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this is the current federal tax developments for the week of february 1st 2021. current federal tax developments are brought to you by kaplan financial education and your state society of cpas i'm ed zollers and we're doing this first week of february you're from phoenix where i'll be recording today's session and what we're going to look at today is a little less hectic week than last week we do have a few things to look at and a lot of it has to do with various things the irs has done this week first thing we'll talk about is a news release crs put out this week to deal with what's become a major problem that some clients may run into uh discovering that they've had their id stolen and was used to apply for unemployment during the pandemic so we're going to talk about what the irs suggests you do if you discover there is a 1099-g that has been issued for you for unemployment compensation that you never actually receive we'll also discuss the irs's new revised form 7200 draft that has given us our first clue about how the irs is going to deal with the advance on the employee retention credit for 2021. the irs announced an interim online system that will allow tax professionals to submit powers of attorney and information authorization forms it has both good and bad aspects to it and it is a temporary system leading to a more complete online system that the irs plans to bring out this summer and finally we'll discuss an aicpa letter that was listed to the irs regarding what the aicpa suggests be done for purposes of dealing with the paycheck protection program forgiveness applications that have already been submitted and the new employee retention credit for 2021 where it turns out no longer were you borrowed on getting the credit if you applied for a pp loan but you can't use the same wages to get your pp forgiveness and your employee retention credit and that creates some problems for people that applied and weren't aware that that trade-off was coming let's go into the first thing this which actually goes back to a story that came out this week the iris issued irs news release ir 2021-24 it was issued on the 28th of january and it deals very simply with a major problem i think a lot of us were aware of during the year that there were id thieves that were attempting to and sometimes successfully applying for unemployment compensation from the various states during the pandemic as we were kind of aware the states got flooded with unemployment applications when the pandemic hit unemployment went to new highs and they were grossly overloaded well thieves never you know will give up a good opportunity and this was a great one because there was a lot of pressure to get this relief out to people quickly and so states were trying to process this under a bit under a lot of pressure and so a lot of identity thieves said hey you know what why don't we try to do this i think a lot of us during the year became aware of people who got notified or actually got the payment sent to them via debit cards or whatever well that was easy because the id thief essentially uh didn't manage to get it right they didn't get the payments redirected well as probably should not be surprising some of them did manage to get the payments redirected and now people are discovering that someone had applied for unemployment on their behalf because now they're receiving a 1099-g from the state in question indicating they had received so many thousand dollars worth of unemployment compensation which in fact they never actually received during the year now i'm sure there's another category of people that'll come up later that will discover uh also had their id stolen also had fake unemployment issued in their name but for whom the address was actually successfully changed by the thieves as well so the 1099 is not going that direction either so yeah i don't think we're done with this yet but let's talk about that group now who did get the 1099-g and are now sitting there staring at this report of income well you know as you know that's going to the irs and we would assume that a cp 2000 would follow unless these people do something about that form so the irs is suggesting what they should do now the irs suggestion which is no question theoretically correct is that you should contact the state unemployment office which i would strongly suggest anyway because obviously there is fraudulent claims out there and the problem is once they discover it was fraudulent uh you know they may very well come back to you the person who had your id stolen and want the money from you if you hadn't reported the fact that there was a fraudulent claim filed on your behalf so you want to get the fraudulent claim process started but the other theory is that the irs is suggesting that you get the state issue a01099g i don't know about you but that it should work but i also know that many times large entities have trouble issuing this they don't want to do it especially because these are going to dribble in over time so there'd be a flood of all these 1099 gs with zero balances to put in and i can see some people just not getting these corrected not being done timely now the irs did advise the states that in such a case where there has been a fraud they did they should not have issued a 1099-g but whether or not the states are going to fix it uh that remains to be seen so i do want to remind you of one thing just in case you have a client that has this happen they should try to get the 1099 corrected they definitely should contact the state employment office both of those make sense but if you can't get it corrected or at least it's not been corrected by the time they go to report their individual return uh of course what i would strongly suggest is you both report it and back it off that would hopefully allow the matching to catch it and you have explanation if the irs does try to assess and this will