Submitting Form 2848 to the IRS Online

The IRS now allows taxpayer representatives to submit Forms 2848 and 8821 online. Any taxpayer representative with an IRS e-Services account can use their e-Services credentials to log on to the new online submission portal. If you don't have an e-Services account, you can sign up for the submission portal at this link.

The IRS requires that all 2848 forms mailed or faxed have a wet-ink signature, but now the IRS will accept electronically-signed 2848s, as long as proper procedures are followed and the forms are submitted electronically through the new submission portal. Below is an acceptable process that a taxpayer representative can follow to remotely obtain and submit a Form 2848 online for an individual taxpayer:

1. Request that the taxpayer electronically provide a copy of their photo ID and the first page of their tax return.

2. Complete IRS Form 2848 with the name, address, and social security number you have received and verified and electronically send the Form 2848 to the taxpayer for signature.

3. Schedule a video conference to verify the taxpayer's identity and their receipt of the Form 2848 and coordinate the taxpayer's signing and and electronic return of the Form 2848.

4. Log into the new IRS online submission portal, answer the questions the portal presents, and upload the appropriate form.

The submission portal provides the option of submitting a Form 2848, Form 8821, or a revocation of an existing authorization. On the next screen, you will be asked if the taxpayer electronically signed the form in a remote transaction (meaning anything not in person). You will then be asked to declare that you "have authenticated the identity of the taxpayer on line 1 of the form or have personal knowledge of the taxpayer’s identity." If you click "no" to this question, you will be logged out, so be sure to authenticate the taxpayer's identity before logging in.

After stating whether the taxpayer is domestic or international, you will input the social security number of the taxpayer and upload the signed Form 2848. Once the file is attached, click "submit." You will receive an email confirming that the form will be processed in the order it was received and recommending that you not submit a duplicate form via mail or fax. The IRS's new online form submission portal is an appropriate and helpful development for a social-distanced world.

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2020 Filing Deadline for Calendar Year Partnerships

As part of its response to COVID, the IRS issued a series of notices, culminating with IRS Notice 2020-23, 2020-18 IRB (April 9, 2020), which generally extended the deadline to file tax returns and pay taxes to July 15, 2020. Pursuant to the Notice, any person with "a Federal tax return or other form filing obligation specified in this section III.A..., which is due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described" in that section. Such "affected taxpayers" are entitled to the relief of the extended deadline.

The notice goes on to specify that the "filing obligations specified in this section III.A" include "[c]alendar year... partnership return filings on Form 1065, U.S. Return of Partnership Income...," which absent the Notice would normally be due on March 16, 2020. According, the Notice creates an ambiguity: Is the due date for calendar year partnership returns extended to July 15 because "calendar year partnership return filings" are specifically included on the list of specified federal form filing obligations entitled to relief, or does the due date for such returns remain at March 16 because they are not due on or after April 1, 2020? This ambiguity was noted shortly after the Notice was issued.

Unofficially resolving this ambiguity, the IRS website currently states, "Notice 2020-23 does not postpone any return filings that were due on March 16, 2020. If a fiscal year partnership or S-corporation has a return due to be filed on or after April 1, 2020, and before July 15, 2020, that filing requirement has been postponed to July 15, 2020." The website does not specifically mention "calendar year partnerships" like the Notice does.

As a practical matter, most partnership tax returns would have had extensions filed before March 16, 2020 anyway because the IRS guidance wasn't issued until after that due date. However, if an extension was not filed for your partnership's return, there is a good argument that binding guidance from the IRS granted an automatic extension to July 15, 2020.

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Tax Credits for Paid Leave under FFCRA

The Families First Coronavirus Response Act (FFCRA) generally requires employers to provide up to two weeks of paid leave at regular pay rates for employees who can't work due to being sick with coronavirus, up to two weeks of paid leave at two-thirds of regular pay rates for employees who can't work due to a family member being sick with coronavirus, and up to ten weeks of paid leave at two-thirds of regular pay rates for employees who can't work because a child's school or child care provider is unavailable. Fortunately, all of an employer's costs for this qualified sick leave is designed to be offset by payroll tax credits.

By way of background, employers are required to withhold estimated employees' income taxes and payroll taxes (Social Security and Medicaid) from employees' paychecks and then match the payroll tax withholding and remit all of such funds to the IRS on (usually) a quarterly basis. The credit for paid leave under the FFCRA offsets the employer's portion of payroll taxes. However, the credits are refundable, meaning that if the qualified sick leave paid in respect of employees impacted by coronavirus exceeds the employer's portion of payroll tax for all employees, the employer will receive a refund from the IRS.

Regulations and forms for these new tax credits will be forthcoming. The most interesting aspect of these tax credits is that employers will apparently be able to retain income taxes withheld and both the employer's and the employees' share of payroll taxes up to the amount of qualified sick leave, rather than deposit such withholdings with the IRS and seek a refund. As I discussed in a prior post, these withholdings are considered to be held in trust for the IRS, and individuals who do not remit such taxes to the IRS will be personally liable for the entirety of such taxes. As such, employers should not utilize this method of reimbursement for qualified sick leave they pay without maintaining very careful records and waiting until final guidance is issued by the IRS. Trust fund taxes must never be used to cover any other expense.

