While more and more legislation is introduced that penalizes all of us for doing things wrong on our tax returns, please remember that at its origin, tax collection in the U.S. is a voluntary. In other words, the tax code is defined, we are given due dates, and the government asks us to voluntarily comply.

When you don’t, there are late filing penalties, underpayment penalties, fines, fees, interest and other imposed compliance incentives including audits. To help guide Congress and the Treasury department, there are ongoing studies conducted to try to calculate the trends in non-compliance.

The Tax Gap

The result of this research is an estimate known as the Tax Gap. As you can imagine, calculating this Tax Gap is made very complicated due to the complex nature of the tax code. Here is the IRS’s most recent Tax Gap projection.

Key observations

• Around 85% of the tax liability is actual paid, leaving underpayment of approximately 15%.
• Collection activity (audits, etc.) brings back approximately 1 to 2% of the underpayment.
• This leaves a projected tax gap of over ½ trillion dollars
• The gap consists of non-filing, under-reporting, and nonpayment, of which under-reporting tax liability is the largest culprit.

So what?

• The more that is under-reported, the more likely audits will bear fruit and increase over time.
• The less compliance, the more likely there will be an increase in pre-baked penalties. This can be seen in the recent trends to fine for late filing of W-2s and 1099s.
• Knowing this Tax Gap information suggests it makes sense to not be in the Net Tax Gap box as that is where compliance is focusing its attention.

During the recent chaos of Federal employment moves over the past couple of weeks, two actions will impact how filing your tax return this year could go and how to prepare accordingly.

Voluntary termination

After being offered voluntary termination, approximately 75,000 employees across all departments of the federal government took up the executive branch’s offer. What isn’t known at this time is what areas of government services will be impacted.

6,500 terminations at the IRS

As part of the executive branch’s trimming of the government, all newly-hired IRS employees were terminated. This includes about 6,500 new hires (approximately 6% of all IRS employees) as part of the IRS’s recent workforce expansion. For those that follow the news, this trimming appears to be politically motivated as the recent expansion of their workforce was a fairly partisan affair.

What it means for you this tax season

The remaining staff are unsettled. There will be greater workload, sadness, and uncertainty about job security for the remaining staff at the IRS. This means getting your questions answered may be more difficult.

IMPACT: If you need a question answered by the IRS, be prepared to wait longer. You may also find it more difficult to get a qualified answer. Should you speak with an IRS representative, try to show some compassion for their situation.

Open questions may take longer to close. As you may recall, during the pandemic the IRS suspended the mailing of notices to taxpayers. When the backlog of notices was turned back on, many taxpayers found themselves facing potential liens because prior notices were never sent. Until the mailing of notices were turned back on, many these taxpayers were unaware of any problems with their tax records. This backlog still exists and will get worse.

IMPACT: You’ll probably have a hard time getting someone on the phone who can help with your particular problem. And responses to your mailed replies to IRS notices is taking a very long time. So be prepared to respond multiple times concerning the same issue. Consider sending all correspondence to the IRS using certified mail so there is evidence should you need to prove the timeliness of YOUR replies.

Don’t expect audit rates to go down. Audit rates are already extremely low, with a significant portion of the audit activity now being identified automatically through computer generated correspondence audits. The irony here is that given the progressive nature of the individual tax system, the majority of tax is paid by a minority of taxpayers. Audits will still naturally follow the potential for a return-on-investment for the time spent auditing a particular tax return.

IMPACT: Double check your 2024 tax return documents for missing items. This is especially true for all 1099s! And double check that they are correct. If you report an incorrect dollar amount, you can almost guarantee you will see a notice from the IRS. And be prepared to defend your deductions with proper documentation.

It’s unfortunate that the idea of voluntary compliance to help fund our government is so chaotic and more political than ever. The best approach is to comply with the tax rules and adjust according to the situation. And this is where our service can help.

In its most recent annual report to Congress, the Taxpayer Advocacy Service outlines troublesome trends it sees in the processing and administration of tax returns and taxpayer support. By law, the National Taxpayer Advocate’s report must identify the 10 most serious problems taxpayers face in their dealings with the IRS and make administrative and legislative recommendations to address those problems. One of the most critical issues identified in their recent report:

Continuing delays in resolving identity theft cases

Per the report, “For cases closed by the IRS’s Identity Theft Victim Assistance (IDTVA) unit in Fiscal Year 2024, the average time it took the IRS to resolve identity theft cases and issue refunds to the affected victims was almost two years.”

Talk about frustrating! It currently takes up to two years to get a victim’s tax records corrected and receive a refund when you have already been made a victim by the ID thief!

While the Taxpayer Advocacy Service is recommending changes, it will take some time to implement by the IRS. So what do you do in the meantime? Here are some tips:

File early. If you have any reason to believe your identity is compromised, file your tax return as early as possible. For example, if you received notices during the year from any businesses that their records may be compromised and exposed some of your personal information, this is a signal that you may be at risk.

