Local income taxes account for only 5% of total local tax collections across the nation, but in the states that rely on this revenue stream, they’re a vital revenue source.
In the state that most relies on local income tax, for example, it provides more than 36.12% of local tax collections and 19.44% of local general revenue.
Read the complete ranking below on the states that rely the most on local income taxes.
Source: Accounting Today
The Internal Revenue Service today warned taxpayers not to fall victim to a new emerging scam involving buying clean energy tax credits.
In this latest scam, the IRS is seeing instances where unscrupulous tax return preparers are misrepresenting the rules for claiming clean energy credits under the Inflation Reduction Act (IRA).
The transferability provisions of the IRA enable the purchase of eligible federal income tax credits from investments in clean energy to offset a buyer’s tax liability. The IRS has seen taxpayers file returns using unscrupulous return preparers who are claiming purchased clean energy credits that the taxpayer is ultimately unable to benefit from.
The scam is generally targeting individuals who file Form 1040. The preparers file returns that have individuals improperly claiming IRA credits that offset income tax from sources such as wages, Social Security and retirement account withdrawals.
Individuals purchasing tax credits under the IRA are subject to the passive activity rules for any purchased credits. Generally, this means they can only use purchased credits to offset income tax from a passive activity. Most taxpayers do not have passive income and a passive income tax liability. Most investment activities are not considered passive.
“This is another example where scammers are trying to use the complexity of the tax law to entice people into claiming credits they’re not entitled to,” said IRS Commissioner Danny Werfel. Taxpayers should be wary of promoters pushing dubious credits like this and others. The IRS is watching out for this scam, and we urge people to use a reputable tax professional before claiming complex credits like clean energy.”
The IRS noted individual taxpayers claiming inappropriate credits risk future compliance action by the IRS and are responsible for repaying the inflated credit, plus interest and possible penalties.
Individual taxpayers considering purchasing clean energy credits under the IRA should consult a trusted tax professional for advice on whether they are eligible to purchase credits and claim the tax benefits. They should also understand how the limitations under the passive activity rules, and other portions of the tax code, may apply to their particular tax situation.
More information about clean energy can be found on the Inflation Reduction Act of 2022 page on IRS.gov.
The IRS continues to warn taxpayers about other scams it continues to see that are misleading taxpayers into filing inappropriate claims for other tax credits. The IRS has warned taxpayers not to fall for scams centered around the Fuel Tax Credit, the Sick and Family Leave Credit and household employment taxes. Fueled by misleading social media advice and promoters, the IRS has seen thousands of dubious claims come in earlier this year where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims.
The IRS is committed to investigating paid tax return preparers who act improperly. To report an abusive tax scheme or a tax return preparer, people should use the online Form 14242, Report Suspected Abusive Tax Promotions or Preparers, or mail or fax a completed Form 14242 PDF and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.
Mail:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677 3405
Fax: 877-477-9135
Taxpayers and tax professionals can also submit this information to the IRS Whistleblower Office, where they may be eligible for a monetary award. For details, refer to Abusive tax schemes and abusive tax return preparers on IRS.gov.
Source: IRS-2024-182, July 3, 2024
With new and evolving scams emerging, the Internal Revenue Service and the Security Summit partners today announced the start of the special summer Protect Your Clients; Protect Yourself campaign to help tax professionals protect themselves against new and ongoing threats involving tax-related identity theft.
“Security threats against tax professionals and their sensitive taxpayer information continue to evolve, and it’s critical to stay on top of the latest developments to protect their business and their clients,” said IRS Commissioner Danny Werfel. “The Security Summit effort between the IRS, states and the nation’s tax industry has worked to protect taxpayers and tax returns from identity thieves, and tax professionals form a key part of these security defenses. It’s critical that everyone in the tax professional community, including smaller practices, stay current on the latest developments to keep their systems safe and protect their clients.”
Now in its ninth year, the Security Summit partners have worked together to raise awareness about these issues in the tax professional community through the Protect Your Clients; Protect Yourself campaign. This is part of the larger effort by the Summit coalition of the IRS, state tax agencies and the nation’s tax community to battle tax-related identity theft that has been in place since 2015.
Security threats against tax professionals remain a daily threat. Through the spring, IRS Stakeholder Liaisons had received reports of nearly 200 tax professional data incidents potentially affecting up to 180,000 clients.
