April 02, 2020

IRS Issues Frequently Asked Questions Regarding Credits Related to the Families First Coronavirus Response Act – Very Helpful!

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As tax attorneys and business professionals in Columbus, Ohio, we assist our business owners in many aspects of their business and tax planning, as well as with the impact of legislation on business income and cash flow. The unprecedented COVID-19 pandemic has caused unparalleled interruptions to almost all market sectors. Businesses are now facing significantly reduced income, or even zero income, resulting in lower cash flows for ongoing operations. The COVID-19 related economic effects have prompted lawmakers to respond with economic assistance legislation to aid businesses, especially small to mid-sized businesses, with financial relief. Undoubtedly, with new legislation comes numerous questions to navigate this new territory.

As you recall, the Families First Coronavirus Response Act (FFCRA), signed by President Trump on March 18, 2020, gives businesses with fewer than 500 employees funds to provide employees with paid sick leave and family and medical leave related to COVID-19. Please see our prior article on this here. Eligible employers can receive a credit in the full amount of qualified sick leave and family leave wages paid for between April 1, 2020, and December 31, 2020. Employers can be reimbursed immediately by reducing their federal employment tax deposits. If there are insufficient federal employment taxes to cover the amount of the credits, employers may request an accelerated payment from the IRS.

With that said, the IRS has issued a frequently asked questions page for small and mid-sized businesses trying to navigate the paid sick and family leave tax credit during the coronavirus outbreak. We strongly encourage each of you to review this. Please see the link here for the detailed frequently asked questions from the IRS. Again, we strongly encourage you to review these.

If you have questions about the Families First Coronavirus Response Act, beyond what the IRS has provided at the link we shared in this blog, please contact Vince Nardone at vnardone@walterhav.com.

March 30, 2020

COVID-19 Financial Assistance Provided by the SBA

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Giulia-DiCenzo
By: Giulia Di Cenzo

As tax attorneys and business professionals in Columbus, Ohio, we assist business owners in many aspects of their business, tax planning, as well as the impact of legislation on business income and cash flow. The unprecedented COVID-19 pandemic has caused unparalleled interruptions to almost all market sectors. Businesses are now facing significantly reduced income, or even zero income, resulting in lower cash flows for ongoing operations. The COVID-19 related economic effects have prompted Congress to respond with phases of unprecedented economic assistance legislation to assist businesses, individuals, and families affected by COVID-19. Businesses may seek relief from their COVID-19 related cash flow issues in the form of a loan from the Small Business Administration (“SBA”).

Phase I: On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act (“CPRSA”) was signed into law, marking it as the first major legislative-initiative to address the COVID-19 emergency. The CPRSA provides $8.3 billion in emergency funding for federal agencies to respond to the coronavirus outbreak. Under Title II of the CPRSA, the SBA is provided appropriations for the Disaster Loans Program Account to provide Economic Injury Disaster Loans (“EIDL”) and Loan Advances to businesses negatively affected by the COVID-19 emergency. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million which can provide vital economic support to small businesses in order to help overcome the temporary loss of revenue. Those applying for an EIDL may also receive a loan advance of up to $10,000, to be used by businesses to cover for ongoing operations while their application is being considered. Funds will be made available within 3 days of a successful application, and the Loan Advance will not have to be repaid even if the applicant is denied an EIDL.

Also, on March 17, 2020, the SBA revised its guidelines so that states or territories are only required to certify that at least five small businesses within that state or territory have suffered substantial economic injury, regardless of where those businesses are located (historically, the SBA required a state or territory to provide documentation certifying that at least five small businesses have suffered substantial economic injury as a result of a disaster, with at least one business located in each declared-disaster area). Under the SBA’s revised guidelines: small business in declared-disaster areas can apply online for an EIDL; and private nonprofits, homeowners, and renters can also apply online for a disaster assistance loan from the SBA. The chart below contains additional information regarding Economic Injury Disaster Loans and Loan Advances.

Phase II: On March 18, 2020, the Families First Coronavirus Response Act (“FFCRA”) was signed into law, marking the second major legislative-initiative to address the COVID-19 emergency. The FFCRA addresses paid family medical leave and paid sick leave, insurance coverage of COVID-19 testing, nutrition assistance, and unemployment benefits.  Additional information on the FFCRA can be found here or in our latest three series blog regarding this discussion, “The Families First Coronavirus Response Act, and The Impact on Employers”.

