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The Internal Revenue Service (IRS) continues to take steps forward in efforts to protect taxpayer data. Two years ago, the IRS moved to provide more privacy for individual taxpayers; now, beginning on December 13, 2020, the IRS will start masking sensitive data on business tax transcripts.

If you’re scratching your head because that doesn’t feel like new news, you’ve been paying attention: the IRS began talking about this change during the summer Nationwide Tax Forums. Now, they’re moving it into practice.

Tax Transcripts

A tax transcript is a summary of your tax return. There are different kinds of transcripts available depending on the need, and they can be used for everything from preparing prior-year tax returns to income verification for mortgages and student loans.

As you can imagine, that’s a lot of information. In addition to your financial details, a transcript traditionally included your name, address, and other identifying information, like your Social Security Number (SSN), Individual Tax Identification Number (ITIN), or Employer Identification Number (EIN).

With the latest changes, here’s what is visible on the new tax transcript:

  • Last four digits of any EIN listed on the transcript: XX-XXX1234;
  • Last four digits of any SSN or ITIN listed on the transcript: XXX-XX-1234;
  • Last four digits of any account or telephone number;
  • First four characters of the first and last name for any individual (first three characters if the name has only four letters);
  • First four characters of any name on the business name line;
  • First six characters of the street address, including spaces; and
  • All money amounts, including wage and income, balance due, interest, and penalties

It looks like this:

Customer File Number

There is also now a space for a Customer File Number. The Customer File Number is an optional 10-digit number that can be created by third parties that allow them to match a transcript to a taxpayer.

What’s the point? It leaves a digital trail.

Consider a transcript request from a lender. The lender will now assign a Customer File Number directly on Form 4506-T, Request for Transcript of Tax Return, and Form 4506T-EZ (you’ll see it on line 5). That number will also appear on the transcript: it serves as the tracking number to match the taxpayer. 

Get Transcript Online Or Get Transcript By Mail

What about transcripts requested using the Get Transcript Online or Get Transcript by Mail feature? Taxpayers can manually enter a Customer File Number assigned to them, for example, by a lender or college financial office. That number will display on the transcript either when it is downloaded or mailed to the taxpayer.

Third Party Reporting

And while I know the use of a fax machine is a running joke these days, the IRS still uses it to communicate. Last year, however, the IRS stopped faxing service for most transcript types to both taxpayers and third parties. They also stopped third-party mailing service via the Forms 4506, 4506-T, and 4506T-EZ. Lenders and others who use those forms to obtain transcripts for income verification purposes should consider other methods, like participating in the Income Verification Express Service (IVES)IVES.

What Does It Mean For Tax Pros?

The news about masking initially worried some tax pros who rely on account transcripts for taxpayer business. But, the IRS says there’s no need for concern: those with proper authorization may now request unmasked Wage and Income Transcripts for tax preparation and e-filing purposes through Transcript Delivery System (TDS). TDS can also be used in connection with the optional Customer File Number: you can input a number that will automatically populate on the transcript provided through TDS. This process allows high-volume users to match the transcript to the taxpayer.

Tax pros can also contact the Practitioner Priority Service (PPS) line for transcripts. If you have proper authorization, an unmasked transcript will be sent to your Secure Object Repository (SOR), available through e-Services. The requested transcript will remain in the SOR for a limited time, and is automatically removed after three days once you view it or after 30 days if it is not viewed. Don’t forget to print or save the transcript if you want to keep a copy.

The Internal Revenue Service (IRS) has announced some changes to its collections processes to assist taxpayers who have been impacted by COVID-19. Specifically, the IRS says it is expanding taxpayer options for making payments and alternatives to resolve balances owed.

“The IRS understands that many taxpayers face challenges, and we’re working hard to help people facing issues paying their tax bills,” said IRS Commissioner Chuck Rettig. “Following up on our People First Initiative earlier this year, this next phase of our efforts will help with further taxpayer relief efforts.”

“We want people to know our IRS employees are committed to continue helping taxpayers wherever possible, including offering many options for those struggling to pay their tax bills,” said Darren Guillot, the IRS Small Business/Self-Employed Deputy Commissioner for Collection and Operations Support.

The new IRS Taxpayer Relief Initiative makes a few changes to collection procedures during COVID.

