WASHINGTON — The Internal Revenue Service today released a new set of tax gap estimates on tax years 2011, 2012 and 2013. The results show the nation's tax compliance rate is substantially unchanged from prior years.
 
The gross tax gap is the difference between true tax liability for a given period and the amount of tax that is paid on time.
 
"Voluntary compliance is the bedrock of our tax system, and it’s important it is holding steady," said IRS Commissioner Chuck Rettig. "Tax gap estimates help policy makers and the IRS in identifying where noncompliance is most prevalent. The results also underscore that both solid taxpayer service and effective enforcement are needed for the best possible tax administration.”
 
The average gross tax gap was estimated at $441 billion per year based on data from tax years 2011, 2012 and 2013. After late payments and enforcement efforts were factored in, the net tax gap was estimated at $381 billion.
 
The tax gap estimates translate to about 83.6%, of taxes paid voluntarily and on time, which is in line with recent levels. The new estimate is essentially unchanged from a revised Tax Year 2008-2010 estimate of 83.8%.  After enforcement efforts are taken into account, the estimated share of taxes eventually paid is 85.8% for both periods.  And it is line with the TY 2001 estimate of 83.7% and the TY 2006 estimate of 82.3%.
 
The IRS will continue to vigorously pursue those that are not compliant. The IRS currently collects more than $3 trillion annually in taxes, penalties, interest and user fees.
 
The voluntary compliance rate of the U.S. tax system is vitally important for our nation. A one-percentage-point increase in voluntary compliance would bring in about $30 billion in additional tax receipts.

Tax Gap studies through the years have consistently demonstrated that third-party reporting significantly raises voluntary compliance. And compliance rises even higher when income payments are also subject to withholding. The IRS also has an array of other programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups to a variety of education and outreach efforts.

The tax gap estimates are a helpful guide to the historical scale of tax compliance and to the persisting sources of low compliance.

“Maintaining the highest possible voluntary compliance rate also helps ensure that taxpayers believe our system is fair,” Rettig said. “The vast majority of taxpayers strive to pay what they owe on time. Those who do not pay their fair share ultimately shift the tax burden to those people who properly meet their tax obligations. The IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law while also focusing on pursuing those who skirt their responsibilities.”

Dear Tax Professional,

Summer is over, and it won’t be long until you’re sitting down at your computer to renew your preparer tax identification number (PTIN) for 2020. In mid-October when renewal season begins, you will notice a data security responsibilities statement has been added to the PTIN renewal process. It serves as a reminder of your legal responsibility to have a data security plan and to provide data and system security protections for all taxpayer information. When completing your PTIN renewal, a checkbox will be available to confirm your awareness of these data security responsibilities.

Data security continues to be a hot topic. That’s because tax professionals remain a top target of identity thieves and data breaches continue to affect tax professionals at an alarming rate. Cybercriminals use sophisticated and ever evolving techniques to gain access to your systems. These criminals steal sensitive taxpayer data to file fraudulent tax returns and create financial havoc for your clients. There are simple steps you can incorporate in your daily operations to minimize your vulnerability and protect client data, including:

• Protect email accounts with strong passwords and two-factor authentication if available.
• Install an anti-phishing tool bar to help identify known phishing sites.
• Use anti-phishing tools that are included in security software products.
• Use security software to help protect systems from malware and scan emails for viruses.
• Never open or download attachments from unknown senders, including potential clients. They should instead make contact first by phone.
• Send only password-protected and encrypted documents when files must be shared with clients over email.
• Never respond to suspicious or unknown emails.
• Back up sensitive data to a safe and secure external source.
• Properly dispose of old computer hard drives that contain sensitive data.

You should also make sure to have a written data security plan in accordance with the Federal Trade Commission’s Safeguard Rule. Remember, protecting your clients is not only good for business, it’s also the law. While the hope is that you’re never the victim of a data breach, preparation and education will go a long way in helping to protect your clients and yourself.

More information:

Publication 4557, Safeguarding Taxpayer Data
Publication 5293, Data Security Resource Guide for Tax Professionals
Identity Theft Information for Tax Professionals

WASHINGTON — The Internal Revenue Service today issued Revenue Procedure 2019-38 that has a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).

If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the section 199A deduction. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations.

 

This safe harbor is available for taxpayers who seek to claim the section 199A deduction with respect to a “rental real estate enterprise.” Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant passthrough entity (RPE) relying on this revenue procedure must hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member.

 

The following requirements must be met by taxpayers or RPEs to qualify for this safe harbor:

• Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
• For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
• The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
• The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

WASHINGTON — The Treasury Department and the Internal Revenue Service today released final regulations and additional proposed regulations under section 168(k) of the Internal Revenue Code on the new 100% additional first year depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service by the business.

The regulations released today on IRS.gov have been submitted to the Federal Register and may vary slightly from the published documents due to minor editorial changes. The documents published in the Federal Register will be the official documents.

