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Last year's sweeping tax overhaul, the Tax Cuts and Jobs Act of 2017 (TCJA), introduced a new tax break for owners of many businesses called the deduction for qualified business income. It’s also known as code Section 199A deduction. If you qualify for it, you will receive a 20% deduction on your qualified business income.

Last year's sweeping tax overhaul, the Tax Cuts and Jobs Act of 2017 (TCJA), introduced a new tax break for owners of many businesses called the deduction for qualified business income. It’s also known as code Section 199A deduction. If you qualify for it, you will receive a 20% deduction on your qualified business income.

Qualified Business Income - Qualified business income means the net income from a qualified trade or business. However, qualified business income does not include certain investment-related income, including:

1. Short and long-term capital gain and losses;
2. Dividend income, income equivalent to a dividend, or payment in lieu of a dividend;
3. Any interest income other than interest income properly allocable to a trade or business;
4. Net gain from foreign currency transactions and commodities transactions;
5. Income from notional principal contracts, other than items attributable to notional principal contracts entered into as hedging transactions;
6. Any amount received from an annuity that is not received in connection with the trade or business; and
7. Any deduction or loss properly allocable to any of these bulleted items described above.

Qualified Trade or Business – Qualified trade or business means any trade or business other than:

1. Employee
2. A Specified Service Trade or Business

Employee - As an employee you can never qualify for this deduction no matter what.

Specified Service Trade or Business – A specified service trade or business is defined as any trade or business involving the performance of services in the following fields:

1. Health.
2. Law.
3. Accounting.
4. Actuarial science.
5. Performing arts.
6. Consulting.
7. Athletics.
8. Financial services.
9. Brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities,
10. Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Catch all rule.

Engineering & Architecture Services - Are specifically excluded from the definition of a specified service trade or business. Therefore, they qualify.

Some of the categories and fields listed above are fairly clear in their meaning. Others - such as "consulting" and "any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees" - are vague, and will be difficult to apply until the IRS provides guidance.

While doctors, accountants, and attorneys will clearly fall victim to the specified fields found in this definition, many businesses will not fit so neatly into one of the disqualified categories. For example, while an actor is in the field of performing arts, is a director? A makeup artist? A producer?

The catch all definition is a bit concerning that a disqualified business includes any trade or business of which the principal asset is the reputation or skill of one or more of its employees or owners. The most obvious problem posed by the catch-all is that it threatens any taxpayer who is not engaged in one of the businesses specifically listed as a disqualified field. Consider the case of a "personal trainer to the stars": Using the definition of "a specified service business" in the law the argument can be made that the trainer is not in the fields of health or athletics. Application of the catch-all, however, would likely yield a different result. What is the principal asset of a celebrity? personal trainer if not the reputation and expertise of that trainer?

To further illustrate the complications caused by the catch-all, compare two restaurants - the first a prominent chain, the second a stand-alone bistro with a world-renowned, five-star chef. Neither restaurant is in a listed disqualified service nor so the initial presumption is that both eateries generate qualified business income eligible for the deduction. Now, consider the application of the catch-all. The principal asset of the chain restaurant is clearly not the skill of its employees or owners; after all, if the chef at one of the locations leaves the restaurant, he or she will be replaced and life will go on. As a result, the chain restaurant should not fall victim to the catch-all. The bistro, however, may not be so fortunate. In this scenario, it is much more likely that the business's principal asset is the skill and reputation of the five-star chef who prepares its food. Put in simple terms, if that chef leaves the bistro, the business probably shutters its doors, adding further evidence that it is the expertise of the chef that drives the business. Thus, based on the current structure of the law it would not be unreasonable to conclude that the second restaurant is a specified service business. But why should the owners of the two restaurants be treated differently when they both provide the same mix of food and services to customers?

As one can see, until further guidance is issued that narrows the scope of the catch-all, it threatens to ensnare far more taxpayers than the specifically delineated disqualified fields.

Real Estate Activities – An emerging consensus among practitioners and expert commentators is that most rental real estate activities other than those involving triple net (NNN) rentals will qualify as trades or businesses, because such rental activities typically involve the regular provision of substantial services to tenants. Also, the fact that last-minute changes were made to the bill to make the deduction more readily available to rental property owners is seen an indication that Congress intended that rental income would be eligible for the deduction.

Limitations – There are three limitations that come into play at different income levels. They are:

1. Specified Service Trade or Business Limitation – if you are a specific service trade or business, married and your taxable income is $315,001 to $415,000 or single $157,501 to $207,500, your deduction will be limited. Above these thresholds it will be completely denied and you will not qualify for the deduction. The limitation is based on the amount that you are over the $100,000 allowed for married and $50,000 for single.
2. Wage Limitation – The W-2 wage limitation on the deduction for qualified business income is based on either W-2 wages paid by the trade or business, or W-2 wages paid plus tangible assets owned by the trade or business. It is the greater of:
3.  

1. 50% of the W-2 wages paid with respect to the qualified trade or business, or
2.  
3. The sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted tax basis, immediately after acquisition, of all qualified property.

1. Taxable Income Limitation – The qualified business income deduction can never be more than 20% of your taxable income.
2.  

Wages – Only W-2 wages paid and reported to the Social Security Administrator qualify. Thus wages paid by an S Corporation to its sole shareholder/employee qualify. However, guaranteed payments paid by a partnership (LLC, GP, LP or LLP) to its member(s) do not. Therefore, in some cases an S Corporation will qualify for the deduction while partnerships that have no employees will not.

Furthermore, IRS is very specific that a partnership cannot pay/issue a W-2 to its members. Only to its non-member employees.

