Federal Tax Updates | Corporate Transparency Act of 2021

In this episode, Annie and Roger discuss The Corporate Transparency Act of 2021, what it mandates, and which companies will be affected. They also debate how this act affects the practitioner community and touch on the Dirty Dozen, give some updates on ERC, and how the $80 billion IRS funding is being used.

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Links mentioned in this episode
IR-2023-62 - Dirty Dozen: IRS urges tax pros and other businesses to beware of spearphishing; offers tips to avoid dangerous common scams

IR-2023-61 - Dirty Dozen: Taking tax advice on social media can be bad news for taxpayers; schemes circulating involving tax forms

IR-2023-59 - Dirty Dozen: IRS warns individuals to stay clear of shady tax preparers; offers tips on carefully choosing tax professionals

IR-2023-57 - Dirty Dozen: IRS warns of scammers using fake charities to exploit taxpayers

IR-2023-55 - Dirty Dozen: Watch out for third-party promoters of false fuel tax credit claims

IR-2023-54 - Dirty Dozen: IRS warns of scammers offering “help” to set up an Online Account; creates identity theft risk for honest taxpayers

IR-2023-51 - Dirty Dozen: Watch out for scammers using email and text messages to try tricking people during tax season

IR-2023-49 - IRS opens 2023 Dirty Dozen with warning about Employee Retention Credit claims; increased scrutiny follows aggressive promoters making offers too good to be true

FAQs for Form 1099-K - https://www.irs.gov/pub/taxpros/fs-2023-06.pdf?fbclid=IwAR3mYpnRVSkuzeaIrQ6EtUZb62KZgMCx_rPYZX-5IsS8tNBtnKM-V3lpNB8

Chapters

(00:00) - FTU E7
(01:11) - Corporate Transparency Act of 2021 (CTA)
(07:17) - What are the penalties for disobeying the CTA
(09:09) - What does the CTA look like?
(29:15) - Updates on ERC
(40:46) - New information on the electric vehicle tax credit
(45:14) - Thoughts on armed IRS agents?

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Annie Schwab

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The full transcript for this episode is available by clicking on the Transcript tab at the top of this page

All content from this podcast by SmallBizPros, Inc. DBA PADGETT BUSINESS SERVICES is intended for informational purposes only.

Creators & Guests

Host

Annie Schwab, CPA

Franchisee Operations Manager at Padgett Business Services

Host

Roger Harris, EA

President at Padgett Business Services

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Roger Harris: [00:00:07] Well, hello and welcome to another Federal Tax Update podcast. I am Roger Harris, and as always, I am joined by Annie Schwab. So Annie, how are you doing today?

Annie Schwab: [00:00:17] Everyone I'm good. I'm good. We're approaching the end of tax season, so I've got a smile on my face.

Roger Harris: [00:00:23] Hope everybody out there feels the same way, you know? And we started doing these. I thought, you know, gosh, it's going to be hard to find something to talk about every two weeks. But the tax world and the compliance world never seems to fail to deliver. So I think we have another full agenda today. And we're going to start with something that we kind of teased a podcast ago or a couple ago, which is the Corporate Transparency Act of 2021. Now, Annie, why in the world would we talk about that on a Federal Tax Updates podcast and what does it have to do with our clients, ourselves.

Annie Schwab: [00:00:59] Whatever? So this was an act that not did not get a lot of attention at the time back in 2020, but it was passed in 2020 and it still at this time only has minimal guidance. But the scary part is that it takes effect and will affect small business owners, lots of small business owners beginning in January of 2024. So while didn't catch a lot of media, it hasn't really been talked about much. Most small business owners don't don't even know that it exists. Of course, a lot of their heads are down in tax season, but it is something that is going to impact a lot of owners. So we're here today to kind of tell you what we know, indicate what we don't have final guidance on and then also give you some tips for talking to your your clients, your small business owners, etcetera.

Roger Harris: [00:01:48] Yeah, because it's it's part of this whole FinCEN and chasing down foreign accounts and things like that. Want to start by giving credit. They were the first group to kind of recognize that this was fast approaching and yet the recognition, awareness, whatever you want to call it about it was almost zero. And yeah, you're going to hear a lot from them and a group that they've put together, but we've started getting questions. There's been some articles written, so we thought. It's maybe a little break from tax season, but it's just going to be just as relevant because as you'll hear as we go through this, the penalties for noncompliance are pretty astronomical.

Annie Schwab: [00:02:35] So penalties generally come from, well, we can we can start with sort of let's start with the penalties and FinCEN. Well, the whole purpose of this. So it's again Corporate Transparency Act of 2020, sometimes you'll see it referred to as the CTA. But anyway, the goal of it was to strengthen any anti anti-money laundering regimes by increasing transparency. And that basically means requiring numerous, numerous business entities to report their beneficial owners. And we'll talk about what that actually is to report who their beneficial owners are. For the very first time, there's going to be some companies that are exempt, some small business owners that may find this cumbersome, so to say, But it was put out by what's called FinCEN. And we'll talk about that. We'll explain what we know as a definition of a beneficial owner who needs to be filing these reports. What do these reports look like? And then what happens if you don't file the reports? And Roger, you mentioned that the penalties for this are extreme and that's not surprising. Most of the time, penalties that come out from any sort of foreign reporting requirement are high. So I'll tell you, Fin Syn is the US Treasury Department's Financial Crimes Enforcement Network. A bunch of words there, but it's been around. This is not new. Fincen's been around since.

Roger Harris: [00:03:59] Not a long time. It's been there for a while.

Annie Schwab: [00:04:01] Right, Right.