With this summer’s Protect Your Clients; Protect Yourself campaign, the Summit partners will work to raise awareness among tax professionals about the importance of maintaining strong security, and what to do if a security incident occurs.
“There are special steps that tax professionals need to take to protect themselves from scammers trying to obtain sensitive information in attempts to file fraudulent state and federal tax returns,” said Sharonne Bonardi, executive director of the Federation of Tax Administrators representing state tax agencies and a co-chair of the Summit’s communications team. “Continued vigilance by tax professionals is a critical part of the larger effort needed to protect tax information at the state and federal level.”
This summer’s effort will be anchored around a series of eight news releases that will run for consecutive weeks each Tuesday, coinciding with the start of the IRS Nationwide Tax Forum on July 9 in Chicago. The news release series and the summer Tax Forums will provide important information to help protect sensitive taxpayer data that tax professionals hold while also protecting their business from identity thieves.
“As the Security Summit has worked collaboratively to strengthen our internal protections against identity thieves, they have shifted more attention to tax professionals and other businesses in hopes of stealing vital information needed to file a tax return and slip through the tax community’s defense systems,” said Julie Magee, tax policy lead at Block Inc and a co-chair of the Summit’s communications team. “This means tax professionals need to be extra cautious in protecting their data.”
“We continue to educate tax professionals on security measures to prevent data breaches that expose taxpayers’ private information and jeopardize their business,” said Taylor Rodier, legislative affairs director at Taxwell and a co-chair of the Summit communications team. “Staying on top of the latest developments and keeping their security up to date is vital.”
In addition to the series of eight news releases, the tax professional security focus will be featured at this summer’s Nationwide Tax Forums. Following the three-day forum in Chicago, the forums will continue on July 30 in Orlando, Aug. 13 in Baltimore, Aug. 20 in Dallas and Sept. 10 in San Diego.
The IRS reminds tax pros that registration deadlines are quickly approaching for several of the forums, which can sell out.
The forums will feature several specific sessions to help educate the tax professional community on security-related topics. Tax professionals will hear from experts at the IRS, the tax professional community as well as a special session from the Salve Regina University’s Pell Center from Rhode Island. The entire news release series will be available in Spanish as well.
By taking some basic security steps, tax pros can help protect themselves against the relentless efforts of identity thieves. This summer’s effort includes reminders for tax pros to focus on fundamentals and to watch out for emerging vulnerabilities as well as new updates involving multi-factor authentication and the latest on Written Information Security Plan PDF, or WISP, which all tax professionals are required to have.
Tax professionals are prime targets of criminal syndicates that are both tech- and tax-savvy. These scammers either trick or hack their way into tax professionals’ computer systems to access client data. Even when tax pros think they have client data stored in a secure platform, such as the cloud, lack of strong authentication can make this information vulnerable.
Identity thieves use stolen data to file fraudulent tax returns that make it more difficult for the IRS and the states to detect because the fraudulent returns use real financial information. Other data thieves sell the basic tax preparer or taxpayer information on the web so other fraudsters can try filing fraudulent tax returns.
The summer Security Summit tax pro campaign will cover key topics that will highlight a series of simple actions that tax professionals can take to better protect their clients and themselves from data theft. Highlights of the summer news release series being issued in upcoming weeks will highlight these topics:
Source: IRS-2024-180, July 2, 2024
The U.S. Department of the Treasury and the Internal Revenue Service today issued final regulationsrequiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency. These reporting requirements will help taxpayers to file accurate tax returns with respect to digital asset transactions, which are already subject to tax under current law.
These final regulations reflect consideration of more than 44,000 public comments received last fall on the proposed regulations. They require brokers to report certain sale and exchange transactions that take place beginning in calendar year 2025 and will be reported on the soon-to-be released Form 1099-DA. The regulations implement reporting requirements by the Infrastructure Investment and Jobs Act, enacted in 2021.
“We reviewed thousands of public comments and believe this new guidance addresses those concerns while striking a balance between industry implementation challenges and closing the tax gap related to digital assets,” said IRS Commissioner Danny Werfel. “These regulations are an important part of the larger effort on high-income individual tax compliance. We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets. Our research and experience demonstrate that third-party reporting improves compliance. In addition, these regulations will provide taxpayers with much needed information, which will reduce burden and simplify the process of reporting their digital asset activity.”