Who Can Claim the Deduction – Shareholders of S Corporations, members/partners of Limited Liability Company (LLC), partners of a general partnership (GP), partners of a limited partnership (LP), members/partners of a limited liability partnership (LLP), independent contractors and sole proprietorships. Going forward the Code refers to these businesses as a “Pass-Through Business”. Trusts and estates qualify for the tax break as well.

Different Rules Apply at Different Levels of Taxable Income – Therefore, we have created three categories of income to address each rule that is applicable to that category. They are:

Category 1 – Married with taxable income of less than $315,000 or single less than $157,500.

Category 2 - Married with taxable income of $315,001 to $415,000 or single $157,501 to $207,500.

Category 3 - Married with taxable income over $415,001 or single over $207,501.

Category 1 – Married with taxable income of less than $315,000 or single less than $157,500

If you fall under this category, everyone who is a Pass-Through Business, regardless of what trade or business you are in, will qualify for the deduction. However, the taxable income limitation applies.

For simplicity in all examples below, we will assume either the taxpayer is married or single, has no dependents, mortgage interest or property taxes to deduct.

Example 1A:    Assume that the taxpayers are married. One spouse receives $50,000 of W-2 income and the other $250,000 from any trade or business. Their qualified business income deduction is $50,000 ($250,000 x 20%). Therefore, they will pay federal income tax on $250,000 ($300,000 - $50,000) not $300,000. Their federal income tax liability is approximately $42,900.

Example 1B:    Assume that the taxpayers are married. One spouse receives $50,000 of W-2 income and the other $250,000. They do not qualify for the qualified business income deduction because both are employees. Their federal income tax liability is approximately $55,300.

As employees the taxpayers will pay approximately $12,400 more in federal tax.

Example 1C:    Assume that the taxpayers are married. One spouse does not work. The other spouse has $300,000 of income from any trade or business. Their qualified business income deduction should be $60,000 ($300,000 x 20%). However, their taxable income is $276,000 ($300,000 minus the standard deduction of $24,000). Based on the taxable income limitation their qualified business income deduction is the lesser of:

1. 20% of the qualified business income, $60,000 ($300,000 x 20%) or
2. 50% of wages paid – Not applicable since they are below the threshold of $315,000 or
3. 20% of their taxable income, $55,200 ($276,000 x 20%).
4.  

Their qualified business income deduction is $55,200. Their federal income tax liability is approximately $41,600.

Example 1D:    Taxpayer is single and an employee, but not an owner, of a qualified business. Taxpayer receives a salary of $100,000 in 2018. Taxpayer does not qualify for the deduction because he or she is only the employee of the qualified business and not an owner.

If you are an employee, it may be tax advantageous for you to consider becoming a Pass-Through Business such as an S Corporation.

Category 2 - Married with taxable income of $315,001 to $415,000 or single $157,501 to $207,500

If you fall under this category you can still claim the qualified business income deduction but you are subject to the specified service trade or business, wage and taxable income limitations. Therefore, your deduction can either be limited or denied.

Example 2A:    Single taxpayer has taxable income of $187,500, of which $150,000 is from a specified service trade or business. Assume that the specified service trade or business has paid sufficient W-2 wages to its employees. He or she is over the threshold allowed by $30,000 ($187,500 - $157,500). The maximum amount allowed that a single taxpayer can be over is $50,000. Therefore, he or she is 60% ($30,000 / $50,000) over the maximum amount allowed. Thus, he or she is only allowed 40% (100% - 60%) of the maximum amount of the qualified business income. The qualified business income is $150,000 x 20% = $30,000. However, he or she only claim 40% of it. Therefore, the deduction for the qualified business income is $12,000 ($30,000 x 40%).

Example 2B:    Single taxpayer has taxable income of $187,500, of which $150,000 is from a specified service trade or business. Assume that the specified service trade or business has paid $40,000 in W-2 wages to its employees. He or she is over the threshold allowed by $30,000 ($187,500 - $157,500). The maximum amount allowed that a single taxpayer can be over is $50,000. Therefore, he or she is 60% ($30,000 / $50,000) over the maximum amount allowed. Thus, he or she is only allowed 40% (100% - 60%) of the maximum amount of the qualified business income. But, he or she has only paid $40,000 in wages. Thus, the maximum qualified business income that the taxpayer qualifies for is the lesser of:

1. 20% of the qualified business income, $30,000 ($150,000 x 20%) or
2. 50% of wages paid, $20,000 ($40,000 x 50%).
3.  

However, the taxpayer can only claim 40% of the lesser amount since he or she was over the threshold. Therefore, the deduction for the qualified business income is $8,000 ($20,000 x 40%).

Example 2C:    Single taxpayer has taxable income of $217,500, of which $150,000 is from a specified service trade or business. Since its taxable income is more than the maximum threshold allowed, $207,500, the taxpayer does not qualify for the qualified business deduction.

Example 2D:    Single taxpayer has taxable income of $187,500, of which all of it is from a qualified trade or business and it paid $60,000 in W-2 wages to its employees. The qualified business income deduction is the lesser of:

1. 20% of the qualified business income, $37,500 ($187,500 x 20%) or
2. 50% of wages paid, $30,000 ($60,000 x 50%).

Therefore, the deduction for the qualified business income is $30,000, the lesser of the two figures above.

Category 3 - Married with taxable income over $415,001 or single over $207,501

If you fall under this category the only way that you will qualify for the deduction is if you have a qualified trade or business. You will not qualify for the deduction if your only source of income is from a specified service trade or business. The wage and taxable income limitations apply.