apply to those that i think unfortunately are going to discover that the id thieves got the address changed as well so 1099g never arrived for this particular taxpayer uh don't forget about internal revenue code section 6201 d 6201 d is a very useful session section not section but section that takes effect whenever you have a 1099 you receive that in fact does not represent income the taxpayer ever received there are some requirements here but if you follow them you put the burden back on the irs they're not allowed to simply go forward from the 1099 to assess the tax and basically what it says is the taxpayer has to raise a reasonable dispute about the payment which in this case is i didn't get it i have no record in my bank account of it getting it you know i have nothing of this sort fully cooperate with the irs you know don't just you know go well i'm going to ignore this because hey you know they can't collect it from me i love clients who have that theory right about what the irs can't do they can't just do this it's like yeah they can and if you want to take that position they can't just do that then things will probably go very badly so let's go back to what they can do and what you can do to shut this down which is this so fully cooperate if the iris wants to see copies of the bank you know your bank account statements obviously you would provide those say yeah there there's the deposits these are from my paychecks there's no unemployment coming into my account right i have no record of this if you fully cooperate again it depends what the irs wants to see but the irs is required then to go back to the state to get proof of actual payment to you and get information and at that point they should be able to get from the state that okay this amount was paid out it was paid out to this account you know it was paid out to this debit card whatever and we're back and forth that given the level of fraud that took place my guess is we're going to be pretty much done with the discussion at that point at least from the tax standpoint so yeah watch out for that this year it's definitely going to be a problem next up the irs put out on the 28th a draft version of a revised form 7200 the january 2021 revision if you remember the form 20 7200 is used to claim a refund by faxing this in where you have refundable payroll tax credits which we added you know both the families first coronavirus relief act we had both qualified sick pay qualified family leave pay and we also had the employee retention credit if those credits are greater than your payroll tax deposit that is due you're allowed to get the excess over that deposit refund it to you directly and you do that by form 7200. 7200 is faxed into the irs now this is a draft form so the first caveat is don't go submit it right now because it is a draft it's not to be used until such time as the draft becomes final and we still don't have the instructions the draft version of the instructions to go with this form 7200 but what's interesting about it is it is the first time we have received some information about what the irs plans to do about the advanced employee retention credit taxpayers you know employers i should say this year uh who expect to qualify for the employee retention credit are allowed to apply for an advance at advance is equal to 70 of the payroll that you know the average payroll they had back in 2019 on a quarterly basis and the idea is we would get this paid up front now if you do that it does offset your employee retention credit for all future payroll tax deposits so of course you'd end up having to pay in the deposit at this point forward but you'd have the cash today and you get the advance on the erc if it turns out ultimately you do not have enough employer retention credit this year to use up that 70 of your average wages from 2019 for a quarter then eventually it'll be paid back be paid back actually technically they are going to treat that as if they're going to just assess some additional employer fica that's a clean up option only but the answer is we're going to do this so you want to keep your eyes open because it really was a question how are we going to get this advanced money in taxpayers hands quickly now some of you may be thinking well this isn't very quick we're already one third of the way through the first quarter and obviously you know there's going to be additional and by now you might have actually already used some erc and so you get the advance it's like well i know i'm probably paying a chunk of this back so that that's up to you whatever although it does appear the irs is saying being aware of this that the total amount you can put on that line is going to be limited to the erc that you would qualify for in advance so whether you're claiming the advance or not you're going to be limited on your 7200 at a maximum at any point in time just showing the amount that you would qualify for under the credit so in theory if you've already got money earlier or you've offset payroll tax deposits earlier this should uh basically take care of itself in terms of not over refunding you the money now that limit on the erc is kind of an interesting one because if you let's say you just didn't have much payroll in 19 you were just barely getting started and you know and you do still qualify because you're in a distress you're in the period where you have a full or partial suspension of your business so you qualify under that test not necessarily on the reduction of revenue test you could end up qualifying for more erc than what you had back in 2019 based on that payroll it does appear at least this draft is not going to let you get that to your file 941 you will see if the final version changes that i suspect somebody may comment on that before we go forward next up the irs is going to go part way to try to get a way for tax professionals to submit powers of attorney and information authorization forms to the irs this