You don’t always need to file an amended tax return to fix an error

While people are often terrified that a simple mistake on their annual federal income tax return will result in an IRS audit, the truth is that minor errors are not uncommon and often easily rectified. In some situations, the IRS would prefer that you don’t file an amended return because the agency will correct minor math errors and either request that the taxpayer pay additional tax or refund an overpayment. However, knowing which situations require an amended return can often trip up taxpayers.

To help taxpayers who believe they may need to file an amended return, we are providing answers to some common questions.

What is an amended return?

An amended tax return is simply a form(s) filed by a taxpayer to correct errors made on a tax return. Most individual taxpayers will use Form 1040-X, Amended U.S. Individual Income Tax Return, to file an amended return.

Form 1040-X can be filed electronically or on paper, but the electronic option is only available for the current tax year and the prior two tax periods. Corrections to older returns must be paper filed. If the amended return corrects a paper-filed return from the current processing year, the amended return must also be paper-filed.

A taxpayer may e-file up to three amended returns per tax year, but any additional returns filed by the taxpayer will be rejected after the third return is accepted.

When should you file an amended return?

An amended return is usually filed to correct errors with the following information provided on the initial return:

• Amount of tax owed

• Reported income

• Number of dependents

• Filing status

• Claimed tax credits or deductions

• Certain claimed deductions affected by legislative changes

An amended return is also used to claim tax relief if the taxpayer was affected by a federally declared natural disaster that changes their tax liability. This is sometimes necessary when the victims of natural disasters must file their federal returns before action is taken to provide them with tax relief.

The IRS also offers a free online tool to help taxpayers determine whether to file an amended return.

When should you not amend?

In most cases, an amended return is not required when the taxpayer discovers a math or clerical error on a recently filed return. The IRS usually finds these errors while processing the return and will send you a bill for any underpayments it uncovers. If the agency determines that you overpaid your taxes due to the error, it will refund the overpayment amount.

How long do you have to amend?

If the amended return will result in a tax refund, the taxpayer must file their Form 1040-X within either three years from the original filing deadline or two years of paying the tax due for that year, whichever is later. Extensions are not included when determining the date the return was due. Still, if the statutory due date falls on a Saturday, Sunday or legal holiday, it must be filed on the first day that is not a weekend or holiday.

For taxpayers not seeking a tax refund, there is no time limit for filing an amended return to correct a previously filed return.

What if I owe the IRS money?

If the amended return shows the taxpayer underpaid their tax due for the year at issue, taxpayers who e-file their Forms 1040-X can make a payment using IRS Direct Pay. Taxpayers who cannot pay the full amount may request a payment plan/installment agreement. A check should be included with the Form 1040-X if paper-filing the form.

Do not make any payments for any interest or penalties you may also owe. The IRS will calculate those amounts and make any needed adjustments.

Should you discover you made a mistake on a previously filed return, a tax preparer can often help. A qualified tax professional understands the rules and regulations that apply to amended returns and can guide you through the process to ensure the amended return is correct and help limit the penalties and interest that may be accruing on any taxes you underpaid in previous tax years.

If you are a tax professional and looking for more information on amended returns, check out our on-demand webinar on filing amended returns for individual taxpayers that will be available beginning in May.

TCJA expiration: what it means for the standard deduction, tax rates and CTC

February 25, 2025

The 2025 tax season is officially in full swing, and if you’re already knee-deep in, you know that uncertainty is at an all-time high. Many taxpayers are not only focused on their 2024 returns, but they’re also looking ahead and wondering how upcoming tax law changes might impact their financial future.

One of the biggest sources of concern is the expiration of key provisions from the Tax Cuts and Jobs Act (TCJA) at the end of 2025. Several taxpayer-friendly benefits will disappear without new legislation, potentially leading to higher tax liabilities.

So, what should tax pros be paying attention to?

The standard deduction: If Congress doesn’t extend the current TCJA provisions, the standard deduction will shrink back to pre-2018 levels, meaning more taxpayers may now itemize.

Individual tax rates: The lower tax brackets introduced under the TCJA are set to expire, meaning clients could face higher tax bills starting in 2026 as rates revert to their pre-TJCA levels.

The child tax credit (CTC): One of the most significant benefits for families, the enhanced CTC could be rolled back, reducing the amount of relief available to taxpayers with dependents.

For tax professionals, now is the time to start conversations with clients about potential planning opportunities. While immediate action may not be necessary, being proactive in discussing what’s ahead can help build trust, minimize surprises, and allow for more strategic tax planning. Here are some charts to help you explain the upcoming changes to your clients. We end with a hypothetical scenario that illustrates the impact of some of these changes.

Standard deduction

The basic standard deduction for 2024-2026 are as follows:

Filing Status

2024

2025

2026 (projected)

Married filing joint (MFJ) and surviving spouse (SS)

$29,200

$30,000

$16,700

Single (S) and married filing separately (MFS)

$14,600

$15,000

$8,350

Heads of household (HOH)

$21,900

$22,500

$12,250

The projected standard deduction would be roughly half of what it is currently. While this could lead many taxpayers to itemize their deductions, for some, their total itemized deductions might be lower than the standard deduction under the TCJA.