Example 3A:    Robert is single and the sole shareholder/employee of ABC, Inc., an S corporation that is a qualified trade or business. ABC has net income in 2018 of $250,000 after deducting Robert's salary of $150,000. Assume that the $150,000 salary paid to Robert is the only W-2 wages paid. Robert’s tentative qualified business income deduction is $50,000 ($250,000 x 20%). However, he has to calculate the wage limitation to determine if its less. The wage limitation is $75,000 ($150,000 x 50%). Therefore, Robert can deduct the $50,000 because the wage limitation is bigger.

Example 3B:    Taxpayers owns residential or commercial rental properties through an LLC. His or her share of the rental income earned by the LLC is $800,000. The LLC pays no W-2 wages, but taxpayer’s share of the unadjusted basis of the building is $5 million. Taxpayer’s tentative qualified business income deduction is $160,000 ($800,000 x 20%). However, taxpayer has to calculate the wage limitation to see if its less. Taxpayer has the option of choosing the greater of the following for the wage limitation calculation:

1. 50% of W-2 wages= $0; or
2. 25% of W-2 wages, $0, plus 2.5% of qualified property = $125,000 ($5M x 2.5%).

Therefore the taxpayer’s qualified business income deduction is $125,000.

Example 3C:    Taxpayer is a sole proprietor. During 2018, the business generates $400,000 of qualified business income, pays $120,000 of W-2 wages, and has $1.5M of qualified property. Taxpayer flies jointly with his or her spouse and their combined taxable income for the year, including the qualified business income, is $600,000. Taxpayers’ tentative deduction is $80,000 ($400,000 x 20%). However, taxpayers’ have to calculate the wage limitation to determine if its less. Taxpayers have the option of choosing the greater of the following for the wage limitation calculation:

1. 50% of W-2 wages = $60,000 ($120,000 x 50%)
2. 25% of W-2 wages, $30,000 ($120,000 x 25%) plus 2.5% of unadjusted basis of qualified property $37,500 ($1.5M x 2.5%) = $67,500 ($30,000 + $37,500).

Therefore, taxpayers’ qualified business income deduction is $67,500.

Reasonable Compensation - S corporations have long had an incentive to classify payments made to shareholder-employees as dividends rather than wages, because wages are subject to employment taxes such as social security and Medicare dividends are not. The IRS, however, can re-characterize "dividends" that are paid lieu of reasonable compensation for services performed for the S corporation to wages. So, "reasonable compensation" of an S corporation shareholder refers to any amounts paid by the S corporation to the shareholder, up to the amount that would constitute reasonable compensation.

Example 4A:    Assume taxpayers A & B own identical businesses. Neither business has any employees or quailed property. Each business generates $500,000 of qualified business income before any wages are paid. A operates his business as a sole proprietor; B an S corporation.

Because A's business has no employees and because, as a sole proprietor, A cannot pay himself a wage, A has a W-2 wage limitation and its zero. Thus, A does not get a deduction.

B as the shareholder of his S Corporation, must comply with the reasonable-compensation requirement. As a result, assume B pays himself $80,000 in 2018.

B's is the lesser of:

1. 20% of the qualified business income, $84,000 (20% x $420,000) or
2. 50% of wages $40,000 ($80,000 x 50%).

B’s qualified business income deduction is $40,000 because B paid him or herself $80,000 of W-2 wages and was able to qualify for the deduction. If B was a member/partner of a LLC and received an $80,000 in guaranteed payments, he or she would not have qualified for the deduction because guaranteed payments do not count as wages.

Example 4B:    Assume the same facts as in the previous example, except the income earned in each business is $150,000, not $500,000. Assume further that both A and B have taxable income below the $315,000/$157,500 thresholds. A, the sole proprietor, is entitled to a deduction of $30,000 (20% of

$150,000). B, the sole shareholder of the S corporation, remains required to pay himself reasonable compensation. Assume he is paid W-2 wages of $70,000.

This reduces the qualified business income B receives from the S corporation to $80,000 ($150,000 - $70,000) and in turn reduces B's deduction to $16,000 ($80,000 x 20%). Thus, when income is below the threshold, the reasonable-compensation requirement works against the shareholder in the S corporation, reducing both his qualified business income and deduction. A, the sole proprietor, has no such requirement and thus preserves the full amount of his qualified business income, giving him a deduction of $30,000, when his S corporation shareholder counterpart receives a deduction of only $16,000.

Netting of Qualified Business Income and Loss – The deduction must be determined separately for each qualified trade or business. After calculating the qualified business income deduction for each trade or business, the taxpayer totals the amounts. If there is an overall loss, no deduction is allowed for that year and the loss is carried over to next year.

Example 5A:    In 2018 taxpayer is allocated qualified business income of $20,000 from qualified business 1 and a qualified business loss of $50,000 from qualified business 2. Taxpayer is not permitted a deduction in 2018 and has a carryover qualified business loss of $30,000 to 2019.

Unadjusted Tax Basis - Only the unadjusted basis of qualified property is counted toward the limitation. Qualified property is tangible property subject to depreciation. As a result, the basis of raw land and inventory, for example, would not be taken into account.

The basis of property used to determine the limitation is unadjusted basis determined before the close of the tax year. The depreciable period begins on the date the property is placed in service and ends on the later of:

• 10 years after the date placed in service; or
• The last day of the last full year in the applicable recovery period that would apply to the property under Sec. 168

Example 6A:    On April12, 2010, Partnership AB, a calendar-year partnership, places in service a

piece of machinery purchased for $50,000 that has a five-year life. The partners may take into account their allocable share of the $50,000 unadjusted basis of the property in 2018, despite the fact that the asset was fully depreciated before the year began. This is because the depreciable period runs for the longer of:

• 10 full years from April12, 2010 (to April12, 2020); or
• The last day of the last full year in the recovery period, which for a five-year asset placed in service during 2010 would have been 2014.

