Are you wondering about those updated per diem rates? The new per-diem numbers are now out, effective October 1, 2019. These numbers are to be used for per-diem allowances paid to any employee on or after October 1, 2019, for travel away from home. The new rates include those for the transportation industry; the rate for the incidental expenses; and the rates and list of high-cost localities for purposes of the high-low substantiation method.

I know, that sounds complicated. But it’s intended to keep things simple. 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 it 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 considered 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.

The reimbursement piece is essential. Remember that for the 2019 tax year, unreimbursed job expenses are 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 2019 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 form 1040; in other words, those folks can continue to use the business standard mileage rate. For details, you can check out Notice 2018-42 (downloads as a PDF).

What about self-employed taxpayers? The good news is that they can still deduct business-related expenses. However, the per diem rates aren’t as useful for self-employed taxpayers 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.

As of October 1, 2019, 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 slightly more than they were last year. The per diem rate for meals & incidental expenses (M&IE) 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 is $5 per day, no matter the location. Incidental expenses include fees and tips paid at lodging, including porters and hotel staff. It’s worth noting that transportation between where you sleep or work and where you eat, as well as the mailing 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. Companies might not have considered the need for specific reimbursement policies before the new tax law, but would likely not want to lose a good employee over a few dollars – especially when those dollars are important to the employee. 

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 $297 for travel to any high-cost locality and $200 for travel to any other locality within the continental United States. The meals & incidental expenses only per diem for travel to those destinations is $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. As you can imagine, high cost of living areas like San Francisco, Boston, New York City, and the District of Columbia continue to make the list. There are, however, a few noteworthy changes, including:

  • The following localities have been added to the list of high-cost localities: Mill Valley/San Rafael/Novato, California; Crested Butte/Gunnison, Colorado; Petoskey, Michigan; Big Sky/West Yellowstone/Gardiner, Montana; Carlsbad, New Mexico; Nashville, Tennessee; and Midland/Odessa, Texas.
  • The following localities have been removed from the list of high-cost localities: Los Angeles, California; San Diego, California; Duluth, Minnesota; Moab, Utah; and Virginia Beach, Virginia. 
  • The following localities have changed the portion of the year in which they are high-cost localities (meaning that seasonal rates apply): Napa, California; Santa Barbara, California; Denver, Colorado; Vail, Colorado; Washington D.C., District of Columbia; Key West, Florida; Jekyll Island/Brunswick, Georgia; New York City, New York; Portland, Oregon; Philadelphia, Pennsylvania; Pecos, Texas; Vancouver, Washington; and Jackson/Pinedale, Wyoming.

You can find the entire high-cost localities list, together with other per diem information, in Notice 2019-55 (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.

Do you file an accurate tax return and pay what you owe each year? If so, you’re in the majority: a report released by the Internal Revenue Service (IRS) indicates that the nation’s tax compliance rate is holding at 84%, the same as in prior years.

The report also provides an estimate of the tax gap for the tax years 2011 through 2013. The last report issued by the IRS had covered the tax years 2008 through 2010. 

The tax gap refers to the difference between the amount of taxes owed to the government as compared to what the government actually collects. The tax gap can be further broken down into two pieces: the gross tax gap and the net tax gap. The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely. The net tax gap is the amount between the gross tax gap and tax that will eventually be paid late or as a result of IRS enforcement activities.

The average gross tax gap for the tax years 2011 through 2013 is estimated to be $441 billion. That breaks down into three pieces: non-filing ($39 billion), underreporting ($352 billion), and underpayment ($50 billion). By taxpayer type, the estimated gross tax gap works out as follows:

  • Individual income tax: $314 billion 
  • Corporation income tax: $42 billion
  • Employment tax: $81 billion
  • Estate and excise tax: $3 billion

Of those unpaid taxes, the IRS estimates that they’ll eventually collect $60 billion, resulting in a net tax gap of $381 billion. By taxpayer type, the estimated net tax gap works out as follows:

  • Individual income tax: $271 billion 
  • Corporation income tax: $32 billion
  • Employment tax: $77 billion
  • Estate and excise tax: $1 billion

The portion of taxes that are paid voluntarily and on time is called the voluntary compliance rate. The most recent voluntary compliance rate is 83.6%, practically the same as the prior rate of 83.8%. How does that translate into dollars? A one-percentage-point increase in voluntary compliance would bring in about $30 billion in additional tax receipts.

