Today, the IRS published the latest executive column “A Closer Look,” which features David Alito, deputy commissioner, IRS Wage & Investment Division discussing the opportunity for taxpayers who normally don’t file, claim credits they are eligible for by filing. “So why would anyone want to file a tax return if they don't have to? Well, actually, there are some important reasons – you might get a tax refund and you may be eligible for an additional stimulus payment. If you’re eligible for future payments or credits, it helps if the IRS has your 2020 tax return and direct deposit information on file,” said Alito. Read more here. Read the Spanish version here.

“A Closer Look” is a column from IRS executives that covers a variety of timely issues of interest to taxpayers and the tax community. It also provides a detailed look at key issues affecting everything from IRS operations and employees to issues involving taxpayers and tax professionals.

Check here for prior posts and new updates.

WASHINGTON ― The Internal Revenue Service today reminded taxpayers who owe 2020 taxes that there are different ways to pay through IRS.gov, including payment options for many people who can’t pay in full.

File by May 17

The most important thing everyone with a tax bill should do is file a return by the May 17 due date, even if they can’t pay in full, or request a six-month extension to avoid higher penalties for failing to file on time. Though automatic tax-filing extensions are available to anyone who wants one, these extensions don’t change the payment deadline. It is not an extension to pay. Visit IRS.gov/Extensions for details.

Usually anyone who owes tax and waits until after that date to file will be charged a late-filing penalty of 5% per month. So, if a tax return is done, filing it by May 17 is always less costly, even if the full amount due can’t be paid on time.

Free File is an easy, quick way to file that is available to anyone who makes $72,000 or less and is available on IRS.gov.

Pay what you can

Interest, plus the much smaller late-payment penalty, will apply to any payments made after May 17.  Making a payment, even a partial payment, will help limit penalty and interest charges. The fastest and easiest way to pay a personal tax bill is with Direct Pay, available only on IRS.gov. For a rundown of other payment options, visit IRS.gov/Payments.

The IRS urges taxpayers to first consider other options for payment, including getting a loan to pay the amount due. In many cases, loan costs may be lower than the combination of interest and penalties the IRS must charge under federal law. Normally, the late-payment penalty is one-half-of-one percent (0.5%) per month. The interest rate, adjusted quarterly, is currently 3% per year, compounded daily.

If a loan isn’t possible, the IRS can often help. 

Online payment plans

Most individual taxpayers qualify to set up an online payment agreement with the IRS, and it only takes a few minutes to apply.  Applicants are notified immediately if their request is approved. No need to call or write to the IRS. The IRS notes that Online payment plans are processed more quickly than requests submitted with electronically-filed tax returns.

There are two main types of Online payment plans. They are:

Taxpayers who do not qualify for an online payment agreement may still be able to arrange to pay in installments. See IRS.gov/payments/payment-plans-installment-agreements for more information.
For some, but not all, struggling taxpayers, three other options are available:

Delayed collection

If the IRS determines a taxpayer is unable to pay, it may delay collection until their financial condition improves. However, the total amount owed will still increase because penalties and interest are charged until paid in full. Taxpayers can request a delay by calling the phone number on their notice or 800-829-1040.

Penalty relief

Some taxpayers qualify to have their late-filing or late-payment penalties reduced or eliminated. This can be done on a case-by-case basis, based on reasonable cause. Alternatively, where a taxpayer has filed and paid on time during the past three years, the IRS can typically  provide relief under the First Time Abatement  program. Visit IRS.gov/penaltyrelief for details.

Offer in Compromise 

Some taxpayers qualify to settle their tax bill for less than the full amount due, through an offer in compromise. Though there is typically a $205 non-refundable application fee, it is generally waived for low-income taxpayers, and for offers based on doubt as to liability. The Offer in Compromise Pre-Qualifier tool can help determine eligibility for anyone interested in applying.

Taxpayers can securely access their federal tax account information at IRS.gov/account. Among other things, this includes viewing any amount due and payment history.