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Fixing Problems with Online IRS EIN Applications, Third Edition

This post is my third installment about fixing rejected online EIN applications submitted on the IRS's website. Consider the following potential causes:

Every EIN application requires a responsible party name and matching tax ID number. "Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity." Previously, it was possible for an entity that had not obtained its EIN online to be the responsible party for a new entity's online EIN application. This is no longer the case, and any attempt to obtain a new EIN using a business as the responsible party will result in an error.

The IRS will only issue an EIN to one responsible party per day. This limitation applies to all requests for EINs, whether through the online EIN application or by fax or mail. If an EIN has been issued to any entity by any application method on a particular day, the responsible party on that EIN application must wait until the next day before being the responsible party on another EIN application.

A rejected EIN application indicating Reference Number 101 has a name conflict. The IRS requires a unique entity name before it will issue an EIN, similar to how the secretary of state requires a unique entity name within that state before Articles or Certificates of Organization may be successfully filed. However, because the IRS is a federal agency issuing EINs for entities in all 50 states, it potentially checks for duplicate entity names across multiple states. There are numerous references to a state on the online EIN application, such as the physical location state, mailing address state, and the state where the Articles are or will be filed.

If all of these state references are the same, the IRS will only check for previously-issued EINs with that entity name in that one state. If multiple states are reported, for example, if the Articles were filed in a different state than the business's physical address, the IRS will check both states for name availability before issuing an EIN, even though filing the Articles only requires a unique entity name in the one state where the Articles are being filed. In the past, it was possible to obtain an EIN over the phone in the case of a name conflict; however, the IRS no longer issues EINs over the phone.

Reference numbers 102, 103, 105, or 108 indicate that the name and tax ID number of the responsible party do not match IRS records. Reference number 104 means a third-party designee's contact information cannot be the same as the address or the phone number of the entity that is applying for an EIN. Reference numbers 109, 110, 112, or 113 mean that the online application is temporarily unable to assign EINs; try again later. Reference number 114 indicates that only one EIN will be assigned per day per responsible party. Reference number 115 indicates that the social security number listed for the responsible party is associated with someone who is deceased.

Reference Numbers 109 and 110 indicate technical problems and an EIN may still be obtainable using the exact same information that resulted in the error. The error might result from too many people trying to obtain an EIN at the same time. Try again later, or try closing and reopening the browser, using a different browser, using a different computer, clearing cookies, restarting the computer, or adjusting your security settings. Or, feel free to contact me; I would be happy to try and help.

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Introduction to Qualified Opportunity Funds

The 2017 Tax Cuts and Jobs Act added sections 1400Z-1 and 1400Z-2 to the Internal Revenue Code. The former provides for the designation of certain low-income communities as "qualified opportunity zones," and the later provides certain incentives for investment in such QOZs. IRS Notice 2018-48 provides a full list of population census tracts designated as qualified opportunity zones; investments within these zones can qualify for the new tax incentive.

The tax incentive permits a taxpayer who has realized a capital gain from the sale of property to an unrelated person to invest all or part of the gain amount into a "qualified opportunity fund" within 180 days of the realization event and elect to defer paying tax on the gain amount so invested. The deferral lasts until the earlier of (a) the date that the taxpayer sells the QOF investment or (b) December 31, 2026.

In addition, if the taxpayer holds the QOF investment for at least five years, ten percent of the deferred gain is permanently excluded from taxation, and if the taxpayer holds the QOF investment for at least seven years, a total of fifteen percent of the deferred gain is permanently excluded from taxation. Finally, if the taxpayer holds the QOF investment for at least ten years, all post-acquisition gain on the QOF investment can be permanently excluded from taxation.

A QOF is an entity organized as a corporation or a partnership for the purpose of investing in QOZ property. Such an entity uses IRS Form 8996 to initially certify that it is organized to invest in QOZ property as well as annually report that it meets the investment standards. Generally speaking, a QOF must hold 90% of its assets in QOZ property or pay a penalty. This tax incentive is a new and important opportunity for many taxpayers with capital gains.

See Maule, 597-2nd T.M., Tax Incentives for Economically Distressed Areas; Qualified Opportunity Zones.

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Creating Individual Inherited Retirement Accounts from a Trust Account

As I discussed in a previous post, a trust may be named as the beneficiary of a retirement plan upon the plan owner's death. There are complications and disadvantages of doing so, but there are potentially important reasons to name a trust as a retirement plan beneficiary. For example, naming a supplemental needs trust created for an individual with special needs as a retirement plan beneficiary, instead of the individual, will prevent the individual from ceasing to qualify for means-tested public assistance due to inheriting the retirement account.

Upon the termination of the trust that is the named beneficiary of a retirement account, any amounts remaining can be passed to the remainder beneficiaries of the trust intact, meaning in a manner that is not treated or reported as a taxable distribution from the retirement account. Instead, the transfer is treated as a plan-to-plan transfer to individual accounts established for the remainder beneficiaries of the trust.

In my experience, the custodian of the retirement account often requests a reference to legal authority that would allow the transfer of the retirement account from a trust account to separate account(s) in the individual name of the trust beneficiaries. IRS private letter ruling 200750019 is one such authority wherein the IRS permitted a trust that was a retirement plan beneficiary to be bypassed and separate, inherited IRA accounts established for the trust beneficiaries. While not binding, this ruling indicates that the IRS regularly permits this practice and can help assure a custodian that this practice is permissible.