Phase III: On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act contains provisions that provide Small Business Interruption Loans as well as a variety of other financial assistance policies and programs for qualified businesses and individuals. The CARES Act creates a new type of loan for the SBA to administer, called the Paycheck Protection Program (“PPP”). Unlike the EIDL, the PPP is potentially forgivable for up to 100% of the principal amount borrowed. Additionally, unlike the SBA’s disaster loans, the PPP is not tied directly to establishing losses suffered during the COVID-19 outbreak, as there is already a presumption of negative impact. The PPP does not require collateral or guarantees, so the program is available to many new businesses not otherwise able to avail themselves to the SBA loan programs and provides much friendlier terms than traditional SBA loan programs. The chart below contains additional information regarding the Paycheck Protection Program.

Loan Type

SBA’s Economic Injury Disaster Loans (EIDL)

SBA’s Paycheck Protection Program (PPP)

Loan Advance Available?

Yes, up to $10,000 Loan Advance that will not have to be repaid even if the applicant is subsequently denied an EIDL.

No.

Eligibility:

Small businesses, small agricultural cooperatives, and most nonprofits located in declared disaster areas.

The SBA defines a “small business’ as one that typically makes a maximum of $38.5 million in annual revenue and has fewer than 100 – 1,500 employees, depending on industry.

Businesses and nonprofits, except those with Medicaid funds, that have been substantially affected by COVID-19 (including supply chain disruptions, staffing challenges, decreases in sales or customer levels, or shuttered businesses).

For the purposes of this loan, a small business is one with fewer than 500 employees (subject to limitations), or those that meet the SBA’s industry-based “size standard” requirements.

Loan Amount:

Maximum of $2 million, and is based upon the economic injury of the business, as well as the business’s financial needs, and is determined through the SBA’s application process.

Maximum of $10 million, or equal to the value that is 2.5 times the average total monthly payments during the 1-year period before the date on which the loan was made by the applicant for:

(1) Payroll;

(2) Mortgages and/or Rent; and

(3) Any debt service obligations that were in place before March 1, 2020.

Loan Terms:

The EIDL can be used to pay for expenses that the business would have been able to pay, if not for the occurrence of COVID-19. This includes:

(1) Payroll, including paid sick leave;

(2) Accounts payable; and

(3) Payments on short term notes and long term notes incurred before March 1, 2020.

The PPP loan can be used to pay:

(1) Payroll, including paid sick, medical, or family leave;

(2) Continuation of group health care benefits;

(3) Employee salaries;

(4) Mortgage payments;

(5) Rent;

(6) Utilities; and

(7) Debt obligations incurred before March 1, 2020.

Interest Rates:

2.75% for non-profits

3.75% for small businesses

Maximum rate of 4.00%

Loan Term Maximum:

Maximum term of 30 years.

The loan term is determined from the business’s ability to repay the loan.

Maximum of 10 years.

Guidance for determining the loan term will be provided to lenders within 30 days of March 27, 2020.

Loan Forgiveness Provision?

No, there is no provision for loan forgiveness.

Yes. Loan amounts applied to maintain payroll from March 1, 2020 through June 30, 2020 are forgivable as applicable below. The forgivable loan amounts will be treated as nontaxable income to the businesses.

Forgivable amounts cannot exceed the sum of:

(1) Payroll costs during the covered period; and

(2) Payments made during the covered period on debt obligations incurred before the covered period.

Loan forgiveness does not include:

(1) Compensation of an individual employee in excess of $33,333 during the covered period, or $100,000, annually;

(2) Qualified sick leave wages for which a credit is taken under Section 7001 of the Families First Coronavirus Response Act; and

(3) Qualified family leave wages for which a credit is allowed under Section 7003 of the Families First Coronavirus Response Act.

Loan forgiveness is reduced by a percentage equal to the percentage of employees let off during the period, as well as by reductions in employee pay greater than 25%. The calculation for the reduction in employee pay only concerns employees who would have made less than $33,333 in the covered period, or $100,000 annually.

Payment Deferral Allowed?

Yes, for 30 days.

Yes, between 6 months and 1 year.

Personal Guarantee:

A guarantor is required to receive the loan.

No guarantor is required. The loan is 100% guaranteed by the federal government, through December 31, 2020.

Prepayment Penalties:

None.

None.

March 27, 2020

Financial Assistance for Individuals and Families Provided by the CARES Act

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Giulia Di Cenzo
By: Giulia Di Cenzo

As tax attorneys and business professionals in Columbus, Ohio, we assist business owners in many aspects of their business, including business and tax planning, as well as the impact of legislation on business income and cash flow. The unprecedented COVID-19 pandemic (“Coronavirus”) has caused unparalleled interruptions to almost all market sectors. Businesses are now facing significantly reduced income, or even zero income, and may be experiencing cash flow issues. The Coronavirus related economic ripple effects have prompted Congress to respond with phases of unprecedented legislation that provides economic assistance to individuals, families, and businesses affected by the Coronavirus.