The IRS reminds taxpayers that they have rights and protections throughout the collection process. For details, see Taxpayer Bill of Rights and Publication 1, Your Rights as a Taxpayer.

For more information about payments, see Topic No. 202, Tax Payment Options, on IRS.gov.

Announcement 2021-10 confirms that the boundaries of Designated Qualified Opportunity Zones were established at the time they were designated and are not subject to change.

Announcement 2021-10 will be published in Internal Revenue Bulletin on June 1, 2021. 

WASHINGTON — The Internal Revenue Service has extended the deadline for civic-minded volunteers to apply for membership on the Taxpayer Advocacy Panel (TAP) for 2022. Taxpayers may submit a TAP application online at www.improveirs.org through June 1, 2021.

The TAP is a federal advisory committee that listens to taxpayers, identifies major taxpayer concerns and makes recommendations for improving IRS service and customer satisfaction.

Taxpayers are encouraged to take this opportunity to make a difference in how the IRS delivers products and services. A video is available with information about the TAP and how to contribute to this dynamic group of volunteers.

The National Taxpayer Advocate Erin M. Collins recently expressed her appreciation for the contributions of TAP volunteers to improve the experience of U.S. taxpayers. “I am grateful to these citizens for volunteering their time and talent to the Taxpayer Advocacy Panel,” she said. “I am very proud of the accomplishments of the TAP last year, and I look forward to the TAP bringing its valuable taxpayer perspective in recommending changes to tax administration to achieve the quality service that taxpayers expect and deserve.”

The TAP reports annually to the Secretary of the Treasury, the Commissioner of the Internal Revenue Service and the National Taxpayer Advocate. The Office of the Taxpayer Advocate is an independent organization within the IRS that provides support for and oversight of the TAP.

To the extent possible, the TAP includes members from all 50 states, the District of Columbia, Puerto Rico and one member representing international taxpayers. Each member is appointed to represent the interests of taxpayers in his or her geographic location as well as taxpayers overall. For the TAP, "international taxpayers" are broadly defined to include U.S. citizens working, living or doing business abroad or in U.S. territories.

The TAP is seeking members in the following locations: Arkansas, California, Connecticut, Delaware, Georgia, Idaho, International, Kentucky, Massachusetts, Michigan, Missouri, Minnesota, Montana, North Dakota, Nebraska, New Mexico, New York, Oklahoma, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont, Wisconsin and West Virginia.

The panel is seeking alternates in the following locations: Alabama, California, Connecticut, District of Columbia, Florida, Hawaii, Idaho, Kentucky, Massachusetts, Michigan, Missouri, North Dakota, Nebraska, New Hampshire, New Mexico, Nevada, Ohio, Oregon, Rhode Island, Texas, Vermont, Wisconsin, West Virginia and Wyoming.

Federal advisory committees are required to have a balanced membership in terms of viewpoints represented. As such, applicants from under-represented groups, such as Native Americans and non-tax professionals, are particularly encouraged to apply. All timely applications, however, will be given consideration.

New TAP members will serve a three-year term starting in December 2021. Applicants chosen as alternate members will be considered to fill any vacancies that open in their areas during the next three years.

To be a member of the TAP, a person must be a U.S. citizen, be current with his or her federal tax obligations, be able to commit 200 to 300 volunteer hours during the year and pass a Federal Bureau of Investigation criminal background check. Members cannot be federally registered lobbyists. Current Department of the Treasury or IRS employees cannot serve on the panel, and former Department of the Treasury or IRS employees and former TAP members must have a three-year separation from their service to be considered for appointment. Tax practitioner applicants must be in good standing with the IRS (meaning not currently under suspension or disbarment).

For additional information about the TAP or the application process, visit www.improveirs.org or call 888-912-1227 (a toll-free call) and select prompt number five. Callers outside the U.S. may call 214-413-6523 (not a toll-free call) or email the TAP staff at taxpayeradvocacypanel@irs.gov.