is news release ir 2021-20 it came out on the 25th of january and this is going to allow individuals who have a secure professionals who have a secure access account with the irs to upload forms 2848 the power of attorney form and form 8821 the form for our you know for disclosure authorization to the tax professional they're going to be allowed to upload that to the irs as opposed to mailing in the forms or faxing the forms in now part of the reason for this is as we'll discuss the irs is looking to move to a fully electronic system they're not ready to go there yet so they're going to try this system this system has pros and cons and i i guess it's not really a huge con except what sounds like a really simplified way to get these things through which it is but it may be a problem if you need quick action because as we'll discover there there's a problem here but so the first thing is you know you have to be signed up online with the irs and you have to be able to have a secure access account with the irs that includes the current username and password or you've got to create that secure access account so assuming you have that then you're going to be able to effectively upload to the irs these forms now okay that seems like no big deal right we do that what's is this really that much better than faxing them up to the irs maybe let's talk about the advantage here one nice thing about this is you know currently i need a wet signature as the term the iris is going to use pin on paper from the client authorizing me to you know basically send in the power of attorney the power of attorney is not valid unless the client has that wet signature on the piece of paper i have to get the piece of paper to the client the client has to sign it and then i can go ahead and fax that form up to the irs the irs in this case for the uploaded forms from professionals who have secure access they are going to accept the forms with what the irs will refer to as an electronic signature so the signature could still be handwritten your client can still sign a piece of paper date it and send that back to you or you can use the electronic option now the irs wants to be clear and this is where you you perk up a bit they're saying electronic signature does not necessarily mean a digital signature a digital signature is a type of electronic signature so the digital signature systems can work but other methods are available let's talk about the difference between electronic signature and the subset called digital a digital signature using things like docusign right signature adobe's electronic signing offer option those are those digital signature systems generally involve some form of authentication and some form of you know way of locking down on the document saying this signature goes to this document and there is a way to lock that down tell us where the person signed from maybe their ip address etc document various issues also if you're using it for like electronic filing of tax returns you've been used to also having knowledge based authentication in order to prove that person is really the person they claim to be well that type of system whether with kba or not is not what you need for this you can use that so if you have your client signed with docusign use acrobats option you're using right signature that will still work for this purpose but the irs will allow something far simpler and they give some examples of this it's just some way to get an approval on the document that could include the client doing nothing fancier than typing their name on the signature block and typing the date you just bring it up in acrobat type your name on as a comment type the signature that's good enough that'll work it could be a scanned or digitized image of their signature that's attached to the record so you know if your client has that you know we have that option many times you can do that on the phone using an adobe sign option adobe has an app that lets people do that just sign those things other pdf programs will do it as well you could have a handwritten signature onto electronic signature pad if you have that available a handwritten signature mark or command input on display screen with a stylus or a signature from third party software that would be like the that would be the electronic type signature options any of those can be sent up through this system so essentially i can make it very very simple for the client to download the form let's say from my portal just type their name however they get their signature on there upload it back i can send it in now couple of issues with this first thing is it's not going to be faster the irs still is going to process your request to get into the caf system on a first come first serve basis so it's not as if these go to the head of the line and that's going to be a bigger problem because for all other they will not accept these electronic signatures except via this system and why that's a concern i don't know about you but sometimes of course i'm getting the form signed because there is a pressing irs matter and i can't really wait for caf to get this you know into the system now the irs claims they cannot accept other than wet signatures outside of this and the term they use is a wet signature i love this wetting sweat ink signature pen to paper is for a security reason right there they're using essentially they don't say it but effectively they're using secure access to make sure that you are the professional sending it in and if that's happening then they're going to accept how you're doing it okay but the problem is that if i have to send in the copy of the 2848 to a person that i call on the practitioner hotline or try to deal with this issue if the irs is not going to accept the uh you know electronic signature if i fax it to the main line i have a feeling they're also not going to accept it when i try to fax it to that iris agent on the phone with me maybe i'm wrong but