Individual tax rates

Below are the marginal tax rates for 2024-2026:

Marginal Tax Rates

2024 and 2025

2026 (revert to permanent pre-TCJA levels)

10%

10%

12%

15%

22%

25%

24%

28%

32%

33%

35%

35%

37%

39.6%

When tax planning, it is important to remember that income tax rates are applied progressively through marginal tax brackets. Each portion of a taxpayer’s income is taxed at different rates depending on which bracket it falls into. Understanding this structure is important, as with planning, one can estimate their tax burden more accurately and explore ways to manage or reduce their taxable income.

Child tax credit

The TCJA’s enhanced CTC rules are still in effect for tax years 2024 and 2025. After tax year 2025, the pre-2018 CTC rules will again apply unless changed by legislation.

Below is a chart that illustrates high-level CTC details for tax years 2024-2026:

Tax Year

Child Tax Credit

Income Phaseout

Other Dependent Credit (ODC)

2024 and 2025

$2,000 per qualifying child

MFJ: the total credit is reduced by $50 for every $1,000 of income (or part of a $1,000) by which the taxpayers’ MAGI exceeds $400,000; $200,000 for all other filers

$500 per qualifying dependent; Same phaseout based on MAGI as $2,000 CTC

2026

$1,000 per qualifying child

$110,000 for MFJ; $75,000 for S, HOH, QSS $55,000 MFS

The ODC will not apply

What will happen in 2026?

The Tax Foundation, a leading nonpartisan tax policy nonprofit, estimates that if the individual provisions of the TCJA are made permanent, about 62% of filers would see a tax reduction, 29% would experience no change, and just under 9% would face a tax increase in 2026. To help tax professionals and their clients better understand the potential impact of these changes, the Tax Foundation has developed an educational tool that allows users to compare the effects of extending or letting TCJA provisions expire.

Hypothetical scenario

Kavya and Nick are typical taxpayers. They are a married couple with two kids under the age of 17 at the end of the year and, therefore, eligible for the CTC. For comparison purposes, we included the 2024 tax year, which would be similar to 2025, except for inflation adjustments. The table below summarizes what their tax situation would look like under the different scenarios.

Line Item

2024

TCJA Made Permanent

TCJA Expires

Adjusted gross income (AGI)

$79,500

$79,500

$79,500

Standard deduction

$29,200

$30,600

$16,600

Personal exemption

N/A

N/A

$21,200

Taxable income (A)

$50,300

$48,900

$41,700

Tax

$5,575

$5,381

$5,043

Child tax credit

$4,000

$4,000

$2,000

Total tax (B)

$1,575

$1,381

$3,043

Marginal tax rate

12%

12%

15% (projected)

Effective tax rate *(B/A)

3.1%

2.8%

7.3%

*The effective rate is the average rate the taxpayer pays on their taxable income. It is calculated by dividing the total tax by the taxable income. The scenario under which the TCJA expires assumes a standard deduction. The results would be different if the taxpayer’s itemized deduction exceeded the standard deduction. Also, the tax brackets widen yearly to keep up with inflation.

As the various scenarios indicate, the CTC reverting to its previous lower amount can significantly impact the total tax paid by families with younger children. While the future of the CTC is uncertain, several proposals are on the table, including the TCJA Permanency Act (H.R. 137), which extends the TCJA’s expiring provisions. If you haven’t yet, join NATP for up-to-date information and updates delivered straight to your email inbox so you can stay focused on serving your clients with excellence.

Tax deductions 101: choosing between standard and itemized

February 18, 2025

Taxpayers can deduct either their standard deduction or itemized deductions from their adjusted gross income (AGI) to calculate their taxable income. The key being one or the other, not both.

The standard and itemized deductions are in essence a layer of tax-free money the government allows taxpayers for cost-of-living expenses. Generally, taxpayers deduct the amount that gives them the lowest tax, which is usually the higher amount. However, there are instances when they are required to use one method over the other.

Standard deduction amounts are set amounts that are increased annually for inflation. The amounts vary by filing status, age and blindness. Taxpayers age 65 or older and/or blind receive an additional amount to add to their regular standard deduction.

For determining age, taxpayers are considered age 65 the day before their birthday. For example, Tillie turns age 65 on Jan. 1, 2026. For tax purposes, Tillie is considered age 65 on Dec. 31, 2025, and is eligible for the increased standard deduction in 2025.

In general, because the standard deduction amounts are known amounts, taxpayers with income levels below their standard deduction generally do not have a filing obligation. Where itemized deductions are not known amounts, causing taxpayers who itemize to have a filing obligation.

For 2025 and 2024 the standard deduction per filing status is:

Description

2025

2026

Standard

MFJ, QSS

$30,000

$29,200

HOH

$22,500

$21,900

S, MFS

$15,000

$14,600

Additional for Age or Blind

MFJ, QSS

$1,600

$1,550

S, HOH, MFS

$2,000

$1,950

Dependents

The greater of:

$1,350 or $450 plus earned income

$1,300 or $450 plus earned income

For example: For 2025, Tillie is 55 and single, her standard deduction is $15,000. If she is age 65 or older her standard deduction is $17,000 ($15,000 + $2,000). If Tillie is also blind, her standard deduction jumps to $19,000 ($15,000 + $2,000 + $2,000).

Itemized deductions are specific personal expenses the IRS allows taxpayers to deduct. They include:

• Medical and dental expenses over 7.5% of AGI

• Taxes paid such as state and local income taxes, sales taxes, real estate taxes, and personal property taxes based on the value of the item

• Mortgage interest paid on two homes, within limits

• Gifts to qualifying charities

• Casualty and theft losses

• Other itemized deductions paid such as gambling losses to the extent of winnings.