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Introduction to Forming a 501(c)(4)

In a prior post, I introduced how to form a 501(c)(3) charitable organization. This post introduces how to form a 501(c)(4) organization. Such organizations must be operated exclusively to promote social welfare, or further the common good of the community. This encompasses a much broader range of permissible activities than those in which charities may engage, but the trade off is that contributions to a 501(c)(4) do not qualify for a charitable deduction as do contributions to charities. Another difference is that a social welfare organization, unlike a charity, can have lobbying, or attempting to influence legislation, as its primary activity; it may not, however, have influencing elections as its primary activity.

The first step in establishing a 501(c)(4) organization is to create a legal entity under state law. While a trust and a limited liability company can be used, it usually makes the most sense to form a nonprofit corporation. After the legal entity is formed, the organization's directors need to appoint officers, adopt bylaws, and apply for an employer identification number. While a 501(c)(4) organization is not required to file an exemption application (historically, such applications were submitted on Form 1024, but they are now submitted on Form 1024-A), it must notify the IRS within 30 days of formation of its intent to operate as a Section 501(c)(4) organization by electronically filing Form 8976.

A few final steps and ongoing requirements are worth noting. Prior to soliciting the public for donations, the organization will need to ensure that it has completed the charitable solicitation registration process that most states require. The organization will also need to file some version of IRS Form 990 each year; small social welfare organizations can file the 990-N postcard version online. Social welfare organizations that collect membership dues must notify anyone who pays a membership due of the amount that is attributable to lobbying and which cannot therefore be taken as a business deduction. Finally, the organization will need to ensure that it keeps its corporate entity in good standing, typically by filing an annual report with the state.

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How Certain Organizations Can Self-Declare Tax-Exempt Status

There are dozens of tax-exempt organizations under the Internal Revenue Code; the IRS has a list of these on its website, along with the application form that each one files (usually Form 1023 or Form 1024). However, most of these organizations are not actually required to submit an exemption application to the IRS: "[Certain] organizations may self-declare their tax exempt status by operating within the requirements of the applicable code section and filing the required annual returns or notices." In other words, the tax-exempt status of a new organization can often be established simply by filing its first tax return.

Self-declaration is available to cooperative associations, social and recreation clubs, and business leagues, to name a few of the more popular ones. A 501(c)(9) and 501(c)(17) organization may not self-declare. While a 501(c)(4) organization is still not required to file an application (historically with Form 1024 but now with Form 1024-A), a 501(c)(4) can no longer simply self-declare by filing the first tax return. In a future post, I will describe how to form a 501(c)(4) organization. Finally, some 501(c)(3) organizations do not need to file an application or self-declare, whereas all others with gross receipts in excess of $5,000 generally may not self-declare and must apply for exemption.

Self-declaring tax-exempt status has its downsides, most notably that the organization will not receive a determination letter from the IRS. This means that, among other things, the organization will not be publicly recognized as tax-exempt and may not be able to qualify as exempt from certain state taxes. If a self-declared tax-exempt organization does not operate within the requirements of the applicable section of the Internal Revenue Code, it could be vulnerable to an audit by the IRS. Thus, another significant benefit of formally applying for tax-exempt status is giving the IRS notice of how the organization intends to operate and providing an opportunity for the IRS to notify the organization that it is not operating as required by the Code.

Establishing tax-exempt status by self-declaration is generally only advisable for small organizations, such as those eligible to file the Form 990-N (e-Postcard) version of the Form 990. After forming a nonprofit entity under state law and obtaining an EIN from the IRS, a representative of the organization must call the IRS at 877-829-5500 and ask that the organization be allowed to file Form 990-N and then file the form. This is all that is required for a small, eligible organization to be classified as tax-exempt.

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Introduction to Forming a 501(c)(3)

While there are many different types of organizations that are exempt from federal income taxation, the best known is the 501(c)(3) organization. There are also many different types of 501(c)(3) organizations, which I summarized in a prior post. By default, a 501(c)(3) organization is a private nonoperating foundation unless it can qualify as a public charity by, for example, achieving certain levels of public support. Anyone can form a public charity, and many have chosen to do so in recent years.

The first step in establishing a 501(c)(3) organization is to create a legal entity under state law. While a trust and a limited liability company can be used, it usually makes the most sense to form a nonprofit corporation. Such an entity must have a charitable purpose that is recognized as such by the IRS; this link contains a description of the exempt purposes for which an organization can be organized and achieve 501(c)(3) status.

After the legal entity is formed, its directors need to appoint officers, adopt bylaws and a conflict of interest policy, and apply for an employer identification number. The next and most difficult step is completing IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and the accompanying exhibits. This step in particular is the one where it makes the most sense to work with an adviser who is familiar with nonprofit organizations because the IRS will scrutinize the exemption application.

Once the application for exemption is approved, the IRS will send a determination letter notifying the organization that it is exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code and that donors can make donations to the organization and take a federal tax deduction for such donations. A copy of Wikimedia Foundation's determination letter appears on the right.

A few final steps and ongoing requirements are worth noting. Prior to soliciting the public for donations, the organization will need to ensure that it has completed the charitable solicitation registration process that most states require. The organization will also need to file some version of IRS Form 990 each year; small charities can file the 990-N postcard version online. Finally, the organization will need to ensure that it keeps its corporate entity in good standing, typically by filing an annual report with the state.

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Alert: Fixing Problems with Online IRS EIN Applications

This post is an update to a prior post, with updated information about fixing rejected online EIN applications submitted on the IRS's website. Apparently, the IRS no longer allows entities to be the responsible party for an EIN application. According to the latest instructions for IRS Form SS-4, "Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity."