Payment Plan Extensions

Currently, the IRS offers short-term and long-term payment plans, including installment agreements that you can apply for online. Online applications are generally available to individuals who owe $50,000 or less in combined income tax, penalties and interest or businesses that owe $25,000 or less combined that have filed all tax returns (if you’re over those amounts, you can still enter into an agreement but you’ll have to talk to someone over the phone). The short-term payment plans are free – there’s no free to set it up – but typically must be paid in full in 120 days. Under the new IRS Taxpayer Relief Initiative, that deadline will be extended to 180 days for certain taxpayers.

Less Documentation For Installment Agreements

Setting up installment agreements can require a lot of paperwork. Now, the IRS says that certain qualified individual taxpayers who owe less than $250,000 may set them up without providing a financial statement or substantiation if their monthly payment proposal is sufficient. 

No Tax Lien Notice Necessary For Certain Installment Agreements

Procedure is typically important when it comes to IRS and installment agreements. For now, some individual taxpayers who only owe for the 2019 tax year and who owe less than $250,000 may qualify to set up an installment agreement without a notice of federal tax lien filed by the IRS.

Tax Liabilities Automatically Added

The IRS will also now automatically add certain new tax balances to existing Installment Agreements, for individual and out of business taxpayers. I know this doesn’t sound like a good thing, but it is. You can put your installment agreement in jeopardy if you don’t pay your taxes, including new balances. It can be tough to keep track when you can barely keep your head above water, so by adding the new balances into the mix, the IRS says this “taxpayer-friendly approach” will help some taxpayers avoid default.

Online Opportunities To Make Changes

Once you have an existing installment agreement, you typically have to talk to the IRS to make changes. Now, qualified taxpayers with installment agreements paid by direct debit may now be able to make changes online, including proposing lower monthly payment amounts and changing their payment due dates.

More Flexibility For Offers In Compromise

An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. The IRS considers a host of circumstances including the ability to pay; income; expenses; and asset equity. Generally, the IRS will only agree to an OIC if they determine they will not be able to collect the amount due within a reasonable period of time. This option shouldn’t be your first choice (and please don’t believe those TV commercials that swear you’ll be able to settle your tax bill for pennies on the dollar).

While you can apply for an OIC on your own, consider a tax professional. If, however, you opt to try it yourself, use the IRS’ Pre-Qualifier online tool to see if you qualify and to calculate a preliminary offer amount.

For taxpayers with existing OICs who are temporarily unable to meet the payment terms, the IRS says it will be “offering additional flexibility.”

Temporary Delays In Collection

The IRS may be able to temporarily delay collections – but you have to ask. This typically happens by having your account marked as “currently not collectible.” But be careful: being currently not collectible does not mean the debt goes away, it means the IRS has determined you cannot afford to pay the debt at this time. You can find out more here.

Reasonable Cause Relief From Penalties

If you have have reasonable cause for failing to file, pay and deposit on time, you may qualify for penalty relief. Those reasons include natural disasters, inability to obtain records, or death, serious illness, incapacitation or unavoidable absence affecting you or your immediate family. Not having enough money is generally not enough – on its own – to qualify. You can find out more about penalty relief here.

First-time penalty abatement relief is also available for taxpayers.

More Information

Taxpayers can find out more by going to the IRS website at IRS.gov.

“If you’re having a tax issue, don’t go silent. Please don’t ignore the notice arriving in your mailbox,” Guillot said. “These problems don’t get better with time. We understand tax issues and know that dealing with the IRS can be intimidating, but our employees really are here to help.”

The Internal Revenue Service (IRS) has announced the annual inflation adjustments for the tax year 2021 – and that includes penalty amounts. Here’s a quick look at some of the most common:

Failure-To-File Penalty

It’s important to file even if you can’t afford to pay because the IRS imposes a failure-to-file penalty if you don’t file your tax return on time. The penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late (unpaid tax is the total tax shown on your return reduced by amounts paid through withholding, estimated tax payments, and allowed refundable credits). For returns filed in 2022 (generally, your 2021 return), if your return is over 60 days late, the minimum failure-to-file penalty is the smaller of $435 or 100% of the tax required to be shown on the return.

Failure-To-Pay Penalty

If you don’t pay what you owe on time, there is a penalty. The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.