Itemized deductions are reported on Schedule A, Itemized Deductions, then carried to Form 1040, U.S. Individual Income Tax Return, Line12. Where the standard deduction is reported directly on Form 1040, Line 12, no other schedule is required.

There are times when taxpayers may be required to use one type of deduction over the other. The most common example of this is when married couples file separately under the married filing separate (MFS) filing status. In these cases, if one spouse itemizes, the standard deduction for the other spouse is $0. Meaning if one spouse itemizes, the other must also itemize. Otherwise, both spouses could use the MFS standard deduction.

Nonresident alien taxpayers who are required to file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, are not eligible to use the standard deduction. Instead, they can use their itemized deductions.

There are pros and cons to taxpayers using either their standard or itemized deductions. The biggest benefit to using the standard deduction is taxpayers do not have to keep track of their itemized deductions unless there are state benefits for doing so. While using itemized deductions generally means a larger deduction causing taxable income to be lower.

The IRS has a tool at its website to help taxpayers determine the amount of their standard deduction. To use this tool taxpayers will need their date of birth, spouse’s date of birth and filing status along with basic income information including amounts and adjust gross income.

The determination to use the standard deduction or itemized deduction for a taxpayer needs to be made on a taxpayer-by-taxpayer basis. What is correct for one taxpayer might not be automatically correct for another taxpayer.

Tax season is not just for filing current year returns

February 4, 2025

Filing prior-year returns is more complicated than it looks, and taxpayers would benefit from the help of a qualified tax pro. During the 2025 tax season, taxpayers and tax professionals will file over 180 million individual and business income tax returns. Most tax filings will be for the 2024 tax year, but tax season is also a reminder to many taxpayers to “catch up with the IRS” if they have not filed all their required prior-year returns.

Each tax season, the IRS receives millions of prior years’ returns from taxpayers getting back into filing compliance with the IRS.

For many reasons, prior-year non-filers need a tax professional to help with filing an accurate return and dealing with potential IRS issues from late filing. 

First, the late filer likely needs prior-year tax knowledge, software and tax forms to file the back returns. Second, they may have to “rebuild” their old tax records and need a tax pro to help them obtain and sort out what is needed to file an accurate return. Lastly, they may fear the IRS and need to know if they are in trouble – especially if they owe on a prior unfiled year.

Tax pros can add their expertise and assistance through six critical actions that will help successfully prepare and file prior year returns:

1. Determine how many back years needed to file. IRS Policy Statement 5-133 generally defines “filing compliance” for individual taxpayers to be the current and past five years of returns. On Jan. 1, 2025, most individual taxpayers must file 2019-2024 returns to be considered “filing compliant” by the IRS. There are several exceptions to this rule, including business taxpayers. However, many taxpayers are very much unaware of this rule and overwhelm themselves (and potentially cause unneeded tax debt) by trying to file many returns that the IRS is not requiring or requesting. Tax pros can confirm what returns are unfiled to avoid filing more or less than what is required by the IRS.
   
   

2. Obtain information from the IRS to help file an accurate return. To identify many income sources, the tax pro can obtain the client’s IRS Wage and Income Transcripts, which report their information returns (W-2s, 1099s, etc.) to the IRS. This step helps the client rebuild their tax records, but it also helps avoid additional IRS scrutiny if the filed return does not match the IRS Wage and Income Transcripts. A discrepancy with the filed return versus IRS reported income information will likely result in IRS inquiries to the accuracy of the return. The IRS can also provide the tax pro any special filing instructions on the late return resulting from IRS non-filing enforcement. The tax pro can contact the IRS to determine if the IRS has started enforcement through the substitute for return process (where the IRS files a return for the taxpayer) or local enforcement. If enforcement exists, specific steps must be taken when filing the return with the IRS compliance unit.
   
   

3. Prepare and file returns, including e-filing if available. Using DIY software to file prior year returns can be very confusing to most taxpayers. In fact, most DIY tax software will not allow taxpayers to e-file prior year returns. Tax pros usually have prior year tax software and knowledge to file an accurate return. If no enforcement is present, they can also e-file the prior two years of returns. The tax pros can also use the unmasked IRS Wage and Income transcripts received from the IRS as a head start to matching the filed tax return with income reported to the IRS.
   
   

4. Confirm IRS acceptance of the prior year return. The common misconception is that once a return is filed, the IRS accepts it. This is especially not true for prior year returns. The IRS screens the returns or accuracy, matching it with the income reported to them for any discrepancies. They also match other items, like proper reporting of Marketplace health care coverage and credits. Prior year returns can also be flagged for potential identity theft or audit. Paper filed back returns can also take several months to process and accept, meaning you need to monitor the returns to acceptance. Tax pros can use transcripts and periodically contact the IRS (Practitioner Priority Service) for the status and reconcile any open issues.
   
   

5. Help with penalty relief. Balance-due, prior-year returns will incur failure to file and pay penalties. Tax pros can evaluate and request first-time penalty abatement or reasonable cause relief for the taxpayer and potentially save them from costly penalties.
   
   

6. Get into an agreement on any balance owed to avoid collection issues. Balance-due filers face the next step: how do I pay? To avoid IRS collection actions such as liens and levies, the taxpayer must pay the balance in full or get into a collection alternative such as an extension to pay, payment plan or a hardship alternative such as not collectible status or an offer in compromise. Here, tax pro involvement is essential to help the client evaluate their best options and avoid IRS enforcement actions.
   
