Overlook on understanding the new business deductions and how it could impact your taxes.

lUnderstanding-sec-199A-business-income-deduction

Why Americans financial pain is lower

Americans continue to experience high levels of personal financial satisfaction thanks primarily to the stock market’s best June performance in decades. The AICPA’s Q2 2019 Personal Financial Satisfaction Index (PFSi) is down slightly from the prior quarter but still remains relatively close to its recent record high. The bull market, abundant job openings, and steadily rising home equity have Americans’ financial pleasure hovering near its all-time high. Further, as a result of delinquencies on loans continuing to trend down and underemployment reaching its lowest level on record in a tight labor market, financial pain is lower now than it was before the Great Recession.

The PFSi is calculated as the Personal Financial Pleasure Index (Pleasure Index) minus the Personal Financial Pain Index (Pain Index). Positive readings indicate that the average American should be feeling a strong sense of financial well-being. The Q2 2019 PFSi measures 37.8, a 0.8 point (2.0 percent) decrease from the prior quarter. The decrease was due to the slight 0.1 point (0.1 percent) increase in the Pleasure Index being outweighed by the 0.9 point (2.5 percent) increase in the Pain Index (an increase in the Pain Index brings down the PFSi overall). This is the second time in the past year that the index has decreased.

The Pleasure Index measures 74.1, a 0.1 point (0.1 percent) increase over the prior quarter. This gain puts the Pleasure index just shy of its all-time high of 75.0 which was set in Q3 2018. The component with the most notable improvement over the last quarter was the PFS 750 Market Index. This is the AICPA’s proprietary stock index comprised of the 750 largest companies trading on the US Market adjusted for inflation and per capita. With a Q2 2019 reading of 91.9, the PFS 750 remains the leading contributor to the Pleasure Index as well as the PFSi overall and is just shy of its all-time high of 92.7 set in Q3 2018. The S&P 500, the Dow Jones industrial average and the Nasdaq composite index were all close to all-time highs at the end of June. Their performance caps off a strong first half of 2019 and a big rebound from May’s market downturn. However, the good news is slightly tempered by the fact that the improvement relied on just five digital economy companies for a third of the gains over the past quarter.

“Having the bulk of your investments in one or two stocks is a risky strategy because of their individual volatility,” said Mark Astrinos, CPA/PFS member of the AICPA Personal Financial Specialist Credential Committee. “Pullbacks are a regular occurrence for risk assets, so it is crucial to not put all your eggs in one basket—or in this case, all your investments in one company or industry. Instead, build a financial plan with a diversified and balanced portfolio that will lend itself to smoother gains and downsize risk over a longer time horizon.”

The AICPA CPA Outlook Index, which captures the expectations of CPA executives in the year ahead for their companies and the U.S. economy, declined a slight 0.9 points (1.8 percent) below the previous quarter and is down 3.7 points (6.8 percent) from last year. Compared with the year ago CPA Outlook Index, all components show declines, strongly led by US Economic Optimism whose decline was almost 3 times that of any other factor. So, while Americans are experiencing near record high levels of financial satisfaction, CPA executives are becoming somewhat more worried about the potential for an economic downturn in the year ahead.

The Personal Financial Pain Index, at 36.3, saw inflation and taxes increase from the previous quarter, combining to raise the index 0.9 points (2.5 percent). The increase in the Pain Index contributed to the decline in the PFSi overall. The Inflation Index led the increase over the preceding quarter, jumping up 4.8 point (15.5 percent). Inflation is the most volatile factor contributing to the PFSi, and with absolute levels so low, small changes result in large percent gains. The Fed has indicated that they anticipate cutting rates in the future, possibly as soon as this month.

“With the potential that the Fed may lower rates on the horizon, Americans should revisit the inflation assumptions used in their financial plans, especially if they are in, or close to, retirement. Lower rates favor the borrower over the investor. While rates are holding steady, now is a good time to review your investments and make sure they are at a minimum keeping up with inflation. Otherwise, it may be time to update your portfolio,” added Astrinos. 

Pain from personal taxes increased 1.5 points (3.1 percent) over the previous quarter and is now at a reading of 49.4 for Q2 2019. This is now the sixth quarter to reflect the impact of the Tax Cuts and Jobs Act (TCJA). After TCJA led to an initial decline of 3.9 points (7.5 percent) in Q1 2018, the quarterly levels remained relatively flat. However, compared to the year-ago level, pain from taxes is up 2.1 points (4.4 percent) and is now only 2.6 points (5.1 percent) lower than its pre-TCJA reading of 52.1 in Q4 2017. The personal taxes value uses information from the Bureau of Labor Statistics on income tax, tax on realized net capital gains and taxes on personal property. Pain from personal taxes continues to be an outsize contributor to financial pain. In fact, over the last three years, the personal taxes factor has been the largest contributor to financial pain for 10 of 12 quarters.

Underemployment, at 31.2 points, is 1.1 points (3.3 percent) lower than the prior quarter and 3.2 points (9.3 percent) down from the prior year level. Since the Great Recession, underemployment has been steadily trending down and it is now tied for its all-time low which was last achieved in 2001. For comparison, its peak value of 84.3 was set in the fourth quarter of 2009. This BLS-calculated factor is a combination of full-title total unemployed numbers, all marginally attached workers, and total number of workers employed part-time for economic reasons.

President Biden is looking to add $2.1 billion more to the Department of the Treasury budget over 2023 enacted levels, an increase that would give the agency $16.3 billion in discretionary budget authority, with the majority of those funds earmarked for the Internal Revenue Service.