Roger Harris: [00:04:02] I guess this is in response to evidently there's a lot of evidence that a lot of the money laundering happens through kind of shell or fake businesses maybe is the best way to put it. And what makes this rule unusual to a lot of them that we face when we're dealing with small businesses, we usually assume there's an exception for the smallest of small businesses that yeah, for the little guy, oh, I don't have to worry about that. My clients are small. Actually, the exception in this bill is for large companies, so it applies to all small businesses. The one caveat that we'll need to make sure you understand it's businesses that are registered or set up with the state. So your sole proprietor, for example, is exempt. But if it's a corporation, an LLC or anything else, your state may require to register with the state to be set up. This bill applies to them no matter how small they are. Again, we'll talk about how big they could be to get out of it. But the small businesses don't get out of it by being small. They actually are, I guess, the target.

Annie Schwab: [00:05:15] Yeah. And mean basically they're collecting basic information like the business name the address the state you were formed of course your in but they're also wanting as particular as it might sound is like the name the date of birth, the address of maybe a government issued photo ID, driver's license number ish thing of all of these direct or indirect beneficial owners. And I know that seems broad and vague, direct or indirect beneficial owners of the entity, but, but we'll get into that as well. But it's it's we haven't seen the report. The report is not out there in the process of creating it. So I can't tell you if it's three pages, if it's a page, if it's, you know, multiple questions, complex instructions for the form. We we haven't seen it. We do expect the FinCEN to publish, I guess, a proposed report hopefully before January 1st. That would be nice given it comes into effect on January 1st. But they're supposed to post it relatively soon and then ask for public comment, which is a normal process.

Roger Harris: [00:06:18] Yeah, I mean, again, this was passed in 2021. We're sitting here in April of 2023. There's been some kind of leaks of maybe what a draft looks like. But a lot of the things we're going to raise today are questions that you might have probably there's no answer to today because the final forms and rules and everything are not available. Right. Let's start the discussion by showing you why you need to care. And that is why should you care? The penalty for not complying with this law is $500 per day, up to $10,000 and potentially two years imprisonment. So if that doesn't get your attention, I don't know what does now. So it's serious. That's I guess it's you know, when you get into FinCEN, everything they do is serious. I mean, yeah, the other things that you have to file with them carry these same kinds of penalties.

Annie Schwab: [00:07:13] Same penalties.

Roger Harris: [00:07:14] Yeah. So, so it's serious. It's something that we have to do. So knowing that that's the penalty kind of any talk about. You've mentioned it briefly. When does it start? And it really starts differently based on which group you fall in?

Annie Schwab: [00:07:30] Right. Okay. So the rules, the act itself comes into effect January 1st of 2024, and that's for any company, a reporting company. And we'll tell you who those companies are, whether you're existing or just existing or you've registered before January 1st. And you have to file that initial report by the following January. So that seems pretty fair now, pretty reasonable depending on where you have to gather the information, if that's at your fingertips or not, will be different. But if you are reporting company created after the first of the year, then you have to file this report within 30 calendar days. 30 days is a pretty fast deadline, in my opinion, for you, for a new business getting started to be aware of it. One, to complete the forms, get the information and then send it in. And then, of course, they have all these stipulations, you know, make a change or you add something or you switch the entity owner or contact or, you know, all of these things. Again, you have 30 days to make those changes, how you make the changes. No, no guidance yet on that. Yeah.

Roger Harris: [00:08:38] What that form looks like. But that's an important distinction because what I expect we'll see at the end of 2025 is this massive number of people finally becoming aware of it that were in existence prior to January 1st of 2025 trying to catch up, but all during 2025. To Annie's point, if you form a new LLC or form a new S corp or whatever you do right, then you've only got 30 days. So you can't ignore it until the end of 2025 unless you don't ever help. And and we'll talk a little bit about some problems and why those of you that help set up these entities might want to reconsider or certainly be aware of this. So so the deadline I mean, guess the start date is January 1st of 2024. And for new startups, that means 30 days for businesses in place before the end of the year. You do have all of 2025, so some cases you've got a good bit of lead time in some cases. It's full bore. Come January 1st.

Annie Schwab: [00:09:47] Yeah. And I think, Roger, like to your point, all of a sudden, I feel like everybody's going to go into panic mode of getting these forms because the penalties are so steep. But right now, I mean, I've seen very few articles. I've seen a couple that were like the countdown to the Corporate Transparency Act or small business owners need to be aware and prepare for this. But overall, I mean, that's coming from like Accounting Today or AICPA or, you know, in general. I really don't think many people know about it and I don't think they're going to pull their heads out of tax season, you know, until the summer. That would be the time to really start communicating, in my opinion, to get people ready, aware. And you hope.

Roger Harris: [00:10:26] That when something like this comes out and it's new and again, I don't know what kind of plan they're going to have to educate people, you know, you would hope, given the severity of the penalties that they're going to do something to to really try to get the word out. But, you know, very little. We're beginning to see some articles as a beginning to be a little more awareness. So there's a little bit more being talked about, but nothing, you know, across the board. I don't know if it'll be a big topic or those of us that go get our education at tax conferences because, I mean, does it fall under the tax world, federal tax? Maybe it.

Annie Schwab: [00:11:04] Does. No.

Roger Harris: [00:11:05] So don't know how they're going to get the word out. That's part of the bill is to educate people. But it hasn't really started. Again, it's just trickling out, if you will, right now. But nothing nothing too serious. So it's here. It's coming. So you know what the penalty is. You know what the start dates are. So let's get into.

Annie Schwab: [00:11:26] Who's affected.

Roger Harris: [00:11:27] What businesses. And again, it's going to be most of your small the broad definition is small businesses that are or well, it doesn't say small businesses. It says businesses that are registered or set up with the state. So LLC doesn't have to do it. Then we mentioned maybe that's the.