The final regulations finalize the proposed regulations issued in August 2018 which implement several provisions included in the Tax Cuts and Jobs Act (TCJA). The proposed regulations contain new provisions not addressed previously.

The 100% additional first year depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.

The deduction applies to qualifying property acquired and placed in service after Sept. 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The final regulations also provide rules for qualified film, television and live theatrical productions.

Additionally, in the proposed regulations, the Treasury Department and IRS propose rules regarding (i) certain property not eligible for the additional first year depreciation deduction, (ii) a de minimis use rule for determining whether a taxpayer previously used property; (iii) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (iv) other aspects not dealt with in the previous August 2018 proposed regulations. The proposed regulations also withdraw and repropose rules regarding application of the used property acquisition requirements (i) to consolidated groups, and (ii) to a series of related transactions. 

For details on claiming the deduction or electing out of claiming it, see the final regulations or the instructions to Form 4562, Depreciation and Amortization (Including Information on Listed Property). For tax years that include Sept. 28, 2017, see Rev. Proc. 2019-33 for further information about making a late election or revoking an election.

Taxpayers who elect out of the 100% depreciation deduction must do so on a timely-filed return. Those who have already timely filed their 2018 return and did not elect out but still wish to do so have six months from the original deadline, without an extension, to file an amended return. 

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

WASHINGTON — The Internal Revenue Service today issued proposed regulations clarifying the reporting requirements generally applicable to tax-exempt organizations. 

The proposed regulations reflect statutory amendments and certain grants of reporting relief announced by the Treasury Department and the IRS in prior guidance to help many tax-exempt organizations generally find the reporting requirements in one place.

Among other provisions, the proposed regulations incorporate the existing exception from having to file an annual return for certain organizations that normally have gross receipts of $50,000 or less, which is found in Revenue Procedure 2011-15. The regulations also incorporate relief from requirements to report contributor names and addresses on annual returns filed by certain tax-exempt organizations, previously provided in Revenue Procedure 2018-38.  A recent court decision held that the Treasury Department and the IRS should have followed notice and comment procedures in 2018 when announcing this relief with respect to providing contributor names and addresses, and these regulations provide the opportunity for notice and comment on that relief as well as on other proposed updates to existing regulations.

Under the proposed regulations, filing requirements for Section 501(c)(3) organizations and Section 527 political organizations remain unchanged, and all organizations are required to keep the contributor information and make it available to the IRS upon request.
 
Treasury and IRS welcome public comments on all aspects of these proposed regulations. For details on submitting comments, see the proposed regulations. The regulations propose to allow tax-exempt organizations to elect to apply the regulations to returns filed after Sept. 6, 2019.
 
Additionally, the IRS issued Notice 2019-47 providing penalty relief for certain exempt organizations that, consistent with the 2018 guidance from the IRS, do not report the names and addresses of contributors on annual returns for tax years ending on or after Dec. 31, 2018, but on or before July 30, 2019. 

WASHINGTON – The Internal Revenue Service today announced new procedures that will enable certain individuals who relinquished their U.S. citizenship to come into compliance with their U.S. tax and filing obligations and receive relief for back taxes.

The Relief Procedures for Certain Former Citizens apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.

Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.  

The IRS is offering these procedures without a specific termination date. The IRS will announce a closing date prior to ending the procedures. Individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible so long as they satisfy the other criteria of the procedures.

These procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities may not use these procedures.

The IRS will host an on-line webinar in the near future providing additional information and practical tips for making a submission to the Relief Procedures for Certain Former Citizens.

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions.

WASHINGTON — The Internal Revenue Service said today that the new Tax Withholding Estimator tool includes a feature designed to make it easier for employees who also receive self-employment income to accurately estimate the right amount of tax to have taken out of their pay. 

The estimator is an expanded, mobile-friendly online tool that replaced the Withholding Calculator, which since 2001 had offered workers an online method for checking their withholding. The old calculator lacked features geared to self-employed individuals; the new estimator made changes to address this important group.

The new tool offers self-employed individuals, workers, retirees and other taxpayers a more dynamic and user-friendly way to calculate the amount of income tax they want to have withheld from either wages or pension payments. With only a third of the year remaining, the IRS encourages these taxpayers – and others – to use the estimator to take a Paycheck Checkup as soon as possible to make sure they are having the right amount of tax withheld and avoid a surprise when they file next year.

Among other things, the estimator allows a user to enter any self-employment income, including income from side gigs or the sharing economy, in addition to wages or pensions. The user is then alerted that they may qualify for several special tax benefits, including the self-employment health insurance deduction or the deduction for contributions to a Simplified Employee Pension (SEP), Savings Incentive Match Plans for Employees (SIMPLE) or other qualified retirement plan. The estimator automatically calculates the self-employment tax and the self-employment tax deduction and incorporates these into its overall tax liability estimate.