It’s worth it to reach out to the IRS when you owe because that penalty rate can go down. For example, the penalty rate is 0.25% for each month or part of a month while you have an installment agreement. And you won’t have to pay the penalty at all if you can show reasonable cause for the failure to pay on time.

But, if you wait until the IRS issues a levy, the penalty rate goes up. Once ten days has passed since the IRS issued a final notice of intent to levy or seize property, the 0.5% rate increases to 1% per month.

Failure-To-File and a Failure-To-Pay Penalty

If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%.

If after five months you still haven’t paid, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25%.

The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.

What About Interest For Individuals?

Interest accrues on the unpaid balance and is compounded daily from the due date of the return (without regard to any extension of time to file) until you pay in full. Even if the IRS abates any related penalties, the interest will almost always continue to accrue until the balance is paid.

The interest rate for taxpayers other than corporations (so, generally, individuals) is the federal short-term rate plus 3%. The federal short-term rate is determined every three months.

Failure-To-File Penalty for Pass Through Entities

It’s not just individual tax returns that can result in penalties. You can be subject to failure-to-file penalties for certain pass-through returns even if there is no tax due. For 2021, in addition to penalties for willful failure to file, those include:

  • For partnership returns (§ 6698(b)(1)): $210, multiplied by the number of partners in the partnership during any part of the taxable year per month.
  • For S corporation returns (§ 6699(b)(1)): $210, multiplied by the number of shareholders in the corporation during any part of the taxable year.

Failure-T0-File Correct Information Returns and Payee Statements

Penalties also apply for failure to timely provide correct information returns and payee statements. Those penalties can vary depending on the size of annual gross receipts and can escalate quickly. Most notably, there is no maximum penalty for failure to file correct information returns due to intentional disregard of the filing requirement.

Tax Preparer Penalties

Yes, tax preparers can be subject to penalties, too. For 2021, those include:

  • Failure to furnish copy of a return to taxpayer: $50 per return up to a maximum penalty of $27,000
  • Failure to sign return: $50 per return up to a maximum penalty of $27,000
  • Failure to furnish identifying number: $50 per return up to a maximum penalty of $27,000
  • Failure to retain copy or list: $50 per return up to a maximum penalty of $27,000
  • Failure to file correct information returns: $50 per return up to a maximum penalty of $27,000
  • Endorsing or otherwise negotiating any check issued to a taxpayer under § 6695(f): $545 per return with no maximum/limit
  • Failure to be diligent in determining eligibility for head of household (HOH) filing status, child tax credit, American opportunity tax credit, and earned income tax credit (EITC): $545 per return with no maximum/limit

You can review the cost of living adjustments for penalties in Revenue Procedure 2020-45 (downloads as a PDF).

The Internal Revenue Service (IRS) has announced that more than a dozen new seminars from the 2020 Nationwide Tax Forums are now available on IRS Nationwide Tax Forums Online.

The self-study seminars provide use interactive videos, PowerPoint slides and audio transcripts. Here’s the list of the new courses:

Advocating for Immigrant Taxpayers    
Advocating for Taxpayers with Collection Information Statements    
Be Tax Ready – Understanding Eligibility Rules for EITC, AOTC, CTC and Head of Household Filing Status
Bipartisan Budget Act of 2015’s Centralized Partnership Audit Regime (The)
Charities & Tax-Exempt Organizations Update    
Créditos Reembolsables (In Spanish)
Diligence in Practice before the IRS: Record-Keeping
Federal Ethics for the Tax Professionals: Office of Professional Responsibility (OPR) and Circular 230
Impact of Non-filing and Non-payment
IRS Key Enforcement Issues
Keys to Mastering Due Diligence Requirements and Audits
Keynote Address
Preparation of Form 1040-NR, U.S. Nonresident Alien Income Tax Return
Retirement Plan Distributions, Loans and More
Tax Changes from a Forms Perspective
Tax Cuts and Jobs Act (TCJA) Update: Opportunity Zones
Tax Cuts and Jobs Act (TCJA) Update: Qualified Business Income Deduction
Update from the IRS Independent Office of Appeals

The IRS Nationwide Tax Forums Online is registered with the IRS Return Preparer Office and the National Association of State Boards of Accountancy as a qualified sponsor of continuing education (CE).