Annie Schwab: [00:11:44] Easiest way it applies to you unless you're specifically excluded. Well, let me tell you, let me get into a little bit of the details about it. And so basically, the reporting is for all individuals who have substantial control directly or indirectly for the company. And that substantial definition generally falls on 25% or more of the ownership or control of the company. So that's. Less vague. But like you said, I think we were discussing earlier, even if you have zero ownership, but you have the ability to make, I would say, executive decisions. How would you term that?

Roger Harris: [00:12:24] Yeah, they talk about we're into the definition of a beneficial owner. And yeah, some of that's easy to determine. Some of it's a little more difficult. 25% ownership is clearly defined as beneficial ownership, so that one, that one is easy, 25.

Annie Schwab: [00:12:42] Or.

Roger Harris: [00:12:43] 25 or more. There's also certain officers, if that's the right term. Yeah. That are covered. So a senior officer, as it's described, which is the president, the CFO, the general counsel, the CEO, the chief operating officer, and any other officer who performs similar functions, whatever that means, Right. So it's going to cover most people. Then it gets into some other kind of interesting descriptions. You could not have one of those titles. You could not be a 25% owner. But if the individual has authority over the appointment or removal of any senior officer, you're a beneficial owner. And if you have power over the direction or determination or substantial influence over important reporting company decisions. So that's where it gets a little murky, where we hope we can get some guidance as to what is an important decision, right? I think that's what.

Annie Schwab: [00:13:47] I was saying.

Roger Harris: [00:13:48] Okay. If you're dealing with the money, which is what they're chasing, then Yeah. They're probably going to consider that an important decision because, again, go back and remember why we're doing this. We're trying to keep up with and catch all the theoretical money that's being filtered through small businesses and tried to get cleaned up and into the system. So if you have the ability to make a decision on those sorts of things, you probably would fall as one of the need to be listed. That has to be disclosed, if you will.

Annie Schwab: [00:14:19] And catch this, Roger, there's I have it written down right here, so I'm just going to read it. But it says also anyone who actually files the documents that created the company, like a lawyer, paralegal, other staff attorney, I mean, you must also have their information and report it. So that right there tells me I certainly, as a CPA, do not want to start putting my name on all of these these forms for sure. Not me.

Roger Harris: [00:14:49] Yeah, I know a lot of you that are listening probably have helped your clients because pay particular attention to what Andy just said. Help your clients, set up an LLC, set up, maybe a corporation or, you know, you do something because it seems like it's a simple thing to do. But now you really got to think about it because you're part of the disclosure requirement. If you do that, then you you are considered, what do they call it, a reporting agent or something? I think.

Annie Schwab: [00:15:19] So. Reporting agent, beneficial owner. Let's see if I have that written down. I didn't write it down. It's the reporting company. So you're a reporting agent for You're the.

Roger Harris: [00:15:29] Reporting agent for the reporting company. So. Right. You now are part of that. So if you helped set it up initially or if you do that for a fee going forward, then you're going to have to file this form. First of all, within 30 days of doing the setup, include your information about yourself as part of the reporting company, and then your response. Because the other thing and I don't know that we've said this, I hope I'm not repeating ourselves, but not only you have to do it when the company is set up, but if there's any change in beneficial ownership. So let's say.

Annie Schwab: [00:16:07] And you only get 30 days for that to.

Roger Harris: [00:16:09] You get 30 days for that. So if you bring in a new officer or something, or you sell 26% of the ownership to somebody else, you got to correct the file. You got to not correct it. It wasn't incorrect. Update it. You have to update the filing and the 30 day clock ticks there. And again, you're there as the reporting agent. So that burden could be potentially and again, we're speculating here because we don't have all the guidance. Right. Could fall on you and subject you to the penalty as well. So you really need to revisit the idea of doing this. And we've also began to hear something. There's always been a certain group of people who thought accountants doing that were getting close to practicing law and of course, that makes some of the lawyers unhappy because that's money that they would be getting that they're not. This may be another reason for them to revisit is is setting up a company now because of this added requirement potentially the practice of law and so. I don't know. It's not something I ever thought about doing and wanted to do. I had plenty of other things to do that I knew how to do and fell into my area of expertise that forming entities wasn't one. Now, I really don't want to do it because I don't want to be responsible for keeping up with all this.

Annie Schwab: [00:17:30] And what if, like the next year you're no longer going to be their reporting agent? Like, how do you get your name off? How do you keep yourself from staying on these, you know?

Roger Harris: [00:17:40] Yeah, that's a great point because you're there. Let's say you choose to disengage the client, you know, forever. And this happens to all of us do it. You know, I don't want to do anything with you anymore. I think and again, I'm guessing here because we don't have full guidance, you would have to file a form to replace you as the reporting agent. Otherwise, you could be sitting there subject to penalties down the road when the next person behind you fails to meet the 30 day rule or whatever, and you're still listed as a reporting agent. So disengaging from a client or if a client disengages from you, making sure you're removed from that report as the reporting agent. So it's got some long legs and potentially some hefty penalties.

Annie Schwab: [00:18:33] Yeah. And you mentioned there are some exempt groups and oddly enough, it's the larger companies. I think it's 20 or more full time employees and more than $5 million. Yeah. Yeah, I think they have to have a physical presence in the US and a couple of things and, and I, I was like, that doesn't make any sense. And then as I started to think through it, it's because probably these larger companies are already doing such reporting, like they're already collecting the information on these guys because they're, they're so big and they have extra reporting requirements and so they don't need to fill out this. The the government's already got the information. I don't know. Maybe maybe I'm wrong there. But no.