President Biden is looking to add $2.1 billion more to the Department of the Treasury budget over 2023 enacted levels, an increase that would give the agency $16.3 billion in discretionary budget authority, with the majority of those funds earmarked for the Internal Revenue Service.

"To ensure that taxpayers receive the highest quality customer service and that all Americans are treated fairly by the U.S. tax system, the Budget provides a total of $14.1 billion for the IRS, $1.8 billion, or 15percent, above the 2023 enacted level," the White House stated in the budget document released on March 9, 2023.

On the same day, the Treasury Department released the so-called “Greenbook” which outlines the administration’s revenue proposals for Fiscal Year 2024.

Adding some additional details, the budget document noted that the IRS budget includes "an increase of $642 million to improve the taxpayer experience and expand customer service outreach to underserved communities and the entire taxpaying public," the document states, adding that $290 million will be allocated to information technology modernization.

The budget document also notes that in "addition to the annual discretionary funding, the Budget proposes to maintain deficit reducing Inflation Reduction Act-funded initiatives in 2032 and beyond. This proposal builds on decades of analysis demonstrating that program integrity investments to enforce existing tax laws and increase revenues in a progressive way by closing the tax gap—the difference between taxes owed and taxes paid."

Tax Policy Highlights

The budget document notes that spending within the overall budget will be offset "by tax reforms to ensure that the wealthiest Americans and multinational corporations pay at least a minimum tax rate and reforming taxation of stock buybacks," which is expected to reduce the deficit by $1.17 trillion during the next decade.

On the corporate side, the document states it plans to raise the corporate income tax rate to 28 percent.

The budget also notes that it will invest "in working families, by cutting taxes for working people and families with children, providing paid leave, and improving home care."

President Biden is proposing in the budget to restore "and make permanent the American Rescue Plan expansion of the Earned Income Tax Credit for workers without qualifying children," as well as other tax provisions, including:

• Providing a neighborhood homes credit;
• Expanding and enhancing the low-income housing credit;
• Expanding the child credit, and making permanent full refundability and advanceability;
• Making the adoption tax credit refundable and allowing certain guardianship arrangements to qualify; and
• Making permanent the income exclusion for forgiven student debt.

The Greenbook also provides some additional clarity on the tax policy proposals. The Biden Administration once again will be seeking the implementation of a billionaire minimum tax of 25 percent, targeted at the wealthiest 0.01 percent of individuals to ensure they are paying their fair share of taxes.

The budget also includes health-related tax policy proposals, including the closure of Medicare tax loopholes and increasing the Medicare tax and the Net Investment Income Tax rate by 1.2 percentage points above $400,000 for a total Medicare tax rate of 5 percent on high-income taxpayers. It also looks to expand tax credits for health insurance premiums.

The IRS has offered tips to taxpayers who received an incorrect Form 1099-K, Payment Card and Third-Party Network Transactions or received one of these forms in error. 2022 transactions were reported on the form taxpayers received by January 31, 2023. If the information on the form is incorrect or wrong, taxpayers are directed to contact the issuer of the Form 1099-K immediately. The issuer’s name appears in the upper left corner on the form along with their phone number. Further, taxpayers should keep a copy of all correspondence with the issuer for their records.

The IRS has offered tips to taxpayers who received an incorrect Form 1099-K, Payment Card and Third-Party Network Transactions or received one of these forms in error. 2022 transactions were reported on the form taxpayers received by January 31, 2023. If the information on the form is incorrect or wrong, taxpayers are directed to contact the issuer of the Form 1099-K immediately. The issuer’s name appears in the upper left corner on the form along with their phone number. Further, taxpayers should keep a copy of all correspondence with the issuer for their records.

If taxpayers can’t get a corrected Form 1099-K, they should report the information on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, as follows:

• Part I – Line 8z – Other Income – Form 1099-K Received in Error.
• Part II – Line 24z – Other Adjustments - Form 1099-K Received in Error.

The net effect of these two adjustments on adjusted gross income would be $0.

Personal Item Sold at Loss

If a taxpayer receives a Form 1099-K for a personal item sold at a loss, report the information on Schedule 1 with offsetting transactions. The net effect of these two adjustments on adjusted gross income would be $0.

Personal Item Sold at Gain

If a taxpayer sells an item owned for personal use, they should report the gain as any other capital gain on Form 8949, Sales and other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses.

Mix of Personal Items Sold

If a taxpayer sold an item owned for personal use at a gain, see Personal items sold at a gain for information on how to report. For personal items sold at a loss, follow the instructions for Personal items sold at a loss.

New Reporting Threshhold

The IRS announced that the new Form 1099-K reporting threshold will start in tax year 2023.

• The old threshold was $20,000 and 200 transactions per year. This applies to tax year 2022 and prior years.
• The new threshold is more than $600. This applies to tax year 2023 and future years.

The IRS has provided relief that permits taxpayers affected by the Coronavirus Disease 2019 (COVID-19) emergency who had a return filing due date postponed by Notice 2020-23, I.R.B. 2020-18, 742, or Notice 2021-21, I.R.B. 2021-15, 986, who did not receive an extension of time for filing such return, and who file timely credit or refund claims, to be credited or refunded amounts deemed paid on April 15 of each year.