Previously, it was possible for an entity that had not obtained its EIN online to be the responsible party for a new entity's online EIN application. In recent months, I have become aware that many IRS online EIN applications are resulting in an error page that doesn't include a reference number. The cause of this error page could be identifying an entity as the responsible party. Unless you are a government entity, you'll need to list an individual with a social security number as the responsible party for all online IRS EIN applications. Thanks to Joel in New Jersey for bringing this to my attention.

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More Guidance on IRS Online EIN Applications

The owner of a new business entity can obtain an Employer Identification Number online from the IRS at no charge; in a previous post, I described how to resolve error codes in the online EIN application form. Alternatively, the owner can complete IRS Form SS-4 and submit the form to the IRS so that an IRS agent can assign the EIN. Finally, the owner of a business can enlist the assistance of someone else to obtain an EIN on his or her behalf; such person is known as a "Third Party Designee."

Before a Third Party Designee can obtain an EIN number, he or she must have an IRS Form SS-4 signed by the business owner with the Third Party Designee section completed. This authorizes the designee to receive the entity’s EIN and answer questions the IRS may have about the completion of the form. The requirement that the designee have a completed Form SS-4 signed by the business owner applies regardless of whether the designee is submitting the Form SS-4 to the IRS or applying for the EIN online; however, the designee will not need to actually produce the Form SS-4 if the online application process is utilized.


According to the IRS, a designee who has a signed SS-4 and intends to obtain an EIN online for the business owner must also have the taxpayer sign an additional statement: "The taxpayer must read and sign a statement that he/she understands that he/she is authorizing the third party to apply for and receive the EIN on his/her behalf, and answer questions about completion of the form. A copy of the signed statement must be retained in the third party's files." This additional statement is clearly in addition to the SS-4, because the designee must certify in the online application process as follows: "The taxpayer has completed and signed a Form SS-4, including the TPD Section and has read and signed a statement authorizing me to apply for and receive an EIN on his/her behalf. I have retained copies of both documents in my files."

Oddly, the Form SS-4 instructs the business owner to complete the Third Party Designee section if they "want to authorize the named individual to receive the entity’s EIN and answer questions about the completion of this form." It is difficult to see what additional benefit arises when the business owner signs the additional statement because it is substantially similar to a statement already appearing on the SS-4. The requirement for the additional statement only arises if the designee is utilizing the online application process, but the additional statement isn't even required to expressly state that the online application process will be used. Nevertheless, these two documents are what a third party designee is instructed by the IRS to obtain and retain in their files.

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Recognizing an IRS Impostor Scam

In a previous post, I discussed a scam whereby a person purporting to be an IRS agent calls demanding immediate payment of past-due taxes. In this post, my hope is to provide additional insight into how to recognize these scams by reproducing a transcript of an actual phone call to an IRS impostor. The target of the scam in this case was instructed to call 479-935-1612; I am also aware of a scam involving phone number 512-212-1838. The transcript begins when the target returns the call:

JS: Internal Revenue Service, how can I help you?

WC: Yeah, I got a call that said I have to call this number or I'll be arrested.

JS: Alright, and when did you receive this call?

WC: Uh, just a half hour ago.

JS: On this very same number?

WC: Yep.

JS: Can you please confirm for me your first and last name?

WC: Wayne Curley.

JS: Williams Curley?

WC: No, Wayne Curley.

JS: Alright, alright; and can you please confirm for me your area's zip code?

WC: 36608.

JS: 36608, correct?

WC: Yeah.

JS: Alright, now do you have a piece of pen and paper?

WC: Yes.

JS: I want you to take a piece of pen and paper and write down some information. My name is officer Jack... my name is officer Jack Smith and my badge ID number is IRM11010. 11010.

WC: K.

JS: Now, I will go ahead an read out the legal charge against your name, so while I'm speaking do not interrupt me. I will give you a fair time to speak once I am done, alright?

WC: Alright.

JS: We conducted an audit in your tax return for a term of last five years, and we found out that there was a numerical miscalculation error in your tax return, and the return in your file does not match the record that we have. So, according to the section 26 U.S. Code 6651 there is an outstanding amount left for you to pay. Failure to do so will result in your arrest. You will be taken into federal custody as an arrest warrant has been already issued in your name. Your travel will cease and all of the property that is in your name will be seized and even your bank account will be totally frozen, and you will be in federal imprisonment without appeal for a minimum of five years. Now, the total outstanding amount in your name which you owe to the Internal Revenue Service that is 4,987 dollar. So, Mr. Wayne, have you done this intentionally or was it by mistake?

WC: Definitely a mistake.

JS: So, at this point of time do you have an attorney ready to fight in your defense? Because you will be summoned to the United States Tax Court in Washington DC in a matter of 48 hours and the second option is that you can resolve this case outside the court house. So that is your decision because we are not here to force you, we are not here to convince you, we are just here to help on how to resolve this case. You make a right decision; that is your wish. So which option do you want to go for it?

WC: Well, I can't afford an attorney.

JS: So you want to resolve this case outside the court house, this correct?

WC: Yeah.

JS: So, in that case, I am going to connect this call to the senior officer who is handling your case right now and he is the decision maker how to resolve your case and how to make a payment plan for you alright?

WC: Okay.

JS: Stay connected with me, alright?

WC: Okay.

JS: Thank you very much.

JH: Thanks for being on hold, your line has be transferred to Jason Horner; how may I help you?

WC: Well, I'm just trying to resolve my account.