The partners will also take into account the $50,000 unadjusted basis of the property in 2019. The basis will not be taken into account in 2020, however, because the depreciable period ends on April12, 2020, before the end of the 2020 tax year. Alternatively, assume the machinery

was placed in service on June 1, 2008. The partners of Partnership AB would not take the $50,000 unadjusted basis into account in 2018 because the depreciable period ended on June 1, 2018, before the close of the 2018 tax year.

How to Avoid Specified Service Trade or Business Status – We are constantly being asked by clients that are a specified service trade or business, what they can do to qualify for the deduction?

Option 1 - One strategy that has been discussed is to infuse a qualified business into a disqualified business - for example, a law firm might acquire commercial real estate that it rents to tenants, or a famous actor might launch a clothing line – in the hopes that it "muddies the waters" enough to convert the entire enterprise into a qualified business. This strategy faces two significant hurdles. First, because the law requires that the deduction be determined on a business-by-business basis, the IRS may force a taxpayer to distinguish among multiple lines of business within the same entity, denying a deduction attributable to any disqualified business line. But even if the businesses could be commingled, the law treats as a disqualified specified service business any business involving the performance of services in the fields of health, law, etc. Thus, the language suggests that even a small amount of services provided in a disqualified field could taint an entire business. Thus, in the examples above involving the law firm/real estate company or actor/clothing line scenarios, because each business would continue to provide some element of personal services in a disqualified field, those services could taint the entire business, potentially preventing the rental income or the income from the clothing line from being treated as qualified business income.

Option 2 - Perhaps a more prudent alternative to maximizing the deduction involves the opposite approach: Having a disqualified business "spin off" the activities of a potentially qualifying business into a separate entity.

Example 7A:    Assume Doctor A currently owns a medical/dental S Corporation, S Corporation 1. He or she is the sole shareholder/owner. It has a net income of $500,000 after it pays Doctor A wages of $200,000 and $300,000 to other employees. Doctor A is married. If Doctor A does nothing, he/she will not qualify for the deduction because being a doctor or dentist a specified service trade or business and his or her taxable income is over $415,000.

                            Doctor A’s federal tax liability will be approximately $189,500.

Example 7B:    Same facts as Example 7A. Doctor A creates two new S Corporations. S Corporation 2 which will do the billing for S Corporation 1. S Corporation 2 which will provide professional services such as administration, purchasing, billing paying and hiring non-licensed professionals for S Corporation 1. These types of organizations are know by many names such as Professional Service Organizations (PSO), Professional Employer Organizations (PEO), Management or Medical Service Organizations (MSO), Dental Service Organization (DSO) and etc.

To make the math simple, assume the only expenses S Corporations 2 and 3 have are the employees that used work for S Corporation 1 to the billing, $50,000, and the non-licensed employees, $100,000. Thus, S Corporation’s 1 salaries and wages expense will decrease by $150,000 ($50,000 + $100,000) because going forward they will be paid by S Corporations 2 and 3.

S Corporation 1 pays fair market fees to S Corporation 2 of $100,000 and $200,000 to S Corporation 3 for the services that they provide it. S Corporation 1 now has a net income of $350,000 ($500,000 - $100,000 - $200,000 + $150,000). Assume S Corporation 2 pays $50,000 in wages so its net income is $50,000 ($100,000 - $50,000) and S Corporation 3 pays $100,000 in wages so its net income is $100,000 ($200,000 - $100,000).

Doctor A’s federal tax liability will be approximately $178,400.

By “spinning-off” the activities of his or her medical/dental practice into three separate entities that two qualify as a qualified trade or business, Doctor A was able to reduce his or her federal tax liability by approximately $11,100.

The above structure is not limited to medical or health professionals. Law firms can do the same. Real estate management companies can “spin off” the janitorial and repair divisions into separate entities. Financial planners can hire their spouses to provide them with administrative services and etc.

The “spin off” division would take the position that because its new business not in the field of health, it is not a specified service trade or business. The IRS could craft regulations which provide that administrative and support services provided to a specified service trade or business are treated as the provision of services in that same specified service trade or business. If this were the case, rendering administrative and support services to a doctor group would be treated as services provided in the field of health, converting that business from a qualified to a disqualified or specified service trade or business.

Furthermore, you need to take into account the cost, management & etc. associated with opening new entities.

Option 3 - Perhaps a safer alternative is for a specified service trade or business - for example, a doctor - forms a new LLC that purchases the building it currently leasing, which then rents the building to the medical practice at the highest justifiable rate. It is unlikely future regulations would deny such a structure, provided the rent were fairly valued, because, in this example, it is property, rather than services, that is being provided to a specified service trade or business.

Example 7C:    Same facts as Example 7B. However, Doctor A purchases the building he or she practices out of for $5M. Assume the rent that was paid to the old landlord, $60,000 per year, is now paid to Doctor A’s LLC. Assume the LLC has no other income, expenses or employees.

                            The LLC qualifies for the deduction it even though it has no employees. The tentative deduction is 20% of the qualified business income, $12,000 ($60,000 x 20%). Or the lesser of:

1. 50% of the W-2 wages paid, which is zero or,
2. The sum of 25% of the W-2 wages, zero, plus 2.5% of the unadjusted tax basis which is $125,000 ($5M x 2.5%).

Thus the deduction is $12,000.