The IRS has provided relief that permits taxpayers affected by the Coronavirus Disease 2019 (COVID-19) emergency who had a return filing due date postponed by Notice 2020-23, I.R.B. 2020-18, 742, or Notice 2021-21, I.R.B. 2021-15, 986, who did not receive an extension of time for filing such return, and who file timely credit or refund claims, to be credited or refunded amounts deemed paid on April 15 of each year.

Among other things, Notice 2020-23 postponed certain federal tax return filing and payment obligations that were due to be performed on or after April 1, 2020, and before July 15, 2020, to July 15, 2020. Notice 2021-21 postponed the due date for both filing Form 1040 series returns with an original due date of April 15, 2021, and making federal income tax payments in connection with one of these forms, to May 17, 2021.

Under Code Sec. 6511, a taxpayer must file a refund or credit claim within three years from the time the taxpayer’s return was filed, or two years from the time the tax was paid, whichever period expires later. Under Code Sec. 6511(b)(2), the credit or refund amount is limited to the amount of tax paid within a specified period immediately preceding the filing of the refund or credit claim (the "lookback period"). When a taxpayer files a claim within three years of filing the return, the lookback period is three years plus the period of any extension of time for filing the return. Otherwise, the lookback period is two years.

While Notice 2020-23 and Notice 2021-21 postponed certain return filing due dates, they did not extend the time for filing the returns because a postponement is not an extension. As a result, the postponements did not lengthen the lookback periods.

Relief for Determining Lookback Period

The relief applies for determining the credit or refund amount on the tax for which the return filing or payment due date was postponed:

• For any person with a federal tax return filing or payment obligation that was postponed by Notice 2020-23 to July 15, 2020, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in determining the beginning of the lookback period.
• For any person with a filing or payment obligation for a Form 1040 series federal income tax return that was postponed by Notice 2021-21 to May 17, 2021, the period beginning on April 15, 2021, and ending on May 17, 2021, will be disregarded in determining the beginning of the lookback period.

The relief is automatic, so affected taxpayers do not have to call the IRS, file any form, or send letters or other documents to receive the relief.

The IRS has issued final regulations for filing certain returns and other documents electronically (e-file). The regulations affect persons required to file returns for partnerships, corporations, unrelated business income tax, withholding, excise taxes, as well as information returns, disclosure statements, and other documents

The IRS has issued final regulations for filing certain returns and other documents electronically (e-file). The regulations affect persons required to file returns for partnerships, corporations, unrelated business income tax, withholding, excise taxes, as well as information returns, disclosure statements, and other documents. The electronic filing requirements generally apply to applicable returns and documents required to be filed beginning in 2024, except for returns of tax-exempt organizations which apply to tax years beginning after July 1, 2019.

Electronic Filing

The final regulations generally adopt the proposed regulations issued in 2021 for electronic filing under the following Code Section:

• Code Secs. 1474, 6011, 6012, 6033, 6057, 6058, and 6059 for determining whether applicable returns and documents must be filed electronically,
• Code Sec. 6011 for reporting certain excise taxes,
• Code Secs. 1461 and 1474 for withholding income taxes on U.S. source income of foreign persons,
• Code Secs. 6045 and 6050M for certain broker reporting and federal agency contracts, and
• Code Sec. 6050I for reporting financial transactions in cash exceeding $10,000.

Like the 2021 proposals, the final regulations generally require e-filing by taxpayers other than individuals if, during the calendar year, they are required to file 250 or more returns. The final rules also eliminate the e-filing exception for income tax returns of corporations that report total assets under $10 million at the end of their taxable year. Partnerships with more than 100 partners are required to e-file information returns, and they require partnerships required to file at least 10 returns of any type during the calendar year to e-file their partnership return.

Information Returns

Under Code Sec. 6011(e) and related regulations, filers are already required to file information returns and statements electronically if, during a calendar year, they are required to file 250 or more returns. The 2021 proposed regulations would have reduced the applicable threshold to 100 or more returns for returns required to be filed during 2022 and 10 or more returns for returns required to be filed after calendar year 2022.

Because the final regulations are not applicable until calendar year 2024, the proposed electronic-filing thresholds of 100 and 10 returns, respectively are not adopted. Instead, the electronic-filing threshold for information returns required to be filed in calendar years 2022 and 2023 remains at 250. However, the final regulations adopt the electronic-filing threshold of 10 for returns required to be filed on or after January 1, 2024.

In addition, the final regulations adopt the proposed rule without any change that if a person is required to file original information returns electronically, that person must file any corresponding corrected information returns electronically.

Waivers and Exemption

Many of the regulations imposing electronic-filing requirements also provide a waiver from electronic filing to any person who establishes undue hardship. The final regulations adopt several changes in reviewing waiver requests, noting that costs to a taxpayer will only be one factor. The Treasury and IRS anticipate providing additional details on the specific hardship-waiver procedures for each form affected by the final regulations, including exemptions for taxpayers whose religious belief conflict with the electronic filing requirement. The final regulations do not provide for waivers and exemptions in all circumstances or for all tax forms required to be electronically filed.

The Financial Crimes Enforcement Network (FinCEN) has published its first set of guidance materials to aid the public, and especially the small business community, in understanding the beneficial ownership information (BOI) reporting requirements which will take effect on January 1, 2024.

The Financial Crimes Enforcement Network (FinCEN) has published its first set of guidance materials to aid the public, and especially the small business community, in understanding the beneficial ownership information (BOI) reporting requirements which will take effect on January 1, 2024.

The Corporate Transparency Act (CTA) established uniform BOI reporting requirements for certain types of corporations, limited liability companies, and other similar entities created in or registered to do business in the United States. New FinCEN regulations require these entities to report to FinCEN information about their "beneficial owners"—the persons who ultimately own or control the company.

