In an effort to address tax noncompliance related to the use of virtual currencies, commonly referred to as “cryptocurrencies,” the IRS recently sent letters to over 10,000 taxpayers with one or more cryptocurrency accounts. The letters informed the taxpayers of their obligation to report transactions involving cryptocurrencies, such as sales, exchanges, and other dispositions, including the use of cryptocurrency to obtain goods and services, as well as provided a date by which the taxpayers must respond to the letter—either to demonstrate their compliance with their reporting requirement or remedy any noncompliance. The reporting obligation applies regardless of whether an account is held in the U.S. or overseas.
To whom are the letters directed?
The letters were directed toward taxpayers who have one or more cryptocurrency accounts and who may not have met their U.S. income tax filing and reporting obligations for one or more tax years from 2013 to 2017. The IRS obtained this information through ongoing compliance efforts with digital wallet providers.
Why are the letters being sent?
The letters were sent to more efficiently enforce U.S. tax laws and to help taxpayers understand and meet their reporting obligations. For U.S. income tax purposes, cryptocurrencies are treated as property, not currency. Therefore, cryptocurrencies sales, exchanges, and dispositions are taxable events that require reporting on U.S. income tax returns.
The current broad noncompliance scenario is reminiscent of what prompted an IRS/DOJ effort in 2009 to address tax liability for undisclosed foreign bank accounts. That program, which offered offenders a series of reduced civil penalties and reduced the likelihood of criminal prosecutions, induced taxpayers to pay over $11.1 billion in back taxes, penalties, and interest. It also brought those offenders and their accounts back into the tax system for future years. Ten years later, it is clear that the international aspects of that program have actually changed the culture of the worldwide financial institution industry relating to compliance with tax laws.
In light of continued IRS budget cuts, the cryptocurrency letters were likely sent as the first step in a similar program to help IRS and DOJ bridge the gap in terms of enforcement. Down the road, the recipients’ responses to these initial letters will surely help the agencies prioritize their enforcement efforts by allowing them to identify individuals who may be willfully disregarding their reporting requirements.
What if I have received a letter from the IRS?
If you have received a letter from the IRS, you should consult with your tax advisor to confirm that you have complied with your reporting obligations as well as gather the necessary information for responding to the letter. If you have not, you should discuss with your tax advisor your options for remedying any noncompliance.
Federal Child and Dependent Care Tax Credit is not just for kids. If you have elderly parents and pay for their care while you work, you may be eligible for a federal tax credit!
The tax credit is for work-related expenses a taxpayer incurs for the care of a dependent or qualified relative so the taxpayer(s) can work or look for work. The credit is filed on federal Form 2441.
Home care or adult day care costs are examples of expenses that are eligible for this credit. Skilled nursing facilities or assisted living residences are not eligible if the individual is a full-time resident.
1. No age requirement.
2. The person in need of care must be physically or mentally unable to care for him/herself. Persons who cannot dress, clean, or feed themselves, and those requiring constant attention to prevent injury are considered unable to care for themselves. A diagnosis of Alzheimer’s or dementia does not automatically make one eligible, but most individuals with these conditions will meet this requirement.
3. Must live with the taxpayer for more than half of the year.
4. The person would have been a dependent except that he or she received gross income higher than the allowed maximum ($4,150 in 2018).
5. Taxpayer must have earned income for the year—work-related expenses must be paid so that the taxpayer can work.
Taxpayer CANNOT hire their spouse or another dependent to provide the care; the care provider’s name, address, and employment ID number or social security number must be reported on the tax return. Keep in mind that hiring someone to come to your home and provide care may make you a “household employer.” As a household employer you may have to pay social security, Medicare, and unemployment taxes under Form Schedule H.
The Federal Child and Dependent Care Tax Credit is based on a maximum of $3,000 work-related dependent care expenses for one qualifying individual ($6,000 expenses for two or more) and can result in a credit of $600 to $1,050 for one qualifying individual ($1,200 and $2,100 for two or more), depending on the amount of the taxpayer’s adjusted gross income.
If your employer has an FSA account, you may be able to exclude up to $5,000 of elderly dependent care costs from your wages. If you received such benefit, you must subtract the amount excluded from your income from the dollar limit that applies to you. Your reduced dollar limit is figured on Form 2441, Part III. FSA plans vary among employers so be sure to check the plan documents.