“Our work to address potential non-compliance in digital currency is another reason why it is so critical to fully fund IRS operations,” Werfel added. “These new assets expand the complexity of our tax system, and the technology and personnel necessary for the IRS to keep pace with these changes is resource intensive. Ultimately, this IRS funding helps address emerging issues and creates significantly more savings than costs to the government’s bottom line.”
The final regulations require reporting by brokers who take possession of the digital assets being sold by their customers. These brokers include operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The majority of digital asset transactions today occur using these brokers. By focusing first on this group, the IRS intends these regulations to cover the greatest number of taxpayers while allowing the IRS and U.S. Treasury Department more time to consider the nuances of transactions involving non-custodial and decentralized brokers.
The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers. The U.S. Treasury Department and the IRS intend to provide rules for these brokers in a different set of final regulations.
In addition to the broker reporting rules, the regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also provide backup withholding rules.
The IRS is aware of the challenges that implementing new reporting requirements can pose, which is why the agency is also providing transitional and penalty relief from reporting and backup withholding rules on certain transactions to help phase-in implementation.
Real estate professionals are also required to report the fair market value of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after January 1, 2026.
The final regulations provide for an optional, aggregate reporting method for certain sales of stablecoins and certain non-fungible tokens (NFTs) applicable only after sales of these stablecoins and NFTs exceed de minimis thresholds. For PDAP transactions, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.
Finally, basis reporting will be required by certain brokers, for transactions occurring on or after January 1, 2026.
Additional guidance to provide transitional relief regarding digital asset transactions includes:
Notice 2024-56 PDF provides general transitional relief from reporting penalties and backup withholding for any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, provided that the broker makes a good faith effort to comply with the reporting obligations. Additionally, the notice provides more limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs. Finally, the Notice also provides backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs.
Notice 2024-57 PDF informs brokers that until the U.S. Treasury Department and the IRS issue further guidance, brokers will not have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:
Transition from universal or multi-wallet approach to allocating basis in digital assets to wallet by wallet or account by account approach. Revenue Procedure 2024-28 PDF generally permits taxpayers to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units based on the taxpayers’ records of unused bases and remaining units in those wallets or accounts.
Source: IRS-2024-178, June 28, 2024
The Internal Revenue Service switched over from focusing its audits on taxpayers earning $10 million or more to those earning $400,000 or more after passage of the Inflation Reduction Act, according to a new report.
The report, released Monday by the Treasury Inspector General for Tax Administration, noted that in 2020, then-Treasury Secretary Steven Mnuchin directed the IRS to audit a minimum of 8% of individual tax returns filed each year with incomes of $10 million or more. The IRS was supposed to meet that goal starting with 2016 tax returns, but for legal and staffing reasons it began instead with 2018 tax returns. The IRS complied with that directive for three years, but then the agency stopped because officials said the examinations were unproductive due to a high no-change rate. Instead, they shifted their focus to examinations of individuals with incomes of $400,000 or more. More recently, the IRS updated its strategic operating plan for the Inflation Reduction Act of 2022 to focus its audits more on large partnerships and corporations as well as high-income taxpayers.
In February 2020, Mnuchin directed the IRS to audit at least 8% of all high-income individual returns filed each year. In March of that year, IRS Commissioner Chuck Rettig responded that accomplishing the goal would require significant costs but he agreed to comply, specifying a total positive income level of $10 million or more to select returns. In August 2022, Congress enacted the Inflation Reduction Act, which in part aimed to fund the IRS so it could examine more high-income taxpayers. In an August 2022 directive to the IRS, Treasury Secretary Janet Yellen said no Inflation Reduction Act funding should be used to increase the audit rate of taxpayers with incomes below $400,000. That effectively lowered the threshold.
TIGTA found the IRS complied with the 2020 Treasury Directive for three tax years but stopped monitoring it at the end of fiscal year 2023. An IRS executive told TIGTA in December 2022 that the 2020 Treasury Directive would no longer be followed because the audits were unproductive and had high no-change rates. The IRS said it was embarking on a different approach, focusing on complying with the 2022 Treasury Directive.