In an effort to make the process as simple as possible, particularly for small businesses who may have never heard of or interacted with FinCEN before, FinCEN has placed several items on its BOI reporting webpage (https://www.fincen.gov/boi), including:

• answers to Frequently Asked Questions about the reporting requirement;
• a Key Filing Dates document;
• a one-page document covering a few Key Questions on the BOI requirement;
• a link to an introductory video; and
• a link to a more detailed video about the BOI requirement.

In the coming months, FinCEN expects to publish additional guidance on the BOI webpage, including a Small Entity Compliance Guide.

The American Institute of CPAs is suggesting a series of frequently asked questions for the Internal Revenue service to post and answer on its website regarding the new digital asset question that appears on the 2022 Form 1040.

The American Institute of CPAs is suggesting a series of frequently asked questions for the Internal Revenue service to post and answer on its website regarding the new digital asset question that appears on the 2022 Form 1040.

The 2022 Form 1040 asks the following yes/no question: "At any time during 2022, did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digitalasset (or a financial interest in a digitalasset)?"

In a February 17, 2023, letter to the agency, AICPA identified 12 questions and offered recommended responses to those questions that the IRS could include on its website to guide taxpayers on how to answer the digital asset question. Among the questions the organization is recommending the IRS answer are:

• What is a digital representation of value?
• What is a cryptographically secured distribution ledger as used in the Form 1040 question?
• How do I determine if my digital asset is recorded on a cryptographically secured distributed ledger?
• What is considered "similar technology" to a cryptographically distributed ledger?
• What are the "characteristics of a digitalasset" as that term is used in the 2022 Form 1040 instructions?
• Does a "yes" answer to the 2022 Form 1040 digital asset question mean that I have tax consequences from digital asset transactions that should be reported on my 2022 Form 1040?

AICPA sent the letter in hopes that "IRS will consider posting these or similar FAQs on the website for this 2022 tax return filing season and that the 2023 Form 1040 instructions will be modified for next year to provide greater certainty to taxpayers and their preparers in confidently and properly complying with the question and overall requirements for digitalasset," the letter states.

A copy of this letter can be found with all of AICPA’s tax policy and comment letters here.

The IRS added widely circulating promoter claims involving Employee Retention Credits (ERC) as a new entry in the annual Dirty Dozen list of tax scams.

The IRS added widely circulating promoter claims involving Employee Retention Credits (ERC) as a new entry in the annual Dirty Dozen list of tax scams. These promotions can be based on inaccurate information related to eligibility for and computation of the credit. Eligible taxpayers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020 through December 31, 2021.

"The aggressive marketing of these credits is deeply troubling and a major concern for the IRS," said IRS Commissioner Danny Werfel. "Businesses need to think twice before filing a claim for these credits. While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits. People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes," he added.

Further, abusive ERC promotions highlight day one of the IRS annual Dirty Dozen campaign. These are a list of 12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more. Finally, more information can be found here.

The U.S. Government Accountability Office is offering recommendations to close the tax gap, a move it says could yield large fiscal benefits even if there is only a modest narrowing of the gap between what is paid and what is owed.

The U.S. Government Accountability Office is offering recommendations to close the tax gap, a move it says could yield large fiscal benefits even if there is only a modest narrowing of the gap between what is paid and what is owed.

In a "snapshot" report issued February 27, 2023, the GAO cited Internal Revenue Service-reported figures for the years 2014-2016 that show taxpayers owed $3.3 trillion in taxes but paid only $2.8 trillion. GAO analysis of IRS data attributes the gap to three key factors: underreporting ($398 billion); underpayment ($59 billion); and nonfiling ($39 billion).

GAO reported a number of factors that have contributed to the tax gap, including limited third-party information reporting, declines in audit rates, worsening customer service and the complexities of the tax code. It also noted that abusive tax shelters also play a role in contributing to the tax gap. The report did not quantify how much these factors contributed to the tax gap.

"Our work shows there are no easy ways to reduce the taxgap," the report states. "Multiple approaches are needed to address the many causes of tax noncompliance."

The government watchdog recommends that the IRS re-establish quantitative goals to reduce the tax gap; expand third-party information reporting; digitize taxpayer returns to make them more readily available to enforcement programs; and make it easier for individuals to report preparers and promoters involved in abusive tax schemes.

It also is recommending that Congress give the IRS explicit authority to establish professional requirements for paid preparers; expand third-party reporting requirements related to real estate; expand IRS authority to correct errors and discrepancies between taxpayer reported and other government collected information; and requiring paper returns include a scannable code to allow information to be processed digitally.

The GAO did not quantify how much benefit the federal government could get with even a modest reduction in the tax gap.

Panelists convened to testify before the Senate Finance Committee called for enhancements of the low income housing tax credit as a means of making real estate more available and affordable.

Panelists convened to testify before the Senate Finance Committee called for enhancements of the low income housing tax credit as a means of making real estate more available and affordable.

During a March 7, 2023 hearing, Denise Scott, president of Local Initiatives Support Corporation, testified that the credit "has been responsible for the production of most of the affordable housing, and more than 50 percent of the households in tax credit properties are extremely low income families."

An overview of various tax policies was prepared for the hearing by the Joint Committee on Taxation and can be found here.

She suggested Congress could "spur the creation of over 2 million more rental units over the next decade by restoring the 12.5 percent increase to the formula for the allocated tax credits." That increase was enacted in 2018 but expired in 2021.