On March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act contains provisions that provide financial assistance to individuals and families in the form of direct payments and increased charitable contributions deduction; removal of certain penalties; and deferral of certain income tax, student loan, and mortgage payments. As of March 27, 2020, the CARES Act was passed by the House of Representatives and will be presented to the President for signature before becoming public law. The President is expected to sign the CARES Act, but despite this expectation, the CARES Act and the discussion below is still subject to change as it is not yet public law. Additional details will be provided when available.

The CARES Act:

  1. Provides direct payments to individuals and families in an amount based on their filed 2019 tax returns or filed 2018 tax returns, as applicable. Individuals with no income or those whose income is entirely from nontaxable means-tested benefit programs (such as SSI benefits) are also eligible for the direct payment in an amount as detailed below:
  1. $1,200 for single tax filers, if his or her adjusted gross income (AGI) is below $75,000 (and is completely phased-out if their AGI exceeds $99,000); or
  2. $2,400 for married couples that filed jointly, if their AGI is not above $150,000 (and is completely phased-out for joint filers with no children if their AGI exceeds $198,000); and
  3. $500 for each child of the taxpayer who has not attained age 17 and meets the definition of “qualifying child” for purposes of the dependency exemption in IRC § 152(c).
  1. Removes the 10% penalty on withdrawals from a qualified retirement plan up to $100,000 if the withdrawn funds are for coronavirus related purposes and otherwise nonexempt from the penalty imposed under IRC § 72(t). Withdrawn funds may be re-contributed to the qualified retirement account in full without penalty since the annual qualified retirement account contribution caps do not apply to such funds. The income tax generated from withdrawn funds will be divided and due over the three years after the withdrawal;
  1. Defers principal and interest payments for all Federal student loans for 6 months until September 30, 2020;
  1. Employers may contribute up to $5,250 per employee towards the employees’ student loans if contributed before January 1, 2021, which will be tax-free to the employees (however, student loan repayments for which this exclusion applies cannot be deducted under IRC § 221, which ordinarily allows the limited deduction of student loan interest. This means that the amount has already been excluded from taxes so the interest on that same excluded payment cannot be deducted twice);
  1. Allows an above-the-line deduction for qualifying charitable cash contributions up to $300, as well as increased charitable contributions limitations for donations made in 2020; and
  1. Allows individuals with federally-backed mortgages to request forbearance on such mortgage payments for temporary protection from foreclosures and evictions.

The CARES Act concerns additional tax-related provisions that may also impact business income and cash flow during and after the unprecedented COVID-19 pandemic. 

March 23, 2020

The Families First Coronavirus Response Act, and Impact on Employers - Part 3

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Giulia-DiCenzo
By: Giulia Di Cenzo

As tax attorneys and business professionals in Columbus, Ohio, we assist business owners in many aspects of their business, including business and tax planning, as well as the impact of legislation on business income and cash flow. In an earlier blog, we discussed the Families First Coronavirus Response Act (the “Act”) which had only been passed by the House at that time. Since then, the Act has progressed into law, and we want to provide additional details on how the Act may impact businesses. 

Background

On March 14, 2020, the House passed a draft of the Act, but then made certain technical corrections to it that were passed on March 16, 2020. Then on March 18, 2020, the Senate passed the March 16, 2020 version of the Act, and the President signed it into law a few hours later. The Act provides paid leave benefits to employees, tax credits for employers and self-employed taxpayers, and FICA tax relief for employers.