The enhancement for self-employed people is just one of many new features offered by the Tax Withholding Estimator. Others include:

The new estimator also makes it easier to enter wages and withholding for each job held as well as jobs held by a spouse. Users can separately enter pensions and other sources of income. At the end of the process, the tool makes specific withholding recommendations for each job and spouse’s job, including incorporating any self-employment income entered into the estimator.

The estimator then automatically links to the appropriate withholding form. For employees, the link goes to Form W-4,  Employee's Withholding Allowance Certificate (PDF) , which they can then fill out and submit to their employer. Similarly, for pension recipients, the link is to Form W-4P, Withholding Certificate for Pension or Annuity Payments, which is submitted to the pension payor. Remember, don’t send these forms to the IRS.

The new tool can help anyone, including self-employed people, doing tax planning for the last few months of the year. The IRS urges everyone to do a Paycheck Checkup and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed earlier this year. It’s also a critical step for those who made withholding adjustments in 2018 or had a major life change, such as marriage, childbirth, adoption or buying a home.

Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two wage earner households, employees with non-wage sources of income and those with complex tax situations.

Anyone who changes their withholding in the middle or latter part of this year should do another Paycheck Checkup in January of 2020. That will help ensure that they have the right amount of tax withheld, on a full-year basis, for all of 2020.

The IRS sponsors a free two-hour webinar on the Tax Withholding Estimator. The webinar will take place on Thursday, Sept. 19 at 2 p.m. Eastern time. To sign up, visit the webinars page on IRS.gov. 

WASHINGTON – The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning Oct. 1, 2019, as they were in the prior quarter. 

The rates will be: 

• five (5) percent for overpayments [four (4) percent in the case of a corporation];
• two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
• five (5) percent for underpayments; and
• seven (7) percent for large corporate underpayments. 

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during July 2019 to take effect Aug. 1, 2019, based on daily compounding.

Revenue Ruling 2019-21, announcing the rates of interest, is attached and will appear in Internal Revenue Bulletin 2019-38, dated Sept. 16, 2019.

WASHINGTON — The Internal Revenue Service is automatically waiving the estimated tax penalty for the more than 400,000 eligible taxpayers who already filed their 2018 federal income tax returns but did not claim the waiver.

The IRS will apply this waiver to tax accounts of all eligible taxpayers, so there is no need to contact the IRS to apply for or request the waiver.

Earlier this year, the IRS lowered the usual 90% penalty threshold to 80% to help taxpayers whose withholding and estimated tax payments fell short of their total 2018 tax liability. The agency also removed the requirement that estimated tax payments be made in four equal installments, as long as they were all made by Jan. 15, 2019. The 90% threshold was initially lowered to 85% on Jan 16 and further lowered to 80% on March 22.

The automatic waiver applies to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments but did not claim the special waiver available to them when they filed their 2018 return earlier this year.

“The IRS is taking this step to help affected taxpayers,” said IRS Commissioner Chuck Rettig. “This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed.”

Refunds planned for eligible taxpayers who paid penalty
Over the next few months, the IRS will mail copies of notices CP 21 granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty will also receive a refund check about three weeks after their CP21 notice regardless if they requested penalty relief. The agency emphasized that eligible taxpayers who have already filed a 2018 return do not need to request penalty relief, contact the IRS or take any other action to receive this relief.

For those yet to file, the IRS urges every eligible taxpayer to claim the waiver on their return. This includes those with tax-filing extensions due to run out on Oct. 15, 2019. The quickest and easiest way is to file electronically and take advantage of the waiver computation built into their tax software package. Those who choose to file on paper can fill out Form 2210 and attach it to their 2018 return. See the instructions to Form 2210 for details.

Because the U.S. tax system is pay-as-you-go, taxpayers are required by law to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by having tax withheld from paychecks, pension payments or Social Security benefits, making estimated tax payments or a combination of these methods.
           
Like last year, the IRS urges everyone to do a “Paycheck Checkup” and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change. Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two wage earner households, employees with nonwage sources of income and those with complex tax situations.

To get started, check out the new Tax Withholding Estimator, available on IRS.gov. More information about tax withholding and estimated tax can be found on the agency’s Pay As You Go web page, as well as in Publication 505.

Tax professionals urged to report thefts immediately; create recovery plan

WASHINGTON — The Internal Revenue Service and its Security Summit partners today reminded tax professionals that they should report data theft immediately to the IRS and follow an established process for helping the IRS protect their clients.

If notified promptly, the IRS can help stop fraudulent tax returns from being filed in clients’ names, thereby avoiding refund delays and other problems for the affected tax professional. But this action requires the cooperation of the tax professional with the IRS.