“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 policymakers 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.”

(For a full-size version which downloads as a PDF, click here.)

Compliance is higher when amounts are subject to information reporting – like forms W-2 and 1099 – and even higher when also subject to withholding. For example, misreporting of income amounts subject to substantial information reporting and withholding is 1%, while income amounts subject to little or no information reporting, such as sole proprietor (nonfarm) income, is 55%.

“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.”

When you factor in enforcement and collection efforts, the estimated share of taxes collected eventually rises to 85.8%. 

According to the report, many factors contribute to differences over time in both the gross tax gap and the compliance rates. These include the overall level of economic activity, changes in tax law and administration, updated data and improved methodologies, and changes in compliance behavior on the part of taxpayers and preparers. In the most recent set of data, some of the variances in the gross tax gap estimates not attributable to a shift in methods is due to the growth of the economy following the recession (December 2007 – June 2009). The next set of data should reflect 2014 through 2016, which means that we won’t know the effect – if any – of the Tax Cuts and Jobs Act (TCJA) for quite some time.

Nobody likes getting a tax bill in the mail. It’s especially concerning when your tax bill is a bit higher than you anticipated. But what happens when it’s hundreds of millions of dollars more than you were expecting? Just ask Donna Smith from Aurora, Colorado. Smith, a part-time worker at a local thrift store, got quite the surprise when she opened a tax bill from the Colorado Department of Revenue to find that the state claimed she owed $216,399,508 in taxes.

Smith, who makes about $10 an hour, couldn’t understand the tax bill. To put the amount in perspective, it’s nearly a quarter of the City of Aurora’s entire budget for the year (report downloads as a PDF).

Smith’s returns are self-prepared, of sorts. Her mother, Diana Valencia, prepared Smith’s tax return for 2018 and couldn’t understand what happened. She told 9News that she went back to check the return, saying, “I mean, I thought, ‘Wow, was that an error on my part?’”

It was an error – but not on Valencia’s part. Valencia used TurboTax to prepare the return. According to the Colorado Department of Revenue (DOR), the TurboTax software made an error tied to Smith’s federal taxable income. 

A spokesperson from TurboTax confirmed the error, saying, “For a small number of TurboTax online customers that filed their taxes between June 13-16, there was an issue that caused select fields on their tax return to be incorrectly transmitted during e-file. The issue was quickly fixed and we have been working directly with affected Colorado taxpayers and the Colorado State DOR to help resolve.” If you were affected by the billing error and aren’t currently working to resolve the matter, you should contact the Department of Revenue at (303) 866-4622 to reach a citizen’s advocate.

The Colorado DOR pegged the number of affected taxpayers at 44. That doesn’t mean, however, that a few dozen taxpayers received multi-million dollar tax bills. According to Daniel Carr, Taxation Communications Manager at the Colorado DOR, that number represents taxpayers who encountered the same glitch using TurboTax software during a three-day window in June of this year. “What the taxpayer entered into TurboTax was correct,” Carr said, explaining that “an error in the TurboTax transfer reported incorrect amounts to the State of Colorado.” 

The bills went out, explains the DOR, because “[o]n our end it was simply data in data out and we could only process what we were given by TurboTax. We cannot determine the accurate amounts based on the information provided.”

Once the errors were discovered, however, the DOR worked with affected taxpayers. “We have reached out to all of the taxpayers affected and are helping them resolve this issue,” says Carr.

That doesn’t mean that the taxpayers don’t have work to do. According to Carr, “Taxpayers, in this case, who kept a copy of what they submitted are able to send us that copy and we will correct the error. Otherwise, they would have to amend their return.”