Roger Harris: [00:19:12] I think you're exactly right. There are some the statute actually exempted. I think there are 12 or 13 businesses. And if you look at them, the one thing that's consistent throughout all of them is that this kind of information has already been furnished somewhere into the system so that they can look up and find out. There's some exceptions even for accounting firms if they're registered with the state. So, again, don't my caution to those of you listening, don't focus on the exemptions because they're pretty narrow unless you are in a business where, like if you're a publicly traded company, then obviously that's how all of this stuff is known. We don't Well, I don't know. I was going to say we don't deal with many publicly traded companies. I don't. But I can't speak to the audience. Right. Right. But assume that most of your companies, if they're set up through your state, are going to have to do this. And you need to really think about the role you want to play beyond advisor in this process, because the money might look good for setting up an LLC and being the advisor. But think down the road. If at some point down the road, either you disengage the client, the client disengages you. You're still listed as the reporting agent or whatever, you know, and what's the process? And, you know, again, we don't know the answer to a lot of this. I mean, do you have to get the client you disengaged to allow you off or can they force you to stay on without their who knows what this is going to be? So remember, starting next year, if you choose to jump into this. It may be easier to get in than to get out. We don't know. So.

Annie Schwab: [00:20:53] And, you know, I was just I was just sitting here thinking when in doubt, like this is one of the times when in doubt, you just follow the form, right? I mean, if you're unsure if you meet an exception or if someone needs to be listed, I mean, when in doubt, list the person, when in doubt, file the form, you know, talk to your clients about it. I would assume, you know, in my practice, I would assume that all of my small business clients, unless they're just schedule C, people are going to have to fill out the form and I'd rather fill it out when it's not needed, then have to have to deal with notices or penalties. Yeah, it's just tough. It's a tough position to be in.

Roger Harris: [00:21:32] But we're assuming that the report is going to require a lot of information from all of these people. So I don't know that many of our.

Annie Schwab: [00:21:42] Don't wait till the last minute.

Roger Harris: [00:21:43] Yeah. You know, because as Annie said, you know, you're going to need their name, address, date of birth. They want a driver's license. Yeah, a driver's license. And this is all kind of reading between the lines of what it's going to be. The FinCEN has has not put out the final form. And, you know, you could have a small business with ten partners or ten shareholders and all that's got to be factored in here. And again, if one of them changes And how often are you aware of some of the changes that could happen? And again, 30 days, that's the clock is ticking pretty quickly. So and we have no idea if you discovered it on the 45th day, is there a process by which you can because or is 30 days, 30 days and they 31, you know, you're done get a penalty. So, you know, and again, we don't know given that this thing passed in 2021 and we're sitting here in 2023 and we're just now in 2020. Yeah, it actually passed in 2020. Yeah. Yeah. What kind of leeway will they give us next year? There's just no way in the world that every small business owner across America is going to know about this.

Annie Schwab: [00:22:53] And be ready. It's going to take it's going to take these companies to develop internal policies and procedures for gathering the information, for identifying their owners, making changes to it. Right. I don't know. Monitor the changes and resubmit the forms. And this is an and it's not like a one time deal. I mean, this is something that needs to be part of the practice of running a small business because. Right, Right. I don't think it's going away, really.

Roger Harris: [00:23:22] It's not just a 2025 problem. No, it's not. It starts in 2025. But it unless the legislation is repealed, it's going to be with us as long as. You meet the definition and you have any kind of changeover. Again, we're hoping and again, I'll ask EPA and some other accounting associations and groups, including us, are working on how do we make more and more people aware. But if all of the accountants that listen to this podcast or attend webinars or go to first class tax conferences that would cover this, it's still probably only half or let's go crazy and say two thirds of the profession. Where is the other third going to learn about this and how are the people they represent going to learn about this? So I see potentially some real problems at the end of 2025 with a lot of small businesses out of just pure ignorance and don't mean they're ignorant. They just are ignorant of the rules. Being in noncompliance with something that evidently is pretty serious. Yeah, 500 a day dollars a day is a lot.

Annie Schwab: [00:24:35] It adds up $10,000. Nobody wants to do that.

Roger Harris: [00:24:38] So, you know, we wanted to make you aware of it. You couldn't file the form today if you wanted to. So there's nothing. And we don't even know.

Annie Schwab: [00:24:47] Now, you think the software is going to have this form? I mean, it's not like something that goes with an annual return. So, I mean, you might have to it's not really.

Roger Harris: [00:24:55] Part of the tax process because it can happen any time. So. Right. And so I don't know that we can rely on our tax software, maybe some. That's why I said I don't even know if it'll be covered at our tax education opportunities because it's not really a tax issue.

Annie Schwab: [00:25:11] No, it's I mean.

Roger Harris: [00:25:12] Now maybe they would do something. You know, you've got the question on the tax return about, you know, foreign investment and filing that. Maybe if you file an LLC or an S Corp, they could add a question on the form to say, have you filed whatever this thing will be to at least use that as fact? I think that would be a good idea, you know, to at least ask the question on the tax return. Have you done this as an education tool? They should have added it.

Annie Schwab: [00:25:39] Bring awareness. Yeah. Because if you don't answer the box, your software is not going to let you file. So at least you have to have that conversation of what is this? Why do I answer yes or no? And what are you?

Roger Harris: [00:25:49] Maybe that'll answer no in 2026 when you should have said yes, you know, are you turning yourself in? And what if you don't? I don't know. So a lot to be learned, but it's serious. It's expensive. If you don't do it, it brings great potential liability to the practitioner community, which is why we wanted to talk about it. I don't know.

Annie Schwab: [00:26:10] But think about it though. If you as a practitioner know about this and are communicating with your clients, it's also giving you a leg up. For those out there that don't know about this, right? I mean, there's there's that aspect of it as well.

Roger Harris: [00:26:24] And there are a lot of them that don't know about it an awful lot. Absolutely. Absolutely. I'll have to admit, I didn't know much about it until.

Annie Schwab: [00:26:31] I didn't.

Roger Harris: [00:26:31] Maybe a month ago or something. And all of a sudden it gets on your radar and then you start looking at it and you go, Man, this is you asked me what.