Certified Public Accountants (CPAs), Enrolled Agents (EAs) and Annual Filing Season Program (AFSP) participants can earn CE credits by taking the classes. To earn credit, users must create an account, answer review questions throughout the seminar and pass short tests at the end of the seminars. The fee is $29 per class.

You can also audit the courses for free. That means you can watch them, but you will not have access to the review questions or final examination, or receive credit for the seminars.

The Internal Revenue Service (IRS) is adding barcode technology to its tax notices.

Starting this month, the IRS will add QR codes to certain tax notices. QR stands for quick response, since the code can convey a lot of information to your smartphone in a short period of time. It’s similar to a barcode but can transfer more information, including internet addresses.

QR codes are a combination of pixels. Each piece of the code conveys specific information – the combination can generate a lot of information. To read the information, you scan the QR Code with a smartphone.

The IRS is using the technology to allow taxpayers to scan codes on two particular notices, the CP14 or CP14 IA, with their smartphone and go directly to IRS.gov. From there, taxpayers can securely access their account, set up a payment plan, or contact the Taxpayer Advocate Service.

A CP14 notice is your first notification from the IRS that you owe money on unpaid taxes. It looks like this:

The IRS typically sends more than 8 million CP14 notices each year. Adding a QR code to the notices allows taxpayers to go directly to payment options, including installment agreements.

“These codes will give taxpayers immediate access to the most important information for them to pay their balances, set up payment agreements or reach out for help,” said Darren Guillot, the IRS Small Business/Self-Employed Deputy Commissioner for Collection and Operations Support. “We understand there’s a lot of information on the web, and we want to give taxpayers more secure tools that can more easily help them resolve their tax situations.”

“This will help make the entire process easier for taxpayers,” Guillot added.

If all goes well, this may be the first of many: the IRS is assessing the possibility of adding other QR codes to other balance due notices in the future.

Days after the Internal Revenue Service (IRS) announced tax relief for victims of victims of the Oregon wildfires and straight-line winds, the IRS has announced similar relief for victims of Hurricane Sally. Those taxpayers who were affected by the storm that began on September 14 now have until January 15, 2021, to file individual and business tax returns and make certain tax payments.

Relief is available for taxpayers in any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Currently, affected taxpayers are those in Baldwin, Escambia and Mobile counties in Alabama.

The extension applies to deadlines – either an original or extended due date – that occurred on or after September 14, 2020, and before January 15, 2021.

This includes individual taxpayers who live in the area, as well as businesses, including tax-exempt organizations, with a principal place of business in the area. Taxpayers who live and work in locations added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on the IRS website.

Here’s what the relief entails: Most tax filing and payment deadlines that occurred starting on September 14, 2020, will be pushed off until January 15, 2021, to file returns and pay any taxes that were originally due during this period. That includes returns and payments that were originally due during this period, including individual tax returns on extensions which are due on October 15, 2020. Remember, however, that extensions are an extension of the time to file, not the time to pay, so payments for 2019 tax returns are still keyed to the July 15, 2020, due date.

Relief also includes a waiver of late penalties for quarterly estimated income tax payments normally due on September 15, 2020, as well as quarterly federal payroll and excise tax returns normally due on November 2, 2020.
It also includes calendar-year tax-exempt organizations that had a valid extension due to run out on November 16, 2020. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2019 extensions run out on October 15, 2020.

Additionally, penalties on payroll and excise tax deposits due on or after September 14 and before September 29, will be abated as long as the deposits are made by September 29, 2020.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. That means that taxpayers do not need to contact the IRS to get this relief. However, if you receive a late filing or late payment penalty notice from the IRS and were entitled to relief, you should call the number on the notice to have the penalty abated.

The IRS will work with any taxpayer who lives outside the disaster area but whose records are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 1.866.562.5227. This includes those workers assisting the relief activities who are affiliated with a recognized government or charitable organization.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on the return for the year the loss occurred – in this instance, the 2020 return normally filed next year – or the return for the prior year (2019). However, remember that the deduction for personal casualty and theft losses has been repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster as declared by the President. That means you need to write the FEMA declaration number – 4563 − for Hurricane Sally on any return claiming a loss. For more on casualty losses after a disaster, click here.

For more details on available tax relief, you can also check out the disaster relief page on IRS.gov.