WASHINGTON — The Internal Revenue Service, in response to disruptions of the fuel supply chain, will not impose a penalty when dyed diesel fuel is sold for use or used on the highway in the States of Alabama, Delaware, Georgia, Florida, Louisiana, Maryland, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, and the District of Columbia.

This relief is retroactive to May 7, 2021, and will remain in effect through May 21, 2021.
 
This penalty relief is available to any person that sells or uses dyed diesel fuel for highway use.  In the case of the operator of the vehicle in which the dyed diesel fuel is used, the relief is available only if the operator or the person selling such fuel pays the tax of 24.4 cents per gallon that is normally applied to diesel fuel for highway use.

The IRS will not impose penalties for failure to make semimonthly deposits of this tax. IRS Publication 510, Excise Taxes, has information on the proper method for reporting and paying the tax.

Ordinarily, dyed diesel fuel is not taxed, because it is sold for uses exempt from excise tax, such as to farmers for farming purposes, for home heating use, and to local governments.

The IRS is closely monitoring the situation and will provide additional relief as needed.

WASHINGTON — Today, the Internal Revenue Service, the U.S. Department of the Treasury, and the Bureau of the Fiscal Service announced they are disbursing nearly 1 million payments in the ninth batch of Economic Impact Payments from the American Rescue Plan.

Today’s announcement brings the total disbursed so far to approximately 165 million payments, with a total value of approximately $388 billion, since these payments began rolling out to Americans in batches as announced on March 12. 

The ninth batch of payments began processing on Friday, May 7, with an official payment date of May 12, with some people receiving direct payments in their accounts earlier as provisional or pending deposits. Here is additional information on this batch of payments:

Additional information is available on the first eight batches of Economic Impact Payments from the American Rescue Plan, which processed weekly on April 30, April 23, April 16, April 9, April 2, March 26, March 19 and March 12.

The IRS will continue to make Economic Impact Payments on a weekly basis. Ongoing payments will be sent to eligible individuals for whom the IRS previously did not have information to issue a payment but who recently filed a tax return, as well to people who qualify for “plus-up” payments.

Special reminder for those who don't normally file a tax return

Although payments are automatic for most people, the IRS continues to urge people who don’t normally file a tax return and haven’t received Economic Impact Payments to file a 2020 tax return to get all the benefits they’re entitled to under the law, including tax credits such as the 2020 Recovery Rebate Credit, the Child Tax Credit, and the Earned Income Tax Credit.  Filing a 2020 tax return will also assist the IRS in determining whether someone is eligible for an advance payment of the 2021 Child Tax Credit, which will begin to be disbursed this summer.

For example, some federal benefits recipients may need to file a 2020 tax return – even if they don't usually file – to provide information the IRS needs to send payments for a qualifying dependent. Eligible individuals in this group should file a 2020 tax return as quickly as possible to be considered for an additional payment for their qualifying dependents.

People who don't normally file a tax return and don't receive federal benefits may qualify for these Economic Impact Payments. This includes those experiencing homelessness, the rural poor, and others. Individuals who didn't get a first or second round Economic Impact Payment or got less than the full amounts may be eligible for the 2020 Recovery Rebate Credit, but they’ll need to file a 2020 tax return. See the special section on IRS.gov: Claiming the 2020 Recovery Rebate Credit if you aren't required to file a tax return.

Free tax return preparation is available for qualifying people.

The IRS reminds taxpayers that the income levels in this third round of Economic Impact Payments have changed. This means that some people won't be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit. Payments will begin to be reduced for individuals making $75,000 or above in Adjusted Gross Income ($150,000 for married filing jointly). The payments end at $80,000 for individuals ($160,000 for married filing jointly); people with Adjusted Gross Incomes above these levels are ineligible for a payment.

Individuals can check the Get My Payment tool on IRS.gov to see the payment status of these payments. Additional information on Economic Impact Payments is available on IRS.gov.