Annie Schwab: [00:26:39] It was, and I shrugged my shoulders. I was like, I have no idea what you're talking about.

Roger Harris: [00:26:43] Yeah, you can feel smart when you first learn about it because nobody knows about it. So you say, Hey, you ever heard of the Corporate Transparency Act? And they go, What are you talking about? Well, exactly. You will learn it. Any last pieces on this?

Annie Schwab: [00:26:54] Anything else? No, I'm just I'm I just, like you said, bring awareness to it. Keep it on your radar. Start thinking about it. Talk to your clients about it, and cross your fingers that the forms come out sooner than later. For public comment, that we get additional guidance, the instructions come out, and we're not waiting till the last minute to know exactly what we need to collect and how to report. And, you know, and we'll we'll keep you posted. We're about to talk about something that we've talked about on every single webinar and every single podcast. And this you know, this this corporate transparency act might be something that we bring up on on all future podcasts. You know, just to get the word out and watch, I'm sure.

Roger Harris: [00:27:32] You know, once more comes out, there'll be webinars on it. So build it into your education routine for the rest of this year. I'm sure once more gets out there, a lot of the people who provide professional education will start offering courses on it and we'll all have to take it because it's going to be new to all of us.

Annie Schwab: [00:27:49] Exactly. Exactly.

Roger Harris: [00:27:50] Be careful who calls himself an expert because nobody's done this before.

Annie Schwab: [00:27:53] Oh, yeah, that's true. That's true.

Roger Harris: [00:27:56] Experts in the eye of the beholder.

Annie Schwab: [00:27:58] All right. All right. Well, as always, where are we going now? Talk about some some highlights, some what's going on, What came out new since our last podcast? And because it's the topic of the year or the last three years, I guess I should say, let's let's revisit IRC and where are we today? Roger Yeah.

Roger Harris: [00:28:17] We, yeah, we got some questions after our last podcast when we told you that the IRS had issued guidance on what we need to do or should do or shouldn't do, and it relates to amending the returns again as background, if you don't know if your client got. The ercae part of the law. In addition to getting the money, you have to go back and amend the return and reduce the wage expense for the year that you use the wages to qualify for the ercae. So something in 20 or 21 you have to amend and send the government some of that money back in the form of higher net income. There were concerns raised by the practitioner community about what if I know that those returns or those 941 X's are the claim for the credit were wrong. And the IRS came out and we we mentioned, I think on our last podcast that they said you should not you should tell the client you believe the I.R.S. claim that the money they got, they shouldn't have gotten and you're not going to amend the return because the IRS is determined. If you do, you are perpetuating the claim. So we did the podcast and we started getting a lot of questions is, well, what does that mean? I do. I feel like I'm caught between a rock and a hard place. And you are?

Annie Schwab: [00:29:36] You are? Yeah.

Roger Harris: [00:29:37] Yeah.

Annie Schwab: [00:29:38] Because it's unfortunate, but.

Roger Harris: [00:29:40] Yes, the client wants to do the right thing and you're telling them you won't do it because you don't think some other person who the client trusted did them wrong.

Annie Schwab: [00:29:51] And that's what the mills if you hear that term that's what those mills are coming out very aggressive talking to clients telling them they qualify, getting them the credit and then off they go with their percentage of the fee or whatever it is. And then that shows up on your doorstep as a preparer and you're looking at it now, I don't know how you would know which is the term that they use. You know, that it's incorrect. I mean, I can think of a couple of scenarios probably that if you let's say you used the wages for a PPP loan, well, you can't double dip for employee retention credit. So clearly that would be a no. But a lot of it's based on facts and circumstances and supply chain issues. And if this, then that. So it's not probably not as clear cut as as you would think. But if it shows up on your doorstep and and you didn't prepare the claim itself and you know that it's wrong or strongly believe that it's not accurate, you're supposed to literally step away from the engagement. Right. Right. And not and not do the return.

Roger Harris: [00:30:53] The return, as you would expect. The IRS didn't answer the question that everybody has. What do I do? So we don't we can't quote the IRS. So you're going to get the anti. And Roger, what we would do in this situation, which I'll give you mine first and then you can either add to it or tell me I'm crazy and give me a dead one. But the first thing I would do is explain to them why I can't do it because I believe it's incorrect. And I would send them back to the company that did the claim to begin with. Now, I don't know if any of these mills even offer income tax preparation or if they're just doing payroll. So that may be sending them to somebody who says we don't do that.

Annie Schwab: [00:31:34] So or they're not even there anymore. I imagine some of these mills are closing down shop and going, you know, quiet.

Roger Harris: [00:31:41] Once the money runs out, they'll be gone. They may still be there now because the money is still available. But yeah, so you first thing is you send them back to a place that maybe isn't a solution. So so but that's the first thing I would tell them. Go back to the person who did the claim. Ask them to do it because they it's their claim. They shouldn't be afraid of perpetuating it any further. Right. The second choice would be go send them back to that person and say, give me more information to make me comfortable that this claim was valid. And to your example, if you it appears you use the PPP loan wages for the ERC, ask them for documentation to prove that that's not what they did.

Annie Schwab: [00:32:25] Yeah, that's.

Roger Harris: [00:32:26] Fair. That's fair. Of course, if they do that then you can send them back again because then you know it's wrong. So you're still going to send them back to their. Yeah. And beyond that you can just sit back and see if the IRS changes any of the guidance because it seems kind of I was in Washington last week meeting with some people on the Hill and actually talked about this. They seem shocked that the IRS said that because if you think about it, amending the tax returns actually helps the claim be less damaging to the government because if they got 200,000 claims and the amended return would produce $20,000 in income tax, the IRS has just said to the business owner, keep the whole 200 or send the whole 200 back, which is really your first. And I got it wrong. The first thing you should say is let me fix it, which means you got to send all the money back.

