-sheltered retirement accounts such as IRAs or 401(k)s. 

Student athletes need an NIL tax game plan - Kay Bell, Don't Mess With Taxes. "Don't rely on luck, though, in your off-field NIL or NFL taxable earnings. The IRS can be a formidable foe, so get yourself a good financial and tax advisor. That's advice that applies to all us non-athletes, too."

Rudy Giuliani Can Write Off $148 Million Verdict While Plaintiffs Pay Tax On 100% - Robert Wood, Forbes. "Was Giuliani engaged in his business of being a lawyer for former President Trump at the time, or acting in some other business pursuit? Maybe, and that suggests he may have a good chance of viewing a verdict or settlement he might pay to the election workers as business expenses. In contrast, the plaintiffs have to pay tax on all of it, maybe even the funds going to their lawyers."

I'm not sure that will be great consolation.

An IRS Identity Protection Unit Saga: Part 5 - Russ Fox, Taxable Talk. "We haven’t received any communications from anyone, for that matter, since my client successfully verified his identity.  Meanwhile, the interest owed to my client has passed $4,500–something you and I will be paying for.  It’s hard to see my client receiving his refund for at least another month; by the time this saga ends it’s likely interest will exceed $5,000."

Last Minute Scramble To Delay New Law Impacting Small Businesses - Kelly Phillips Erb, Forbes. "A 2021 law, the Corporate Transparency Act—or CTA—which requires reporting companies to file reports with FinCEN, the Financial Crimes Enforcement Network, is getting new looks from the tax and business communities. Here’s what the commotion is about—starting Jan. 1, 2024, many companies will be required to report information to the U.S. government about who ultimately owns and controls them. Many say they’re not ready."

House Passes a Bill to Extend Some Initial BOI Reports Before Going on Recess - Ed Zollars, Current Federal Tax Developments. "Even if this bill becomes law, the first initial reports would still be required by late March of 2024 for entities formed early in 2024, as the due date for those reports are not changed by this bill as currently drafted."

Georgia Taxpayers Lose $160,000 for Every Job Created by Film Tax Credits - Eric Boehm, Reason. "A new audit of Georgia's Film Tax Credit program found that the state "loses money" on the program. A lot of money, actually: about $160,000 for every job the program creates. Georgia is now spending about $1.3 billion annually on the program, but it generates a return on investment of just 19 cents per dollar, the auditors conclude."

The Era of Big Taxes Is Upon Us - Tom Fairless, Wall Street Journal. "In the U.S., tax receipts at all levels of government climbed to nearly 28% of GDP last year, up from 25% in 2019 and the highest level since at least 1965, aside from a brief period of budget consolidation during the Clinton administration. During the late 1990s, the U.S. turned budget deficits into surpluses with tax increases, spending restraint and fast economic growth."

Breaking Down the Child Tax Credit: Refundability and Earnings Requirements - Andrew Lautz and Rachel Snyderman, Bipartisan Policy Center. "The main difference between refundability and earnings requirements is that refundability concerns the income tax liability of a taxpayer while income requirements concern the earnings of a taxpayer. Understanding the difference is important for policymakers working on CTC reform."

Business Owner Couldn’t Backfill Material Participation Proof - Nathan Richman, Tax Notes ($):

A federal district court rejected a taxpayer’s attempt to prove, via contracts signed in subsequent tax years, that he materially participated in three businesses as a way out of the net investment income tax.

The employment agreements signed in later tax years specifying minimum participation requirements aren’t good proof of the taxpayer’s material participation and instead “appear to be an obvious effort to ‘paper over’ a lack of any meaningful, contemporaneous records” of the taxpayer’s activities, Judge William M. Conley of the U.S. District Court for the Western District of Wisconsin wrote in a December 15 order...

The case illustrates problems that come up when taxpayers need to prove that they are "materially participating" in a business. This commonly comes up in two situations:

1. When the owner of a profitable business wants to avoid the 3.8% "net investment income tax," which doesn't apply to non-passive income from partnerships and S corporations, and

2. When the owner wants to avoid limits on "passive" losses.

The same material participation rules apply in both situations.

In this case, the taxpayer said he met one of the tests: "The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test."

On audit, the IRS found that the taxpayer failed to materially participate and owed over $100,000 in net investment income tax for 2014 and 2015.

The taxpayer had a serious problem: he couldn't document that he did enough work in any of the activities to qualify as non-passive. So he turned to paperwork, signing employment agreements with three entities requiring him to work 250 hours or so for each of them. This failed to convince the court (taxpayer name omitted, empahsis added):

To begin, the post-event employment agreements Taxpayer signed with Reconyx and DFC do nothing to substantiate the hours Taxpayer now purports to have worked for either company in 2014 and 2015. If anything, they appear to be an obvious effort to “paper over” a lack of any meaningful, contemporaneous records of Taxpayer's actual activities. Thus, the agreements are not reasonably meaningful evidence of his actual work. In particular, language in the agreements obligating Taxpayer to work 276 and 255 hours in future years “consistent with historical practices,” as well as testimonial evidence, appear to be a rather blatant, post-hoc attempt to document the hours Taxpayer worked. Moreover, while the agreements are purportedly between distinct companies: (1) the headings, structure and language of the provisions, including the “historical practices” language, are nearly identical; (2) Taxpayer is the only signatory on the DFC agreement; and (3) the CEO and chairman of the board of directors of Reconyx, testified at his deposition that he “honestly [did] not know where that number [276 hours] came from.”

Decision for IRS. 

The moral? You should document that you are non-passive as you go - not later when you get audited. Keep your calendars. Keep a spreadsheet or log showing the days and hours you work on each activity, with notes showing what you are doing; "working" isn't a very helpful notation. Yes, the recordkeeping annoying, but it could have been worth over $200,000 for this taxpayer.

Thanks mom. From the IRS Criminal Investigation news story Altamonte Springs dentist sentenced to two years in federal prison for tax evasion (Taxpayer name omitted):

Senior United States District Judge Gregory A. Presnell has sentenced Defendant to two years in federal prison for tax evasion. In addition to the prison sentence, Defendant was ordered to pay the Internal Revenue Service (IRS) $896,588.89 for his outstanding tax liabilities. A federal jury had found Defendant guilty in August 2023.

According to testimony and evidence presented at trial, Defendant amassed more than $600,000 in tax liabilities to the IRS between 2014 and 2020. He evaded tax payments on his income by hiding hundreds of thousands of dollars in his mother's bank accounts (for which he had signatory authority), trading funds overseas in his mother's name, and making materially false statements to the IRS on financial disclosure forms.

Don't do that.

Something for everyone. It's National Oatmeal Muffin Day and National Emo Day!