Sharon Wilson Geno, president of the National Multifamily Housing Council, recommended that the low income housing tax credit be expanded to capture more middle class families and build "off of the success of the low income housing tax credit."

However, Mark Calabria, senor advisor at the Cato Institute, urged a little restraint when it comes to using tax policy to stimulate the housing market.

"Most indicators suggest that rents would decline over the next 12-to-18 months," he testified before the committee. "So, I would just urge some cautiousness to thinking about adding stimulus to additional construction at a time when we are likely passing the peak of the cycle."

Wilson Geno said that the private market "simply cannot afford to provide housing in the amounts we need it in the lowest income tiers, and also the middle-income tier. So those tax incentives are incredibly useful."

Calabria also cautioned about offering any additional credits that are focused on the demand side of housing equation.

"We need to be cautious about adding demand subsidies that simply run up prices, which is how we’ve gotten the inflationary pressures we face today," he said.

Department of the Treasury Secretary Janet Yellen was noncommittal on the idea of trading a permanent child tax credit for the elimination of the state and local tax deduction.

Department of the Treasury Secretary Janet Yellen was noncommittal on the idea of trading a permanent child tax credit for the elimination of the state and local tax deduction.

Yellen was faced with this question during a March 16, 2023, Senate Finance Committee hearing convened to discuss the Biden Administration’s proposed budget for fiscal year 2024 and the corresponding so-called "Greenbook," which outlines proposed changes to tax policy that in total reflect how the government plans to pay for changes to the overall budget.

Sen. Steve Daines (R-Mont.) noted that the White House budget proposal increases the child tax credit from $2,000 to $3,600 and makes it fully refundable and deliverable on a monthly basis.

"However, I see they didn’t make that change permanent," Sen. Daines said, adding that increase would expire in 2025. "My question is this: does the President believe that the child tax credit should be made permanent for $3,600? And if so, are you willing to eliminate the SALT deduction, which overwhelmingly benefits the wealthy, to give working families an expanded child tax credit that, importantly, never ends?"

Yellen explained that the reason for the proposed expanded tax credit expiring in 2025 is due to other provisions in the Tax Cuts and Jobs Act that will expire in 2025 that affect the child tax credit.

"And then there will need to be consideration of what to do," Yellen said, while offering no explicit comment on the desire to make the child tax credit permanent and not addressing at all the possibility of making the CTC permanent while at the same time eliminating the SALT deduction.

One point Yellen was challenged on was on the promise that there would be no increases in taxes on individuals and corporations making less than $400,000. Sen. Todd Young (R-Ind.) suggested that President Biden would not be able to keep that promise based on provisions in the Tax Cuts and Jobs Act that would sunset in or after 2025.

"Well, there certainly are aspects of the TCJA that, if they sunset, would impact households [with] taxpayers earning under $400,000,”" Yellen testified. "And the President has, as you mentioned, pledged he doesn’t want to see taxes raised by a penny on anyone making under that. He stands ready to work with Congress."

However, when pressed further to provide a list of those sunsetting provisions that could push taxes higher for taxpayers making under $400,000, Yellen said that "I don’t know that I can provide you with that. I think there are a lot of complicated provisions." She declined to commit to providing the information within the two-week time frame that Sen. Young asked for, but pledged to work with the committee to provide the information.

A Mirror Of Previous Testimony

For the questions that covered the budget, the committee touched on many of the same subjects and asked similar questions of Yellen that the House Ways and Means Committee did on March 10, 2023, although conversations about the budget at times took a back seat to discussion on the recent bank failures and the government’s response to it as well as the looming need to address the debt ceiling.

When the budget was discussed, Yellen promoted the improvements to customer service, noting that the Internal Revenue Service has answered "hundreds of thousands" of more call calls this tax season than at the same point last year. She also pushed the Biden Administration’s targeting of the highest earning taxpayers, both individual and corporate, to get them to pay their fair share.

Yellen also reiterated the defense of the United States’ participation in the Organisation for Economic Co-operation and Development’s work on building a framework for implementing a global corporate minimum tax structure. She did emphasize that any agreement would not violate existing tax treaties between the United States and other individual countries, although there was pushback on whether that was accurate.

She also promoted the provisions in the Greenbook that will help close the housing supply gap, noting the budget has provisions to make to make rent and ownership more affordable.

Yellen also said the IRS plan to spend the $80 billion that was allocated to agency in the Inflation Reduction Act would be ready in the coming weeks.

The U.S. Supreme Court has ruled that the $10,000 maximum penalty under the Bank Secrecy Act (BSA) for the nonwillful failure to file a compliant Report of Foreign Bank and Financial Accounts (FBAR) accrues on a per-report, not a per-account, basis. This ruling settles a split in authority between the Ninth Circuit (J. Boyd, CA-9, 2021-1 ustc ¶50,112) and the Fifth Circuit (A. Bittner, CA-5, 2021-2 ustc ¶50,242).

The U.S. Supreme Court has ruled that the $10,000 maximum penalty under the Bank Secrecy Act (BSA) for the nonwillful failure to file a compliant Report of Foreign Bank and Financial Accounts (FBAR) accrues on a per-report, not a per-account, basis. This ruling settles a split in authority between the Ninth Circuit (J. Boyd, CA-9, 2021-1 ustc ¶50,112) and the Fifth Circuit (A. Bittner, CA-5, 2021-2 ustc ¶50,242).