Paid Family Medical Leave

  1. The Act amends the Family and Medical Leave Act of 1993 (FMLA) to provide 12 weeks of job-protected leave to employees who have been on the job for at least 30 days and who are also employees of employers with fewer than 500 employees. This FMLA amendment expires on December 31, 2020.
  2. Among other uses, qualifying employees may use the family medical leave to respond to quarantine requirements or recommendations, to care for family members who are responding to quarantine requirements or recommendations, and to care for a child whose school or place of care has been closed as a result of the COVID-19 pandemic.
  3. Employers are not required to compensate employees during the first ten (10) days of the family medical leave period (the “unpaid period”). But after the unpaid period, employers must compensate employees throughout the remaining family medical leave period. It is important to note that employers may still have to compensate employees during the unpaid period. For example, employees may use their accrued personal or sick leave to receive compensation during the unpaid period.
  4. After the unpaid period, employers must compensate employees in an amount that is no less than two-thirds of the employee’s regular rate of pay. This pay requirement only applies to the COVID-19 related family medical leave reasons listed in paragraph two, above.
  5. Employers are required to restore the employee’s position after the employee returns from family medical leave. But, employers with fewer than 25 employees may be exempt from this requirement if specific conditions are present for them. One such condition is the position held by the employee when the family medical leave commenced no longer exists due to economic conditions or other changes.
  6. The Act provides employers with tax credits for the family medical leave payments made under the Act (the “Act’s family medical tax credit”). The Act’s family medical tax credit may provide a favorable tax-related outcome for employers. For reference, a tax credit directly reduces, dollar-for-dollar, the amount of tax owed.
  7. The Act’s family medical tax credit is equal to 100% of the employer’s qualified family medical leave payments to employees per calendar quarter. But, employers that are already receiving a credit for paid family and medical leave under IRC § 45S are ineligible to also receive the Act’s family medical tax credit for the family medical leave payments made under the Act.
  8. The Act’s family medical tax credit is limited to $200 per day, per qualified employee, and maxes out at a total of $10,000 per year, per qualified employee.
  9. Employers may be entitled to an increased tax credit if the employer concurrently provides and maintains a group health plan.
  10. The Act will go into effect 15 days after the date of enactment and expire on December 31, 2020. Thus, the Act will go into effect on or after April 2, 2020.

Paid Sick Leave

  1. The Act requires employers with fewer than 500 employees to provide employees with two weeks of paid sick leave for COVID-19 related circumstances, such as an employee is required to quarantine himself, or to seek a diagnosis or preventative measure.
  2. Employers must compensate employees on sick leave at the employees’ regular rate of pay. For example, full-time employees are entitled to two weeks of pay (or a maximum of 80 hours of pay), while part-time employees are entitled compensation equaling the usual number of hours that they work in a typical two week period.
  3. If an employee is on sick leave to care for a family member or a child whose school or care provider is closed or otherwise unavailable, the employee is entitled to two-thirds of the employee’s regular rate, as described in paragraph two, above.
  4. The Act provides employers with tax credits for the sick leave payments made under the Act (the “Act’s sick leave tax credit”). The Act’s sick leave tax credit may provide a favorable tax-related outcome for employers. Again, for reference, a tax credit directly reduces the amount of tax owed, while a tax deduction reduces how much income is subject to taxes.
  5. The Act’s sick leave tax credit is equal to 100% of the qualified sick leave payments to employees per calendar quarter. But, employers that are already receiving a credit for paid sick leave under IRC § 45S are ineligible to also receive the Act’s sick leave tax credit for the sick leave payments made under the Act.
  6. If an employee’s sick leave is to care for himself, then the Act’s sick leave tax credit is limited to that employee’s wages per day, up to $511 per day.
  7. If the employee’s sick leave is to care for another, as mentioned in paragraph 3, the Act’s sick leave tax credit is limited to the employee’s wages per day, up to $200 per day.
  8. The sick leave tax credit is also limited to the number of days in excess of 10 days over the aggregate number of days taken into account for all preceding calendar quarters.
  9. Employers may be entitled to an increased sick leave tax credit if the employer concurrently provides and maintains a group health plan.
  1. The Act will go into effect 15 days after the date of enactment and expire on December 31, 2020. Thus, the Act will go into effect on or after April 2, 2020.

Unemployment Insurance

As mentioned before, the Act provides $1 billion in emergency unemployment insurance (UI) relief to the states: $500 million for costs associated with increased administration of each state’s UI program and $500 million held in reserve to assist states with a 10 percent increase in unemployment. Besides the necessary increase in unemployment, in order to receive a portion of this grant money, states must temporarily relax certain UI eligibility requirements, such as waiting periods and work search requirements.

Concerns for Employers

As mentioned above, the Act places the burden on employers. And again, while we all want to do our part, small businesses must be able to survive. As drafted, the leave provisions apply only to employers with fewer than 500 employees. According to commentators in the know, it is unclear why the Act was drafted this way or whether additional legislation may be forthcoming for employers with more than 500 employees. And, it is unclear what relief will be provided to small businesses in facilitating this Act or other COVID-19 related costs. More to come on this.

March 17, 2020

The Families First Coronavirus Response Act, and Impact on Employers - Part 2

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As tax attorneys and business professionals in Columbus, Ohio, we assist business owners in many aspects of their business, including business and tax planning, as well as the impact of legislation on business income and cash flow. In an earlier blog, we discussed the recently passed (by the House) Families First Coronavirus Response Act (the “Families First Bill”). We now want to provide some additional details, and how this may impact businesses.