JH: I'm sorry?

WC: Just trying to resolve my account.

JH: Alright sir, your line has been transferred to me so that you want to rectify outside a court house without facing any legal consequences, right?

WC: Yeah.

JH: Alright, so I hope you understand, if you want to resolve this case, then you need to pay what you owe, right? The full outstanding amount is 4,987 dollars, that is the outstanding amount that you owe to the IRS.

WC: Yes.

JH: So, if you want to resolve this case then as I've told you, you need to pay the outstanding amount that you owe to the IRS so can you come up today in order to... in order to resolve this case?

WC: Yeah.

JH: Alright, so if you want to resolve this case, then you need to be online with me you need to stay connected with me on the same recording line, you need to follow the procedure alright? I will guide you step by step how you are going to resolve this case, alright?

WC: Ok.

JH: So at this time the payment is not going to be accepted over the phone call, check, or online payment; this time the payment will be done using electronic federal tax payment system, which is a tax pay voucher that you need to purchase from a government-certified store. I will be guiding you where you have to go and which voucher you need to purchase in order to resolve this case, alright?

WC: Alright.

JH: So, uh, is this your home phone number or this is your cell phone number?

WC: Cell phone.

JH: Alright, so you need to stay connected with me while you're on this recording line; you cannot put me on mute, you cannot put me on hold, you need to stay connected, is that understood?

WC: Yes.

JH: So, you need to drive down to a... a store, a government-certified store, which is... by the government. You can go to either Walmart or a Target or a Rite Aide store. So which store will be convenient and nearest to you?

WC: Um, I'm not sure, I'll have to drive around and see what's closest.

JH: Do you have any nearby store like Walmart or Target?

WC: Um, let me, let me look outside and kind of see where I am. Now I can't... I can't pay this over the phone?

JH: No, no, you're not going to pay a single penny over the phone call.

WC: Oh, and should I go to the IRS website and use their online payment option?

JH: No, no, there is a procedure, alright? Before your warrant get expired, I need to cancel your warrant, so there is a procedure you need to follow the protocols of the IRS, alright, if you want to resolve this case. As I've told you, you need to stay connected with me on this same recording line until... resolve this case; you cannot put me on mute, you cannot put me on hold, alright?

WC: Alright, but I know you can pay online with the IRS's EFTPS system, and you're saying I shouldn't do that?

JH: If you can follow the procedure, I'm here to guide you, I'm here to help you, if you don't follow the procedures that's okay, alright. You can disconnect this call, and just wait to face the consequences.

WC: Can I... can I just mail a check in to the IRS?

JH: No, we are not going to accept from a check or online payment; we're not going to do that.

WC: Why?

JH: As I've told you, there is a procedure, right? If you want to resolve this case, than you need to follow the procedure.

WC: It sounds like...

JH: Step by step, I will guide you on how... on how you're going to make a payment.

WC: It just sounds like an unusual procedure.

JH: I'm sorry?

WC: The procedure you've described sounds very unusual. I didn't know the IRS did that.

JH: So, I'm not here to force you, I'm not here to convince you, you can just disconnect this call and just wait to face the consequences.

WC: And what are the consequences again?

JH: You will be getting arrested within 45 minutes, your state police department will be at your doorstep and your house, your car, your bank account, everything will be seized by the government.

WC: That also sounds unusual, I didn't think the IRS acted in that way.

JH: Why? Why did you say that?

WC: Well, from what I know, the IRS always sends out letters before they take collection action.

JH: Uh-huh. And?

WC: And I didn't get any.

JH: What else?

WC: Well, I didn't get any letters, so why is that?

JH: As I've told you, you can just disconnect this call and just wait to face the consequences, alright?

WC: Are you really the IRS?

JH: No, no I'm not from the IRS.

WC: Where are you from?

JH: I'm from Washington DC.

WC: But do you work for the IRS?

JH: Yes, exactly, why do you ask that kind of question?

WC: What office? Which IRS office are you out of?

JH: Uh, today, sir, if you want to resolve this case, then you need to go down to Walmart, alright?

WC: I don't think you work for the IRS. I think this is a scam.

JH: What?

WC: Yep, I think this is a scam.

JH: Why, why are you saying that?

WC: The IRS doesn't take collection action without sending letters first.

JH: So why... why did you say you want to resolve this case?

WC: Just wanted to see what would happen

JH: Hmm?

WC: So who do you really work for? Where are you located?

JH: We are located 1111 Constitution, Washington DC. Is there any problem?

WC: Well, who do you really work for if your not the IRS?

JH: Are you an idiot?

WC: No.

JH: Then why are you asking these kinds of questions? So get ready to face the consequences. Alright, bye.

WC: Okay, bye.

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Reporting Refunds of Charitable Contributions

A donation to a charitable organization is an irrevocable gift, and even if the donor changes his or her mind about the gift, they generally have no legal basis on which to seek a return or refund of the donation. Furthermore, even if the charity desired to return the gift, the rules under the Internal Revenue Code are such that it should be hesitant to do so. For a good summary of these issues, see Richard R. Hammar's article, Refunds of Charitable Contributions.

If a charity nevertheless decides to refund a charitable donation, the question of whether it must then issue an IRS Form 1099 to the donor arises. In general, businesses must file a Form 1099 to report many types of income; the requirement also applies to charities.

It is clear that a taxpayer who receives the full tax benefit of a charitable donation in one year and who receives a refund of that donation in another year is required to include in gross income the amount previously deducted. In this situation, it makes sense that a charity should issue the former donor a Form 1099.