   

Tax season always brings tax professionals opportunities to file back returns for clients. In the 2025 tax season, tax pros should see more prior-year filers than ever due to very low past non-filer enforcement. 

IRS data shows, from 2015-2019, it knew of more than 50 million individuals who had a filing requirement, but did not file a return. The IRS is also aware of tens of millions of unfiled business returns. The IRS is also aware that the non-filing tax gap is growing at an alarming rate. Last year, the IRS restarted non-filing notices, after several years of inactivity. With more enforcement and the growing number of non-filers, tax pros will be called on this season to help their clients with back-returns and get them back into good standing with the IRS.

Tax season 2025 scam alert: text messages impersonating the IRS

January 29, 2025

As the 2025 tax season ramps up, a troubling new scam is targeting taxpayers: fake text messages impersonating the IRS. These fraudulent texts falsely promise economic impact payments (EIPs), also known as recovery rebate credits, in an attempt to steal sensitive personal information. Tax professionals are uniquely positioned to educate and protect clients from falling victim to these schemes.

The scam at a glance

Scammers are exploiting the promise of financial assistance by sending texts that claim to be from the IRS. These messages often include links to malicious websites or requests for personal information, such as Social Security numbers or bank account details. It’s important to remind clients that the IRS never communicates about EIPs or other sensitive matters via text.

“The rise in tax-related scams is troubling, especially when taxpayers are targeted during times of financial uncertainty,” said Scott Artman, CPA, CGMA, and CEO of NATP. “We urge taxpayers to stay vigilant and to consult trusted tax professionals who prioritize accuracy and integrity.”

How to spot an IRS text scam

Encourage clients to watch for these red flags:

• Unsolicited text messages: The IRS does not send text messages for economic impact payments or other tax-related matters.
  
  

• Suspicious links: Any URL that does not end in “.gov” should be treated as suspicious.
  
  

• Requests for personal information: The IRS will never ask for Social Security numbers, bank details, or other sensitive information via text.
  
  

What clients should do if they receive a scam text

Provide your clients with a simple action plan:

1. Do not respond: Reassure clients that ignoring the message is the best first step.
   
   

2. Avoid clicking links: Scammers often use these links to steal information or install malware.
   
   

3. Report the message: Advise clients to report the scam text to the appropriate authorities or the IRS hotline.
   
   

How tax professionals can help

Tax professionals play a vital role in protecting clients from scams by staying informed and sharing best practices. Educate clients about common scams during appointments, include reminders in newsletters, and provide them with resources to verify legitimate IRS communications.

Stay vigilant this tax season

Scams like these can undermine taxpayer confidence and lead to costly consequences. By staying proactive and providing clear guidance, tax professionals can help clients navigate the 2025 tax season safely and with peace of mind. Anyone who receives the message can report it to the U.S. Treasury Inspector General for Tax Administration’s office.

Tax experts weigh in on the impact of the elections on the future of tax

November 19, 2024

Key Takeaways

Business as usual (for now)

The consensus among the panelists was it should be business as usual for the upcoming tax season. Although there are changes on the horizon, the experts agreed that any new tax policies are unlikely to disrupt the upcoming filing season. With the new administration transitioning, significant legislation will likely take time to navigate through Congress. Gray emphasized the importance of the “lame-duck session” – the period after the elections but before the new Congress is sworn in – where the current Congress could pass last-minute bills.

One key proposal to watch is the Smith-Widen bill, which could be passed during the lame-duck session. This bipartisan bill championed by prominent Ways and Means and Senate Finance committees members could impact tax policy moving forward. However, if changes arise that affect current or prior year tax returns, NATP will be ready to update members promptly.

Checks and balances remain

The election’s close results underscore America’s commitment to a balanced government, preventing one party from holding unchecked power. Phillips Erb noted that while Republicans hold the presidency and a narrow Senate majority, the lack of a supermajority (60 votes) in the Senate means tax reforms could use the reconciliation process. If laws are passed using this method, they are temporary (in short the legislation cannot last longer than 10 years).

Qualified business income deduction (QBI) likely to stay

Panelists broadly agreed that the QBI deduction would likely remain intact, albeit with potential modifications. While the deduction provides a substantial benefit to small business owners, it’s been subject to political debate. Gray suggested the deduction may be capped or further targeted to ensure it primarily benefits middle-income earners, but it’s expected to survive any upcoming legislative revisions.

Estate tax exemption: will it snap back?

The panel also discussed the estate tax exemption, which doubled under the Tax Cuts and Jobs Act (TCJA) but is scheduled to revert to pre-TCJA levels after 2025. While some anticipated a gradual reduction, Reynolds speculated the exemption might stabilize around $12 million rather than reverting fully to potentially $7 million. Gray advised against any immediate changes in estate planning strategies, encouraging preparers to “wait and see” as details unfold.

Corporate tax rates and domestic incentives

Corporate tax rates are another area to keep an eye on. While the current rate is set at a flat 21%, there has been mention of dropping this to 20%, or even having a tiered structure based on gross income from the business. Reynolds also mentioned a potential 15% tax rate on U.S.-manufactured goods, intended to incentivize domestic production. For agricultural clients, this would provide an additional advantage, allowing them to retain a larger share of their revenue. However, Reynolds and Gray both advised practitioners to approach this with caution, as it’s still speculative.