Check your credit reports. Remember, each year the three major credit agencies are required to provide copies of your credit report free of charge. The beginning of the year is a great time to check. If you see anything fishy, file your tax return immediately. These reports can be ordered at: AnnualCreditReport.com

Consider the IRS Identity Protection PIN program. While not for everyone, if you are worried about IRS Identity theft, sign up to receive a unique id or PIN to be used when filing your federal tax return. While it can be a hassle, it will help avoid anyone else filing using your identification.

In the meantime, there is hope that the Taxpayer Advocacy report will motivate the IRS or someone in Congress to take action to help victims receive more timely resolution to their problem.

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FIN-2025-CTA1 February 18, 2025
FinCEN Extends Beneficial Ownership Information Reporting Deadline by 30 Days;
Announces Intention to Revise Reporting Rule

The on then off then on again requirement for small businesses to report their beneficial owners to the federal government is now on again with a new reporting deadline of March 21, 2025. This represents a “stay” of a judge’s order to eliminate the requirement. In other words, the filing requirement may be removed, but until it is, most small businesses need to still file the report.

Should you file the report for your business?

Per the notice:

Notably, in keeping with Treasury’s commitment to reducing regulatory burden on businesses, during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.

The current ruling says yes…but it probably will change if you can read into this notice. Here is a link to the announcement: FinCEN Announcment

The tax code allows deductions for qualified miles driven for business, medical, moving and charitable purposes. But to claim this deduction you must keep adequate records of actual miles driven. During an audit, this is an often disallowed deduction, despite the fact that you actually drove the distance claimed. How can you make sure this doesn’t happen to you? Here are some tips.

1. Keep a log. The tax code is clear on this point. You may not estimate your miles driven. You must support your claimed deduction, ideally with a detailed mileage log.

2. Create good habits. Your odometer reading and miles driven should be noted as soon as possible after the event. Keep a log book in your car and note the miles driven each day. Logs created after-the-fact with estimated miles driven could be disallowed during an audit.

3. Make thorough entries. Note the odometer readings, date, miles driven, the to/from locations, and the qualified purpose for the trip.

4. Don’t lose out on the extras. The deduction for miles driven is meant to provide a deduction for fuel, depreciation, and repairs. You can also deduct out-of-pocket expenses for tolls, parking and other transportation fees. Keep a running total of these fees in the back of your mileage log.

5. Keep separate logs for each deduction. Remember you may deduct mileage for business, charitable purposes, qualified moving and medical miles. It is best to keep track of each in a separate mileage log.

6. Alternative business transportation deduction. When it comes to deducting business transportation expenses, remember the miles driven method is not the only one available to you. You may also deduct your actual expenses, but how and when you make this determination is important. In the initial year of placing your vehicle into service for your business, it is best to keep track and record all your actual auto expenses. An analysis can then be conducted to see which method is best for you to maximize your deduction.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
All rights reserved.

As informational tax forms start flowing in, you are reminded to review the forms and determine the correctness of the form. One of the keys is whether your employer (or contractor) sends you the correct form. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment-related taxes. Here is what you need to know.

The basics

As a contractor. If you are the worker and you are not considered an employee you must:

• Pay self-employment taxes (Social Security and Medicare-related taxes)
• Make estimated federal and state tax payments
• Handle your own benefits, insurance, and bookkeeping

As an employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

• Payment and penalties related to Social Security and Medicare taxes
• Payment of possible overtime including penalties for a contractor reclassified as an employee
• Legal obligation to pay for benefits

Determining the answer: Things to consider

Usually in determining whether you are an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and you, the worker. The IRS focuses on the degree of control exercised by the business over the work done, and they will assess your level of independence. Here are some tips.

• The more the employer has the right to control your work, when the work is done, how the work is done, and where the work is done, the more likely you are an employee.
• The more the financial relationship is controlled by the employer, the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
• The more business-like the arrangement, the more likely you have an independent contractor relationship.

Don’t forget your obligations

With so many workers now in the contractor ranks, it is important to stay on top of your tax filing obligations. With 15.3% of your income due for Social Security and Medicare taxes, forgetting to pay this can quickly become a financial nightmare.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged by the IRS. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.

In late December, the IRS announced plans to issue automatic payments to eligible people who did not claim the Recovery Rebate Credit on their 2021 tax returns. The payments should be received in late January. No action is needed for eligible taxpayers to receive the credit with a maximum payment of $1,400.

Background

As part of various COVID-19 relief programs, the federal government issued Economic Impact Payments and a Recovery Rebate Credit. The latter was to be awarded on 2021 income tax returns. Upon reviewing internal data, the IRS determined that approximately one million taxpayers overlooked claiming this refundable credit. The IRS would not typically take proactive actions to pay out this money…instead the agency would normally remind taxpayers to claim any and all refunds before the statute of limitations runs out, which in this case is April 15, 2025. But in a surprise to many, the IRS is deciding to be proactive in this case.