Background

U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency (31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. 1010.350, 1010.306). If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for nonwillful violations, unless the violation was due to reasonable cause (31 USC 5321).

Here, the taxpayer nonwillfully failed to report his interests in multiple foreign bank accounts on annual FBAR forms for several years. The government assessed $2.72 million in civil penalties against the taxpayer: $10,000 for each unreported account each year for five years. The district court found the taxpayer liable and denied his reasonable cause defense, but reduced the assessment to $50,000 because it determined that the $10,000 maximum penalty attached to each failure to file an annual FBAR, not to each failure to report an account.

The Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the "violation" of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-report basis.

FBAR Penalty Per Report

In the majority opinion by Justice Gorsuch, the Court determined that 31 USC 5314, which delineates an individual’s legal duties under the BSA, does not mention accounts or their number, but instead addresses the legal duty to file reports which must include various kinds of information about an individual’s foreign transactions or relationships. Further, 31 USC 5321 authorizes the Treasury Secretary to impose a civil penalty of up to $10,000 for “any violation” of section 5314. The nonwillful penalty provision in section 5321 does not speak in terms of accounts or their number, but instead pegs the quantity of nonwillful penalties to the quantity of violations. While multiple deficient reports may yield multiple $10,000 penalties, and even a simple deficiency in a single report may expose an individual to a $10,000 penalty, the Court ruled that the penalties for nonwillful violations accrue on a per-report basis, not a per-account basis. Also, while section 5321 does tailor penalties to accounts for certain cases that involve willful violations, Congress did not say in section 5321 that the government may impose nonwillful penalties on a per-account basis.

The Court found other contextual clues that cut against the government’s arguments. First, the government's guidance to the public in various warnings, fact sheets, and instructions seemed to tell the public that the failure to file a report represented a single violation exposing a nonwillful violator to one $10,000 penalty. Also, when Congress amended the law in 2004 to authorize penalties for nonwillful violations, it did not apply language from previous amendments to willful penalties to authorize per-account penalties for nonwillful violations.

The Court also observed that other features of the BSA and its regulatory scheme suggested that the law aimed to provide the government with a report sufficient to tip it to the need for further investigation, not to ensure the presentation of every detail or maximize revenue for each mistake. Finally, the Court stated that the government’s per-account penalty reading of the statute invited anomalies, such as subjecting willful violators to lower penalties than nonwillful violators, that are avoided by reading the nonwillful penalty to apply on a per-report basis.

The Court concluded that, best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.

Dissenting Opinion

Justice Barrett’s dissent (joined by Justices Thomas, Sotomayor, and Kagan) stated that the most natural reading of the statute establishes that each failure to report a qualifying foreign account constitutes a separate reporting violation, so the government can levy penalties on a per-account basis.

The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The reworked Taxpayer First Act ( HR 3151) cleared the Senate on the evening of June 13. The revamped measure had been approved unanimously in the House on June 10.

"After years of good-faith, bipartisan work, our IRS reforms are finally going to become law," House Ways and Means Committee Chairman Richard Neal, D-Mass., and ranking member Kevin Brady, R-Tex., said in a joint statement. "In this historic legislation, we focused on putting taxpayers first."

Likewise, Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, praised the passage of the bipartisan, bicameral IRS reform bill. "It’s a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be," Grassley said in a statement. "I look forward to President Trump signing it into law so the IRS can begin implementing long overdue reforms that will put taxpayers first," he added.

Reworked Bill

The reworked IRS reform bill, originally introduced in the last Congress, was revised earlier in June after the House passed a prior version in April. However, the original House-approved Taxpayer First bill (HR 1957) was deemed doomed in the Senate by May because of recent controversy surrounding the IRS’s Free File program. Thus, the provision codifying the Free File program was stripped from the original bill; the measure was reintroduced as HR 3151. It then quickly cleared each chamber.

Service Improvements

Generally, the Taxpayer First Act aims to reform the IRS for the first time in 20 years to better meet the needs of taxpayers. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign its structure, modernize its technology, and enhance its cyber security. In addition, the new law will:

• waive the application fee for an offer in compromise (OIC) by a low-income taxpayer;

• clarify information available about low-income taxpayer clinics (LITCs);

• codify the Volunteer Income Tax Assistance (VITA) Program;

• require notice regarding the closure of taxpayer assistance centers (TACs);

• improve the IRS whistleblower program; and

• modify the private debt collection program.

Identity Protection

The legislation includes a number of provisions to help protect taxpayers from tax ID theft and improve taxpayer interaction with the IRS should they become a victim. For example, the IRS must provide a single point of contact for victims of identity theft, notification of suspected identity theft, and guidelines for stolen identity refund fraud cases.

The IRS is required to expand its current program that allows victims of tax ID theft to obtain a personalized PIN. Any individual must be allowed to request an identity protection personal identification number (IP PIN) to confirm a taxpayer’s identity on tax returns.

Electronic Filing

The IRS reform bill directly impacts taxpayers and other persons by reducing the threshold for filing electronically from 250 or more returns during the year. The threshold is 100 or more returns for 2021, and 10 or more return after 2021. The IRS can waive the e-file requirement for tax return preparers in areas with limited internet access.

E-filing requirements are also extended to all tax-exempt organizations that file returns or statements, regardless of amount of assets, gross receipts, or number of returns to be filed. In addition, the IRS is directed to develop an internet portal to allow taxpayers to file series Form 1099, similar to the portal used to file series Form W-2 with the Social Security Administration.