i'm guessing that may be a problem so it may turn out that i'm still going to be better off even though i may submit using this system i may not use the electronic form unless i'm submitting for something that will not be pressing with regard to time the other catch is you can do this for your clients you already have a relationship with no problem however if you do not currently have a relationship with the client then you have to uh use a system to otherwise authenticate them now this obviously kba could be done with electronic signatures that would appear to be valid but they do have other ways of doing it so basically let's talk about an individual a brand new person a client contacts your potential client contacts you they got an irs issue and they they need a cpa to help them resolve it so you decide yep i'm going to step up i'll go i can do that but it's the pandemic right so i don't really want to meet them in person to authenticate potentially they don't want to meet me in person to authenticate so what we can do is i need to take the following steps what they suggest is i need to inspect a valid government-issued photo id that could be a you know a driver's license which is most likely an employer id uh you know it was those things which i love that employer i would assume that's if the employer is the a school id probably for government state id military id national id voter id visa or passport and i can inspect that and i've got to see them so i got to get this picture of them on the id and i've got to see them they do say that can be done via video conferencing or via a self-taken picture of the taxpayer so i could just get them together on a zoom conference i can see i'm gonna turn on their camera so i can see them so i see them and then they could hold up their passport or their driver's license to the screen now i would probably want to use something like the built-in snipping tool if you've ever used that in windows you know just hit the windows key and type in snip and you'll find out that there'll be an option there that will let you snip from the screen and i would probably snip from the screen when they're showing the passport also snip from the screen when they're on the screen to show yep i verified it's the same person and file that away i also need to record the name social security number or itin number address and date of birth in that case and i need to verify that information i just recorded through secondary documentation such as a federal state tax return the irs notice their letter i'm probably going to have that right so security card credit card utility statement right and if they change their address then i could take a look at their tax return and then the utility statement to prove that okay the tax return shows me information about them id social security number etc from last year and then they moved well i've got the utility statement that would establish their address the irs provides other steps for corporations s-corporations partnerships as well as for not-for-profits right and you need to retain that proof of authentication that'll be the key now the irs then ends in describing they have a plan to go to a system eventually that will be fully electronic and result in instantaneous they claim submission into the caf system and that will be one where the tax professional will be able to sign online the taxpayer will need to set up a secure access account basically but then they can electronically sign and when they sign then the form will be submitted at least that's what they claim now that could get interesting because normally they have to appoint us as ta as for power of attorney and then we had to accept and we couldn't accept on any day before they appointed us so iris is describing would seem to be a change to that and we'll have to see if that's what the iris really means or if there's going to be another issue there but that is their plan to go fully electronic finally let's discuss an aicpa letter that was set to i think at this point probably former individuals in treasury because it was sent on january 15th as you may remember five days later we changed administrations but also to the commissioner and presumably it was forwarded to the appropriate people currently in treasury or at least those who are filling in for now with the aicpa suggestions about how to deal with this new employee retention credit issue for 2020. the issue is pretty straightforward we thought initially last year remember you could not claim an employee retention credit if you received a paycheck protection program loan okay so everybody who got the ppp loan you know they made their choice they said hey the pb loan looks like a better deal for me than they play retention credit so i'm gonna go get the pp loan understanding that they also then do immediately that they would not be able to do an employee retention credit so when it came time to apply for forgiveness a lot of them who applied last year and there were people that did some banks allowed it right and some people actually got their forgiveness well i've talked with people in that position i've talked with cpas who are working with people in that position and many times the question arose look we had a 24-week period to spend the money payroll alone will get rid of the whole loan do i really have to go back and you know limit the payroll to just what we need for you know cancellation or and also deal with all those other expenses we could have used because hey the payroll by itself would give us full cancellation and the sba had already told us that no you didn't have to submit any expenses beyond once you had enough qualified expenses that got you forgiven you didn't need to have any others so there were a number of taxpayers that did just submit their payroll and also didn't want to bother with cutting it off you know they just submitted all payroll for the 24 weeks saying hey that was easiest and i don't i