WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.

WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.

"Right now, we are planning for restarting those notices," Darren Guillot, commissioner for collection and operation support in the IRS Small Business/Self Employment Division, said May 5, 2023, during a panel discussion at the ABA May Tax Meeting. "We have a very detailed plan."

Guillot assured attendees that the plan does not involve every notice just starting up on an unannounced day. Rather, the IRS will "communicate vigorously" with taxpayers, tax professionals and Congress on the timing of the plans so no one will be caught off guard by their generation.

He also stated that the plan is to stagger the issuance of different types of notices to make sure the agency is not overwhelmed with responses to them.

"The notice restart is really going to be staggered," Guillot said. "We’re going to time it at an appropriate cadence so that we believe we can handle the incoming phone calls that it can generate."

Guillot continued: "We want to also be mindful of the impact that it will have on the IRS Independent Office of Appeal. Some of those notices come with appeals rights and we want to make sure that we give taxpayers a chance to resolve their issues without the need to have to go to appeal or even get to that stage of that notice. So, it will be a staggered process."

In terms of helping to avoid the appeals process and getting taxpayers back into compliance, Guillot offered a scenario of what taxpayers might expect. In the example, if a taxpayer was set to receive a final Notice of Intent to Levy right before the pause for the pandemic was instituted, "we’re probably going to give most of those taxpayers a gentle reminder notice to try and see if they want to comply before we go straight to that final notice. That’s good for the taxpayer and it’s good for the IRS. And it’s good for the appellate process as well."

Guillot also said the agency is going to look at the totality of the 500-series of notices and taxpayers and their circumstances to see if there is a more efficient way of communicating and collecting past due amounts from taxpayers.

He also stressed that the IRS has been working with National Taxpayer Advocate Erin Collins and she has offered "input that we’re incorporating and taking into consideration every step of the way."

Collins, who also was on the panel, confirmed that and added that the IRS is "trying to take a very reasonable approach of how to turn it back on," adding that the staggered approach will also help practitioners and the Taxpayer Advocate Service from being overwhelmed as well as the IRS.

Guillot also mentioned that in the very near future, the IRS will start generating CP-14 notices, which are the statutory due notices. This is the first notice that a taxpayer will receive at the end of a tax season when there is money that they owe and those will start to be sent out to taxpayers around the end of May.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.

The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.

The agency is "going to be focused completely on … closing the gap," IRS Commissioner Daniel said April 27, 2023, during a hearing of the House Ways and Means Committee. "What that means is the auditrate, the most recent auditrate, we have that’s complete and final is 2018. That is the rate that I want to share with the American people. The auditrate will not go above that rate for years to come because for the next several years, at least, we’re going to be focused on work that we’re doing with the highest income filers."

Werfel added that even if the IRS were to expand its audit footprint a few years from now, "you’re still not going to get anywhere near that historical average for quite some time. So, I think there can be assurances to the American people that if you earn under $400,000, there’s no new wave of audits coming. The probability of you being audited before the Inflation Reduction Act and after the Inflation Reduction Act are not changed at all."

He also noted that many of the new hires that will be brought in to handle enforcement will focus on the wealthiest individuals and businesses. Werfel said that there currently are only 2,600 employees that cover filings of the wealthiest 390,000 filers and that is where many of the enforcement hires will be used.

"We have to up our game if we’re going to effectively assess whether these organizations are paying what they owe," he testified. "So, it’s about hiring. It’s about training. And it’s not just hiring auditors, it’s about hiring economists, scientists, engineers. And when I [say] scientists, I mean data scientists to truly help us strategically figure out where the gaps are so we can close those gaps."

Werfel did sidestep a question about the potential need for actually increasing the number of audits for those making under $400,000. When asked about a Joint Committee on Taxation report that found that more than 90 percent of unreported income actually came from taxpayers earning less than $400,000, he responded that "there is a lot of mounting evidence that there is significant underreporting or tax gap in the highest income filers. For example, there’s a study that was done by the U.S. Treasury Department that looked at the top one percent of Americans and found that as much as $163 billion of tax dodging, roughly."

And while answering the questions on the need for more personnel to handle the audits of the wealthy, he did acknowledge that "a big driver" of needing such a large workforce to handle the filings of wealthy taxpayers is due to the complexity of the tax code, in addition to a growing population, a growing economy, and an increasing number of wealthy taxpayers.