However, if the donor only received a partial tax benefit or no benefit for the donation, the charity would be placing the donor in an unfair position by issuing a Form 1099. Fortunately, the Internal Revenue Code contemplates this and does not require the charity to issue a 1099 when it refunds a charitable donation.

IRC § 6041(a) imposes the 1099 filing requirement where an organization makes a payment of, among other things, "fixed or determinable gains, profits, and income... of $600 or more." PLR 200704004 interprets this provision as follows:

While any accession to wealth can be income, not all income is fixed or determinable. Income is “fixed” when it is to be paid in amounts definitely predetermined [and] is “determinable” when there is a basis of calculation by which the amount to be paid may be ascertained. Because section 6041(a) is conditioned on a payor knowing that a payment to a payee is in the nature of income and the amount of income, if a payor cannot determine either that a payment is in the nature of income or in what amount, then the payor is not required to file an information return under the section...

The effect of the tax benefit rule can be seen in a number of contexts, for example, casualty losses, real estate tax refunds, and charitable contributions... If by its nature a payment to a taxpayer would not be an item of gross income unless the tax benefit rule applies, and the payor has no way of knowing one way or the other, then the payment is not “fixed or determinable” income falling within section 6041(a).

Accordingly, a charity should not need to report refunded charitable donations on Form 1099.

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Updated: Fixing Problems with Online IRS EIN Applications

This post is an update to a prior post, with updated information about fixing rejected online EIN applications submitted on the IRS's website. Consider the following potential causes:

Every EIN application requires a responsible party name and matching tax ID number. Often, this will be an individual and their social security number, but sometimes the responsible party is another business with another EIN number. The IRS will not process online EIN applications if the responsible party is an entity with an EIN previously obtained through the internet. In other words, unless the responsible party is an individual with a social security number or an entity with an EIN that was not obtained through the internet, the online EIN application will always return an error.

If the first two numbers of the entity's EIN Number begin with 20, 26, 27, 45, 46, or 47, that EIN number was obtained through the online EIN application. Accordingly, that entity can never be a responsible party for another online EIN application; you will have to apply over the phone or list another responsible party on the online application, such as the individual who owns the entity. If the responsible party's EIN begins with 30, 32, 35, 36, 37, 38, 61, 80, 84, 90, or 91, that EIN number was not obtained through the online EIN application, and that entity should be able to be a responsible party on another online EIN application.

The IRS will only issue an EIN to one responsible party per day. This limitation applies to all requests for EINs, whether through the online EIN application or by phone, fax, or mail. If an EIN has been issued to any entity by any application method on a particular day, the responsible party on that EIN application must wait until the next day before being the responsible party on another EIN application.

A rejected EIN application indicating Reference Number 101 has a name conflict. The IRS requires a unique entity name before it will issue an EIN, similar to how the secretary of state requires a unique entity name within that state before Articles or Certificates of Formation may be successfully filed. However, because the IRS is a federal agency issuing EINs for entities in all 50 states, it potentially checks for duplicate entity names across multiple states. There are numerous references to a state on the online EIN application, such as the physical location state, mailing address state, and the state where the Articles are or will be filed.

If all of these state references are the same, the IRS will only check for previously-issued EINs with that entity name in that one state. If multiple states are reported, for example, if the Articles were filed in a different state than the business's physical address, the IRS will check both states for name availability before issuing an EIN, even though filing the Articles only requires a unique entity name in the one state where the Articles are being filed. Applying for an EIN over the phone may be required in these name conflict situations; often, the IRS agent will ask to see a copy of the Articles before issuing an EIN.

Reference numbers 102, 103, 105, or 108 indicate that the name and tax ID number of the responsible party do not match IRS records. Reference number 104 means a third-party designee's contact information cannot be the same as the address or the phone number of the entity that is applying for an EIN. Reference numbers 109, 110, 112, or 113 mean that the online application is temporarily unable to assign EINs; try again later. Reference number 114 indicates that only one EIN will be assigned per day per responsible party.

Reference Numbers 109 and 110 indicate technical problems and an EIN may still be obtainable using the exact same information that resulted in the error. The error might result from too many people trying to obtain an EIN at the same time. Try again later, or try closing and reopening the browser, using a different browser, using a different computer, clearing cookies, restarting the computer, or adjusting your security settings. Or, feel free to contact me; I would be happy to try and help.

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IRS Imposter Phone Scam

I've been contacted multiple times in the past few months by individuals who have received calls from someone purporting to be with the IRS and demanding immediate payment of an outstanding tax liability. Such phone calls are scams, and have been occurring for years. Based on my recent experience and information published by U.S. government agencies, I'm offering the following ways to recognize these phone scams:

• The caller says they are from the IRS or Treasury Department and demands payment of a tax bill over the phone immediately. 
• The IRS will never call to demand immediate payment over the phone. 
• The caller demands payment via a prepaid debit card, a money order, or a wire transfer.
• The IRS will never call and ask for credit card numbers or bank information over the phone. The IRS does not need this information; any taxpayer can initiate a payment to the IRS for any federal tax at any time using the EFTPS System.
• The caller threatens those who don't pay with criminal charges, a grand jury indictment, immediate arrest, deportation, or loss of a passport or driver’s license.
• The IRS will never take or threaten to take any of these actions if payment is not made during the course of a phone call. Certainly, criminal penalties are possible in certain circumstances, but not before due process. As IRS Commissioner John Koskinen put it, "If you are surprised to be hearing from us, then you're not hearing from us."