State and local tax deduction (SALT)

A prominent discussion point was the $10,000 cap on state and local tax (SALT) deductions, a point of contention since it disproportionately affects taxpayers in high-tax states. Phillips Erb mentioned that bipartisan support exists for modifying or removing this cap, possibly raising the limit to alleviate tax burdens for middle-income earners. However, as Reynolds pointed out, removing the SALT cap could impact revenue neutrality, potentially complicating the reconciliation process. With growing interest from both parties, SALT may be a key area for reform in upcoming sessions.

What this means for tax professionals

The panel advised tax professionals to approach this tax season with a “business as usual” mentality. While significant reforms are possible, they are not imminent. Reynolds recommended that preparers use this time to begin conversations with clients about potential future changes, particularly as we approach the scheduled expiration of TCJA provisions in 2025.

IRS increasing enforcement of gambling income filing requirements

November 18, 2024

After the Treasury Inspector General for Tax Administration (TIGTA) found the IRS has not applied tax filing requirements related to reported gambling winnings, the IRS is beginning to take enforcement actions and conduct a review of the reasons non-filers have not been identified. TIGTA found the IRS has not enforced income tax return filing requirements for the recipients of millions of Forms W-2G, Certain Gambling Winnings, that reported millions of dollars in gambling winnings.

TIGTA reached its conclusions after reviewing all the Forms W-2G issued to individuals during tax years 2018 through 2020 and found 148,908 individuals with gambling winnings totaling $15,000 each who were issued Forms W-2G, but did not file a tax return. In total, these nonfilers were associated with approximately $13.2 billion in total gambling winnings.

Following TIGTA’s review, the IRS analyzed 17,436 high-income nonfilers with a total positive income of $100,000 or more for the 2018 tax year and calculated that it could increase tax revenue by roughly $1.4 billion by addressing 139,045 nonfilers with gambling winnings that were included in the agency’s nonfiler case creation process inventory. The IRS also said it will begin appropriate enforcement actions for nonfilers with gambling winnings for the 2018 through 2020 tax years, including against the top 100 nonfiler cases identified by TIGTA.

The IRS also agreed to review and profile the population of nonfilers with gambling winnings for the 2018 through 2020 tax years that were not identified by the agency’s Individual Master File Case Creation Nonfiler Identification Process (IMF CCNIP). The research will determine potential reasons why nonfiler returns were not identified and assess the current state of the returns to determine whether filing requirements have been satisfied. If a taxpayer has not satisfied the filing requirement and enforcement is applicable, then the Collection or Exam divisions will consider manual enforcement.

While TIGTA found hundreds of the Forms W-2G it reviewed did not include the taxpayer identification numbers (TINs) necessary to trace income to the recipient, the IRS disagreed with TIGTA’s recommendation that it conduct an analysis of forms missing TINs. IRS officials maintained that Forms W-2G that were issued with missing or invalid TINs do not contribute significantly to the tax gap. Additionally, it said the percentage of Forms W-2G filed without TINs were an insignificant percentage of the total annual volume of Forms W-2G it receives.

FinCEN offers additional guidance on BOI reporting

November 12, 2024

The Financial Crimes Enforcement Network (FinCEN) recently updated its list of FAQs to add or revise the answers to 25 questions addressing the filing of beneficial ownership information (BOI) reports. FinCEN’s extensive list of FAQs provides most of the agency’s guidance regarding the required filing of BOI reports.

Entities that meet reporting requirements created or registered with their secretary of state prior to 2024 must file their initial BOI report by Dec. 31, 2024. Those that were created or registered in 2024 have 90 days from the day they received notice they have been created or registered to file their initial BOI report. Beginning in 2025, newly created or registered entities will have 30 days from the date they were created or registered to file their report.

Notable items added to the FAQ include answers to questions addressing the following issues:

Freedom of Information Act

BOI reports to FinCEN are exempt from disclosure under the Freedom of Information Act (FOIA).

Non-attorney third-party submissions and the practice of law

Whether the submission of a BOI report by a third-party service provider that is not an attorney qualifies as the unauthorized practice of law is generally determined by state law. However, nothing in the Corporate Transparency Act (CTA) or FinCEN’s regulations prevent non-attorney third-party service providers from submitting reports on a company’s behalf if they have been authorized to do so.

Number of beneficial owners to report

A reporting company can have more than one beneficial owner who exercises substantial control, has ownership interests or both. There is no maximum number of beneficial owners who must be reported.

Nobody controls more than 25% of the company

FinCEN expects that every reporting company will be substantially controlled by one or more individuals and will be able to identify and report at least one beneficial owner.

Offices “similar” to the secretary of state

For BOI reporting purposes, most businesses are considered to have been created when the secretary of state or similar office has given notice that the creation or registration is effective. However, the term “similar office” is undefined in the statute.

According to FinCEN, a similar office is any office under the law of a state or tribe – including departments, agencies and bureaus – where or through which a domestic entity files a document to be created, or a foreign entity files a document to be registered to do business in the U.S.

Federal agencies are not similar offices.

Multiple beneficial owners

Multiple company applicants or beneficial owners can be added to a beneficial ownership report. The FAQ provides illustrated instructions on how to do that using FinCEN’s website.

Community property states

If both spouses own or control at least 25% of the ownership interest in a reporting company created or registered in a community property state, both spouses must be reported to FinCEN, unless an exception applies.