What you need to know

No action is required on your part. If you or a family member is eligible for the credit, the IRS will automatically deposit the money in the direct deposit account noted on your 2023 tax return. If no bank account is noted, you will receive a paper check. Things to note:

• Should you receive a payment, it is legitimate. There should also be a letter from the IRS explaining the payment.
• Most taxpayers already received this credit. So no need to call wondering if you are going to get a payment. While $2.4 billion in payments going out is no small number, it only represents a small percentage of total payments to all taxpayers.
• Double check 2021 non-filers. If you know of someone who did not file a 2021 tax return, it may be worth looking at doing so before April 15, 2025 or the ability to claim this credit goes away.

To learn more: See IRS IR-2024-314

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
All rights reserved.

As a reminder, tax season is also tax scam season for savvy criminals. As you prepare to file your tax return, here are some things to know to reduce your risk of having your valuable personal information stolen. These tips are provided by the IRS and other experts.

• Scam sources are typically over the phone, email and even in person!
• The IRS DOES NOT initiate contact by email or request personal or financial information in this format.
• The IRS typically initiates contact via mail.
• On rare occasion the IRS will call. When this happens, get the IRS agent’s name and badge number. Then hang up and call the IRS independently (not the phone number they give you). Better still, call your tax professional!
• Email phishing. If you receive a suspicious email DO NOT OPEN IT or any links. Do not reply or open attachments. Report it to phishing@irs.gov.
• Phone scams. Do not give personal information to unsolicited phone calls from the IRS. Even if it looks legitimate. Scammers are getting good at spoofing legitimate phone numbers on your caller id. Report the caller ID and call back number to the IRS using phishing@irs.gov. Put IRS phone scam in the subject line.
• Payment. Only pay the US Treasury directly. DO NOT pay anyone else, even if they threaten you. No one is allowed to collect money directly from you.

Finally, the IRS and Federal Trade Commission have tons of material regarding these thieves and their techniques. Become familiar with them and reach out for help, as a tax professional may be able to help read through the scam.

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FinCEN BOI reporting requirement on hold once again

Required filing of beneficial owner information (BOI) on FinCEN.gov continues its roller coaster judicial journey. On December 26th, the requirement to file is (for now) officially on hold once again pending further judicial review. Last week the injunction to halt the filing requirement was overturned leaving your business until January 13, 2025 to file your report. Now that ruling is suspended. Go to FinCEN.gov to learn more.

The beginning of each year is a great time to start next year’s tax planning. One area to help reduce your tax obligation, that benefits from an early in the year start, is leveraging your kids to the fullest using the kiddie tax rules.

Background

The term kiddie tax was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2025 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,700 be taxed at their parent’s tax rate.

Applies to

• Children under the age of 19
• Full-time students under the age of 24 and providing less than half of their own financial support
• Children with unearned incomes above $2,700

Who/What it does NOT apply to

• Earned income (wages and self-employed income from things like babysitting or paper routes)
• Children that are over age 18 and have earnings providing more than half of their support
• Children over age 19 that are not full-time students
• Gifts received by your child during the year

How it works

• The first $1,350 of unearned income is generally tax-free
• The next $1,350 of unearned income is taxed at the child’s (usually lower) tax rate

The excess over $2,700 is taxed at the parent’s rate either on the parent’s tax return

Planning thoughts

So while your child’s unearned income above $2,700 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

Create accounts in your child’s name. Establish a Uniform Transfers to Minor Act (UTMA) account at your favorite bank and/or investment institution. This will allow you to manage assets in the name of a minor child. Then gift cash or investments into the account. Gains and interest in the UTMA account will now create unearned income in the name of the child. Be aware of annual gift limits to keep reporting simple (currently $19,000 per individual per year in 2025). Build these accounts to provide up to $2,700 in unearned income each year.

Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.

Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.

Leverage gift giving. Each year, if your children are not maximizing tax-free investment income consider gifting additional funds to allow for unearned income up to the kiddie tax thresholds.

Properly managed, the kiddie tax rules can be used to your advantage. But be careful as your child reaches their legal adult age, this part of the tax code can create an unwelcome surprise if not handled properly.

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Small Business ALERT:

Department of Justice FinCEN Judicial order is overturned.

What this means. All firms must register their beneficial owners (BOI) through the FinCEN application as originally dictated by the law. The law was ruled an overreach by a judicial order earlier this month, but in an emergency ruling the Justice Department got the order overturned. The original filing deadline of 12/31/24 is now extended to 1/13/25. If you are a small business and have not registered your owners you will need to ensure you comply. Go to www.FinCEN.gov and review the information.