Advantages & Disadvantages S Corporation versus Sole Proprietorships – The following are the advantages of conducting your business through an S Corporation versus a sole proprietorship:

1. Payroll Tax Savings – S Corporations pay payroll taxes on the wages paid to its shareholder/employee(s). Sole proprietorships pay payroll taxes on the net income of the business. Payroll tax is made up of:

1. Social Security or FICA – 12.4% on the first $128,400 of wages and
2. Medicare – 2.9% and there is no limit.
3. Hospital Insurance (HI) - 0.9% of wages over $250,000 for married and $200,000 for single.

Example 8A:    Taxpayer is single and the sole shareholder/employee of his or her S Corporation. Its net income is $330,000 before wages. The S Corporation pays the taxpayer wages of $80,000. Taxpayer will pay the following payroll taxes:

                            $9,920 in Social Security or FICA – 12.4% x 80,000

                            $2,320 in Medicare – 2.9% x $80,000

                            $0 in Hospital Insurance

                            Total payroll tax paid by the taxpayer is $12,240.

Example 8B:    Same facts as above except that the taxpayer is a sole proprietorship. Thus, its net income is $330,000. Taxpayer will pay the following payroll taxes:

                            $15,923 in Social Security or FICA – 12.4% x $128,400

                            $9,571 in Medicare – 2.9% x $330,000

                            $943 in Hospital Insurance - .9% x ($330,000 – $200,000 - $15,922 - $9,570)

Total payroll tax paid by the taxpayer is $26,437. By being an S Corporation and receiving a reasonable compensation the taxpayer saved $14,197 ($26,437 - $12,240) in payroll taxes.

In Example 4B, A the sole proprietorship received a bigger deduction than B the sole shareholder/employee of the S Corporation. However, you have to take into account the additional payroll tax cost to accurately calculate if there is a tax savings as a sole proprietorship.

1. Liability Protection – Generally S Corporations provide liability protection to their shareholders. A sole proprietor is liable for his or her business. This is a legal issue and it should be discussed with an attorney.
2.  
3. Audit Protection – S Corporations have the least chance of being audited by IRS. Sole proprietors have a higher chance.
4.  

The following are the disadvantages of conducting your business through an S Corporation versus a sole proprietorship:

1. Incorporation Fee – There is a one-time fee to incorporate with the Secretary of State.
2.  
3. Annual Minimum Franchise Tax – State a California charges the greater of $800 or 1.5% of the S Corporation’s net income as a franchise tax. Thus, at minimum you will pay $800 a year in franchise tax.
4.  
5. Quarterly & Annual Federal and State Payroll Tax Returns – You have to file quarterly and annual federal and state payroll tax returns.
6.  
7. Annual S Corporation Income Tax Returns – You have to file annual federal and California S Corporation income tax returns. Furthermore, you need to keep separate books and records for the corporation. Therefore, you should have some kind of a bookkeeping system implemented.

We are able to provide you with any and all of the services listed above. We can incorporate your business, provide bookkeeping services, prepare the required quarterly and annual payroll tax returns and prepare your annual S Corporation income tax returns.

Gain on the Sale of Depreciable Asset Used in a Trade or Business, Section 1231 Gain – The law is silent on the treatment of the gain when you sell an asset that you have used in your trade or business for more than one year. This is called a Section 1231 gain.

Is the gain qualified business income? Since Section 1231 asset is specifically excluded from the definition of a capital asset it seems like until guidance from the IRS provides otherwise, it is reasonable to include the gains and losses in qualified business income.

Like-Kind Exchanges - Regulations will provide rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.

Tiered Entities - Future regulations will provide guidance on how to determine the deduction in the case of tiered entities.

Commonly Controlled Entities - At present, the law does not allow for an allocation of the W-2 wages paid by the management company to each of the operating companies. As a result,

assuming the shareholders of the operating companies have taxable income exceeding the threshold amounts, they would be precluded from claiming a deduction, courtesy of the W-2 limitations. Similar problems arise in the case of employees leased through a professional

employer organization (PEO) or employee leasing firm.

Increased Exposure to Underpayment Penalty - Generally, for taxpayers other than C corporations, the understatement is substantial if its amount for the tax year exceeds the greater of:

• 10% of the tax required to be shown on the return for the tax year; or
• $5,000

Under the new law, substantial understatement penalty is applied when:

• 5% of the tax required to be shown on the return for the tax year; or
• $5,000

This lower threshold is particularly harsh, given the lack of guidance surrounding key aspects of this new law and the resulting challenges taxpayers and their advisers face in implementing the

provision. Importantly, the changes do not require the substantial understatement to be attributable to the qualified business income deduction. Thus, any taxpayer who claims the deduction will be subject to the lower threshold, even if the understatement on the return is unrelated to the qualified business income deduction.

Conclusion - While the purpose of the deduction is clear, its statutory construction and legislative text is anything but clear. The provision is rife with limitations, exceptions to limitations, phase-ins and phase-out’s, and critical but poorly defined terms of art. As a result, the new law has created ample controversy since its enactment, with many tax advisers anticipating that until further guidance is issued, the uncertainty surrounding the provision will lead to countless disputes between taxpayers and the IRS. Adding concern is that, despite the ambiguity inherent in the law, Congress saw fit to lower the threshold at which any taxpayer claiming the deduction can be subject to a substantial understatement penalty.

Right now is a great time for tax planning and creating an analysis specific to your business to determine if you qualify for the deduction. If you do not qualify for the deduction we can advise you on other options that may be available to you. Please do not hesitate to call us.

The information within this email is an accumulation from many sources; especially, Parker Tax Pro Library and The Tax Adviser April 2018 issue.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2022 Standard Mileage Rates

The standard mileage rates for 2022 are:

• 58.5 cents per mile for business uses;

• 18 cents per mile for medical uses; and

• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2022

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2021 is:

• $56,100 for passenger automobiles, and

• $56,100 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2022 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 18 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,

• on active military duty, and

• moving under a military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,

• state or local government officials paid on a fee basis, and

• performing artists with relatively low incomes.

