The IRS has finally resumed its payments on Employee Retention Credit claims – somewhat. Now buckle in, there is a lot going on here.

The agency put a hold on its processing because of the high number of fraudulent claims it was receiving. And this has not gone away as the IRS plans to deny tens of thousands of improper claims. It also still is not going to process newer claims as it is finding the vast majority of them to be fraudulent.

But there is good news!

Low-risk older returns will start to be processed again, so hopefully some businesses will start receiving these payments again in short time. The moratorium on processing any claims started back in September, so some people have been waiting on this for a while. And thankfully for some of those who have been waiting the longest, the oldest claims generally will be worked on first.

The breakdown of what the IRS is seeing fits a simple scheme. The agency is finding that between 10-20% of claims are in the highest risk group, meaning they are pretty clearly erroneous, and these are the ones that will start being denied. A different 10-20% of the claims are low risk and these are the ones that will start to be paid out again.

So that leaves a large middle 60-70% of claims sitting on ground where the IRS is going to do more investigation to determine the legitimacy of these claims. Will most of these end up paid out? Will most of these be denied? Will most of these receive something but not the full amount of their claim?

At this point the only answer we can give is a shrug.

I think it is important to remember that the moratorium on processing claims began because of a high percentage of fairly open scams. It was impossible to be a business and not receive multiple offers from various groups popping up out of nowhere saying that they can get you money if you let them process an ERC claim. These groups were not doing the proper due diligence to determine eligibility for the credit and even for those businesses that may have been actually eligible, they probably made a larger claim than was legal.

So if you completed your claim with a trusted advisor, at least now there is more hope that you will receive your payment – even if how long this will take is not completely clear. We can be thankful, however, that there is some forward momentum with this again.

Warmly,

Josh Bousquet
Connect to Us ~ Facebook ~ Twitter

We shouldn’t be surprised when the IRS lets us down a little bit. It happens often enough that it often feels it deserves nothing more than a shrug.

Of course, sometimes there are good reasons for the agency’s issues.  Like during the pandemic when fewer people were working in IRS offices, we understood why it was taking a long time for paper tax returns to be processed. Maybe where we went wrong then was feeling some excitement when the backlog was finally extinguished.

Well, that was part of the backlog apparently.

For earlier this month, a report was released by the Treasury Inspector General for Tax Administration that called out the IRS for having more than two million source documents involved in making a tax adjustment that still needed to be properly handled.

Essentially, tax adjustments happen either when the IRS finds an error in a tax return or when a taxpayer submits an amended return.  What has to happen from there, well, it doesn’t seem as streamlined or optimal a process as it should be, as outlined in an article about the situation:

“When a tax adjustment is made on a business or individual taxpayer's tax account, the IRS office that makes the adjustment needs to send all of the documentation supporting the adjustment to one of its tax processing centers, either in Austin, Texas; Kansas City, Missouri; or Ogden, Utah. Then when the adjustment is made, a Form 5147, Integrated Data Retrieval System Transactions Record, is printed at the tax processing center and paired with the source documents supporting the tax adjustment transaction. “

TIGTA also called the IRS out for not having a strategy to handle the 2.6 million documents stuck in this stage. This is along with reporting inaccuracies in the reporting of those document inventories.

So just all told, yeah, things are messy.

And with so much political debate over how much funding the IRS should receive, it is difficult to imagine that the agency’s multiple issues are going to magically fix themselves in the near future. This is simply something we must deal with, though. So let this be another example of how dealing with the agency can be timely and difficult, but it just is what it is.

But you can remain confident we are committed to working with you through it all if you ever need to have more interaction with the agency than you want.

Warmly,

Josh Bousquet
Connect to Us ~ Facebook ~ Twitter

Many people who begin small businesses do it to try to make money out of something they already enjoy doing. That line between when something is a hobby and when it is a business, though, can be a blurry one and it is one that comes with tax implications.

Of course, when something is strictly a hobby, it does not matter for taxes. At that point, what you spend money on and how you wish to spend your time is completely up to you. But let’s say you enjoy knitting, people know this, and you start to sell a few pieces. Have you then become a business?

The biggest line between the two is that a business operates with the expectation of turning a profit. If you craft something for a friend who pays you for the material involved, you are clearly not yet operating as a business. If you start putting up some goods online, though, even if it is just to make enough money to pay for going out to dinner once a month, you may have crossed that line.

Even then, however, the barrier between the two activities doesn’t suddenly become clear. For one thing, just how does your income get reported? In the first scenario above, your friend probably hands you some cash, no one else is ever the wiser, and that’s the end of the story. If you do start selling things online, though, you are probably going to receive a 1099-K at the beginning of the next year that reports what you were paid for goods or services over the past year. And with that, a copy is also going to the IRS, so it has become part of a story that carries over onto your tax return.

Unfortunately, some people do not realize they are crossing the line between hobby and business, and receiving such forms can be a surprise. Hopefully at that point, things have not progressed to a point where the increased tax burden is insurmountable.

If one is prepared for the transition into a business, however, there can be great power there. At that point you can be sure that you keep good records, including tracking the expenses that you have in this business, no matter how small they may be. After all, once you are a business, the expenses for that business may have become tax-deductible.

​Of course, the answers to just what expenses are deductions are not always clear to those who do not know the tax world. But entering that world knowing some are and keeping track of what you have been spending money on is this now-business will give you the power to let it work for you in the best ways possible.

Warmly,

Josh Bousquet
Connect to Us ~ Facebook ~ Twitter

A couple weeks ago, I expressed some surprise in this space that summer was already approaching as we were only a few days away from Memorial Day.  And now that the calendar has turned to June, it is impossible to push off any disbelief about the time of year. And now, with this time of year comes a few things that you may want to be aware of for tax purposes.

First, this is a big time of year for people to get married. So, if you are doing this and it results in a name change, be sure to report that to the Social Security Administration. Additionally, if it results in a change of address, be sure to notify the United States Postal Service, employers, and the IRS, as well. This will help ensure that everything that needs to reach you can do so come tax time.

Also, by the very name itself, this is the time of year for summer camp. If you are sending a kid to one, there may be a tax benefit, so keep any receipts from those payments.

Once kids get a little older, though, this is also a big time of year for part-time work. If this is the only work one does for the year, then there very well may not be any federal withholding tax owed from this money. So maybe it makes sense to fill out new hire paperwork to not have any withheld from one’s paycheck. Either way, though, make sure these workers know about filing a return come tax time. After all, a relatively small amount of effort to complete a return is likely to result in them receiving a refund. And who ever minds receiving money?

Finally, I wanted to mention travel during the summer. Obviously, this is the time of year when many families do a lot of their travel with there being no worries about school. We have heard various stories, however, of people who try to write off vacations as a business expense.  So please remember that, yes, we understand you may have done some work while on vacation, but just because you can answer some emails from the beach doesn’t mean you had to be on the beach to answer those emails. So, let’s be careful about what are business expenses and what are not, and as always, remember we are here to help when such questions arise.

Warmly,

Josh Bousquet
Connect to Us ~ Facebook ~ Twitter