Other Electronic Services

To help increase the use of electronic services, the IRS must publish within six months uniform standards for accepting electronic signatures on requests for disclosure of taxpayer information (Forms 2848, 4506-T, and 8821). It must also limit the redisclosure of return information by a designee to only those expressly consented to by the taxpayer.

The new law increases the penalty for improper disclosure or use of information by return preparers. It also puts new limits on access to returns and return information by non-IRS employees.

Overall, the IRS must develop procedures to authenticate users of its suite of electronic services, to prevent tax refund fraud. Included in these services, the IRS must develop an automated version of its Income Verification Express Service (IVES) for third-parties.

Planning Note: The legislation also allows the IRS to accept credit and debit card payments for the payment of taxes directly, as opposed to through a third party. In addition, the IRS must establish procedures for taxpayers to report misdirected deposits of refunds.

Other Changes

Additional changes made by the Taxpayer First Act include:

• clarifying procedures for equitable relief from joint liability;

• establish new safeguards on the seizure of funds believed to be structured to avoid the $10,000 financial reporting requirement; and

• modify procedures for the issuance of summons and notice of third party contacts by the IRS.

To help pay for these changes, the minimum penalty for failure to file returns is increased after 2019 to the lesser of $330 (indexed for inflation) or 100 percent of the amount required to be shown on the return.

Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

• Proposed regulations provide detailed rules for coop patrons and specified cooperatives to calculate the deduction.

• A proposed revenue procedure provides three methods for specified cooperatives to calculate W-2 wages.

199A Deduction for Cooperatives and Patrons

The 199A deduction, also known as the pass-through deduction or the QBI deduction, generally allows individuals, estates and trusts to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships and pass-through entities. Since most coops are C corporations, they cannot claim the deduction. However, their members may receive patronage dividends that are included in QBI.

Despite these general rules, certain agricultural or horticultural coops, known as "specified cooperatives," can claim their own version of the a deduction under Code Sec. 199A(g). A specified coop can also pass through any portion of this deduction by making qualified payments to its patrons. The patrons must reduce their own QBI accordingly.

For specified coops, the 199A(g) deduction retains many of the rules that governed the Code Sec. 199 domestic production activities deduction before it was repealed at the end of 2017. For example, the 199A(g) deduction is based on the specified coop’s domestic production gross receipts (DPGR) and qualified production activities income (QPAI), rather than its QBI.

Sec. 199A Deduction for Coop Patrons in General

Under the proposed regulations, any coop patron’s QBI may include patronage dividends and an exempt coop’s non-patronage dividends that:

• are related to the patron’s trade or business,

• are qualified items of income, gain, deduction or loss at the coop level,

• are not from a specified service trade or business (SSTB), and

• are properly reported to the patron.

The proposed regulations provide detailed rules for how coops must report the required information to their patrons. However, the coop does not report any W-2 wages or unadjusted basis in qualified property immediately after acquisition (UBIA). The W-2/UBIA limit that can reduce QBI for higher-income taxpayers is calculated only at the patron level.

Sec. 199A(g) Deduction for Specified Cooperatives

Code Sec. 199A(g) allows specified coops to claim a 199A deduction and pass through any portion of it by making qualified payments to its members. However, as mentioned above, a specified coop’s deduction is largely based on the pre-2018 domestic production activities deduction (DPAD). This means that the 199A(g) deduction for specified coops is effectively separate from the general Code Sec. 199A(a) deduction for other taxpayers.

Since specified coop patrons might be able to claim both the general 199A(a) deduction and the passed-through portion of the coop’s 199A(a) deduction, they must reduce their 199A(a)deduction by nine percent of QBI (or if less, 50 percent of W-2 wages) that is allocable to the qualified payments from the specified coop.

The proposed regulations offer a safe harbor that patrons can use to calculate this reduction. The patron allocates aggregate business expenses and W-2 wages between qualified payments and other gross receipts by ratably apportioning them based on the ratio of qualified payments to total gross receipts in QBI.

The proposed regulations also define several terms that are relevant to the 199A(g) deduction for specified coops, including:

• Patron,

• Specified cooperative,

• Agricultural or horticultural products (though the IRS is also considering broader definitions), and

• In whole or significant part.

Sec. 199A(g) Deduction and DPAD

The proposed regulations also provide four steps to determine the amount of a specified coop’s 199A(g) deduction. A specified coop that is not tax-exempt must:

• separate patronage and non-patronage gross receipts and related deductions;

• identify patronage gross receipts that qualify as DPGR,

• use the patronage DPGR from step (3) to calculate QPAI, and

• calculate the 199A(g) deduction, which is generally nine percent of the lesser of QPAI from step (4), or taxable income

These last three steps are virtually identical to the pre-2018 DPAD rules.

A tax-exempt specified coop calculates two separate 199A(g) deductions: one based on gross receipts and related deductions from patronage sources, and one based on those items from non-patronage sources.

The proposed regulations also apply DPAD-types rules to:

• determine the coop’s DPGR,

• reduce a specified coop’s 199A(g) deduction to reflect oil-related QPAI, and

• pass through the deduction to patrons.

In addition, the proposed regulations provide special rules for partnerships and expanded affiliated groups (EAGs).

Specified Coops and W-2 Wages

Although the proposed regulations treat the 199A(g) deduction as largely independent from the general 199A(a) deduction, both deductions generally use the same rules for W-2 wages. However, under the proposed regulations, W-2 wages for the 199A(g) deduction cannot include wages paid with respect to employment in Puerto Rico.