Notice 2021-2, I.R.B. 2021-2, 478, is superseded.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

Advance Child Tax Credit Payments

The IRS advised families who received advance payments to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return. Taxpayers who received less than the amount for which they're eligible can claim a credit for the remaining amount of Child Tax Credit on their 2021 tax return. Similarly, taxpayers who received more than the amount for which they're eligible may need to repay some or all of the excess payment when they file. Additionally, eligible families who did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the Child Tax Credit when they file a 2021 federal income tax return next year. This includes families who don’t normally need to file a return.

The IRS announced that it would send Letter 6419 in January 2022 with the total amount of advance Child Tax Credit payments taxpayers received in 2021. Taxpayers should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.

Economic Impact Payments and Recovery Rebate Credit

Individuals who failed to qualify for the third Economic Impact Payment (EIP) or did not receive the full amount may be eligible for the Recovery Rebate Credit based on their 2021 tax information. Accordingly, these individuals will need to file a 2021 tax return, even if they do not usually file, to claim the credit. Further, individuals will also need the amount of their third EIP and any Plus-Up Payments received to calculate their correct 2021 Recovery Rebate Credit amount when they file their tax return.

Charitable Deduction Changes

Finally, taxpayers who do not itemize deductions may qualify to take a charitable deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

Audit or Collection

The Service will accept e-signatures during audit or collection for:

• extensions of statute of limitations on an assessment or collection;

• waivers of statutory notice of deficiency and consents to an assessment;

• closing agreements; and

• other statements or forms collected outside standard filing procedures.

The IRS accepts two types of electronic signatures during an audit or collection interaction (1) digital signatures, and (2) imaged signatures. Regarding imaging signatures, taxpayers that do not have a digital certificate may hand sign a document, and then scan or photograph the document and save it in a standard picture format such as JPEG, TIFF or PDF.

Other Forms That Can Be Electronically Signed

Electronic signatures are also allowed through October 31, 2023 for the following forms and purposes:

• Form 11-C, Occupational Tax and Registration Return for Wagering;

• Form 637, Application for Registration (For Certain Excise Tax Activities);

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 706-A, U.S. Additional Estate Tax Return;

• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

• Form 706 Schedule R-1, Generation Skipping Transfer Tax;

• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

• Form 730, Monthly Tax Return for Wagers;

• Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

• Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

• Form 1128, Application to Adopt, Change or Retain a Tax Year;

• Form 2678, Employer/Payer Appointment of Agent;

• Form 3115, Application for Change in Accounting Method;

• Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts;

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees;

• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

• Form 8283, Noncash Charitable Contributions;

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

• Form 8802, Application for U.S. Residency Certification;

• Form 8832, Entity Classification Election;

• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and

• Elections made pursuant to Code Sec. 83(b).

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The guidance applies to employers that:

• paid wages after September 30, 2021,

• either received an advance payment of the credit for those wages, or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021, but

• are ineligible for the credit due to the change in the law.

Advance Payments

Employers that are not recovery startup businesses but received advance payments of the employee retention credit for fourth quarter wages of 2021 can avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns. Failure to repay the advance payment by the due date may result in the IRS imposing failure to pay penalties.

Reduced Employment Tax Deposits

Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the employee retention credit but are not recovery startup businesses will not be subject to a failure to deposit penalty for the retained deposits if they:

• reduced deposits in anticipation of the credit, consistent with the rules in Notice 2021-24;

• deposit the amounts initially retained in anticipation of the credit on or before the relevant due date for wages paid on December 31, 2021, regardless of whether the employer actually pays wages on that date; and

• report the tax liability resulting from the termination of the credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

Failure to Deposit Penalty Waiver

Due to the termination of the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses, the IRS will not waive failure to deposit penalties for employers that reduce deposits in anticipation of the employee retention credit after December 20, 2021.

Reasonable Cause Relief

Employers that do not qualify for relief under this guidance can reply to an IRS penalty notice with an explanation. The IRS will consider reasonable cause relief.

Effect on Other Documents

This guidance modifies Notice 2021-49, IRB 2021-34, 316, and Notice 2021-24, IRB 2021-18, 1122.

The IRS has reminded tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. The IRS has balanced the e-signature option with critical security and protection needed against identity theft and fraud.

The IRS has reminded tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. The IRS has balanced the e-signature option with critical security and protection needed against identity theft and fraud. The Service has informed taxpayers that acceptable electronic signature methods include:

• a typed name on a signature block;

• a scanned or digitized image of a handwritten signature that's attached to an electronic record;

• a handwritten signature input onto an electronic signature pad;

• a handwritten signature, mark or command input on a display screen with a stylus device; or

• a signature created by a third-party software.

The IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as .tiff, .jpg, .jpeg, .pdf, Microsoft Office suite, or Zip. Further, the IRS allows taxpayers and representatives to use electronic or digital signatures on certain paper forms which they cannot file using IRS e-file. The forms are available on the IRS website and through tax professional's software products.

The IRS has also added a new feature this year, which gives taxpayers digital control over who can represent them or view their tax records. The new feature, one of many recent enhancements to the Online Account for individuals, will allow individual taxpayers to authorize their tax practitioner to represent them before the IRS with a Power of Attorney (POA) and to view their tax accounts with a Tax Information Authorization (TIA). Tax professionals may go to the new Tax Pro Account on IRS.gov to digitally initiate POAs and TIAs. These digital authorization requests are simpler versions of Forms 2848 and 8821.