Annie Schwab: [00:33:19] Yeah. Which they probably don't have anymore, right?

Roger Harris: [00:33:22] Because they certainly don't have the part they didn't get.

Annie Schwab: [00:33:24] Well, right. If they, if the claim was $50,000 or something and they paid ten to the mill, well even if they were sitting on the 40, they still don't have all the 50 to send back. Right.

Roger Harris: [00:33:35] You know, I don't know. I mean, that's your first duty because that's true in any situation where you're presented to make a tax issue that isn't correct, the first thing you should do is tell the client how to fix it. You know, you can fix it. You can go back and re amend the 941, send the money back and explain to them the potential damages. If they don't, they're going to ask you for the next option after that one because, yeah.

Annie Schwab: [00:34:01] Nobody wants that one.

Roger Harris: [00:34:03] They're not going to be thrilled about that one. That's when you would then send them back to the mill for either the mill to prepare the amended returns or they're perpetuating their own claim or furnishing additional proof to you that makes you comfortable that you're not perpetuating a false claim that you really believe that the claim is accurate. I guess the third option is wait and see if the IRS changes their mind, issues additional guidance, create some sort of safe harbor for people to get right with the government, if you will, when they find them. You know, this is all new stuff to us and to our clients. And I don't know we've ever had a situation where a claim produced this much money where the person preparing the claim took a substantial portion of it. So the taxpayers now having to give back more money than they actually got. Usually if it's a mistake on your tax return, you got the full amount of the money and so you're just giving what you got back here. You may be having to pay back 100% when you only got 80.

Annie Schwab: [00:35:04] Right. Well, it's definitely on the radar because we're seeing warnings. In fact, every year around this time, the IRS, IRS puts out a list and they call it the Dirty Dozen. Right. It's a list of the 12 kind of scams to watch out for or something like that. And the very first one, number one.

Roger Harris: [00:35:23] On the list.

Annie Schwab: [00:35:24] Number one on the list was warning about the I.R.S. claims and that the scrutiny that follows the aggressive promoters for making the offers too good for these small business owners, convincing them that they deserve the credit, qualify for the credit when they really don't. So that was number one. I mean, when you're at the top of the Dirty Dozen, that's not so good.

Roger Harris: [00:35:45] Yeah. If this was the old if when we used to show my age here, when all the music came out, you know, there was the billboard record chart and it was always, you know, number one with a bullet number five. This is number one with a bullet. This is. Yeah, this is at the top of their list. Huge dollars, big emphasis at the IRS, huge fraud being perpetuated within the claim. So it's it's going to be a problem. And we don't have A don't think we have an answer that anybody likes. Yeah.

Annie Schwab: [00:36:19] But yeah, and it's so much.

Roger Harris: [00:36:21] I don't know of any other thing to tell them. Yeah.

Annie Schwab: [00:36:24] It's just so much time and energy and a lot of dollars and a lot of risk and what we're going on three years of kind of all of this tax credit scamming schemes, you know. I don't know. I don't know. Yeah. So you figure.

Roger Harris: [00:36:41] Tell them how to fix it. Suggest they fix it. If they don't do that, send them back to the person who did the claim. And if they don't do that, then just disengage and tell them you're sorry. But you've been told, you know, you can't rely on this third party's information without getting you in trouble. And I don't know. I don't know why I'd want to get in trouble for somebody else's money, but.

Annie Schwab: [00:37:03] Yeah. And just because you said that, that brings up a good point. If you were the one who everybody makes a mistake, if you thought one of your clients qualified and you filed the forms, this is the time to make the correction. Own up to it. Make the correction right. And you know, yeah.

Roger Harris: [00:37:23] If you did it, you should. You did.

Annie Schwab: [00:37:25] It. You should probably now, you know, and the law was it's confusing. I mean you know. Well it changed and thought.

Roger Harris: [00:37:33] Yeah there was a lot of confusion about if you applied for a PPP loan and just threw a number on the PPP loan for wages. And then you looked at the retention credit, what number did you have to use? Could you use what you know? So, I mean, look, I know there was probably and those things were changing and all this was happening in real time in the middle of a pandemic. Oh, yeah. So, yeah, so I'm sure there's ones we made mistakes on. And so we definitely need to own up to our mistakes and fix them. All right. What else was on the dirty minutes list? Yeah, what else we got? Oh, the dirty Dozen list that we need to talk about.

Annie Schwab: [00:38:06] Anything. So. Well, there's always spearfishing. Maybe that's new. Well, the fuel credit, that's becoming kind of one of those. Watch out for third party promoters of false fuel credit claims. So that's. That's relatively new. I would say. Again, there's always the one about, you know, getting emails or text messages from the IRS. I will tell you right now, the IRS only contacts you by letter by mail, snail mail. So if somebody calls you and says they're calling from the IRS, do not fall for that one. But I mean, otherwise they're similar ones about identity theft and.

Roger Harris: [00:38:46] That kind of. The one thing that was kind of new that's interesting that certainly hadn't wasn't a problem a few years ago is they warn about getting bad tax advice on social media.

Annie Schwab: [00:38:55] Oh, yeah, that's a good one.

Roger Harris: [00:38:57] We didn't have social media. Not long ago. And so you just had to worry about having your stupid neighbor give you bad tax advice. Now you can go to Facebook, Twitter or wherever, and somebody can put something up that looks just well, that looks right to me. But be careful.

Annie Schwab: [00:39:15] Your Google searches mean just because it's on Google doesn't mean it's right. That's right. Sure.

Roger Harris: [00:39:22] So, All right. We're moving away from the dirty dozen. What else? Where do we want to talk about now?

Annie Schwab: [00:39:28] How about.