Background

On March 14, 2020, the House passed the Families First Bill. And then, on March 16, 2020, certain technical corrections were made to the bill. The Senate and President are in support of that bill, although, it is unclear on what changes will be made. What is clear, however, is that the employers will bear the brunt of this legislation, especially when it comes to paid sick leave. Please see a discussion below.   

Paid Family Medical Leave

  1. The bill amends the Family and Medical Leave Act of 1993 (FMLA) to provide 12 weeks of job-protected leave to employees who have been on the job for at least 30 days and who are also employees of employers with fewer than 500 employees.
  2. Among other uses, qualifying employees may use the leave to respond to quarantine requirements or recommendations, to care for family members who are responding to quarantine requirements or recommendations, and to care for a child whose school or place of care has been closed as a result of the COVID-19 pandemic.
  3. The bill allows the first 14 days of the leave to be unpaid. Employees may use accrued personal or sick leave during the first 14 days, but employers may not require employees to do so.
  4. After the first 14 days, employers must compensate employees in an amount that is no less than two-thirds of the employee’s regular rate of pay. These pay requirements apply to only the COVID-19-related leave reasons listed above.
  5. Under the bill, certain employers are allowed the family leave credit for each qualified employee. The family leave credit is limited to $200 per day and maxes out at a total of $10,000 per qualified employee. Employers that are not already receiving a credit for paid family and medical leave under IRC § 45S are eligible for the family leave credit.  
  6. If the bill is passed, the provisions will go into effect 15 days after the date of enactment and expire on December 31, 2020.

Paid Sick Leave

  1. The bill requires employers with fewer than 500 employees to provide employees with 2 weeks of paid sick leave for specific circumstances related to COVID-19. Such employers will also be required to post a notice informing their employees of their rights to leave.
  2. Under the bill, if an employee is on leave to quarantine, or to seek a diagnosis or preventative measure, the employee is entitled to 2 weeks of paid sick leave that equals their regular rate. For example, full-time employees are entitled to 2 weeks (80) hours, while part-time employees are entitled to the usual number of hours that they work in a typical 2 week period.
  3. If an employee is on leave to care for a family member or a child whose school or care provider is closed or otherwise unavailable, the employee is entitled to two-thirds of the employee’s regular rate, as described above.
  4. Under the bill, certain employers are allowed the sick leave credit for each qualified employee. The sick leave credit is limited to the employee’s wages up to $511 per day if the employee’s sick leave is to care for themself. If the employee’s sick leave is to care for another, as mentioned above, the sick leave credit is limited to the employee’s wages up to $200 per day. The sick leave credit is also limited to the number of days in excess of 10 days over the aggregate number of days taken into account for all preceding calendar quarters.
  5. Employers that are not already receiving a credit for paid family and medical leave under IRC § 45S are eligible for the family leave credit.
  6. As currently drafted, the bill expressly provides that it does not preempt existing state or local paid sick leave entitlements.
  7. If the bill is passed, the provisions will go into effect 15 days after the date of enactment and expire on December 31, 2020.

Unemployment Insurance

The bill provides $1 billion in emergency unemployment insurance (UI) relief to the states: $500 million for costs associated with increased administration of each state’s UI program and $500 million held in reserve to assist states with a 10 percent increase in unemployment. Besides the necessary increase in unemployment, in order to receive a portion of this grant money, states must temporarily relax certain UI eligibility requirements, such as waiting periods and work search requirements.

Concerns for Employers

As mentioned above, the Families First Bill places the burden on employers. And again, while we all want to do our part, small businesses must be able to survive. As drafted, the leave provisions apply only to employers with fewer than 500 employees. According to commentators in the know, it is unclear why the bill was drafted this way or whether additional legislation may be forthcoming for employers with more than 500 employees. And, it is unclear what relief will be provided to small businesses, in terms of tax credits for making payments under the Families First Bill, and loans or grants through forms of disaster relief. More to come on this.

Important: It is important to remember that this was passed by the House only. It still has to make it through the Senate and be signed by the president. We expect changes. Once we see those changes, we will provide additional guidance.

March 16, 2020

The Families First Coronavirus Response Act, and Impact on Employers

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As tax attorneys and business professionals in Columbus, Ohio, we assist business owners in many aspects of their business, including business and tax planning, as well as the impact of legislation on business income and cash flow. This blog will briefly discuss the recently passed (by the House) Families First Coronavirus Response Act (the “Families First Bill”). A later blog will discuss in more detail, and discuss the actual impact on business owners, while we wait for the Senate’s response.

