ALERT – Page 6 – Larson Accounting Group

26 de April de 2021

The Internal Revenue Service could be doing more to track unreported income flowing through increasingly popular peer-to-peer payment apps like Venmo and Zelle, according to a new report.

The report, issued Monday by the Treasury Inspector General for Tax Administration, found that the minimal reporting thresholds of $20,000 and 200 transactions that trigger the existing requirements for information return reporting presents challenges in how effectively the IRS is able to identify potential cases of tax noncompliance. The inspector general’s report recommended three ways for the IRS to crack down on unreported income, but the IRS was only willing to go along with one of them.

Congress passed a law in the midst of the financial crisis, the Housing and Recovery Act of 2008, that added Section 6050W to the Tax Code. It requires more third-party information return reporting by businesses to narrow the tax gap and identify potential noncompliance by requiring reporting of income above those de minimis thresholds. However, in the years since, P2P payment apps like Venmo and Zelle have grown in popularity, rivaling older ones like PayPal, Google Wallet and Square. But as these apps are generally used for transferring small amounts of money, they can skirt the reporting thresholds and result in income that’s not reported to the IRS.

“If the IRS is unable to effectively identify noncompliance, taxpayers may begin using P2P payment applications to conduct business, skirt third-party reporting, and avoid paying taxes on income,” said the TIGTA report.

The report pointed to the growth of P2P payment applications, which has made it easier and cheaper to send payments from one person to another. But the technology can present a tax compliance challenge because the payments are often not reported to the IRS and can be difficult to detect during an IRS examination. TIGTA selected eight of the P2P payment applications and found the companies did not appear to meet the current definition of a third-party settlement organization and therefore aren’t required to file a Form 1099-K, Payment Card and Third Party Network Transactions. However, three P2P companies filed 950,965 Forms 1099-K involving $198.6 billion of payments in tax year 2017, which included amounts below the reporting thresholds. The report doesn’t identify which companies those are, although it does mention several of the payment apps by way of context.

Even when the information reporting was available, the IRS didn’t always take action against the nonfilers of tax returns and underreporters of P2P payments. That could mean billions of dollars of income may have gone unreported. “In total, 169,711 taxpayers potentially did not report up to $29 billion of payments received per Form 1099-K documents issued to them by three P2P payment application companies,” said the report. “While the IRS can identify potential underreporting and nonfiling issues by matching information presented on a taxpayer’s income tax return with third-party information return documents filed with the IRS, such as Forms 1099-K, taxpayers using P2P payment applications may not always receive a Form 1099-K”

Even if they don’t receive a Form 1099-K, the report noted that taxpayers are still required to report any taxable income on their income tax return.

The report recommended the IRS should work with the Treasury Department’s Office of Tax Policy to consider pursuing regulatory changes that would clarify the designation of third-party settlement organizations, including defining their provisions for guarantee of payment under the Tax Code. TIGTA also recommended the IRS should consider requiring the completion of a minimum income probe of all individual business, corporate and other business taxpayers, including those designated as “limited scope,” and expand it to include their internet use and e-commerce income activity. The IRS agreed with those recommendations, but rejected another recommendation that it establish a compliance initiative project using Form 1099-K payments associated with P2P payment applications because it doesn’t believe there’s a demonstrated compliance problem that warrants such a project.

An IRS official defended the agency’s compliance efforts. “We are concerned TIGTA has not considered the results of the compliance efforts taken by the IRS, particularly in the underreport programs,” wrote De Lon Harris, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. He pointed out that the IRS’s Business Underreporter program had pursued 3,456 Form 1099-K discrepancies in tax year 2017 covering $2.5 billion in payments, but only 22 percent of the discrepancies (representing $550 million) were found to result from underreporting of income, leading to $31 million in assessments so far. Another automated underreporter program pursued over 72,000 underreporters for tax year 2017 over $31.6 billion in 1099-K gross payments and found a discrepancy of $28.3 billion, but assessed only 6 percent (or $673 million) of the proposed tax.

Harris pointed to valid explanations such as businesses sharing terminals in processing payments, reporting of income by related businesses, or reporting of income on a different line item of the return as accounting for many of the discrepancies. Besides, proceeds reported on a Form 1099-K may not always be taxable. Given the IRS’s resource constraints and the costs of prioritizing this 1099-K issue over other issues that would likely lead to greater tax assessments, he doesn’t believe the compliance problem warrants further IRS examination resources.

Source: Accounting Today
The IRS headquarters in Washington, D.C.
Andrew Harrer/Bloomberg

by Larson Accounting

6 de February de 2021

IR-2021-30, February 5, 2021

WASHINGTON — The Internal Revenue Service reminds taxpayers to avoid “ghost” tax return preparers whose refusal to sign returns can cause a frightening array of problems. It is important to file a valid, accurate tax return because the taxpayer is ultimately responsible for it.

Ghost preparers get their scary name because they don’t sign tax returns they prepare. Like a ghost, they try to be invisible to the fact they’ve prepared the return and will print the return and get the taxpayer to sign and mail it. For e-filed returns, the ghost preparer will prepare but refuse to digitally sign it as the paid preparer.

By law, anyone who is paid to prepare or assists in preparing federal tax returns must have a valid Preparer Tax Identification Number, or PTIN. Paid preparers must sign and include their PTIN on the return. Not signing a return is a red flag that the paid preparer may be looking to make a fast buck by promising a big refund or charging fees based on the size of the refund.

Unscrupulous tax return preparers may also:

Require payment in cash only and not provide a receipt.
Invent income to qualify their clients for tax credits.
Claim fake deductions to boost the size of the refund.
Direct refunds into their bank account, not the taxpayer’s account.

The IRS urges taxpayers to choose a tax return preparer wisely. The Choosing a Tax Professional page on IRS.gov has information about tax preparer credentials and qualifications. The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can help identify many preparers by type of credential or qualification.

No matter who prepares the return, the IRS urges taxpayers to review it carefully and ask questions about anything not clear before signing. Taxpayers should verify both their routing and bank account number on the completed tax return for any direct deposit refund. And taxpayers should watch out for preparers putting their bank account information onto the returns.

Taxpayers can report preparer misconduct to the IRS using IRS Form 14157. If a taxpayer suspects a tax preparer filed or changed their tax return without their consent, they should file Form 14157-A.

Source: https://www.irs.gov/newsroom/beware-of-ghost-preparers-who-dont-sign-tax-returns

IRS pushed to crack down on P2P payment apps

Beware of “ghost” preparers who don’t sign tax returns