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Tax pros should create recovery plan and report thefts immediately

IRS Tax Tip 2019-126, September 12, 2019

Tax professionals should review their security measures and create a data theft recovery plan. This plan can help save valuable time and protect tax professionals and taxpayers after a data theft (PDF) . One of the first things a preparer should do after a theft is contact the IRS. Here are other steps tax pros should outline in their plan:

Contact the IRS and law enforcement:

  • Report client data theft to the local IRS Stakeholder Liaison. They will notify IRS Criminal Investigation and other appropriate offices within the agency on behalf of the preparer. Speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in a preparer’s clients’ names.
  •  Local Federal Bureau of Investigation.
  • Local police and file report on the data theft.

Contact state agencies where they prepare state returns:

  • State Tax Agencies. Email the Federation of Tax Administrators at StateAlert@taxadmin.org to get information on how to report victim information to the states.
  • State Attorneys General. Most states require that the attorney general be notified of data thefts. This process may involve contacting multiple offices.

Contact experts:

  • Security expert. They can determine the cause and scope of the theft. They can also figure out how to prevent further losses.
  • Insurance company. Preparers should check to see if their insurance policy covers expenses related to the data loss.

Contact clients and other services:

  • Federal Trade Commission. They offer tips and templates for businesses that suffer data compromise. They even have suggested language for informing clients.
  • Clients. Send a letter to victims letting them know about the theft. Preparers should work with law enforcement on timing. A preparer who has prior-year data in their system may need to contact former clients.
  • Tax software provider. They may need to take steps to prevent inappropriate use of the compromised account for e-filing.
  • Website and client portal provider. Thieves may have stolen passwords. The preparer and provider would need to reset these.
  • Credit and identity theft protection agency. Certain states require credit monitoring and identity theft protection to victims of ID theft.
  • Credit bureaus. Notify them if there’s a compromise. The preparer’s clients may seek their services.

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IRS Waives Estimated Tax Penalty for Eligible 2018 Filers

IRS Waives Estimated Tax Penalty for Eligible 2018 Filers

IRS Waives Estimated Tax Penalty for Eligible 2018 Filers

For some taxpayers paying estimated taxes who have filed their 2018 tax returns there’s a little bit of bad news—and some good news.

The bad news is they failed to claim the special waiver that would have spared them from the estimated tax penalty mandated when withholding and estimated tax payments fell short of their total tax liability.

The good news is the IRS is granting the waiver automatically and will refund any penalty payments eligible taxpayers made. There’s no need to contact the IRS to request the waiver.

How Did That Happen?

Earlier this year, the IRS lowered the usual 90% penalty threshold to 80% to help taxpayers whose withholding and estimated tax payments fell short of their total 2018 tax liability. The agency also removed the requirement that estimated tax payments be made in four equal installments, as long as they were all made by Jan. 15, 2019.

The 90% threshold was initially lowered to 85% on Jan 16 and further lowered to 80% on March 22.

About 400,000 taxpayers will qualify for the automatic waiver, which applies to any individual who paid at least 80% of their total tax liability through withholding or quarterly estimated tax payments but did not claim the special waiver when they filed their 2018 return earlier this year.

“The IRS is taking this step to help affected taxpayers,” said IRS Commissioner Chuck Rettig. “This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed.”

Refunds Planned for Qualified Taxpayers

Over the next few months, the IRS will mail copies of notice CP21 granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty will also receive a refund check about three weeks after their CP21 notice regardless if they requested penalty relief.

The IRS stresses that eligible taxpayers who have already filed a 2018 return do not need to request penalty relief, contact the IRS or take any other action to receive this relief.

For those taxpayers who have yet to file, eligible taxpayers are urged to claim the waiver on their return. This includes taxpayers with filing extensions due to run out on Oct. 15, 2019.

The quickest and easiest way is to file electronically and take advantage of the waiver computation built into their tax software package. Those who choose to file on paper can fill out Form 2210 and attach it to their 2018 return. See the instructions to Form 2210 for details.

Check That Withholding

Like last year, the IRS urges everyone to do a “Paycheck Checkup” and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change.

To get started, check out the new Tax Withholding Estimator, available on IRS.gov. More information about tax withholding and estimated tax can be found on the IRS’ Pay As You Go web page, as well as in Publication 505.

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Tax Tips for New Business Owners

Tax Tips for New Business Owners

Tax Tips for New Business Owners

Owning your own business can be a very rewarding experience. The process of starting a business, however, can seem overwhelming to the uninitiated. There are so many choices to consider – from business plans to market strategies and tax responsibilities.

The IRS has put together a quick list of items any new owner of a business will have to determine. While the list may be the most benefit to first-time business owners, it can help owners of any new enterprise get off to a good start.