The IRS will always send notices and bills in the mail and follow their standard collection and appeals process, which I described in a previous post. If you do receive a call from an individual claiming to be with the IRS and demanding money immediately, hang up the phone. The Treasury Inspector General for Tax Administration has an online form that can be filled out to report the scam.

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Streamlined Filing Compliance Procedures

U.S. taxpayers are required to report foreign assets. For those who have not, the IRS has offered various options for addressing these failures. One such option is the Offshore Voluntary Disclosure Program (OVDP), which is now in its fourth iteration. The distinguishing characteristics of this program are relatively steep penalties that include a 20% understatement penalty and a 27.5% offshore penalty but the benefit of being able to “generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs."

The other alternative is Streamlined Filing Compliance Procedures (SFCP), which are available to taxpayers who can certify that their "failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct." On June 18, 2014, the IRS announced major changes in its offshore voluntary compliance programs, a key change being that for the first time, SFCP are available to certain U.S. taxpayers residing in the United States. Thus, SFCP now have two subsets, Streamlined Foreign Offshore Procedures (SFOP) and Streamlined Domestic Offshore Procedures (SDOP), which are available to foreign taxpayers and domestic taxpayers, respectively.

The decision between whether to use the OVDP or SFCP depends in part on the taxpayer’s level of concern regarding whether their failure to properly report could be viewed as willful. If SFCP are selected and the IRS discovers evidence of willfulness, it may open an investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral for criminal investigation. Once the OVDP or SFCP option has been pursued, the option not pursued becomes unavailable.

In order to participate in SFCP, taxpayers must file any delinquent FBARs for most recent 6 years according to special IRS instructions and file an amended U.S. tax return for most recent 3 years. Foreign individuals using SFOP can file an original return, but domestic individuals must have already filed. The returns must be filed at a specially-designated IRS address and include a statement certifying SFCP eligibility, that the FBARs have been filed, and that the failure to file was non-willful. Finally, the taxpayer must pay all taxes, penalties, and interest and individuals using SDOP must include the 5% the Miscellaneous Offshore Penalty. As this has been a high-level overview, consult with a competent tax adviser before undertaking any of these programs.

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Updating Business Names with the IRS

Every business has a name, and sometimes, that name needs to be changed. If the business operates through a legal entity, such as a corporation or LLC, then an amendment to the formation document must be filed with the state in which the entity has been formed in order to legally change the business name.

Doing this, however, does not change the business name on IRS records, meaning the name associated with the unique employer identification number for the business. The easiest way to update the IRS's records with the new business name is simply to use the new name when filing the business's annual tax return and check the box at the top of the front page of the form indicating that the business name has changed. There is no need to reference the old business name on the tax return.

But what if the business needs to change its name prior to the next tax return filing season, or what if the business is a disregarded entity that doesn't file a tax return? The IRS's instructions say to write them a letter; however, the instructions do not indicate what the letter should say, and they leave out an important step.

The most important items to include in a business name-change letter to the IRS are as follows: The EIN number for the business, the old business name, as well as the business address, all of which must match the current IRS records. The letter should explain that the business name has changed, state the new business name, and request that confirmation be sent once the IRS has updated its records.

The letter must be signed by the business owner or corporate officer that appears in IRS records as an authorized individual. According to some IRS agents I've spoken with, even an agent of the business that has a valid Form 2848 on file may not have sufficient authority to sign the name-change letter.

Finally, the business name-change letter should include a copy of the stamp-filed document with the state that effectuated the name change. This is not mentioned as a requirement on the IRS's website, but failure to include this document can result in the IRS declining to make the name change. Sole proprietorships or general partnerships obviously cannot include such a document, but all other business entities should do so. Name change letters currently take about six weeks to be processed; don't wait that long only to have the IRS request additional information.

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Help with State Income Tax Audits

Just as the IRS conducts tax audits, so do the states. If you become involved in a state tax audit, keep in mind that Internal Revenue Code Section 6103 authorizes the IRS to share tax information with state governments for tax administration purposes. Among the information exchanged between the IRS and state taxation authorities is individual and business return information. One of the procedures that state taxing authorities use in selecting returns for audit is comparing the information (or the lack thereof) reported on an individual's federal income tax return with what is reported on their state income tax return.

With this in mind, one of the first steps in dealing with a state income tax audit is to gather all information on your account with the IRS. Basic information is readily available on a taxpayer's tax return transcript, a copy of which can be easily obtained through the IRS's Get Transcript webpage. Keep in mind that it will take around 10 days to receive your transcript. As mentioned below, this could potentially be different than the information on your tax return.

Once you have a copy of your IRS transcript, compare income and expense items with the corresponding items under review by your state tax commission. Many states use federal AGI as a key figure in the calculation of state income tax liability, so a difference in federal AGI reported by the IRS and federal AGI reported on your state income tax return could have triggered the audit.

If there are discrepancies, consider why that might be the case. Did you file your federal return but forget to file your state return (or vice versa)? Did the IRS make changes to your tax return? I've even seen a case of a false IRS return filed by a third party engaging in federal refund fraud that triggered a state income tax audit. Of course, you should always talk with a tax professional at the very earliest sign of an audit. With the right information and good advice, you can make any necessary changes to your returns and arrive at a fair resolution of your state income tax audit.