Other Topics Covered

Werfel’s testimony covered a wide range of topics, from the size and role of the personnel to be hired to the offering of service that has the IRS fill out tax forms for filers to technology and security upgrade, similar to a round of questions the agency commissioner faced before the Senate Finance Committee in a hearing a week earlier.

He reiterated that a study is expected to arrive mid-May that will report on the feasibility of the IRS offering a service to fill out tax forms for taxpayers. Werfel stressed that if such a service were to be offered, it would be strictly optional and there would be no plans to make using such a service mandatory.

"Our hope and our vision [is] that we will meet taxpayers where they are," he testified. "If they want to file on paper, we’re not thrilled with it, but we’ll be ready for it. If they want the fully digital experience, if they want to work with a third-party servicer, we want to accommodate that."

Werfel also reiterated a commitment to examine the use of cloud computing as a way to modernize the IRS’s information technology infrastructure.

And he also continued his call for an increase in annual appropriations to compliment the funding provided by the Inflation Reduction Act. He testified that modernization funds were "raided" so that phones could be answered and to prevent service levels from declining while still being able to modernize the agency, more annual funds will need to be appropriated.

By Gregory Twachtman, Washington News Editor

The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. 

The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. The Court of Appeals also affirmed, finding that the summonses fell within the exception in Code Sec. 7609(c)(2)(D)(i) to the general notice requirement.

Exceptions to Notice Requirement

The taxpayers argued that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS. However, the statute does not mention legal interest and does not require that a taxpayer maintain such an interest for the exception to apply. Further, the taxpayers’ arguments in support of their proposed legal interest test, failed. The taxpayers first contended that the phrase "in aid of the collection" would not be accomplished by summons unless it was targeted at an account containing assets that the IRS can collect to satisfy the taxpayers’ liability. However, a summons might not itself reveal taxpayer assets that can be collected but it might help the IRS find such assets.

The taxpayers’ second argument that if Code Sec. 7609(c)(2)(D)(i) is read to exempt every summons from notice that would help the IRS collect an "assessment" against a delinquent taxpayer, there would be no work left for the second exception to notice, found in Code Sec. 7609(c)(2)(D)(ii). However, clause (i) applies upon an assessment, while clause (ii) applies upon a finding of liability. In addition, clause (i) concerns delinquent taxpayers, while clause (ii) concerns transferees or fiduciaries. As a result, clause (ii) permits the IRS to issue unnoticed summonses to aid its collection from transferees or fiduciaries before it makes an official assessment of liability. Consequently, Code Sec. 7609(c)(2)(D)(i) does not require that a taxpayer maintain a legal interest in records summoned by the IRS.

An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:

An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:

• --the Code Sec. 45 electricity production tax credit,
• --the new Code Sec. 45Y clean electricity production credit,
• --the Code Sec. 48 energy investment credit, and
• --the new Code Sec. 48E clean energy investment credit.

The notice also provides a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies. Finally, it describes recordkeeping and certification requirements for the domestic content bonus credit.

Taxpayer Reliance

Taxpayers may rely on the notice for any qualified facility, energy project, or energy storage technology the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register.

The IRS intends to propose that the proposed regs will apply to tax years ending after May 12, 2023.

Domestic Content Bonus Requirements

The notice defines several terms that are relevant to the domestic content bonus credit, including manufactured, manufactured product, manufacturing process, mined and produced. In addition, the notice extends domestic content test to retrofitted projects that satisfy the 80/20 rule for new and used property.

The notice also provides detailed rules for satisfying the requirement that at least 40 percent (or 20 percent for an offshore wind facility) of steel, iron or manufactured product components are produced in the United States. In particular, the notice provides an Adjusted Percentage Rule for determining whether manufactured product components are produced in the U.S.

Safe Harbor for Classifying Product Components

The safe harbor applies to a variety of project components. A table list the components, the project that might use each component, and assigns each component to either the steel/iron category or the manufactured product category.

The table is not exhaustive. In addition, components listed in the table must still meet the relevant statutory requirements for the particular credit to be eligible for the domestic content bonus credit.

Certification and Substantiation

Finally, the notice explains that a taxpayer that claims the domestic content bonus credit must certify that a project meets the domestic content requirement as of the date the project is placed in service. The taxpayer must also satisfy the general income tax recordkeeping requirements to substantiate the credit.