A Health Savings Account (HSA) is a great way to pay for your current health care needs and to allow for future value growth in your account to plan for anticipated health costs during retirement years.
The IRS has recently announced that HSA contributions limits will increase in 2020. Under a high deductible health plan, an individual with self-only coverage can contribute up $3,550 and an individual with family coverage can contribute up to $7,100 in 2020. These are increases of $50 and $100, respectively, from 2019 contribution limits. There is no change in HSA catch-up contributions ($1,000 for those age 55 or older) from 2019.
For 2020, a high deductible health plan (HDHP) is a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed $6,900 for self-only coverage or $13,800 for family coverage.
Individual Taxpayer Identification Numbers (ITINs) are obtained by those persons who are required to make a tax filing or have a payment obligation under U.S. law but are not eligible for a Social Security Number. Periodically, the IRS issues a list of ITINs which will expire if not renewed.
The following ITINs are expired or will expire on December 31, 2019:
• ITINs with middle digits of 70 through 87 (e.g., NNN-70-NNNN); and
• ITINs that have not been used on a tax filing in the last three years.
If a person with an ITIN which meets one of the above criteria expects to have a 2020 filing requirement, the ITIN should be renewed as soon as possible. There are three options for renewing an ITIN with the IRS:
• By mail to the IRS address listed on the Form W-7
• Through a Certified Acceptance Agent
authorized by the IRS or
• In person at an IRS Taxpayer Assistance Center
Information on ITINs is available online
in English, Spanish, Chinese, Korean, Haitian Creole, Russian and Vietnamese.
On April 20, 2019, the IRS outlined a plan that provides a six-year strategy to modernize IRS information technology systems and build critical infrastructure needed for the future of the nation’s tax system. The plan is anticipated to cost between $2.3 billion and $2.7 billion over six years through fiscal year 2024.
The IRS Commissioner, Chuck Rettig stated that “a critical component of the plan involves the IRS’s ongoing efforts to secure their systems and protect taxpayer data.”
The announcement made by the IRS stated that the initiative, including those underway and others, will enhance taxpayer service and enforcement activities over the next several years.
The plan, as outlined, envisions the IRS being able to:
• Significantly improve the taxpayer experience by standardizing customer workflows and by expanding access to information.
• Reduce call wait and case resolution times.
• Simplify identity verification to expand access to online services while protecting data.
• Increase systems availability for taxpayers and tax practitioners.
• Make implementation of new tax provisions more straightforward.
For more information on the IRS plan, see the IRS Integrated Modernization Business Plan.
The IRS levies a tax known as “backup withholding” on certain payments to a payee that are not otherwise subject to withholding at the time of payment. As of January 1, 2018, the backup withholding tax rate dropped from 28% to 24%.
When does the IRS require backup withholding?
A payee may be subject to backup withholding under the following circumstances:
• Failure to complete Form W-9, Request for Taxpayer Identification Number, or the taxpayer provided an incorrect taxpayer identification number (Social Security Number, Employer Identification Number or Individual Taxpayer Identification Number). Form W-9 is required upon opening a new account, making an investment or receiving payments reportable on Form 1099
• Failure to report interest, dividend or patronage dividend income on income tax return.
What payments are subject to backup withholding?
Payments that may be subject to backup withholding include:
• Interest (Form 1099-INT)
• Dividends (Form 1099-DIV)
• Patronage dividends, but only if at least half of the payment is money (Form 1099-PATR)
• Rents, profits and other income (Form 1099-Misc)
• Royalties (Form 1099-Misc)
• Commissions, fees or other payments for work performed as an independent contractor (Form 1099-Misc)
• Certain payments made by fishing boat operations (Form 1099-Misc)
• Broker and barter exchange transactions (Form 1099-B)
• Payment Card and Third-Party Network Transactions (Form 1099-K)
• Gambling winnings, if not already subject to regular gambling withholding (Form W-2G)
How can backup withholding be prevented?
Backup withholding can be prevented by accurately completing Form W-9 and reporting the correct income on federal income tax returns.
If you receive a notice from a payer stating you haven’t provided a taxpayer identification number or that it’s incorrect, you can usually prevent backup withholding or stop it once you provide the correct name and taxpayer identification number.
How is the backup withholding reported on an income tax return?