Mistakes happen all of the time – just maybe not quite this big. No matter the size of the return, taxpayers can protect themselves, Carr advises, by always keeping a copy of filed returns. And if the bill seems out of place? “Contact the Department of Revenue immediately to have it resolved.” 

Don’t ignore the problem. That’s good advice for all taxpayers, no matter whether the bill is federal, state or local. In most cases – even when the bill is hundreds of millions of dollars – errors are totally fixable. But don’t wait and hope that it goes away: it’s important to reach out to the respective tax authorities to clear up any problems as soon as possible.

(For more on how to fix a mistake on your return, click here.)

Genetic testing kits are all the rage these days—and recent tax news may make it even more affordable. Taxpayers may now get a tax break for some testing, piquing interest for some taxpayers. Unfortunately, the increased popularity also makes genetic testing kits ripe for scammers. 

The U.S. Department of Health and Human Services (DHHS) Office of Inspector General recently issued an alert about a fraud scheme involving genetic testing. The scheme, which tends to target seniors, offers Medicare beneficiaries “free” screenings or cheek swabs for genetic testing in return for Medicare information. Those who agree to the testing or verify Medicare information may be given a cheek swab, an in-person screening or receive a testing kit in the mail, even if it is not ordered by a physician or considered medically necessary. 

As part of the scam, even though the testing isn’t ordered by a physician or considered medically necessary, Medicare is billed for the test. If Medicare denies the claim, the testing or ordering company still wants to get paid. As a result, the Medicare beneficiary—that might be you—could be on the hook for the entire cost of the test. In some cases, that could be thousands of dollars.

(You can read more about the scheme here.)

The best way to protect yourself? Your doctor—not a company or a salesperson—should order genetic testing. A good rule of thumb? If anyone other than your physician’s office requests your Medicare information, do not provide it.

If the term “medically necessary” sounds familiar, it’s similar to the standard that the Internal Revenue Service (IRS) uses for medical expenses deductions and inclusion under a Flexible Spending Account (FSA) or Health Savings Account (HSA). For federal income tax purposes, medical expenses that qualify as deductible include as a treatment for a diagnosed disease or condition and must be specifically ordered by your doctor (in other words, prescribed). Medical expenses include visits for routine medical, dental and vision care, as well as specialist care, and also include treatments, including medications and follow-up visits. Medical expenses may also include associated out-of-pocket costs, like mileage (for mileage costs in 2019, click here). Medical expenses that would qualify for the medical and dental expenses deduction are typically the same as those which qualify for FSA and HSA purposes.

(You can read more about medical expenses here. For more on HSAs and preventative care, click here.)

That standard means that genetic and ancestry tests to find out if you’re related to the Queen—or if you actually come from Italy—are not tax-deductible. However, a recent Private Letter Ruling (PLR) issued by the IRS suggests that you may deduct the cost of genetic testing that relates directly to health services like diagnostics and genetic markers for cancer. 

(You can read the PLR, which downloads as a PDF, here. A quick reminder: PLRs are issued to an individual taxpayer in response to a particular set of facts. You can’t rely on a PLR as precedent, but it does give you a good sense of the IRS’ position on a particular matter.)

This year, the company, 23andMe, which is regulated by the Federal Drug Administration (FDA), got approval to offer risk analysis for nearly a dozen genetically linked diseases. One of their testing plans, the Health + Ancestry plan, now includes testing for genetic health risks and carrier status. If you opt for a combined plan like that one—with medical and non-medical markers—only the cost of genetic testing may be considered a qualified medical expense. You’ll have to allocate the price of the medical care portion as a portion fo the total paid for the kit. 23andMe has embraced the latest PLR, and has even posted a calculator on its website to help taxpayers determine the portion that might be appropriate for FSA and HSA coverage.

A quick word of caution: Not all companies are created equal. While some companies may offer genetic testing kits for legitimate purposes, it’s clear from the DHHS alert that scammers are trying to take advantage. Do your homework and use caution before providing your information. If you have questions about whether a specific test might qualify for HSA, FSA, federal income tax or Medicare purposes, check with your tax or benefits professional.