Roger Harris: [00:39:29] Amazing? Happens every day?

Annie Schwab: [00:39:31] Seriously, I know I feel like something new. So I think it was yesterday or two days ago there was some information on the electric vehicle tax credits. There was some proposed regs that days after that, followed by some new FAQs or revised FAQs by the IRS. And there's some stuff now the term critical mineral that they're trying to define and, you know, making stipulations here. I mean, the goal is to be able to provide information and guidance to the public. But it's complicated. There's a lot of steps with the EV credit.

Roger Harris: [00:40:04] Yeah. And it's getting caught up in politics. We're talking about all the credits that came out of the Inflation Reduction Act, which turned out to be more of a green energy bill than an inflation reduction bill. Yeah, it did, but it, but it created a lot of credits for new electric vehicles and it tied it to production in the United States and certain percentages. And it was if you followed it. And remember back, Senator Manchin worked with the administration on producing the bill. Now, the IRS is starting to issue some guidance on, you know, the details in the bill. Nothing's final yet. They're out for comment. Senator Manchin is disappointed in it. He thinks they're not interpreting the bill the way it was intended. So now we've got some political turmoil going on with the whole idea of what are the you know, how do I know where the car was finally manufactured? How do I know if the battery, you know, all these things that are coming up and now politics have gotten into it. So we do have some FAQs. We have some proposed guidance. We're going to have to watch it closely because a lot of this stuff is effective now.

Annie Schwab: [00:41:14] Yeah, theoretically.

Roger Harris: [00:41:16] You mean the credits are available now, I guess is a better way to put it?

Annie Schwab: [00:41:19] Yeah, it is something we're probably have to do a webinar. A podcast on this one too. Yeah, probably we need a little bit more information so that we can kind of provide more of like a takeaway and steps and questions. And the FAQs are good to find out.

Roger Harris: [00:41:34] They are good. The question is whether they'll be the final FAQs. You know, now that politics have creeped in, you know, does pressure get shifted one way or the other? So I would would if you have someone who's looking to buy a vehicle based on the credit, look at the FAQs they came out. I think I thought I had something in front of me.

Annie Schwab: [00:41:55] It was just a couple of days ago.

Roger Harris: [00:41:57] Well, it says March 20th, 23. It's 23, 2023. Dash eight is the FAQs on it. So, okay, that's the best we got right now. Again, the guidance is proposed, but the FAQs are pretty good. But just, you know, warn your client something could change because, you know, politics are involved. Well, they were in the first place and they still are. So don't know why we're shocked. But there you go. All right. What else?

Annie Schwab: [00:42:21] Let's see. Oh, let's let's talk about that $80 billion that the IRS is getting. What's happening with that? Because I'm starting of politics. Yep. Back in the news, I saw AICPA. I know we sent similar letters asking them to please use it on infrastructure for taxpayer assistance for it, modernization. But what's up with it?

Roger Harris: [00:42:45] Well, there's two things. The bill actually designated how that money was to be spent. It puts so much in technology, so much enforcement, so much in service. I think what AICPA was trying to get them to do was take money out of enforcement, put it more into service. What we reallocate. Yeah, reallocate it. We really said that'd be great if you can do it. I don't know how easy that is to do, but. But the first thing you should do is fix the service before you worry about enforcement. Because, number one, it's such a political hot potato that if you start by enforcing the law and not improving service, you're going to feed right into your detractors messaging. So yeah, so it's it's political. The Republicans, I think, voted to repeal it, which means nothing because it can't pass the Senate or get signed by the president. So the service needs to to do a good job of spending the money. There are some people now think the general consensus from everybody who's trying to look at this fairly without a political slight is focus on service, make the system work better, make it work like other customer service agencies before you start cracking the whip on enforcement. But sadly, enforcement is where the money is. So we'll. See. Yeah.

Annie Schwab: [00:44:01] So. So what about these armed agents? What do you think, Roger?

Roger Harris: [00:44:05] Well, you know, I know you have to. The real world sometimes gets in the way of good lines. Yeah. All we heard was there's 84,000 armed IRS agents out there. And I was on a call about a week or two ago with the IRS, and they're really concerned that there is a certain group in the population who believes that that every IRS person now is armed and they're concerned that there's going to be taxpayers who feel like they need to be armed when they meet the IRS agent. So I guess it's a level playing field. I don't know. And and they ask us to spread the word to our taxpayers and our business owners that the IRS agents are not armed. There's a very small percentage that the Criminal Investigation Division who do some really nasty things and work and they're not always just doing for the IRS. They may be involved in with the Secret Service and all kinds of people in foreign countries that are armed. But the the person who you talk to or you visit with to audit you to collect the money is not packing heat when they come to see you. And but that's not.

Annie Schwab: [00:45:14] What the media is saying. Yeah.

Roger Harris: [00:45:16] Do not fall into that. They're concerned that they're going to have an ugly situation where someone's going to walk in, an agent's going to walk into a business, let's say, and be confronted by an armed taxpayer who believes that they're being challenged by an armed IRS agent. So they've asked that we get the message out to to make sure people understand that's not. True. Yes, there are certain people at the IRS that are armed. But I will tell you what, if you run up on one of those, you got a lot bigger problems than the IRS. Armed agents? I guess so. Criminal investigation comes knocking on your door. You got a big problem. So help get that word out there. We don't need to have somebody get. In a shootout with an IRS agent just because of something he heard on the media.

Annie Schwab: [00:46:03] Exactly. All right. We're running out of time, but just a few other things you may have. You know, all of these storms and and tornadoes and have multiple states have now have additional time to file some or July 31st. Some are a little different. So just a heads up. Make sure you're checking states, especially those out today.

Roger Harris: [00:46:28] Another one came out today for the last set of storms. Well, not the last because those just happened over the weekend. So there'll be some more.