A taxpayer certifies a project by submitting a Domestic Content Certification Statement to the IRS certifying that any steel, iron or manufactured product that is subject to the domestic content test was produced in the U.S. The taxpayer must attach the statement to the form that reports the credit. The taxpayer must continue to attach the form to the relevant credit form for subsequent tax years.

A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.

A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.

The deadline for the taxpayers to file a petition in the Tax Court was July 18, 2022. The taxpayers were living in Alabama when they electronically filed their petition. At the time of filing, the Tax Court's electronic case management system (DAWSON) automatically applied a cover sheet to their petition. The cover sheet showed that the court electronically received the petition at 12:05 a.m. eastern time on July 19, 2022, and filed it the same day. However, when the Tax Court received the petition, it was 11:05 p.m. central time on July 18, 2022, in Alabama.

Electronically Filed Petition

The taxpayers’ petition was untimely because it was filed after the due date under Code Sec. 6213(a). Tax Court Rule 22(d) dictates that the last day of a period for electronic filing ends at 11:59 p.m. eastern time, the Tax Court’s local time zone. Further, the timely mailing rule under Code Sec. 7502(a) applies only to documents that are delivered by U.S. mail or a designated delivery service, not to an electronically filed petition.

Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.

Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.

"I will stay laser-focused on this to ensure that we identify and implement changes prior to the next tax filing season," Werfel stated in a May 15, 2023, letter to Senate Finance Committee Chairman Ron Wyden (D-Ore.).

The issue of racial disparities was raised during Werfel’s confirmation hearing an in subsequent hearings before Congress after taking over as commissioner in the wake of a study issued by Stanford University that found that African American taxpayers are audited at three to five times the rate of other taxpayers.

The IRS "is committed to enforcing tax laws in a manner that is fair and impartial," Werfel wrote in the letter. "When evidence of unfair treatment is presented, we must take immediate actions to address it."

He emphasized that the agency does not and "will not consider race as part of our case selection and audit processes."

He noted that the Stanford study suggested that the audits were triggered by taxpayers claiming the Earned Income Tax Credit.

"We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take," he wrote, adding that the agency has been studying the issue since he has taken over as commissioner and that the work is ongoing. Werfel suggested that initial findings of IRS research into the issue "support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population."

Werfel added that elements in the Inflation Reduction Act Strategic Operating Plan include commitments to "conducting research to understand any systemic bias in compliance strategies and treatment. … The ongoing evaluation of our EITC audit selection algorithms is the topmost priority within this larger body of work, and we are committed to transparency regarding our research findings as the work matures."

By Gregory Twachtman, Washington News Editor

The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.

The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.

In a May 3, 2023, letter to Sen. Marsha Blackburn (R-Tenn.) and Sen. Catherine Cortez Masto (D-Nev.), the AICPA applauded the legislators for The Electronic Communication Uniformity Act (S. 1338), which would treat electronic payments made to the IRS as timely at the point they are submitted, not at the point they are processed, which is how they are currently treated. The move would make the treatment similar to physically mailed payments, which are considered timely based on the post mark indicating when they are mailed, not when the payment physically arrives at the IRS or when the agency processes it.

S. 1338 was introduced by Sen. Blackburn on April 27, 2023. At press time, Sen. Cortez Masto is the only co-sponsor to the bill.

The bill adopts a recommendation included by the National Taxpayer Advocate in the annual so-called "Purple Book" of legislative recommendations made to Congress by the NTA. The Purple Book notes that IRS does not have the authority to apply the mailbox rule to electronic payments and it would need an act of Congress to make the change.

"Your bill would provide welcome relief and solve a problem that taxpayers have been faced with, i.e., incurring penalties through no fault of their own because they believed their filings or payments were timely submitted through an electronic platform," the AICPA letter states. This legislation would provide equity by treating similarly situated taxpayers similarly. It would also improve tax administration by eliminating IRS notices assessing unnecessary penalties when the taxpayer or practitioner electronically submits a tax return by the deadline regardless of when the IRS processes it.

Tax policy and comment letters submitted to the government can be found here.

By Gregory Twachtman, Washington News Editor

WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.

The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.

WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.

The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.

Roberts also described the plan as a tool to help bring the agency together and more unified in its mission.

"We intentionally wrote the plan to sort of break down some of those institutional silos," she said. "So, we didn’t write it based on business unit or function."