In February 2023, IRS executives informed TIGTA that the IRS would continue to audit high-income individual returns with total positive income of $10 million or more but would not aim to achieve the 8% audit rate in the future. IRS executives said at that time that they considered the 2020 Treasury Directive obsolete. The executives explained that the IRS’s new focus would be on compliance with the 2022 Treasury Directive to expand examinations of individuals with incomes of $400,000 or more. In November 2023, the SB/SE Division informed TIGTA that it would no longer generate the agency-wide Audit Rate $10M Monitoring Report and that the last report prepared was through the end of fiscal year 2023. Therefore, the IRS no longer monitors whether it has met or needs to put in process additional examinations to meet the 8% audit rate goal established by the 2020 Treasury Directive for high-income individuals with total positive income of $10 million or more.
TIGTA found that many of the examined returns under the 2020 Treasury Directive were productive, but that depended on which function in the IRS conducted the examinations and which case selection methods were used. The Small Business/Self Employed Division’s closed examinations of individual taxpayer returns with income of $10 million or more, in tax years 2016 through 2021, were generally more productive than income ranges below $10 million. Those higher income ranges yielded four times more dollars assessed per return and twice as many dollars assessed per hour when compared to examinations of returns with income of $400,000 to under $10 million.
On the other hand, the IRS’s Large Business and International Division case selection methods that were in place prior to the 2020 Treasury Directive resulted in better productivity metrics when compared to later results. For example, the no-change rate has increased when comparing pre-directive tax years (tax years 2016 through 2017) to post-directive tax years (tax years 2018 through 2020).
TIGTA also found that some of the opportunity costs the IRS identified at the outset of the 2020 Treasury Directive were overstated by 190 examinations of large and midsized businesses.
TIGTA made two recommendations in the report. It suggested the IRS include a separate category for taxpayers with total positive income of $10 million or more when evaluating the compliance of high-income individual taxpayers for an initiative of the IRS strategic operating plan in order to track and analyze the productivity of examinations on these high-income individual returns in comparison to examinations of taxpayers at other income levels. It also recommended the IRS identify the potential causes behind the Large Business and International Division’s low productivity examination results and monitor the measures so the most productive returns would be selected for examination.
The IRS partially agreed with both of the report’s recommendations and said it already categorizes and monitors productivity measures for high-income high-wealth taxpayers, including those with total positive income of $10 million or more. The IRS said it would identify the potential causes for the low productivity examination results and use enhanced data and analytics to select cases based on the highest risk of noncompliance.
“The IRA provided much-needed funding for the IRS to enforce the tax laws against those wealthy individuals, large corporations and large, complex partnerships who today do not pay what they owe,” wrote Lia Colbert, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “The IRS will not use IRA resources to increase audits for small businesses and taxpayers making under $400,000. Accordingly, the IRS is focusing on high income, high wealth taxpayers, including those reporting $10 million or more, to ensure this population of taxpayers pays what it owes.”
She noted that the IRS recovered $520 million as of Jan. 2024 from taxpayers with more than $1 million in income who have either not filed their taxes or failed to pay their tax debts.
Source: AccountingToday
Tax relief is available for people living in areas declared disasters by the Federal Emergency Management Agency. To find out if an area qualifies for disaster tax relief, check IRS news from around the nation.
If people live at an address in an area that qualifies for IRS disaster tax relief, they automatically get extra time from the IRS to file returns and pay taxes.
If people have damaged or lost property due to a federally declared disaster, they may qualify to claim a casualty loss deduction and get a larger refund. They can claim this on their current or prior-year tax return.
If people have lost their tax records, they can request a tax return transcript and a copy of their tax return from the IRS.
People can get tax return transcripts online or request mail delivery with Get Transcript. Taxpayers can also file Form 4506-T, Request for Transcript of Tax Return.
To get a copy of a tax return, people can file Form 4506, Request for Copy of Tax Return. The IRS waives the fees and expedites these requests for people who need to apply for disaster-related benefits or file amended returns to claim disaster-related losses.
To speed up the process, people who file Forms 4506-T or 4506 should:
After a disaster, people might need to relocate. Taxpayers should use their current address when filing their tax return. If the they move after filing, they should update their address with the IRS by calling the IRS Disaster Hotline at 866-562-5227, or by filing Form 8822, Change of AddressPDF. The IRS also recommends that taxpayers notify the post office serving the old address.
The Small Business Administration offers disaster assistance to business owners, homeowners and renters in a federally declared disaster area. To qualify for an SBA loan or grant, people must have filed all required tax returns.
The Internal Revenue Service today announced the release of draft Form 6765, Credit for Increasing Research ActivitiesPDF, also known as the Research Credit.