Beginning in January 2021, the Internal Revenue Service (IRS) will be expanding the voluntary Identity Protection PIN (IP PIN) program.

What Is An IP PIN?

An IP PIN is a six-digit number assigned to eligible taxpayers to help prevent tax refund fraud on federal income tax returns. An IP PIN helps the IRS to verify a taxpayer’s identity. It’s used for Forms 1040, 1040PR, and 1040SS (you will not use it on an amended return or on a request for extension).

I like to think of the IP PIN like the security code on the back of your credit card: without your assigned IP PIN, your tax return can’t be processed. If a tax return is e-filed with your SSN but an incorrect or missing IP PIN, the IRS e-file system will reject the return until you submit it with the correct IP PIN. If a tax return is filed on paper with your SSN but an incorrect or missing IP PIN, the IRS will delay processing the return – including any refund due – while they determine the validity of the return.

Before 2021

Previously, confirmed identity theft victims would receive an IP PIN if their identity theft case was resolved before the start of the next filing season. And, if you resided in one of 20 locations, you were eligible for the online IP PIN Opt-In Program. In 2020, to be eligible, you must have filed a federal return in 2019 as a resident of Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas or Washington. The IRS had noted last year that they would be expanding eligibility for the IP PIN Opt-In Program.

Beginning In 2021

Beginning in 2021, taxpayers may go to the Get an IP PIN tool on the IRS website, be authenticated, and immediately access a six-digit IP PIN. If you have a Social Security number (SSN) or Individual Tax Identification Number (ITIN), and you can verify your identity,you’re eligible for the Opt-In program. To opt-in, you must use the online Get an IP PIN tool.

What If You Can’t Authenticate Your Identity Online?

If you cannot authenticate your identity online and you make $72,000 or less, you may file Form 15227, Application for an Identity Protection Personal Identification Number, which will be available beginning January 2021. An IRS assistor will call you with a series of questions to verify your identity, and the IRS will issue your IP PIN at the start of the next calendar year.

If you cannot authenticate online and you make more than $72,000, you may have an option to verify your identity in person at an IRS office (this is still being vetted).

No matter the circumstances, you cannot obtain an IP PIN by calling the IRS.

Valid For One Year

IP PINs are only valid for one calendar year. You’ll have to renew your IP PIN each year, and if you lose your IP PIN, you’ll need to retrieve it or have it reissued to e-file your return. So be thoughtful, since there currently is no opt-out feature.

It’s Not Your Filing PIN

Don’t confuse the IP PIN with the 5 digit PIN you use to e-file your returns: those PINS aren’t interchangeable.

Keep It Secure

Once you have your IP PIN, don’t pass it around. Your tax professional will need it to prepare your return, but otherwise, keep it close. According to the IRS, the agency will never ask for your IP PIN. That’s good information to help you avoid phone, email, or text scams trying to trick you into revealing your IP PIN.

Victims Of Identity Theft

One more thing: if you are a victim of identity theft, follow the standard IRS recommendations. Form 14039, Identity Theft Affidavit (downloads as a PDF), is still applicable when your e-filed return is rejected because of a duplicate SSN filing. Once the case is resolved, the IRS will automatically send you an IP PIN via US mail at the start of the next calendar year.

Resources In Other Languages

If you need more information about IP PINs, you can find available resources on the IRS website in English, Spanish, Chinese (simplified), Chinese (traditional), Korean, Russian, Vietnamese, and Haitian Creole.

The Internal Revenue Service (IRS) has announced tax relief for victims of victims of the Oregon wildfires and straight-line winds. Those taxpayers who have been affected by the fires have until January 15, 2021, to file individual and business tax returns and make certain tax payments.

Relief is available for taxpayers in any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Currently, affected taxpayers are those in Clackamas, Douglas, Jackson, Klamath, Lane, Lincoln, Linn and Marion counties in Oregon.

The extension applies to deadlines – either an original or extended due date – that occurred on or after September 7, 2020, and before January 15, 2021.

This includes individual taxpayers who live in the area, as well as businesses, including tax-exempt organizations, with a principal place of business in the area. Taxpayers who live and work in locations added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on the IRS website.