She framed the development of the plan a "cross-functional, cross-agency effort," adding that it "wasn’t like, ‘here’s how we’re going to change wage and investment or large business.’ It was, ‘here’s how we’re going to change service and enforcement and technology. And those pieces touch everything."

Roberts also highlighted the need for better data analytics across the agency, something that the SOP emphasizes particularly as it beings to ramp up enforcement activities to help close the tax gap.

"We are never going to be able to hire at a level that you can audit everybody," she said. "So, the ability to use data and analytics to really focus our resources on where we think there is true noncompliance," rather than conducting audits that result in no changes. "That’s not helpful for taxpayers. That’s not helpful for the IRS."

By Gregory Twachtman, Washington News Editor

The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.

The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.

Appeals resolve federal tax disputes through conferences, wherein an appeals officer will engage with taxpayers in a way that is fair and impartial to taxpayers as well as the government to discuss potential settlements. Additionally, taxpayers can resolve their disputes by mail or secure messaging. Although, conferences are offered by telephone, video, the mode of meeting with Appeals is completely decided by the taxpayer. Recently, appeals expanded access to video conferencing to meet taxpayer needs during the COVID-19 pandemic. Further, taxpayers and representatives who prefer to meet with Appeals in person have the option to do so as, appeals has a presence in over 60 offices across 40 states where they can host in-person conferences.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

IRS Recommended Action Steps

Specifically, the IRS advised the taxpayers take the following steps now to jump start a successful 2016 filing season for their 2015 tax year returns:

• Consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with an employer if certain life circumstances have changed (such as a change in marital status or the birth of a child). A new child could mean an additional exemption and/or tax credits that might lower your tax liability. Therefore you might benefit from claiming an extra withholding allowance. Conversely, getting married (or divorced) could change your income, making it advantageous to readjust your withholding accordingly.
• Report any changes or projected changes in income to the Health Insurance Marketplace (if taxpayer obtained insurance through a marketplace). Income affects the calculation of subsidy payments. Recipients of the advance premium tax credit may owe tax for 2015 if their subsidy payments are too high.
• Maintain accurate and organized tax records, such as home loan documents or financial aid documents. Many deductions must be substantiated with evidence, and staying organized now could facilitate the tax return filing process in the future.
• Find a tax return preparer. Looking for a qualified tax return preparer may be easier in the off-season, when you are under no immediate pressure to select a person. This can provide taxpayers with more time to evaluate a preparer's credentials.
• Plan to increase itemized deductions. If a taxpayer plans to purchase a house, contribute to charity, or incur medical expenses that may not be reimbursed during 2015, it may be beneficial to consider whether itemizing deductions would be more beneficial than claiming the standard deduction for 2015.
• Stay informed of the latest tax law changes. Keeping on top of developments can reduce confusion in the long run.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.

Impersonators

Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets.  The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.

Reporting

For now, only specified individuals are required to file Form 8938, but specified U.S. entities will eventually also have to file the form. Taxpayers who do not file a federal income tax return for the year do not have to File Form 8938, even if the value of their foreign assets exceeds the normal reporting threshold.

Individuals who have to file Form 8938 include U.S. citizens, resident aliens for any part of the year, and nonresident aliens living in Puerto Rico or American Samoa.

Reporting applies to specified foreign financial assets. Specified foreign financial assets include:

• A financial account maintained by a foreign financial institution;
• Other foreign financial assets, such as stock or securities issued by a non-U.S. person, or an interest in a foreign entity.

The aggregate value of the individual’s specified foreign financial assets must exceed specified reporting thresholds, as follows:

• Unmarried U.S. taxpayers, and married U.S. taxpayers filing a separate return – more than $50,000 on the last day of the year, or more than $75,000 at any time during the year;
• U.S. married taxpayers filing a joint return – more than $100,000 on the last day of the year, or more than $150,000 at any time during the year; or
• Taxpayers living abroad: if filing a joint return, more than $400,000 on the last day of the year, or more than $600,000 during the year; other taxpayers, more than $200,000 on the last day of the year, or more than $300,000 at any time during the year.

Taxpayers who report assets on other forms, such as Form 3520, do not have to report the asset on Form 8938, but must use Form 8938 to identify other forms on which they report.

Filing

Reporting applies for tax years beginning after March 18, 2010, the date that FATCA was enacted. Most taxpayers, such as those who report their taxes for the calendar year, must start filing Form 8938 with their 2011 income tax return.

If you have any questions about Form 8938, please contact our office.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.