This new digital authorization option will allow the IRS to reduce its current CAF inventory and to focus on authorization requests received through fax, mail or the Submit Forms 2848 and 8821 Online – all of which require IRS personnel to handle. The Security Summit partners remind all tax professionals to review their security measures. IRS Publication 4557, Safeguarding Taxpayer Data (.pdf), provides tax pros with a starting point for basic steps to protect clients. IRS Publication 5293, Data Security Resource Guide for Tax Professionals (.pdf), provides a compilation of data theft information available on IRS.gov, including the reporting processes.

The IRS has reminded taxpayers that they can get extra protection starting in January by joining the Service's Identity Protection Personal Identification Number (IP PIN) program. The IRS has made recent changes to the program to make it easier for more taxpayers to join. The fastest and easiest way to receive an IP Pin is by using the Get an IP PIN tool.

The IRS has reminded taxpayers that they can get extra protection starting in January by joining the Service's Identity Protection Personal Identification Number (IP PIN) program. The IRS has made recent changes to the program to make it easier for more taxpayers to join. The fastest and easiest way to receive an IP Pin is by using the Get an IP PIN tool.

The IRS has urged any IP PIN applicant previously rejected during the identity authentication process to try applying again in 2022. The authentication process has been refined and improved, now enabling many taxpayers screened out in the past to have a better chance of passing the authentication process. Taxpayers are requested to keep in mind these key points about the IP PIN program:

• For 2022, the Get an IP PIN tool is scheduled to launch on January 10. It’s the fastest and easiest way to get an IP PIN. It is also the only option that immediately reveals the IP PIN to the taxpayer. For that reason, the IRS urges everyone to try the Get an IP PIN tool first, before pursuing other options.

• No identity theft affidavit is required for taxpayers opting in.

• The IP PIN is valid for one year.

• Taxpayers should enter the IP PIN on any return, whether it is filed electronically or on paper.

• Anyone with either a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) who can verify their identity is eligible for the IP PIN opt-in program.

• Any eligible family member can get an IP PIN.

• Taxpayers should never reveal an IP PIN to anyone. The only exception is a taxpayer who uses a trusted tax professional to file their return.

There are two options have been made available for people who cannot pass the IRS online identity authentication process. One involves filing Form 15227 and the other requires a visit to an IRS Taxpayer Assistance Center (TAC). Further, for processing year 2022, individuals with an adjusted gross income of $73,000 or less and those married filing jointly with an AGI of $146,000 or less with access to a telephone can complete Form 15227 (.pdf) and either mail or fax it to the IRS. Any taxpayer who is ineligible to file a Form 15227 may make an appointment to visit an IRS Taxpayer Assistance Center (TAC). Anyone using this option must bring two forms of picture identification. Because this is an in- person identity verification, an IP PIN will be mailed to the taxpayer after their visit. To find the nearest TAC, taxpayers can use the IRS Local Office Locator online tool or call 844-545-5640.

The Internal Revenue Service is now allowing taxpayers who have had an offer in compromise accepted by the agency to keep their tax refunds instead of the previous policy of having those refunds applied to their outstanding tax debt.

An offer in compromise (OIC) happens when the IRS and the taxpayer settle past due taxes for an amount that is less than the full amount owed. This typically happens when the agency agrees with the taxpayer that the payment in full will create a financial burden.

"For taxpayers facing an economic hardship, the anticipation of a refund may be the safety pin holding together a family’s ability to meet basic living expenses, especially for taxpayers relying on the Earned Income Tax Credit or the Additional Child Tax Credit that Congress intended for subsistence of low-income taxpayers," National Taxpayer Advocate Erin Collins said in a recent blog post discussing the changes, which went into effect in November. She added that it will also help those who are struggling financially because of the COVID-19 pandemic.

The blog notes that the filing of an amended return could cause the refund to be applied to an existing debt rather than being sent to the taxpayer.

Additionally, the agency announced that certain taxpayers will be able to seek an offset bypass refund while OIC decisions are pending, although taxpayers need to be proactive in contacting the IRS if they want an offset bypass refund, as there is no formal form to request it.

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed "Check Book IRA" was taxable income even though she took the coins as manager of the IRA’s LLC. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed "Check Book IRA" was taxable income even though she took the coins as manager of the IRA’s LLC. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

Background

A husband and wife each established a self-directed IRA and directed assets held in the IRA to invest in a single-member limited liability company (LLC). The wife was the manager of the LLC that her IRA invested in. She directed the LLC to purchase American Eagle coins and took physical possession of the coins. The IRS treated this as a taxable distribution in the year she received physical custody of the coins. The husband directed his IRA to invest in these kinds of coins and a condominium through an LLC. He conceded that he received taxable distributions from these transactions but contested understatement penalties for the failure to report the distributions.

Custody

According to the court, IRA owners cannot have unfettered command over the IRA assets without tax consequences. A qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds.

Penalties

Understatement penalties were imposed even though the Check Book IRA website said that taking possession of the property as manager of the LLC would not be treated as a taxable distribution. The court was skeptical about treating viewing the Check Book’s website as seeking professional advice upon which a reasonable person could rely. The taxpayers did not seek or receive any advice from their C.P.A., who prepared their returns, regarding their self-directed IRAs. They failed to disclose the relevant information to their C.P.A. They were both professionals. They liquidated nearly $750,000 from their existing qualified retirement accounts to invest in a questionable internet scheme without disclosing the transactions to their C.P.A.

The Internal Revenue Service is keeping the pressure on high income taxpayers who do not file their taxes as well as other high wealth taxpayers who may otherwise be hiding their earnings to avoid paying taxes.