Background

As mentioned above, the House recently passed the Families First Bill, and it is expected to be signed by the Senate and President early this week. The Families First Bill responds to the coronavirus outbreak by providing paid sick leave and free coronavirus testing, expanding food assistance and unemployment benefits, and requiring employers to provide additional protections for health care workers. Here is a summary of the Families First Bill provided by Congress.

Specifically, the bill provides FY2020 supplemental appropriations to the Department of Agriculture (USDA) for nutrition and food assistance programs, including:

  1. the Special Supplemental Nutrition Program for Women, Infants, and Children;
  2. the Emergency Food Assistance Program; and
  3. the nutrition assistance grants for U.S. territories.

The bill also provides FY2020 appropriations to the Department of Health and Human Services for nutrition programs that assist the elderly. The supplemental appropriations provided by the bill are designated as emergency spending, which is exempt from discretionary spending limits. The bill then modifies USDA food assistance and nutrition programs to:

  1. allow certain waivers to requirements for the school meal programs;
  2. suspend the work requirements for the Supplemental Nutrition Assistance Program (SNAP, formerly known as the food stamp program); and
  3. allow states to request waivers to provide certain emergency SNAP benefits.

In addition, the bill requires the Occupational Safety and Health Administration to issue a temporary emergency standard that requires certain employers to develop and implement a comprehensive infectious disease exposure control plan to protect health care workers.

Finally, and most importantly for our business owners, the Families First Bill includes provisions that:

  1. establish a federal emergency paid leave benefits program to provide payments to employees taking unpaid leave due to the coronavirus outbreak;
  2. expand unemployment benefits and provide grants to states for processing and paying claims;
  3. require employers to provide paid sick leave to employees;
  4. establish requirements for providing coronavirus diagnostic testing at no cost to consumers;
  5. treat personal respiratory protective devices as covered countermeasures that are eligible for certain liability protections; and
  6. temporarily increase the Medicaid federal medical assistance percentage (FMAP).

In the coming days, we will have more information on the potential impact on employers. To be clear, the employers will bear the brunt of this legislation, especially when it comes to paid sick leave. But, there are mechanisms available to work within this framework, and some relief provided by the federal government.   

December 23, 2019

Treatment of Monetary Gifts When Filing an Offer-In-Compromise with the IRS

Canva - Several 20 Us Dollar Banknotes

 

As tax attorneys and professionals in Columbus, Ohio, we assist taxpayers in utilizing the Internal Revenue Services’ (the “IRS”) available collection alternatives to help manage their federal tax liabilities. These alternatives, including Installment Agreements and the Offer-in-Compromise process, can help reduce or eliminate tax liabilities arising from an IRS examination or audit.

When considering the payment plan proposed by a taxpayer filing an Offer-in-Compromise, the IRS will investigate several months of the taxpayer’s bank statements, and scrutinize any item that is not explained or does not have supporting documentation. For example, if a taxpayer claims to have more expenses in a month than they have income, the IRS will question how the taxpayer is able to pay their monthly expenses. If the expenses are paid in full, the IRS may suspect that the income reported on the Offer-in-Compromise is lower than the taxpayer’s actual income. This would prompt the IRS to investigate the account further. If no reason is given for the discrepancy, the IRS may deny the Offer-in-Compromise.

In practice, it is relatively common for paid expenses to exceed earned income. When a person is in financial difficulty, they may receive help from friends and family to make ends meet, with or without concern that the money will ever be paid back. To the IRS, this can be seen as unexplained funds entering the taxpayer’s financial accounts from seemingly random sources. It is best to disclose the source of these funds so that the IRS does not deny the Offer-in-Compromise by default. However, this raises an interesting question:

Are these monetary gifts considered income on an Offer-in-Compromise?

The short answer is ‘no.' Per the Internal Revenue Manual, Section 5.6.5.20, there are certain items that the IRS cannot consider when estimating a taxpayer’s future income, which is used to determine a taxpayer’s ability to pay the underlying tax liability. Within this section of the manual are a number of examples for the IRS to follow when considering an Offer-in-Compromise. This includes the following example for a taxpayer receiving monetary gifts from related parties:

The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future, and the amount does not appear to be based on the transfer of assets to the parents. Do not include the gift amount as income.

This example contains a few conditions to be aware of.

  • The gifts have been received over a relatively short term period (in this example, six months). If the taxpayer has been receiving gifts consistently for a long period of time, the IRS may consider them as a stable source of funds available to satisfy the tax liability.

  • The taxpayer has no guaranteed right to receive future funds. This is an important distinction. If, for example, monetary gifts were received through the disbursement of a trust – one which would have a defined amount and period of time in which the funds are paid out to the taxpayer – then the IRS may very well consider such a gift as a stable source of funds to satisfy the tax liability.