If you were subject to backup withholding, the amount withheld will be reported on Form 1099 and should be reported as a payment toward the tax due on your federal income tax return for the year in which it is reported.
Isn’t Roth 401(k) the same as after-tax 401(k)?
While both involve making contributions using after-tax dollars, the two differ in a few key ways.
First, Roth 401(k) contributions are subject to the usual 401(k) contribution limits. In 2019, that limit is $19,000, plus a $6,000 catch-up limit for individuals aged 50 and older. After-tax 401(k) contributions are not considered to be “deferrals” and are not subject to the $19,000/$25,000 limit. Therefore, after-tax 401(k) contributions can be higher as long as total 401(k) contributions don’t exceed $56,000.
The tax treatment of Roth 401(k) contributions and after-tax contributions is also different at withdrawal. While both contributions are tax-free at withdrawal, any earnings generated on Roth 401(k) contributions are tax-free but earnings generated on after-tax contributions are only tax-deferred and are taxed as ordinary income at the time of distribution.
What happens to after-tax 401(k) contributions when I leave my job or retire?
Your after-tax contributions can be rolled into a Roth IRA and any earnings can be rolled into a Traditional IRA. If you want to convert any of the earnings to Roth, taxes would be due—on the earnings portion only.
What is this “back door” business with after-tax 401(k) contributions?
A back door Roth IRA is a method used by taxpayers to place retirement savings in a Roth IRA, even if their income is higher than the maximum the IRS allows for regular Roth IRA contributions. After-tax 401(k) contributions can eventually be converted to Roth IRA without including earnings. This allows individuals whose income exceeds IRS Roth IRA contribution limits a “back door” to Roth IRA.
While any unpaid tax balance is subject to interest that compounds daily and a monthly late payment penalty until the tax liability is fully paid, the Internal Revenue Service (IRS) does have a payment option available to taxpayers.
Please note that entering into an agreement with the IRS does not stop the interest and penalty accumulation.
Full payment agreements for up to 120 days
The IRS can grant you up to 120 days to pay in full. The IRS does not charge a user fee for this arrangement. An individual can apply by filling out the Online Payment Agreement or by calling (800)-829-1040.
An installment agreement allows you to make a series of monthly payments over time. Payments can be made through direct debit from your bank account; payroll deduction from your employer; payment by electronic federal tax payment system (EFTPS); or payment by credit card, check, money order or cash at a retail partner.
To request an installment agreement, use the Online Payment Agreement application or complete an Installment Agreement Request, Form 9465, and mail it to the IRS. The IRS charges a user fee when you enter into a standard installment agreement or a payroll deduction agreement.
Be advised that before your installment agreement can be considered, you must be current on all filing and payment requirements. Taxpayers in an open bankruptcy proceeding are not eligible.
Offer in compromise
An offer in compromise is an agreement between you and the IRS that resolves your tax liability by payment of an agreed upon reduced amount.
Before the IRS considers an offer, you must have filed all tax returns, made all required estimated payments for the current year and made all required federal tax deposits for the current quarter if you are a business owner with employees.
As in the case of the installment payment agreement, taxpayers in an open bankruptcy proceeding are not eligible.
Temporarily delay collection
If the IRS determines that you cannot pay your tax debt due to financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible. Changing the debt status as currently not collectible, however, does not mean the debt goes away. As mentioned before, interest and penalties still continue to accrue even if the debt is delayed for collection.
Before the IRS approves your request to delay collection, you need to complete a Collection Information Statement (Form 433-F, Form 433-A or Form 433-B). By filling out these statements, you are providing the IRS with your assets information as well as your monthly income and expenses.
The IRS may temporarily suspend certain collection actions, such as issuing a levy until your financial condition improves but can still file a Notice of Federal Tax Lien while your account is suspended. The IRS may also file a Notice of Federal Tax Lien in the public records, which means that your creditors are notified that the IRS has a claim against all your property. By doing so, your credit rating may be affected. Once a lien arises, the IRS cannot release the lien until the tax, the penalty, interest and recording fees are paid in full or until the IRS may no longer legally collect the tax.
Other payment options
In addition to the IRS payment options mentioned above, you might also consider financing the full tax payment of your tax liability through loans, such as a home equity loan or a credit card. The interest and penalties set by the Internal Revenue Code may be higher than any applicable fees charged by the bank or credit card company.