Here’s what the relief entails: Most tax filing and payment deadlines that occurred starting on September 7, 2020, will be pushed off until January 15, 2021, to file returns and pay any taxes that were originally due during this period. That includes returns and payments that were originally due during this period, including individual tax returns on extensions which are due on October 15, 2020. Remember, however, that extensions are an extension of the time to file, not the time to pay, so payments for 2019 tax returns are still keyed to the July 15, 2020, due date.

Relief also includes a waiver of late penalties for quarterly estimated income tax payments normally due on September 15, 2020, as well as quarterly federal payroll and excise tax returns normally due on November 2, 2020.

It also includes calendar-year tax-exempt organizations that had a valid extension due to run out on November 16, 2020. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2019 extensions run out on October 15, 2020.

Additionally, penalties on payroll and excise tax deposits due on or after September 7 and before September 22, will be abated as long as the deposits are made by September 22, 2020.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. That means that taxpayers do not need to contact the IRS to get this relief. However, if you receive a late filing or late payment penalty notice from the IRS and were entitled to relief, you should call the number on the notice to have the penalty abated.

The IRS will work with any taxpayer who lives outside the disaster area but whose records are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 1.866.562.5227. This includes those workers assisting the relief activities who are affiliated with a recognized government or charitable organization.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on the return for the year the loss occurred – in this instance, the 2020 return normally filed next year – or the return for the prior year (2019). However, remember that the deduction for personal casualty and theft losses has been repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster as declared by the President. That means you need to write the FEMA declaration number – 4562 − for the wildfires in Oregon on any return claiming a loss. For more on casualty losses after a disaster, click here.

For more details on available tax relief, you can also check out the disaster relief page on IRS.gov.

The new per diem numbers are now out – a little earlier than normal. It’s important to note that they are not effective until October 1, 2020. These numbers are to be used for per diem allowances paid to any employee on or after October 1, 2020, for travel away from home.

The Internal Revenue Service (IRS) allows the use of per diem (that’s Latin meaning “for each day” – remember, lawyers love Latin) rates to make reimbursements easier for employers and employees. Per diem rates are a fixed amount paid to employees to compensate for lodging, meals, and incidental expenses incurred when traveling on business rather than using actual expenses. 

Here’s How Per Diem Typically Works

A per diem rate can be used by an employer to reimburse employees for combined lodging and meal costs, or meal costs alone. Per diem payments are not part of the employee’s wages for tax purposes so long as the payments are equal to, or less than the federal per diem rate, and the employee provides an expense report. If the employee doesn’t provide a complete expense report, the payments will be taxable to the employee. Similarly, any payments which are more than the per diem rate will also be taxable.

Reimbursed & Unreimbursed Expenses

The reimbursement piece is key. Remember that unreimbursed job expenses are currently not deductible. The Tax Cuts and Jobs Act (TCJA) eliminated unreimbursed job expenses and miscellaneous itemized deductions subject to the 2% floor for the tax years 2018 through 2025. Those expenses include unreimbursed travel and mileage.

That also means that the business standard mileage rate (you’ll find the 2020 rate here) cannot be used to deduct unreimbursed employee travel expenses for the 2018 through 2025 tax years. The IRS has clarified, however, that members of a reserve component of the Armed Forces of the United States, state or local government officials paid on a fee basis, and certain performing artists may still deduct unreimbursed employee travel expenses as an adjustment to income on the front page of the 1040; in other words, those folks can continue to use the business standard mileage rate. For details, check out Notice 2018-42 (downloads as a PDF).

Self-Employed Taxpayers

What about self-employed taxpayers? The TCJA didn’t change deductions for self-employed taxpayers (those that file a Schedule C). Self-employed taxpayers can still deduct business-related expenses. However, the per diem rates aren’t as useful for the self-employed because they can only use the per diem rates for meal costs. Realistically, that means that self-employed taxpayers must continue to keep excellent records and use exact numbers.

The New Numbers

As of October 1, 2020, the special meals and incidental expenses (M&IE) per diem rates for taxpayers in the transportation industry are $66 for any locality of travel in the continental United States and $71 for any locality of travel outside the continental United States; those rates are the same as they were last year. The per diem rate for meals & incidental expenses includes all meals, room service, laundry, dry cleaning, and pressing of clothing, and fees and tips for persons who provide services, such as food servers and luggage handlers.