  • The taxpayer did not receive funds due to a transfer of assets. This is, again, an important distinction: the case where a taxpayer indebted to the IRS sells or gifts a car to a family member for a fraction of its value opens up an entirely different conversation, where both the taxpayer and the benefiting family member may be subject to IRS investigation for attempting to hide assets.

In general, the IRS will not consider monetary gifts given to the taxpayer to help with monthly expenses as part of future income. As the IRS will investigate several months of bank statements when reviewing an Offer-in-Compromise, the taxpayer should include a narrative that explains the monetary gifts.

However, this is only the case when considering future income. When disclosing bank account information to the IRS as part of the Offer-in-Compromise, the IRS will consider the total amount in the taxpayer’s bank accounts as funds available to pay the tax liability. In this case, it does not matter how the money was received: if the amount is available in the bank account, the IRS may request a larger payment or deny the Offer-in-Compromise. So, if monthly gifts received exceed the expenses being paid, the excess can be considered as available funds to pay off outstanding tax liability.

So, in summary, monetary gifts to the taxpayer to assist with monthly expenses are generally not considered income when proposing an Offer-in-Compromise. Monetary gifts in excess of the amount spent, however, will likely increase the proposed payment amount on the Offer-in-Compromise.

December 18, 2019

Tax Attorney Vince Nardone Speaks at the 2019 Mega Tax Conference

image from www.ohiocpa.com

 

On December 10, 2019, Vince Nardone participated in a panel discussion with Jonathan Olszowy at The Ohio Society of CPAs Mega Tax Conference. Jonathan serves as the Ohio Department of Taxation’s Program Executive for the Taxpayer Services and Compliance Divisions. Vince and Jonathan discussed “Minimizing Ohio Tax Liabilities” while working with the Ohio Department of Taxation. We want to thank Jonathan for participating in this panel discussion and giving us the unique and very valuable perspective from the Ohio Department of Taxation and tips and guidance on working with the Department.

The Ohio Society of CPAs is the #1 provider of CPE for Ohio CPAs year after year, and the 2019 Mega Tax Conference was a great opportunity for CPAs to learn about the latest advancements on a variety of essential topics in the industry.  We appreciate and thank The Ohio Society of CPAs’ accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate. 

September 18, 2019

Obtaining a Claim for Refund from the IRS or Ohio Department of Taxation

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As a tax attorney in Columbus, Ohio, I routinely assist businesses with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and state tax agencies. As part of that representation, I try to keep individuals and businesses informed about new information and guidance provided by the IRS and the Ohio Department of Taxation (the “ODT”), as well as taxpayer rights. This article will detail the timeframe that an individual Taxpayer has to claim a refund.

Overview

For individual taxpayers, a tax refund commonly comes from overpayments made by their employer via W-2 withholdings. To the extent that these withholdings exceed the tax liability assessed by the IRS or another tax agency, the taxpayer is due a refund.  Overpayments may also occur when an error is discovered that results in a lower tax liability. This can be found by the taxpayer (in which case the taxpayer should file an amended return), or it can be discovered by the IRS or another tax agency (in which case the taxpayer should review the notice provided by the agency to determine the next step).

Refunds per the IRS

For individual taxpayers filing a federal tax return (the Form 1040), the limits on refunds are described in the Internal Revenue Code, Section 6511(a) and 6511(b). In general:

Refunds must be claimed within 3 years from the time the return was filed, or 2 years from the time the tax was paid, whichever is later.

Additionally, even if the above rule is followed, refunds can only be claimed on payments within the last three years of when the return was filed. For purposes of this calculation, taxes paid via an employer’s W-2 withholdings are considered paid as of the due date of the return.

In effect, an individual taxpayer will only be permitted a tax refund on payments made through their W-2 withholdings if the return is filed within three years of the filing due date, including extensions. In the case of amended returns resulting in a lower tax liability, a taxpayer has three years from when their return was filed to submit a corrected return to be eligible for a refund.

Refunds per the State of Ohio

For individual taxpayers filing a state tax return (the Ohio IT 1040), the limits on refunds are described in the Ohio Revised Code, Section 5747.10 and 5747.11. In general:

Refunds must be claimed within four years of the date of payment to be eligible for a refund. For the purposes of this rule, taxes paid via an employer’s W-2 withholdings are considered paid as of the due date of the return.

Even if outside the four-year limit, if the adjustment is due to changes made by the IRS (meaning outside of the taxpayer’s control), the taxpayer is granted 60 days from the IRS’s notice to file an amended return with the State and obtain a refund. Note that this limitation only applies to the portion of the return amended by the IRS and does not allow refund balances that have previously expired to once again become refundable.