And while agents are actively pursuing these people, Darren Guillot, Commissioner of the IRS Small Business/Self-Employed – Collection division said the goal is to avoid as much as possible escalating a case to enforcement proceedings.

His message on November 15 to attendees of the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., was a simple one: "Just tell the truth. We want to get you in compliance. We want you to file on time and pay what you owe. Every case is not criminal. We don’t want any case to be criminal, or enforcement or a seizure."

The Internal Revenue Service is keeping the pressure on high income taxpayers who do not file their taxes as well as other high wealth taxpayers who may otherwise be hiding their earnings to avoid paying taxes.

And while agents are actively pursuing these people, Darren Guillot, Commissioner of the IRS Small Business/Self-Employed – Collection division said the goal is to avoid as much as possible escalating a case to enforcement proceedings.

His message on November 15 to attendees of the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., was a simple one: "Just tell the truth. We want to get you in compliance. We want you to file on time and pay what you owe. Every case is not criminal. We don’t want any case to be criminal, or enforcement or a seizure."

HiDeF Sweeps

To that end, he highlighted some of the activities the agency is engaged in that target high income non-filers, which he defined as earning at least $100,000 in income from a third-party source. The agency is employing data analytics to identify these individuals and are engaging these taxpayers through what is called High Income Delinquent Filer (HiDeF) Sweeps, which began in December 2018.

The analytics identified those who meet the income threshold and had at least three years of unfiled returns. The agency then proceeded with unannounced field visits, though those were moved to a virtual environment because of the COVID-19 pandemic.

Guillot said these personal interactions with agents have been key in collection activities. "It sends a message," he said. "We just want to hear from you. And you certainly are going to hear from us."

He noted that in 2019, there were 9.5 million non-filers and of them, more than 843,000 were high income non-filers. He said the program HiDeF program would be continuing for years to come. For those instances that involve egregious noncompliance and/or potential fraud, the IRS has what is called Operation Surround Sound, a collaboration beween the Office of Fraud Enforcement, Collection and Examination Operations.

These types of cases could involve significantly higher amounts of earned income, as well as foreign holdings and cryptocurrency. And again, Guillot reiterated the advice of "just tell the truth" about what is going on and get back into compliance before it has a chance to become an enforcement action that could entail measures such as levies, asset collections, repatriation of foreign assets and revocation or denial of passports.

Busting Ghost Employers

Guillot also highlighted another target the agency recently began focusing on: ghost employers. These involve employers who provide a W-2 to their employees but do not file the proper forms or pay the money owed to the IRS or the Social Security Administration.

Again, he pointed to the agency’s use of data analytics, which uncovered this scheme, and in a relatively short amount of time, revenue officers were able to help launch a number of criminal investigations. He said the work in this area is going to continue.

Other areas the IRS is focused on include employers who fraudulently applied for COVID assistance to help keep their employees, which he noted that work in this area has stopped hundreds of millions of dollars in payments; tracking transactions of more than $10,000 in cash where no tax returns are filed; and efforts that are focusing on high income earners and under-reporting of income in gig economy segments.

Internal Revenue Service Commissioner Charles Rettig praised the work of agency employees throughout the COVID-19 pandemic but stated that there simply are not enough of them as the agency is slowly working through the backlog the pandemic caused.

Rettig used that as the foundation to call for not only more funding for the agency, but to encourage people to apply for open positions within the agency, especially as it is facing significant employee shortages in the coming years.

Internal Revenue Service Commissioner Charles Rettig praised the work of agency employees throughout the COVID-19 pandemic but stated that there simply are not enough of them as the agency is slowly working through the backlog the pandemic caused.

Rettig used that as the foundation to call for not only more funding for the agency, but to encourage people to apply for open positions within the agency, especially as it is facing significant employee shortages in the coming years.

"I appreciate your patience and understanding and working with us," he said November 16 at the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., acknowledging how challenging it has been for them to be working with the IRS throughout the pandemic.

One issue has been the backlog in mail, which by July 2020, there were more than 20 million pieces of mail stockpiled Rettig said.

An Extreme Spike In Calls Received

He also noted that during the pandemic, the agency has been receiving a significantly higher number of phone calls. By August 2021, the agency received 246 million calls being handled by less than 15,000 customer service representatives. He said that on March 15, the calls were coming in at a rate of 1,500 calls per second. By comparison, the IRS received 42 million calls in 2019 and 44 million calls in 2020.

The average call in 2021 was also four minutes longer than in previous years, he said.

With that in mind, Retting stated that taxpayers and the tax professionals who help them deserve the timely responses they may not be getting, whether by mail or over the phone, because of workplace protocols that make some of these processes challenging and cause delays and issues between departments within the agency.

However, Rettig noted the constraints of working for the government are keeping the agency from expanding as it would simply do if it was a private firm.

"Level of service is an appropriated item," meaning the IRS simply could not hire more people to man the phones or open the mail without getting more money from Congress to do so. "This should help frame up for you the importance of a properly funded Internal Revenue Service."

He also noted that in the next six years, the agency is going to lose 52,000 employees.

"Our rebuild is critical for you and for the country," he said. "If you ever thought about coming to work for the government, no better way to say it than now is the time. You can make a difference."

If You See Something, Say Something

The other clear message he wanted to pass along to attendees of the conference was to be vocal with the agency about what is going on in the field so the agency can continue to improve. Rettig noted his work as a professional CPA prior to taking on the commissioner’s role and how he remains in regular contact with his professional peers from his time in private practice.

"You should be a part of this," he said, emphasizing that he is easily reachable.

But he also mentioned that he has heard tax professionals that he knows complain in public forums about things without bringing it to his direct attention.

"If I know it and I don’t do something, that’s on me," he said. "Continue to help us help others."