The “kiddie tax” generally applies to most unearned income of children under age 19 and of full-time students under age 24 (unless the student provides more than half of their own support from earned income). Unearned income for purposes of the kiddie tax means income other than wages, salaries, professional fees and other compensation for professional services.
Before 2018, unearned income subject to the kiddie tax was generally taxed at the parents’ tax rate. The Tax Cuts and Jobs Act (TCJA) makes the kiddie tax harsher by revising the tax rate structure.
From 2018 to 2025, the parents’ tax rate will not matter. Instead, a child’s unearned income beyond $2,100 (in 2018) will be taxed according to the tax brackets used for trusts and estates. For 2018, once taxable income exceeds $12,500, a child’s unearned income will be taxed at the highest marginal rate of 37%.
In contrast, for a married couple filing jointly, the highest marginal rate of 37% does not kick in until their 2018 taxable income tops $600,000.
In other words, under the TCJA, a child’s unearned income, in some cases, can be taxed at a higher rate than their parents’ income beginning in 2018.
However, high-income taxpayers who are already in the highest 37% tax bracket, could potentially benefit by paying lower rates of 10% to 24% on additional income above the first $2,100 of up to $11,250 per child. In addition, if the parents’ tax rate for capital gains is already the 20% maximum, they can save on the first $2,600 of capital gains above the $2,100 income limit as they qualify for a 0% rate, and the 15% rate applying up to $12,700 per child.
The IRS has announced limited penalty relief for underpayment of estimated income tax due for the year 2018. IRS Notice 2019-11 provides a waiver of penalties to individuals whose total tax payments for 2018 via wage withholding and/or timely-made estimated tax payments exceed 85% of the tax ultimately determined to be due.Background.
Generally, the Internal Revenue Code requires taxpayers to pay federal income tax as they earn income. Payments are made via wage withholding or by quarterly estimated income tax payments. The required estimated payment is generally the lesser of (1) 90% of the tax ultimately determined to be due or (2) 100% of the tax owed by the taxpayer for the prior year (110% if the taxpayer’s adjusted gross income for the prior year was greater than $150,000). If the taxpayer fails to make these estimated payments, a penalty is imposed. There are some exceptions to the imposition of penalties for underpayment, the most common one being that there is no penalty if the remaining tax owed on April 15th is less than $1,000.
The Tax Cuts and Jobs Act (“TCJA”) of December 2017 made substantial changes to the Internal Revenue Code. These changes made it challenging for taxpayers to determine the appropriate amount of their wage withholding or estimated payments for 2018. In February 2018, the IRS issued a revised Withholding Calculator to help taxpayers determined their proper withholding (or estimated tax payment) amounts for 2018. The updated federal tax withholding tables reflected the TCJA’s lower tax rates and doubled standard deduction. It resulted in less tax withheld. However, the new tables did not completely reflect changes such as the suspension of dependence exemptions and significantly decreased itemized deductions. As a result, some taxpayers did not pay enough in federal taxes via wage withholding or estimated payments for 2018.The General Accounting Office (GAO) reports that the Department of the Treasury expects that 21% of filers will be under withheld for 2018. While this number is significant, the GAO reports that 18% of filers were likely to have been under withheld if the tax laws had not changed.Notice 2019-11.
The Notice reports that due to the substantial changes generated by the TCJA (and despite the publication of the revised Withholding Calculator) the IRS is providing relief to individual taxpayers. To qualify for the waiver of penalties due to underpaid tax estimates, the taxpayer must (1) be an individual (2) whose total withholding and estimated tax payments for the year 2018 were made by January 15, 2019, and (3) whose payments equaled at least 85% of the tax ultimately determined to be owed for 2018.
To claim the relief, the taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estate and Trusts, with his/her 2018 income tax return.Handling 2018.
Given the magnitude of the changes to the Internal Revenue Code, it may be smart to gather your tax information as soon as possible to do a rough draft of your 2018 federal income tax return. You can pull information from your final paystub and from your financial records to estimate your wage and other income. Your tax records will help you determine if you are limited to the new standard deduction or if itemizing is available to you.Planning for 2019.
After you have attended to your 2018 income taxes, make sure your tax estimates for 2019 are on-target using the 2019 Withholding Calculator
on the IRS website.