The rate for incidental expenses only remains $5 per day, no matter the location. Incidental expenses include fees and tips paid at lodging, including porters and hotel staff. Transportation between where you sleep or work and where you eat, as well as the cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. If you want to snag a break for those, and you use the per diem rates, you may request that your employer reimburse you.

That’s good advice across the board: If you previously deducted those unreimbursed job expenses and can no longer do so under the TCJA, ask your employer about potential reimbursements.

Of course, since the cost of travel can vary depending on where – and when – you’re going, there are special rates for certain destinations. For purposes of the high-low substantiation method, the per diem rates are $292 for travel to any high-cost locality and $198 for travel to any other locality within the continental United States. The meals & incidental expenses only per diem for travel to those destinations remain $71 for travel to a high-cost locality and $60 for travel to any other locality within the continental United States.

You can find the list of high-cost localities for all or part of the calendar year – including the applicable rates – in the most recent IRS notice. There are, however, a few noteworthy changes, including:

  • The following localities have been added to the list of high-cost localities: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; and Virginia Beach, Virginia.
  • The following localities have been removed from the list of high-cost localities: Midland/Odessa, Texas, and Pecos, Texas.
  • The following localities have changed the portion of the year in which they are high-cost localities (meaning that seasonal rates apply): Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia (see also Maryland and Virginia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; and Charleston, South Carolina.

Resources

You can find the entire list, together with other per diem information, in Notice 2020-71 (downloads as a PDF).

To find the federal government per diem rates by locality name or zip code, head over to the General Services Administration (GSA) website.

Not sure that things are changing in the tax and legal worlds? Here’s proof that it is: The Internal Revenue Service (IRS) has released a new marijuana business webpage to help business owners understand and meet their tax responsibilities.

That’s right. Marijuana. Webpage. At IRS.gov.

You can find it here.

The IRS says that it “understands this is a new and growing industry and provided frequently asked questions about record keeping, cash payment options, large cash amounts, and other related topics to help promote voluntary compliance in the industry.”

Income From The Sale Of Marijuana Is Taxable

So, first things first. While still prohibited by federal law (possession can lead to fines and jail time), today, forty-two states and the District of Columbia currently have laws legalizing marijuana for either medical or recreational use. As of this summer, states that allow marijuana for medical use include Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington, and West Virginia – as well as the District of Columbia (some states allow CBD oil use only, including Georgia, Indiana, Iowa, Kentucky, Texas, and Virginia). Eleven states have legalized marijuana for recreational use, including Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington.

But the legality doesn’t even matter from a tax perspective. Income from any source is taxable: that includes income from the sale of marijuana (whether legal or not). On the new webpage, the IRS points out that federal courts have consistently upheld its determinations that state compliant marijuana dispensaries have taxable income. E.g., Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015); Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019); Beck v. Commissioner, T.C. Memo. 2015-149.

But spoiler alert: the sale of marijuana outside of state compliant marijuana dispensaries is also taxable.

Section 280E

If you follow tax and legal developments in this area, you’re already thinking, “But what about section 280E?”

Section 280E of the Tax Code disallows expenses connected with the illegal sale of drugs. It says: Expenditures in connection with the illegal sale of drugs. No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

It’s the gold standard in drug tax laws. As such, on the new webpage, the IRS reminds “businesses that traffic marijuana in contravention of federal or state law” that they are subject to the limitations of Internal Revenue Code (IRC) Section 280E.

Words like “traffic” and “in contravention of federal or state law” are good reminders that issues surrounding the industry are far from settled.

You can find some history on the evolution of the treatment of marijuana in the tax and legal worlds here.

Marijuana Industry FAQs

Still, the IRS aims to make sense of some of the transition – as well as the law as it stands now(ish) – with their Marijuana Industry FAQs (you can find those here).

In the FAQs, the IRS notes that while section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any business that violate federal drug laws (including those that sell marijuana in states that have legalized the sale of marijuana), section 280E does not prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business. So, no to deductions for advertising but yes to deducting the cost of goods sold.

More Marijuana Resources

And, because many marijuana-industry businesses conduct transactions in cash, the IRS also links to resources on paying your tax in cash, reporting single cash transactions of more than $10,000 in cash and a cash intensive business audit techniques guide.

Truly, the times are a-changing.

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