  • Choose a business structure. The form of business determines which income tax return a business taxpayer needs to file. The most common business structures are:
    • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
    • Partnership: An unincorporated business with ownership shared between two or more people.
    • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
    • S Corporation: A corporation that elects to pass corporate income, losses, deductions, and credits through to the shareholders.
    • Limited Liability Company: A business structure allowed by state statute.
  • Choose a tax year. A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
    • Calendar year: 12 consecutive months beginning January 1 and ending December 31.
    • Fiscal year: 12 consecutive months ending on the last day of any month except December.
  • Apply for an employer identification number. An Employer Identification Number or EIN is also called a federal tax identification number. It’s used to identify a business. Most businesses need an EIN.
  • Have all employees complete these forms:
    • Form I-9, Employment Eligibility Verification
    • Form W-4, Employee’s Withholding Allowance Certificate
  • Pay business taxes. The form of business determines what taxes must be paid and how to pay them.

Taxpayers interested in starting a business can find information for some industries on the IRS’ Industries/Professions Tax Centers webpage. Each state has additional requirements for starting and operating a business. Prospective business owners should visit their state’s website for info about state requirements.

More information may also be found on the Small Business Administration’s web page 10 Steps to Start Your Business.

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IRS Says it’s Time to Renew Expiring ITINs

IRS Says it’s Time to Renew Expiring ITINs

IRS Says it’s Time to Renew Expiring ITINs

Time is running out for taxpayers who need to renew an expiring ITIN before next filing season.

In June, the IRS issued a press release reminding taxpayers that failing to renew an expiring ITIN can result in refund delays and ineligibility for some tax credits. While ITINs are only used by taxpayers who can’t get a Social Security Number, the IRS reported “nearly 2 million … are set to expire at the end of 2019.”

In the release, the IRS suggested two factors that could lead to ITIN expiration at the end of this year:  

  1. “Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal return at least once in the last three consecutive years will expire Dec. 31, 2019”
  2. “ITINs with middle digits 83, 84, 85, 86, or 87 that have not already been renewed will also expire at the end of the year”

If either of those circumstances applies to ITIN holders who will need to file a tax year 2019 return, the IRS said they should “complete a Form W-7 and submit all required documentation.” In addition to providing a link to the form instructions, the IRS pointed out that taxpayers can renew ITINs for every member of their family at the same time.

To help taxpayers avoid problems when renewing their ITIN, the IRS put together a list of common errors. Here are the regular offenders:

  • “Mailing identification documentation without a Form W-7”
  • “Missing information on the Form W-7”
  • “Insufficient supporting documentation, such as U.S. residency documentation or official documentation to support name changes”

ITIN holders need to have proof of U.S. residency for any dependents “from a country other than Canada or Mexico, or dependents from U.S. military personnel overseas” that they want to claim on their return. If the dependents’ passports are not stamped with the date of entry, then the ITIN applicants will have to supply other information, like medical and school records.

According to the IRS, affected taxpayers should have already started receiving CP48 Notices. If any of your clients are ITIN holders, now is as good a time as any to prepare for renewal questions. For more information, visit the “Individual Taxpayer Identification Number” page on IRS.gov. The IRS also offers videos explaining ITINs in English and Spanish.

Sources: IR-2019-118, “Individual Taxpayer Identification Number” 

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No Dyed Fuel Penalty in Florida, IRS Says

No Dyed Fuel Penalty in Florida, IRS Says

No Dyed Fuel Penalty in Florida, IRS Says

The IRS last Friday announced that it would be waiving the penalty for using red-dyed diesel in highway vehicles in Florida until September 15. The press release came while Floridians prepared for the possibility that Hurricane Dorian would make landfall.

As of this afternoon, the now-Category 2 storm has yet to make landfall in the United States, but NPR reported that Dorian battered the Bahamas with rain and 185-mile-per-hour winds as a Category 5 over the weekend.

Despite the storm weakening over the past few days, it still represents a very real threat to residents in the Southeastern US. When the IRS announced the dyed-fuel waiver, they wanted “to minimize or prevent disruptions to the supply of fuel for diesel-powered highway vehicles.”

The IRS points out that dyed fuel is normally used for non-taxable purposes, like providing home heating and running farm equipment and government buses. According to Publication 510, Excise Taxes, a penalty—“the greater of $1,000 or $10 per gallon of the dyed diesel fuel”—comes into play if someone knowingly sells or uses dyed fuel for non-taxable purposes.

While the waiver suspends the penalty until September 15, the agency says the usual 24.4-cent-per-gallon tax on highway diesel will still apply. Other restricted fuels, however, are not covered by the waiver: “Diesel fuel with sulfur content higher than 15 parts-per-million may not be used in highway vehicles.”

The IRS ended the release by noting they would “provide additional relief as needed.”

Sources: IR-2019-148; “The Latest on Hurricane Dorian and Its Path

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