The IRS received helpful comments from various external stakeholders that have informed several revisions the IRS is making to reduce taxpayer burden. The feedback and changes will alleviate taxpayer burden, provide taxpayers with a consistent and predefined format and improve the information received for tax administration.
The changes include:
Section G, which was labeled “Section F” in the version of the form that IRS shared last fall, requests the Business Component Detail. The instructions will provide that Section G will be optional for:
In response to feedback from stakeholders, the IRS reduced the number of business components that must be reported on Section G. Taxpayers should report 80% of total QREs in descending order by the amount of total QREs per business component, but no more than 50 business components (with special instructions for taxpayers using the ASC 730 directive who can report ASC 730 QREs as a single line item on Section G).
The amount of information that must be provided with respect to the reduced number of business components on Section G has also been reduced. For example, the IRS eliminated whether a business component is new/improved, a sale/license/lease and the narrative requirement (for original returns) that describes the information sought to be discovered. The selections for the type of business component are reduced, and the definitions for officers, controlled group reporting and business component descriptive names will be clarified in the instructions.
The revised Section G will be optional for all filers for tax year 2024 (processing year 2025). This will allow taxpayers time to transition to the Section G format. Section G will be effective for tax year 2025 (processing year 2026), subject to the guidelines noted above.
On Sept. 15, 2023, the IRS released a preview of proposed changes to Form 6765 and solicited comments from interested parties. The preview included a new Business Component Detail section for reporting quantitative and qualitative information for each business component, new questions seeking various information and reordering some of the existing questions on the form. The solicitation requested feedback on whether the new Business Component Detail section should be optional for certain taxpayers.
Please see Form 6765PDF. Instructions will be released at a later date.
Source: IRS-2024-171, June 21, 2024
The Department of the Treasury and the Internal Revenue Service issued final regulations today on the prevailing wage and apprenticeship (PWA) requirements related to increased credit or deduction amounts for certain clean energy incentives, enacted as a part of the Inflation Reduction Act (IRA).
The IRA provides increased credit or deduction amounts for taxpayers who satisfy certain PWA requirements regarding the construction, alteration or repair of certain clean energy facilities or properties, projects or equipment. By satisfying the PWA requirements, taxpayers can generally increase the base amount of the credit or deduction by five times.
“The increased credit or deduction for taxpayers meeting prevailing wage and apprenticeship requirements creates opportunities for both workers and employers,” IRS Commissioner Danny Werfel said. “The IRS is committed to ensuring that taxpayers claiming the clean energy credits comply with all of the applicable prevailing wage and apprenticeship requirements. The additional resources the IRS has received are making a difference for our efforts to ramp up taxpayer service and enforcement, and we will continue to build on these improvements.”
To qualify for the PWA increased credit or deduction amounts, taxpayers generally need to:
The PWA requirements apply to all contractors and subcontractors of the taxpayer who employ laborers and mechanics in construction, alteration or repair work. However, taxpayers claiming the increased credit or deduction are solely responsible for ensuring that the PWA requirements are satisfied.
Ensuring that taxpayers claiming the PWA increased credit or deduction amounts have met the requirements – along with enforcing the requirements for other clean energy tax credits – is a top priority for the IRS. In the months ahead, the IRS will dedicate significant resources to promoting and enforcing compliance with the final clean energy rules.
The IRS is committed to working with taxpayers, their advisors and other stakeholders to ensure compliance, including conducting appropriate education and outreach. The IRA funding will support efforts for effective tax administration of these novel and cross-cutting provisions.
As part of this effort, the IRS also released Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact SheetPDF updated Publication 5855, IRA Prevailing Wage & Registered Apprenticeship OverviewPDF and the Prevailing wage and apprenticeship frequently asked questions.
Publication 5855 provides a summary of the PWA requirements. The frequently asked questions provide more details about the PWA requirements and information for how to alert the IRS of suspected tax violations related to the PWA requirements. The IRS takes referrals of alleged tax violations seriously and may use the information received about potential violations in connection with any applicable audit.
The PWA provisions include a significant penalty framework for failures to meet the PWA requirements. The penalty structure is intended to create incentives for real-time compliance with the PWA requirements.
Given the potential increased credit or deduction amounts available under the PWA provisions and the significant penalties at stake, taxpayers should consider establishing frameworks to support timely compliance with the PWA requirements, including the associated reporting and recordkeeping requirements. To minimize the potential for mistakes and significant penalties, taxpayers who know they intend to claim an increased credit or deduction amount through satisfaction of the PWA requirements should proactively take steps to position their project for compliance with the PWA requirements.