have to worry about when we're going to cut it off and all those issues so we just submit our documentation that also means if there's some part of the payroll they didn't like i have more than enough to cover me so i get full forgiveness and there's no downside then we got the new bill and in the you know in the extension of the employee retention credit we discovered unfortunately that now we have a special rule that says we cannot claim the erc on wages that were also used for forgiveness now the problem comes out what if the client basically submitted excess wages on their forgiveness form that was already processed by december 27th when the new erc provision came into the law now is the taxpayer is the bar where i should say just out of luck and the aicpa says look that that really shouldn't be the case obviously nobody knew that this was there and people you know were filing for forgiveness and had no idea there's going to be this secondary problem so what the aicpa is recommending that people end up doing is that the irs provide guide stating that the filing of the loan forgiveness does not constitute an election to forego the erc if the amount of wages upon the application form that exceed the amount necessary for loan forgiveness and the aicpa's view that would even include a case where we have expenses we didn't submit but we could have submitted and those expenses along with payroll let's say that was limited to what was necessary to spend 60 of the loan on payroll that we could minimize that number and again some things that are payroll costs for pp loan forgiveness purposes are not payroll costs for the employee retention credit and we have that limit of 10 000 for 2020 on the wages so in essence there's an optimization option here you could work with so can we go back and now optimize since we know about this issue the aicpa offers a couple of examples one of which is you just need a million dollars you know to get forgiveness you submit a million five of wages the taxpayers should or the borrowers should in that case obviously be able to say look i can take 500 000 of those wages and i can apply them to the erc as well they say and what if we had a whole bunch of other expenses that we just didn't bother submitting because hey look we were so far over the top on payroll it didn't seem to matter the aicpa wants crs to allow the taxpayer to if challenge submit that proof now the problem is as of right now it's just a request and we haven't had any response from the irs about what they're going to do they are still talking all we have is what we discussed last week about that very narrow uh exception they put in place to get your erc refunds for last year based on you've been totally denied so we don't really have anything yet i'm going to hope we get guidance like this from the irs but again we'll have to wait and see the irs has still not done anything for erc my own take is the service prioritized they were given a lot to do in a very short time frame uh the first priority was clearly getting the 600 checks out so they got the computer systems updated for that the second priority is going to be getting e-filing running for individuals that's february 12th i wouldn't be shocked to see this guidance come out basically following that or very close to february 12th i i think it's going to be in a position after they've got personnel they've got the computer systems rewritten then they can move on to dealing with the computer systems to deal with the erc and the refund claims they may get in that regard so like i said i wouldn't be surprised if the erc we're not sitting well into march before people can actually be comfortable with the level of relief they're going to get for the erc or 2021 or even begin to go for claims for refund in 2020. i realize that's not very good for what's supposed to be a relief program but i think the catch was something had to give and the irs is prioritizing you know which one of these is going to get the least squawking and i guarantee you there's already enough squawking from the 10 40 rule not being able to start until the 12th of february that i suspect they've decided you know what this erc just is going to be one of those things that we'll deal with when it finally comes up well this has been the current field tax developments for the week here of february the 1st 2021. uh i again if you have any questions or comments you can email me ed zoller's at current protections.com you can follow me on twitter at ed zoller's i tend to post and we do updates we have our update site at currentfieldtax development.com where you can read uh information as we post updates during the week i also follow along on the connect sites for a number of cpa societies arizona new jersey minnesota illinois washington so if you have you know if you're a member of those and you post there and i see it and i think i can be of help i'll try and chime in on those and also you know we still have a few things coming up here i will be doing a course later in february a monthly update another update on the pp loan where we are with covid stuff where the new jersey society will come up later this month uh we'll also see about if anything else happens and we're kind of getting outside of the cpe season i suspect that unless we see a relief bill passed very very quickly that probably most of you unless there absolutely is something that you have to understand right this instant are probably going to be looking at learning that bill if it comes after taxes unless we have to pay attention before then but if we if it does turn out it's relevant we might be looking at doing something if any new bill comes up otherwise be sure to come back here next week we'll talk to you about all the issues what else we may find out happens maybe we'll get some erc guidance so we can start working these employee retention credit refunds and whatever else may be happening here in the area of federal taxes