The IRS, state tax agencies and the private-sector tax industry are calling on all tax professionals to pause this summer and review their security measures and make appropriate changes. Acting as the Security Summit, the partners created a special “Taxes-Security-Together” checklist to help tax professionals with this review. Fraudulent returns using stolen tax data are harder to detect.

“Our objective is to get every tax professional to stop and think about client data security. The ‘Taxes-Security-Together’ Checklist is intended as a starting point, spelling out the basic steps necessary to start a security review,” said Chuck Rettig, IRS Commissioner. “Practitioners are the first line of defense against organized criminal syndicates running these identity theft scams. Despite our progress, this is no time to let down our guard in the tax community. We need your help.”

Creating a data theft recovery plan is the fifth and final action item in this summer’s Security Summit series. Previous checklist topics included: deploying the “Security Six” safeguards, creating a written data security plan, educating yourself on phishing scams and recognizing the signs of data theft.

Checklist Item 5: Create a data theft recovery plan

Rather than wait for an emergency, tax professionals should consider creating a data theft recovery plan in advance and make calling the IRS an immediate action item. Having an action plan can save valuable time and protect your clients and yourself. Should a tax professional experience a data compromise – whether by cybercriminals, theft or just an accident – there are certain basic steps to take.  These include:

Contacting the IRS and law enforcement:

• Internal Revenue Service. Report client data theft to local IRS Stakeholder Liaisons, who will notify IRS Criminal Investigation and others within the agency on the tax professional’s behalf. Speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in clients’ names, helping your firm and your clients.
• Federal Bureau of Investigation, local office (if directed).
• Secret Service, local office (if directed).

Contacting states in which the tax professional prepares state returns:

• State revenue agencies. Any breach of personal information could have an effect on the victim’s tax accounts with the state revenue agencies as well as the IRS. To help tax professionals find where to report data security incidents at the state level, the Federation of Tax Administrators has created a special email address as a contact point: StateAlert@taxadmin.org.
• State Attorneys General for each state in which the tax professional prepares returns.  Most states require that the attorney general be notified of data breaches, so this notification process may involve multiple offices in some locations.

Contacting experts:

• Security expert. They can help determine the cause and scope of the breach as well as stop the breach and prevent further breaches from occurring.
• Insurance company. Not only to report the breach, but to check if the insurance policy covers data breach mitigation expenses.

Contacting clients and other services:

• Federal Trade Commission for guidance for businesses. For more individualized guidance, contact the FTC at idt-brt@ftc.gov.
• Credit / identity theft protection agency. Certain states require offering credit monitoring and identity theft protection to victims of identity theft.
• Credit bureaus. Notifying them if there is a compromise and your clients may seek their services.
• Clients. At a minimum, send an individual letter to all victims to inform them of the breach but work with law enforcement on timing. Clients should complete IRS Form 14039, Identity Theft Affidavit, but only if their e-filed return is rejected because of a duplicate Social Security number or they are instructed to do so.
• Remember: IRS toll-free assisters cannot accept third-party notification of tax-related identity theft. Again, preparers should use their local IRS Stakeholder Liaison to report data loss.

The objective of the “Taxes-Security-Together” Checklist is to ensure all tax professionals, whether a one-person shop or a major firm, understand the risk posed by national and international criminal syndicates, take the appropriate steps to protect their clients and business and understand the laws around their obligation to secure that data.

“The number of tax professionals reporting data thefts to the IRS remains too high, and it puts tens of thousands of taxpayers at risk for identity theft,” Rettig said. “We hope tax professionals will use the Summit checklist as a starting point, not an end point, to protect their client’s data — and themselves. It’s not only a good business practice, it’s the law.”

Reporting schemes helps everyone

The IRS, states and tax industry share information about scams and schemes through their Identity Theft Tax Refund Fraud Information Sharing and Analysis Center, which allows the partners to rapidly respond to emerging threats. When tax professionals report data thefts to the IRS, it enables the partners to identify new schemes.

The ability to share information about emerging threats is critical to the ability to combat identity theft and refund fraud. Thieves are constantly creating new scams to trick tax professionals and taxpayers into divulging sensitive information.

Additional Resources

The Security Summit reminds all tax professionals that they must have a written data security plan as required by the Federal Trade Commission and its Safeguards Rule. Get help with security recommendations by reviewing the recently revised IRS Publication 4557, Safeguarding Taxpayer Data, and Small Business Information Security: the Fundamentals by the National Institute of Standards and Technology.

Publication 5293, Data Security Resource Guide for Tax Professionals, provides a compilation of data theft information available on IRS.gov. Also, tax pros should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media.

Reminder: The Taxes-Security-Together Checklist

During this special Security Summit series, the checklist highlighted these key areas:

• Deploy “Security Six” basic safeguards
• Create data security plan
• Educate yourself on phishing scams
• Recognize the signs of client data theft
• Create a data theft recovery plan, and call the IRS immediately