WASHINGTON — The Internal Revenue Service today provided an overview of some of the key tax provisions in the American Rescue Plan Act.

Several provisions affect the 2020 tax return people are filling out this filing season, including one exempting up to $10,200 in unemployment compensation from tax and another benefiting many people who purchased subsidized health coverage through either federal or state Health Insurance Marketplaces. In addition, the law also includes a third round of Economic Impact Payments, now going out to eligible Americans, that are generally equal to $1,400 per person for most people, as well as several other key changes for tax-year 2021.

The best way to keep up with tax law developments is by regularly checking IRS.gov.

In the meantime, the IRS urges taxpayers who have already filed their 2020 returns to avoid filing amended returns, refund claims or contacting the IRS about obtaining newly-enacted tax benefits. Taking any of these actions now will not speed up a future refund and may even slow down an existing refund claim. Instead, as noted below, the IRS will automatically provide these benefits to eligible filers.

Retroactive changes for 2020

Some unemployment compensation not taxed for many

For tax year 2020 only, the first $10,200 of unemployment compensation is not taxable for most households. This tax benefit is only available to those whose modified adjusted gross income is below $150,000 during 2020. The same income cap applies to all filing statuses.

This means that those eligible who haven’t filed a 2020 return yet can subtract the first $10,200 from the total compensation received and only include the difference in their taxable income. For couples where both spouses received unemployment compensation, each spouse can subtract $10,200. Details, including a worksheet, are available at IRS.gov/Form1040.

For any eligible taxpayer who has already filed and reported their compensation as fully taxable, the IRS is automatically adjusting their return and providing them this tax benefit. Refunds, based on this adjustment, are being issued in May and continuing through the summer.

Repayment of excess Advance Premium Tax Credit suspended

Taxpayers who purchased health insurance through a federal or state Health Insurance Marketplace won’t report an excess repayment or attach Form 8962, Premium Tax Credit, when they file. Taxpayers use Form 8962 to figure the amount of the premium tax credit (PTC) they are entitled to receive and reconcile it with any advance premium tax credit (APTC) they receive through the Marketplace. If the advance payment was too little, they claim a net premium tax credit. The process remains unchanged for taxpayers claiming a net PTC for 2020. They must file Form 8962 when they file their 2020 tax return.

However, if the advance payment was higher than their allowable PTC, they need to pay back the difference, known as the excess APTC.

The new law suspends the repayment requirement for 2020. This means that affected taxpayers do not need to report excess APTC or file Form 8962. The IRS will automatically reduce the repayment amount to zero. In addition, the agency will automatically reimburse anyone who has already repaid their 2020 excess APTC.

Looking ahead to the 2021 tax season

Child and dependent care credit increased for 2021 only

The new law increases the amount of the credit and eligible expenses for child and dependent care, modifies the phase-out of the credit for higher earners and makes it refundable.

For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%.
In addition, eligible taxpayers can claim qualifying child and dependent care expenses of up to:

This means that the maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.

When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses.

As before, the more a taxpayer earns, the lower the credit percentage. But under the new law, more people will qualify for the new maximum 50% credit rate. That’s because the adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000.

Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20% until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.

In 2021, for the first time, the credit is fully refundable. This means that an eligible family can get it, even if they owe no federal income tax.

Workers can set aside more in a Dependent Care FSA

For 2021, the maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500. This means that an employee can set aside $10,500 in a dependent care FSA, if their employer has one, instead of the normal $5,000.

Workers can only do that if their employer adopts this change. Interested employees should contact their employer for details.

Childless EITC expanded for 2021

For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit that helps many low- and moderate-income workers and working families. That’s because the maximum credit is nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens.

In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don’t qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.

Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Changes expanding EITC for 2021 and future years

Changes expanding the EITC for 2021 and future years include:

Expanded Child Tax Credit for 2021 only

The new law increases the amount of the Child Tax Credit, makes it available for 17-year-old dependents, makes it fully refundable and makes it possible for families to receive up to half of it, in advance, during the last half of 2021. Moreover, families can get the credit, even if they have little or no income from a job, business or other source.

Currently, the credit is worth up to $2,000 per eligible child. The new law increases it to as much as $3,000 per child for dependents ages 6 through 17, and $3,600 for dependents ages 5 and under.

The maximum credit is available to taxpayers with a modified AGI of:

Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI.

Also, the credit is fully refundable for 2021. Before this year, the refundable portion was limited to $1,400 per child.

Advance Child Tax Credit payments

From July through December 2021, up to half the credit will be advanced to eligible families by Treasury and the IRS. The advance payments will be estimated from their 2020 return, or if not available, their 2019 return.

For that reason, the IRS urges families to file their 2020 return as soon as possible. This includes many low-and moderate-income families who don’t normally file returns. Often, those families will qualify for an Economic Impact Payment or tax benefits, such as the EITC. This year, taxpayers have until May 17, 2021, to file a return.

To speed delivery of any refund, be sure to file electronically and choose direct deposit. Doing so will also ensure quick delivery of the Advance Child Tax Credit payments, later this year.

In the next few weeks, eligible families can choose to decline receiving the advance payments. Likewise, families will also be able to notify Treasury and IRS of changes in their income, filing status or number of qualifying children. Details will be available soon.

The IRS also urges community groups, non-profits, associations, education groups and anyone else with connections to people with children to share this critical information about the Child Tax Credit as well as other important benefits. The IRS will be providing additional materials and information in the near future that can be easily shared by social media, email and other methods.

For the most up-to-date information on the Child Tax Credit and advance payments, visit Advance Child Tax Credit Payments in 2021.

Revenue Procedure 2021-26 provides guidance with respect to accounting method changes made on behalf of certain foreign corporations.  The procedure accomplishes the following:

The Treasury Department and the IRS previously announced their intention to issue the guidance set forth in this procedure in the Treasury decision containing the final section 951A regulations published on June 21, 2019. 

Revenue Procedure 2021-26 will be published in Internal Revenue Bulletin  2021-22 on June 1, 2021.

WASHINGTON – The Internal Revenue Service today issued guidance on the taxability of dependent care assistance programs for 2021 and 2022, clarifying that amounts attributable to carryovers or an extended period for incurring claims generally are not taxable. The guidance also illustrates the interaction of this standard with the one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for the 2021 taxable year under the American Rescue Plan Act. 

Because of the pandemic, many people were unable to use the money they set aside in their dependent care assistance programs in 2020 and 2021. Generally, under these plans, an employer allows its employees to set aside a certain amount of pre-tax wages to pay for dependent care expenses. The employee’s expenses are then reimbursed from the dependent care assistance program. 

Carryovers of unused dependent care assistance program amounts generally are not permitted (although a 2½ month grace period is allowed). However, recent coronavirus-related legislation (the Taxpayer Certainty and Disaster Tax Relief Act of 2020) allowed employers to amend their plans to permit the carryover of unused dependent care assistance program amounts to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period. 

Today’s Notice 2021-26 clarifies for taxpayers that if these dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable), these benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022. 

Notice 2021-15, issued in February 2021, states that if an employer adopted a carryover or extended period for incurring claims, the annual limits for dependent care assistance program amounts apply to amounts contributed, not to amounts reimbursed or available for reimbursement in a particular plan or calendar year. Therefore, participants in dependent care assistance programs may continue to contribute the maximum amount to their plans for 2021 and 2022. 

For more on coronavirus-related tax relief, see IRS.gov.

Revenue Procedure 2021-25 provides the 2022 inflation adjusted amounts for health savings accounts and the maximum amount that may be made newly available for excepted benefit health reimbursement arrangements.

 

Revenue Procedure 2021-25 will be published in Internal Revenue Bulletin 2021-21 on May 24, 2021.