Corporate conversions

Depending on the law of a state or tribe and the type of entity undergoing conversion, filing for a conversion may result in the creation of a new domestic reporting company.

When the conversion results in a new domestic reporting company, it is required to file an initial BOI report. Additionally, some conversion filings that don’t create a new domestic reporting company may still require the submission of an updated BOI report.

For example, if a company that goes by the name “Company, Inc.” converts to an LLC and changes its name to “Company LLC,” it may be required to file an updated report because it is a change to required information that had previously been submitted.

Changes in jurisdiction

A reporting company must report the jurisdiction where it was originally created. But if it changes jurisdictions, the company must file an updated BOI report. For example, if a company ceases to be incorporated under California law and incorporates under Texas law, it must submit an updated BOI report.

Registering in other states

A reporting company that filed a BOI report based on its creation or registration in one state does not need to file additional BOI reports in connection with filings of secretaries of state or other offices in additional states when the registration only:

1. Authorizes the existing domestic company under the laws of one state or tribe to do business under the laws of another state or tribe

2. Authorizes a foreign reporting company already registered under the laws of one state or tribe to do business under the laws of another state or tribe

Updated or corrected FinCEN identifier information

Information that is used to request a FinCEN identifier (FinCEN ID) must be updated or corrected using a FinCEN identifier application. A FinCEN ID is a unique identification number issued by the agency that is not required but can simplify the reporting process.

Beneficial owners must report any change in the information submitted no later than 30 days after the change occurred. Individuals must correct any inaccuracies within 30 days of becoming aware of the inaccuracy or having reason to know about it. Reporting companies must update or correct their information by filing an updated or corrected BOI report, as necessary.

Changes to voluntary disclosure form show the IRS is imposing stricter requirements

October 27, 2024

The IRS recently made notable changes to Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and its instructions that reflect a stricter approach to enforcement with regard to taxpayers who participate in its voluntary disclosure practice (VDP). The revised instructions released in June and September include more stringent requirements regarding documentation, a mandatory admission that the taxpayer acted willfully, the required disclosure of digital assets and other changes.

The VDP offers taxpayers with previously undisclosed income a way to cooperate with the IRS to resolve their tax issues. If the disclosure is timely and accurate, the IRS will take it under consideration when deciding whether to recommend criminal prosecution. But, the disclosure does not guarantee immunity from prosecution. Because the VDP is not authorized by statute, taxpayers must follow the administrative requirements laid out by the IRS in the instructions for Form 14457 to participate.

Document submission

The updated Form 14457 requires the taxpayer to check a box attesting that they have prepared and hold all required documents to provide to the examiner upon initial contact. The form includes a note stating that failure to check the attestation boxes will result in the immediate denial of a taxpayer’s VDP and that no appeals will be granted.

Previously, Form 14457 included no attestation regarding the required documents. The instructions for that version said taxpayers granted preliminary acceptance into VDP should wait for an IRS examiner to contact them with an initial letter, usually followed by a telephone call. It then listed the documents that may be requested by the examiner.

The documents that are now required include:

• Delinquent or amended tax and information returns

• Statute extensions for all applicable income tax and FBAR years

• Accounting books, records, workpapers and supporting documents

• Bank statements and related account opening documents

• Advice provided by a professional

• Any materials the taxpayer received from a promoter, enabler or facilitator of tax noncompliance

• Full payment of tax, interest and penalties

While the instructions list full payment of tax, interest and penalties as required documents, taxpayers still have the option of claiming an inability to immediately pay all outstanding federal tax liabilities by checking a box on the form. If the IRS agrees the taxpayer can’t immediately pay in full, the taxpayer must work out other financial arrangements with the agency.

Willful actions

The revised Form 14457 also added a check-the-box attestation that the taxpayer’s willful actions led to their noncompliance and that they understand that admitting to their willfulness is a requirement for VDP consideration. The previous version of Form 14457 did not require taxpayers to attest to the willfulness of their actions, but the instructions said taxpayers should use VDP when they have engaged in willful noncompliance.

Digital assets

The provisions addressing digital assets on Form 14457 have been updated and expanded. For example, the disclosure special features checklist in Section 2 of Part I now includes a checkbox for digital asset issues.

Additionally, a schedule of digital assets has replaced the schedule of virtual currency that was in the previous version of the form. The schedule now requests information on a taxpayer’s digital assets that includes:

• Centralized digital asset exchange name

• Transactions recorded on a public blockchain

• Digital asset transactions conducted within an exchange or peer-to-peer transaction

• The dates on which specified digital asset transactions took place

• Information on the buyer of digital assets for transactions conducted within an exchange or peer-to-peer transaction

Other changes to the form

The voluntary disclosure included in the revised Form 14457 now seeks an estimate of both annual unreported income and/or overstated deductions for the disclosure period. Previously, the form only required an estimate of annual unreported income.

When the form is disclosing fraud involving both a corporate officer and the corporation and the corporation is voluntarily making the disclosure, it is now made on a single Form 14457. Previously, when fraud involved both a corporate officer and the corporation, a separate Form 14457 was required for the corporation.