This stresses the importance of filing timely tax returns, especially when the Taxpayer is due a refund. Please note that rules will differ when considering other tax forms as well as taxes filed in other states.  If you have any questions or would like more information, contact me at vnardone@nardonelimited.com and I would certainly be happy to discuss.

September 10, 2019

FBAR Penalty and Impact of Taxpayer’s Failure to Disclosure Foreign Assets and IRS’s Assessment of Penalties

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As a criminal and civil tax attorney, I like to report on and advise taxpayers about U.S. tax reporting requirements and obligations regarding foreign and domestic financial accounts and the importance of reporting previously undisclosed accounts or income. Although the reporting and enforcement involving the Internal Revenue Service (“IRS”) and taxpayers has been highlighted for over a decade now, the failure to report continues—subjecting taxpayers to significant penalties.  As discussed below, a recent federal district court, Schwarzbaum (DC Fl 8/23/2019), rejected an individual's claim that FBAR penalties assessed against him should be set aside because they were assessed after the limitations period expired.

Background

If a taxpayer has a financial interest in, or signature authority over, a foreign financial account, a taxpayer may be required to report the account to the IRS. It is important to understand that those who fail to meet the IRS’s requirements could face criminal or civil penalties.  Generally, U.S. persons who maintain a financial account in a foreign country—foreign financial account—must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury's Financial Crimes Enforcement (FinCEN) division. An FBAR is required for all foreign financial accounts a taxpayer maintained that had a balance exceeding $10,000 at any time during the previous calendar year. Under Title 31 USC § 3521(a)(5)(A), a taxpayer’s willful failure to file an FBAR may result in a significant penalty. And, as the Schwarzbaum court pointed out below, an FBAR penalty may be assessed at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty was assessed.

Facts in Schwarzbaum Case

As I understand it, between 2006 and 2009, the taxpayer, Isac Schwarzbaum, maintained several foreign financial accounts. According to the case reporting, the taxpayer failed to file FBARs for his accounts in Switzerland.  See the link for the actual case from the district court. In 2011, the taxpayer submitted an Offshore Voluntary Disclosure request, attempting to avail himself of the Offshore Voluntary Disclosure Initiative (OVDI). As part of his participation in the OVDI, the taxpayer signed an extension of the limitations period to assess and collect taxes and penalties related to his 2006-2009 returns.  The taxpayer then opted out of OVDI and underwent full examinations of his returns.

Nardone Comment: From my perspective, opting out was probably the first major mistake for the taxpayer. But, without knowing all the facts and circumstances, or the motivations of the taxpayer, there may have been very good reasoning for opting out at the time. So, it is hard to say.

As part of the examination, the IRS asserted a willful FBAR penalty against the taxpayer, which is not unusual in a case where a taxpayer opts out and puts the IRS through additional hoops and forces the government to continue to work the case. Thus, no one should be surprised that that the IRS took this position and assessed the penalty. Either way, the FBAR penalties (for tax years 2006-2009) were assessed in September 2016.

The taxpayer argued that the FBAR penalty assessments were time-barred. The IRS argued that the taxpayer voluntarily signed a consent to extend the limitations period to assess and collect taxes related to his 2006-2009 returns.  The Schwarzbaum court held that the taxpayer’s argument that the FBAR penalties assessed against him were time-barred was meritless. The court found that it was taxpayer’s burden to show that his voluntary agreement to extend the limitations period to assess FBAR penalties was invalid since that was the taxpayer’s affirmative defense. According to the court, the taxpayer failed to point to any legal authority to support his argument that the agreement he signed was invalid.  The Schwarzbaum court further highlighted that a taxpayer—who fails to press a point by supporting it with pertinent authority or by showing why it is sound despite a lack of supporting authority or in the face of contrary authority—forfeits the point. (Melford v Kahane & Assocs., (DC FL 2019) 371 F Supp 3d 1116)

Nardone Comment: In November 2018, the IRS replaced the OVDI with an updated voluntary disclosure program. If you would like more information on UVDP, see our previous blog article.

Conclusion

We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their foreign or domestic financial accounts, even if they have not done so in the past. The IRS offers options to non-compliant taxpayers when it comes to disclosing unreported financial accounts or income. But, taxpayers must be diligent when it comes to communicating with the IRS. That is why it is important to seek help from an attorney who has vast experience representing taxpayers before the IRS. Ultimately, if you have undisclosed foreign financial accounts, or would simply like more information regarding your filing obligation, contact me at vnardone@nardonelimited.com and I would certainly be happy to discuss.

 

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