These steps could include, but would not necessarily be limited to:
The U.S. Department of Labor (DOL) determines the applicable prevailing wage rates for each classification of laborers and mechanics in a prescribed geographic area for a particular type of construction. For more information about prevailing wage rates please visit the Department of Labor’s website.
To support the IRS’s efforts in ensuring taxpayer compliance with the PWA requirements, DOL and the IRS are working on a Memorandum of Understanding (MOU) to be signed by the end of the year. Harnessing DOL’s extensive prevailing wage and registered apprenticeship expertise, the MOU will facilitate joint and cooperative education and public outreach and development of training content for IRS examination personnel. The MOU will also facilitate DOL’s review and comment as part of the development of PWA tax forms. Finally, the MOU will formalize a process for DOL to share with the IRS any credible tips or information that DOL receives as to potential noncompliance with the PWA requirements.
More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.
Source: IRS-2024-168, June 18, 2024
The Department of the Treasury and Internal Revenue Service issued Revenue Procedure 2024-26PDF today for the submission of information by qualified manufacturers of new clean vehicles and dealers and sellers of new clean vehicles and previously-owned clean vehicles.
Today’s guidance provides additional procedures for qualified manufacturers to submit attestations, certifications and documentation demonstrating the qualified manufacturer’s compliance with certain requirements regarding new clean vehicles placed in service after Dec. 31, 2024.
The guidance updates procedures for qualified manufacturers to submit information regarding new clean vehicles for upfront review by the IRS, with analytical assistance from the Department of Energy, to ensure the vehicles satisfy relevant requirements for the calendar year and are eligible for the new clean vehicle credit.
Finally, this revenue procedure provides rules regarding seller report updates and rescissions and provides clarification for qualified manufacturers for the transition rule for impracticable-to-trace battery materials.
More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.
Source: IRS-2024-158, June 7, 2024
In recent years, the global workforce has witnessed a significant shift toward remote work and the rise of digital nomads — individuals who work entirely over the internet while traveling and have no fixed place of business. As many countries are recognizing this growing trend, the solution — the digital nomad visa — is increasing in popularity. The visa, offered under varying names, is currently available in more than 70 countries.
While obtaining a digital nomad visa takes care of the immigration requirement to enter and work in a country for a specific period, it generally does not relieve the individual from income tax or Social Security exposure, or the employer from payroll considerations.
It is much simpler to get than a traditional business visa, according to Richard Leach, a CPA and director at the Global Tax Network. “A business visa takes time, and there are a lot of hoops to jump through,” he said. “It’s like a business visa light. The process is cheaper, and there are far fewer restrictions on who is eligible. You have to show a certain amount of money or income, and on the basis of the visa you can stay and work legally in the country for the specified time.”
While the visa solves the immigration issue, it does not necessarily take care of the tax issue, according to Leach. “Only 12 countries currently attach a tax break to the visa,” he said. “These include Croatia, Ecuador and Greece. But the majority of the countries that offer digital nomad visas do not lighten the tax burden. It’s the exception to the rule.”
“They typically charge a few hundred dollars for the visa, and then there’s an income requirement, often in the neighborhood of $2,000-$3,000 a month. It’s 600 euros per month in France. Typically, the amount is what you would need to qualify for $30,000 per year. That’s a relatively low income threshold.”
Many don’t realize they are required to pay tax in the country they live in, according to Leach.
“And some countries have a withholding tax requirement. For example, Argentina assumes that 70% of your income is from Argentina, so they expect withholding on that amount every month if you have employees,” he said. “People tend to be excited about the freedom they have and the ease of getting the visa, but they ignore the withholding requirement on top of the fact that they need to file a tax return. There are compliance complexities they’re just not aware of.”
Leach, formerly a managing director at KPMG in Denver, where he led the global mobility tax services line, said he gets frequent calls from HR departments when an employee plans to work remotely in another county on the digital nomad visa.
“My advice to remote employees — and their employers — is to proceed with caution,” he said. “They should not apply for the visa just because they will get a tax break. They may or they may not, but that should not be the point. And critically, they don’t want to create ‘permanent establishment’ status, which would expose the profits of the U.S. company to tax in the remote country.”
Source: Roger Russell – Accounting Today