FBAR deadlines postponed for victims of hurricanes Helene, Beryl and Debby, Tropical Storm Francine

October 10, 2024

The Financial Crimes Enforcement Network (FinCEN) has postponed 2023 FBAR filing deadlines for the victims of recent hurricanes and tropical storms. The following deadlines apply for victims with FBARs for the 2023 calendar year that were otherwise due Oct. 15:

• Hurricane Helene victims have until May 1, 2025

• Victims of hurricanes Beryl and Debby and Tropical Storm Francine have until Feb. 3, 2025

Beneficial ownership reporting deadline is fast approaching

September 29, 2024

Barring a federal court intervention, the filing deadline for all businesses created prior to 2024 that are required to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) is Jan. 1, 2025. While an Arkansas federal judge has found the Corporate Transparency Act (CTA) to be unconstitutional and barred the enforcement of provisions requiring the filing of BOI reports, that decision only bars enforcement against members of the National Small Business Association, which filed the lawsuit.

The Arkansas decision has been appealed to the U.S. Court of Appeals for the 11th Circuit. Some have expected that the appeals court would find that FinCEN has no power to enforce the CTA’s BOI provisions before the reports are due (or at least postpone reporting), but the court has given no indication that it will act before the deadline. As a result, unless they have otherwise been exempted from the reporting requirements by the Arkansas court decision, all businesses that are required to file a report under the CTA should plan on doing do so by Jan. 1, 2025. The civil penalty for reporting violations can be as high as $591 per day.

Who must file a report?

The CTA mandates that BOI reports must be filed with FinCEN by entities created by filing with a secretary of state or similar office in the U.S. This includes S corporations, C corporations and limited liability companies. Sole proprietorships and general partnerships are usually not required to file BOI reports unless they were created by filing a document with the secretary of state or similar office. Foreign companies formed under the laws of other countries must file if they registered to do business in the U.S. by filing with a secretary of state or similar office.

All reporting businesses that were created or registered to do business prior to Jan. 1, 2024, must file a BOI report with FinCEN by Jan. 1, 2025. After the initial report has been filed, there is no annual reporting requirement. Reporting companies need only file additional BOI reports when the included information needs to be updated or corrected.

Companies that were created or registered during 2024 must file their initial BOI report with FinCEN within 90 calendar days of receiving actual or public notice that their registration is effective. Those reporting companies that were created or registered on or after Jan. 1, 2025, will have 30 days to file their report after receiving actual or public notice that their creation or registration is effective.

If you have any questions about which companies are required to file a report, FinCEN maintains an extensive list of FAQs that answer questions related to the filing requirements, including the situations in which entities like homeowners’ associations, nonprofits and business trusts must file.

What must be reported?

Companies that are subject to the CTA’s BOI reporting requirements must identify their beneficial owners whose information must be reported. Generally, reporting companies must provide the following information about their beneficial owner:

• Name

• Date of birth

• Address

• Identifying number and issuer from a U.S. driver’s license, U.S. passport or an identification document issued by a state, local government or Native American tribe. If the beneficial owner has none of those documents, an unexpired foreign passport may be used.

The reporting company must also provide information about itself, such as its name and address.

Who is a beneficial owner?

A beneficial owner must be an individual. The beneficial owner who must be named in a BOI report is a person who either directly or indirectly:

• Exercises substantial control over the reporting company

• Owners or controls at least 25% of the reporting company’s ownership interests

Legal entities, such as trusts or corporations, can’t be beneficial owners. However, in specific circumstances, information about an entity may be reported in lieu of information about the beneficial owner.

Beware of BOI reporting scams

FinCEN has issued an alert to notify the public that it has received reports of fraudulent attempts to solicit information from individuals and entities that may be subject to BOI reporting requirements. Reported scams include:

• Correspondence seeking payment. There are no fees for filing a BOI report directly with FinCEN and the agency does not send out correspondence requesting payment for filing a report.

• Emails or letters asking the recipient to click on a URL or scan a QR code. FinCEN is warning individuals that they should not click on any suspicious links or attachments on websites or unsolicited mailings.

• Correspondence referencing “Form 4022” or an important compliance notice. FinCEN does not have a Form 4022, and any forms included in this correspondence are fraudulent and should not be completed.

• Correspondence or other documents that reference the “U.S. Business Regulations Dept.” There is no government entity with that name.

Presidential tax policies: what’s on the ballot in 2024

September 25, 2024

There is no hiding; we are in an election season. Social media, cable news outlets and print news mediums are abuzz with a continuous stream of 2024 presidential election content on an array of topics (some trivial and others particularly important). However, one such area that is highly relevant to selecting a U.S. president is the area of tax policy. With this in mind, now is the time to best understand the tax policy positions of each candidate.

In the upcoming live (free!) webinar Tax Policies of the Presidential Candidates, an expert panel of Wolters Kluwer tax experts will speak on this very important subject.

Pressing tax matters at hand

In the last election of 2020, there were few tax policies at play between the two presidential candidates. That is not the case this time around. Due in part to the use of the budget reconciliation process in passing the Tax Cuts and Jobs Act of 2017 (TCJA), much of President Trump’s signature legislation comes with a built-in sunset date of 2025.

Only a small part of the TCJA is permanent. So, whoever wins the presidency this November will be tasked with working with Congress to decide what aspects of TCJA will be permanent versus what will regress back to the standards eight years ago.

TCJA deadlines in focus

With many TCJA sunsetting deadlines fast approaching, consumers will surely be calling/emailing/texting their respective tax pros shortly after election day for guidance on impacted areas such as:

• Individual taxation rates – Is change inevitable for the current TCJA tax brackets of 10, 12, 22, 24, 32, 35 and 37%?

• Capital gains/dividends – Will the TCJA capital gains rates of 0, 15, and 20% for capital gains and qualified dividends (based on individual status) change?