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Nonprofits Reference Chart

Section 501(c)(3) of the Internal Revenue Code is only one of nearly three dozen Code sections that provide for tax-exempt status for certain organizations. The IRS has an good chart, located at this link, summarizing those other sections and organizations. At the same time, there are numerous sub-categories of 501(c)(3) organizations. The purpose of this post is to supplement the IRS's chart with a list of distinct tax-exempt entities that fall under 501(c)(3). The organizations described below apply for tax-exempt status with IRS Form 1023 and can receive contributions which are tax-deductible to the donor:

Code Sections	Description
509(a)	All 501(c)(3) organizations are private nonoperating foundations unless described in another line on this chart
509(a)(1) and 170(b)(1)(A)(i)	A church or a convention or association of churches
509(a)(1) and 170(b)(1)(A)(ii)	A school, meaning an educational organization with regular faculty, curriculum, and enrolled body students in attendance
509(a)(1) and 170(b)(1)(A)(iii)	A hospital providing medical or hospital care, medical education or medical research
509(a)(1) and 170(b)(1)(A)(iv)	An organization operated for the benefit of a college or university that is owned or operated by a governmental unit
509(a)(1) and 170(b)(1)(A)(v)	Certain governmental units
509(a)(1) and 170(b)(1)(A)(vi)	An organization that receives a substantial part of its financial support in the form of contributions from publicly supported organizations, from a governmental unit, or from the general public
509(a)(2)	An organization that normally receives not more than one-third of its financial support from gross investment income and receives more than one-third of its financial support from contributions, membership fees, and gross receipts from activities related to its exempt functions
509(a)(3)(B)(i)	Type I supporting organization, which must be operated, supervised, or controlled by one or more 509(a)(1) or (2) organizations
509(a)(3)(B)(ii)	Type II supporting organization, which must be supervised or controlled in connection with one or more 509(a)(1) or (2) organizations
509(a)(3)(B)(iii)	Type III supporting organization, which must be operated in connection with one or more 509(a)(1) or (2) organizations
509(a)(4)	An organization which is organized and operated exclusively for testing for public safety
170(b)(1)(A)(vii) and 170(b)(1)(F)(i)	A private operating foundation
170(b)(1)(A)(vii) and 170(b)(1)(F)(ii)	A private nonoperating conduit foundation
170(b)(1)(A)(vii) and 170(b)(1)(F)(iii)	A common fund foundation

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IRS Notice 784 - Trust Fund Recovery Penalty

As mentioned in a previous post, the IRS pays out tax refunds (often constituting amounts an employer has withheld from an employee's paycheck in excess of that employee's income tax liability) before verifying if the employer has actually withheld those amounts or paid them to the IRS. This is a flawed method and helps explain why the IRS is extremely concerned that employers remit these withheld taxes, as well as social security and Medicaid taxes, to the IRS.

One enforcement mechanism is the Trust Fund Recovery Penalty (TFRP), which is described IRS Notice 784, which is referenced in the IRS's website and current Internal Revenue Manual. Since Notice 784 effectively explains the TFRP but does not appear to be generally available on the web, I quote it here:

Could You be Personally Liable for Certain Unpaid Federal Taxes?

If you are an employer, you must withhold federal income, social security (or railroad retirement), and Medicare taxes from your employee’s wages or salaries. If you provide communication or air transportation services, you also may have to collect certain excise taxes from people who paid you for the services. (Get Pub. 510 for more information on excise taxes.) These taxes are called trust fund taxes and must be paid to the Internal Revenue Service through tax deposits or as payments made with the applicable returns.

The trust fund recovery penalty. – If trust fund taxes willfully aren’t collected, not truthfully accounted for and paid, or are evaded or defeated in any way, we may charge a trust fund recovery penalty. This penalty is equal to the amount of the trust fund taxes evaded, not collected, not accounted for, or not paid to IRS. We also charge interest on the penalty.

Who has to pay the penalty? – The trust fund recovery penalty may apply to a person or persons IRS decides is responsible for collecting, accounting for and paying the trust fund taxes and who acted willfully in not doing so. If IRS can’t immediately collect the taxes from the employer or business, we will decide who the responsible person or persons are and who acted willfully.

“Willfully” means voluntarily, consciously, and intentionally. A responsible persons acts “willfully” if this person knows that the required actions are not taking place for any reason. Paying other business expenses instead of trust fund taxes is considered willful behavior.

Any person who had responsibility for certain aspects of the business and financial affairs of the employer (or business) may be a responsible person. A responsible person may be an officer or employee of a corporation, or a partner or employee of a partnership. This category may include accountants, trustees in bankruptcy, members of a board, banks, insurance companies, or sureties. The responsible person can even be another corporation, a volunteer director/trustee, or employee of a sole proprietorship. Responsible persons may include those who direct or have authority to direct the spending of business funds.

If we charge you this penalty, we may take your assets (except exempt assets) to collect the amount owed.

Avoid the penalty. – You can avoid the trust fund recovery penalty by making sure that all taxes are collected, accounted for, and paid to IRS when required. Make your tax deposits and payments on time. IRS employees are available to assist you if you need information on tax deposits and payments. You may telephone the IRS tax information number in your area for help. Pub. 937, Employment Taxes and Information Returns, Pub. 15, Employer’s Tax Guide, and Form 941, Employer’s Quarterly Federal Tax Return, are also helpful and available from IRS.

Source: Bloomberg BNA, Tax and Accounting Center, links added by me.

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