As mentioned above, a wages/UBIA limit may reduce the 199A deduction for higher-income taxpayers. A proposed revenue procedure provides three methods for calculating W-2 wages for purposes of the 199A(g) deduction:

• unmodified Box method

• modified Box 1 method

• tracking wages method.

These methods are largely identical to the methods provided in Rev. Proc. 2019-11, but are intended to better reflect changes that may be made in the underlying Form W-2, Wage and Tax Statement.

Effective Dates for 199A Proposed Regulations and Revenue Procedure

The regulations are proposed to apply to tax years beginning after the date they are published as final. However, taxpayers may apply them in their entirely before that date.

The notice of the proposed revenue procedure is effective on June 18, 2019. Specified cooperatives may rely on the proposed procedure before it is published in its final form.

IRS Invites Comments on Proposed Rules for Sec. 199A

The IRS requests comments on the proposed regulations and the proposed revenue procedure. In particular, the IRS invites comments on the following elements:

• A coop’s reporting of W-2 wages and UBIA,

• The safe harbor for coop patrons,

• Definitions,

• A specified coop’s separation of patronage and non-patronage income,

• DPGR treatment of minor assembly and contract work, and

• W-2 wages and Puerto Rico.

Comments are due by August 19, 2019. They may be mailed or hand-delivered to the IRS, or submitted electronically via the Federal eRulemaking Portal at www.regulations.gov. Comments on the proposed regs should reference "IRS REG-118425-18" and comments on the proposed revenue procedure should reference "Notice 2019-27".

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments have adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes. Regardless of state and local law, however, federal law controls when determining charitable deductions for federal income tax purposes.

Return Benefit

The final regulations generally adopt the rule in proposal regulations ( NPRM REG-112176-18) that the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). If a taxpayer makes a payment or transfers property to Code Sec. 170(c) entity, he or she must reduce any charitable contribution deduction for federal income tax purposes if he or she receives or expects to receive a SALT credit in return. A taxpayer is generally is not required to reduce the charitable deduction on account of its receipt of state or local tax deductions. However, the taxpayer must reduce its charitable deduction if it receives or expects to receive state or local tax deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

De Minimis Exception

The final regulations retain the de minimis exception that a taxpayer’s charitable deduction is not reduced if the SALT credits received as a return benefit do not exceed 15 percent of the taxpayer’s charitable payment. The 15-percent exception applies only if the sum of the taxpayer SALT credit received or excepted to receive does not exceed 15 percent of the taxpayer’s payment or of the fair market value of the property transferred.

Safe Harbor

The IRS has also issued Notice 2019-12 providing a safe harbor for certain individuals if any portion of a charitable contribution deduction disallowed due to the receipt of a SALT credit. Under the safe harbor, any disallowed portion of the charitable deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164.

Eligible taxpayers can use the safe harbor to determine their SALT deduction on their tax-year 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).

Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

HRA Use Expanded

The final rules expand the use of HRAs by:

• allowing integration of an HRA with individual health insurance coverage and thereby satisfy the Affordable Care Act’s annual dollar limit and preventive care cost sharing requirements;

• creating "excepted benefit HRAs" limited in amount and to the types of coverage for which premiums may be reimbursed;

• providing new premium tax credit eligibility rules for individuals who are offered an HRA integrated with individual health insurance coverage;

• clarifying that individual health insurance coverage, the premiums of which are reimbursed by an HRA or qualified small employer HRA (QSEHRA), does not become part of an ERISA plan when certain conditions are met; and

• adding new special enrollment for the individual market for individuals who gain access to HRAs integrated with individual health insurance coverage or who are provided a QSEHRA.

The final regulations add conditions on individual coverage HRAs intended to prevent a negative impact on the individual market.

Integration With Individual Coverage

Almost any employer can satisfy Affordable Care Act reimbursement requirements by having employees buy their own individual coverage. An employers may integrate an HRA with individual health coverage only if:

• participants and dependents are actually enrolled in individual health insurance coverage (though not coverage that consists solely of excepted benefits) for each month they are covered by the HRA;

• coverage is offered to a class of employees to whom a traditional group health plan is not offered;

• coverage is offered on the same terms in amount and conditions to all employees within each class (though certain variations based on age are allowed);

• an opt out option is provided for individuals who prefer Affordable Care Act Exchange coverage, but would not be eligible for the premium tax credit if enrolled in an employer health plan such as an HRA; and

• substantiation and notice requirements are met.

To guard against adverse selection, the final rules add a minimum class size requirement that will apply to certain classes of employees in certain instances. Classes of employees may include full-time employees; part-time employees; seasonal employees; employees who are included in a unit of employees covered by a collective bargaining agreement in which the plan sponsor participates; employees who have not satisfied a waiting period for coverage; employees who have not attained age 25 prior to the beginning of the plan year; nonresident aliens with no U.S.-based income; employees whose primary site of employment is in the same rating area; and groups combining any of these classes of employee.

Excepted Benefit HRAs

An employer that wants to offer an HRA that is not integrated with non-HRA group coverage, Medicare, TRICARE, or individual health insurance coverage may do so as an excepted benefit. As excepted benefits, these HRAs would not be subject to the employer group plan rules, including the market reforms under the Affordable Care Act. An excepted benefit HRA:

• must not be an integral part of the plan;

• must provide benefits that are limited in amount ($1,800 per year, adjusted for inflation after 2020);

• cannot provide reimbursement for premiums for certain health insurance coverage; and

• must be made available under the same terms to all similarly situated individuals.