Annie Schwab: [00:46:35] So we'll probably get some more. So we see them coming out in various. You know, with various with different deadline dates, extended deadline dates. So just keep that in mind if you're filing, especially if you're doing a, you know, a one off state and you're not used to that particular.

Roger Harris: [00:46:49] And remember, too, that some of these disaster claims obviously cover the taxpayer, but they also allow if the practitioner was in that area, that their clients are covered by it because the practitioner can't perform their duties. So, you know, so it's important if you work in or have clients in these impacted areas that you watch the IRS, they're pretty good about it. They're pretty quick about it. Like I said, one came out today and I think it was for the Arkansas maybe. I don't know. It was it was a storm hit. And, you know, we're in that time of year where these kinds of storms happen. It seems like every day or I saw this morning there's some trouble. There's going to be some potential bad storms in the Midwest tomorrow and Wednesday. So, you know, if you're impacted by these or your clients are impacted by these, watch for the IRS and you're almost certainly going to be given some extended due dates to file different kinds and types of returns so that, you know, and then you've got the whole issue of how do you reconstruct records that may not exist.

Annie Schwab: [00:47:51] Yeah, that's going to also be very hard. I lived through Hurricane Katrina and that was not fun. Not fun at all.

Roger Harris: [00:47:57] And you probably don't if if your house disappeared, I'm kind of sure your records went with it.

Annie Schwab: [00:48:03] So it went with it. Yeah. I mean, there's a lot of people who do electronic stuff and save it in the cloud and the this and the that. But.

Roger Harris: [00:48:10] But, but if you're not an old fashioned shoe box in the back room and all my records in it.

Annie Schwab: [00:48:15] And gone.

Roger Harris: [00:48:16] But but the IRS recognizes that and there's there's court cases one of them Cohen case or something about how to reconstruct records if they don't exist. So there's there's the IRS is they try to be fair and they're not they're certainly not perfect, but they try to do things the best they can.

Annie Schwab: [00:48:34] So. All right, let's.

Roger Harris: [00:48:35] See what else.

Annie Schwab: [00:48:36] We got. We got some new FAQs for the 1099 KS. We've touched on that in some previous podcasts. It's not it doesn't affect this reporting here, but it is not going anywhere. And and the 1099. Ks will definitely resurface and there's some updated questions both for like the general section and then there's one for the individual section. We will certainly Roger and I will certainly revisit that. But if you're getting 1099 K questions, just know that there are some updated FAQs out there. And speaking of FAQs, there have been four new FAQs related to medical expenses. And it's kind of an odd type of medical expenses. All of them seem to be focused on health and wellness, weight loss programs, gym memberships, certain kinds of foods that you might be able to put in medical certain over-the-counter drugs. So there's a focus. It's FAQ 910. 12 and 13, I believe. And so, you know, if that's if you have a client who one itemizes would have enough medical expenses to make it matter, I guess. Take a look at these new FAQs. There are some examples. Fewer and fewer.

Roger Harris: [00:49:48] People itemize and then fewer that itemize can take medical, but know it might be a big deal for some of you. Yeah. One comment. Going back to the 1099 case I mentioned, I was in Washington last week. The Congress is aware of the debate about 600 being too low. But here's a shocker. Republicans and Democrats can't agree what to do to fix it. They all agree that 600 is too low. I talked to offices that thought 5000 was the right number. I actually talked to offices who didn't even think 25,000 was the right number because we're moving more and more into a paperless society and digitally they're concerned that 25,000 might not even be enough. So Congress is aware that the 1099 problem exists. That's that's a different being aware of it and fixing it are two different things.

Annie Schwab: [00:50:34] Coming to an agreement is almost impossible.

Roger Harris: [00:50:36] So until we get some kind of guidance, it's 600. It's just been delayed a year. Again, the IRS issued some good FAQs on what to do. If you have somebody that got a 99 and some of the third party people are. Gathering the information. What's interesting is somehow, and I think it may have been intentional for anybody that uses Zelle. They're exempt from reporting.

Annie Schwab: [00:51:03] I did not know that. What makes some?

Roger Harris: [00:51:07] Somehow they got something. Either the way the bill was written or the way they're set up is that if you use Zelle to transfer money, they're not going to give you a 1099 and they're pretty certain that they can get away with it. And certain members of Congress agreed with them. So I don't know what makes Zelle different than Venmo, than the other things. But right now, Zelle is your go to if you want to buy interesting rules and then other apps. Thanks for the tip Yeah other apps are just saying check business or personal and if you check business you get a 1099. If you check personal, you don't. Well, what do you think everybody's going to do? I mean, they don't check personal And so I don't know if this thing is going to be effective. It's going to be another pain in the you know, what that we have to deal with. But yeah, that's the latest on that.

Annie Schwab: [00:51:52] Well, I like that advice. Yes. Thank you. Yeah. Yeah.

Roger Harris: [00:51:55] And I'm not being paid by Zelle because I didn't know that. But there you go.

Annie Schwab: [00:51:59] That's okay. That's okay. Well, we are at the top of the hour. Take us home, Annie. This is it, man. We're so close to the end of tax season. We do appreciate everyone joining us, like us, share us. Invite your friends and feel free to post because we'll be coming back. And if there's a topic that you want to hear about, yeah, send us a comment about it.

Roger Harris: [00:52:21] Good and bad. And we want to make it better. And absolutely talk about what you want us to talk about. Yeah, and good luck, Roger. Depending on when you're listening to this, as we record this, there's about two more weeks, so hang in there. There'll be so close, but it'll be. This will be over soon. This. This too shall pass.

Annie Schwab: [00:52:42] That's true. And we'll be back with some more wonderful topics, hot topics, news. So thank you for watching and take care.

Roger Harris: [00:52:50] Bye, everybody.