• Taxation of tips – What do each of the presidential candidates promise in this gig economy focused area of the economy?

• Social Security taxation – Will seniors have a reason for optimism in 2025?

• Child tax and earned income tax credits – Can taxpayers expect to retain or see increased credits related to these areas?

• Corporate tax rates – Will businesses that enjoyed the low 21% rate over the last eight years be in for a pleasant or unpleasant surprise as we enter 2025?

• Estate taxes – Will the double exclusion amounts for both estate, gift and generation-skipping transfer tax continue?

• International taxation – Where does each candidate stand on U.S.-connected income as well as industry specific tariffs (which are the primary forms of taxing foreign businesses)?

While the abovementioned areas (most of which are related to TCJA sunsetting provisions) are front and center on the minds of tax pros, they do not account for new proposals floated by each candidate over the last few weeks.

Be prepared for each presidential outcome scenario

In summary, as the campaigns of each candidate wind down, one will have to wait to learn which of the above-mentioned outcomes are most likely to occur. However, one does not have to stand still. 

IRS restarting processing of some ERC claims

August 26, 2024

After a nearly year-long pause to address its issues with processing employee retention credit (ERC) claims, the IRS has begun processing some claims filed after Sept. 14, 2023. The IRS also plans to begin the payment process for 50,000 claims in September. However, the IRS isn’t lifting its moratorium on the processing of new ERC claims. Instead, the agency is “shifting” the moratorium period to allow for the processing of claims filed between Sept. 14, 2023, and Jan. 31, 2024.

The IRS will focus its attention on claims at the highest and lowest risk of being incorrect when it begins processing its next batch of claims. As a result, the IRS will begin taking actions on claims from that time period where the agency has sound reasons for either paying or denying the claim.

In addition to beginning payment on claims for the first time since the moratorium was implemented, the IRS is continuing to take action against taxpayers who submitted improper or incorrect ERC claims. In recent weeks, the agency sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect. The disallowances will prevent an estimated $5 billion in improper ERC payments. The IRS is also undertaking thousands of audits related to ERC claims and has initiated 460 criminal cases related to improper claims.

For those taxpayers who submitted improper or incorrect ERC claims and have already received refunds, the IRS has reopened its ERC voluntary disclosure program. Taxpayers with improper claims that have not been processed may still withdraw their ERC claim.

A new stage of ERC processing

To counter the flood of erroneous ERC claims the agency was receiving following aggressive marketing campaigns targeting ineligible taxpayers, the IRS imposed a moratorium on processing claims submitted after Sept. 14, 2023. The moratorium gave the IRS time to digitize the information on a group of ERC claims it was studying. The information needed to be digitized because ERC claims were paper filed.

The IRS’s analysis of the digitized claims helped inform the next steps it planned on taking by providing information to improve the accuracy of ERC claims processing going forward. This detailed review allowed the IRS to move into a new stage of the program where it will be issuing more taxpayer payments and disallowances. The agency said it will continue working with tax professionals to help them navigate the complex process on behalf of their clients.

Appealing denied claims

Businesses that have had their ERC claim denied by the IRS can file an administrative appeal with the agency or file a federal court claim. Administrative appeals are filed by responding to the address listed on the denial letter within the stated time period, usually 30 days from the date of the letter. Additional information on filing an administrative appeal is available on the IRS’s website.

Some recent denial letters inadvertently omitted the paragraph highlighting the process for filing an appeal to the IRS or federal court, and the agency is taking steps to ensure that a letter explaining the correct process is mailed to all relevant taxpayers. Regardless of the language in the notice, those taxpayers who’ve had their ERC claims denied are entitled to an administrative appeal.

IRS says few claims denied by mistake

The agency said it is aware of the concerns tax practitioners have raised concerning potential IRS errors when denying properly filed ERC claims and plans on working with taxpayers to correct any mistakes. The agency is evaluating the results of its first significant wave of disallowances in 2024 and determined that errors are relatively rare and that more than 90% of disallowance notices were validly issued.

The IRS is continuing to monitor the feedback it is receiving from the tax community regarding invalid claims and will make any adjustments necessary to minimize the burden on businesses and their representatives. Specifically, the agency will be adjusting its process and filters for determining whether ERC claims are invalid following each wave of disallowances.

IRS continuing compliance work

The IRS is continuing its analysis of ERC claims, increasing the number of audits and pursuing promoter and criminal investigations. In addition to the latest wave of disallowance letters, the IRS has pursued other initiatives, which have generated the following results:

• ERC claim withdrawal program is ongoing, and has led to more than 7,300 entities withdrawing $677 million in claims

• First ERC voluntary disclosure program ended in March (it recently reopened) and the IRS received more than 2,600 applications from ERC recipients disclosing $1.09 billion in credits

• Criminal Investigations unit has initiated criminal cases related to potentially fraudulent claims totaling nearly $7 billion. So far, 37 investigations have resulted in federal charges, with 17 resulting in convictions and nine defendants have been sentenced to an average of 20 months in prison

• IRS’s Office of Promoter Investigations has received hundreds of referrals related to suspected abusive tax promoters and preparers improperly marketing the ERC to ineligible taxpayers. The IRS is continuing to gather information and will continue its civil and criminal enforcement efforts with regard to these unscrupulous promoters and preparers

While the ERC voluntary disclosure program closed in March, the IRS said it is planning to reopen the program and will soon be releasing additional details.