WASHINGTON — The Internal Revenue Service today issued a memorandum that provides interim guidance to the agency’s compliance staff on requests to designate issues for litigation.

Designation of issues for litigation, a decision that is made with the Office of Chief Counsel, limits a taxpayer’s opportunity to administratively resolve their case with the IRS Independent Office of Appeals. Disputes between the IRS and taxpayers over designated issues must be resolved through litigation. The IRS took this step to update and clarify its designation procedures as part of its implementation of the Taxpayer First Act (TFA) enacted in July 2019.

The IRS’s approach of judiciously designating issues for litigation balances the need to soundly administer the tax law while recognizing the important role of Appeals in resolving tax controversies without litigation.  The designation of issues for litigation has been and remains infrequent. The IRS recently submitted its first TFA annual report indicating that no issues have been designated for litigation.  For perspective, the Office of Chief Counsel annually litigates between 25,000 and 30,000 cases in the United States Tax Court, many of them involving small dollar amounts and pro se litigants. 

The process of designating an issue is exhaustive. It involves several written notices and opportunities for the taxpayer to avoid designation and is subject to the highest level of oversight within the IRS and Chief Counsel. It also includes the opportunity to personally meet with the Chief Counsel to make a case against designation. The TFA codifies this framework and high level of oversight. It also sets forth the specific elements for the written notice required to be provided to the taxpayer and grants taxpayers the right to administratively appeal designation determinations.

The designation procedures set out in the memorandum will be incorporated into the Internal Revenue Manual, and corresponding changes will be made to the Chief Counsel Directive Manual.  This ensures that IRS and Chief Counsel employees adhere to the designation procedures and comply with the TFA provisions.  As part of the IRS’s ongoing implementation of the TFA with public input, comments on today’s release may be sent to TFAO@irs.gov.

WASHINGTON — The Internal Revenue Service today reminds IRA owners, beneficiaries or workplace retirement plan participants who received a Required Minimum Distribution (RMD) this year that they have until Aug. 31 to rollover or repay the distribution to avoid paying taxes.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, waives RMDs during 2020 for IRAs and retirement plans, including for beneficiaries with inherited accounts. This waiver includes RMDs for individuals who turned age 70 ½ in 2019 and took their first RMD in 2020. Roth IRAs don’t require withdrawals until after the death of the owner. 

Individuals who took RMDs in 2020, including those who turned 70 ½ during 2019, have the option of returning the distribution to their account or other qualified plan.

Since the RMD rule is suspended, RMDs taken in 2020 are considered eligible for rollover. Therefore, RMDs can be rolled over to another IRA, another qualified retirement plan, or returned to the original plan by Aug. 31, to avoid paying taxes on that distribution.

IRS Notice 2020-51 also provides that the one rollover per 12-month period limitation and the restriction on rollovers to inherited IRAs don’t apply to this repayment.

The CARES Act provisions apply to most retirement plans, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. The RMD suspension doesn’t apply to qualified defined benefit plans.

Where can I find more information?

More information on the CARES Act and retirement plans, including FAQs, can be found on the Coronavirus-related relief for retirement plans and IRAs questions and answers page.

Using a reputable firm or group can protect employers from fraud; options include PSPs, RAs and CPEOs

WASHINGTON — The IRS reminded employers today to carefully choose their payroll service providers following continuing concerns that some disreputable organizations can fail to deposit employment taxes, leaving businesses vulnerable to unpaid bills.

Many employers outsource their payroll and related tax duties to third parties. This streamlines business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.

“A business doing everything else right can suddenly find its future in doubt if it falls victim to an unscrupulous third party that fails to make the required payroll and withholding deposits,” said IRS Commissioner Chuck Rettig. “We want to encourage all employers to understand their obligations and choose wisely when it comes to selecting a trusted payroll service to carry out this critical function. This is especially important right now as businesses face unique challenges because of the pandemic.”

Though most of these businesses provide quality service, there are, unfortunately, some who do not have their clients’ best interests at heart. Each year, a few of these third parties fail to remit the payroll taxes entrusted to them and close their doors abruptly. The damage hits their unsuspecting clients hard.

“Most third-party payroll services do a good job helping small businesses meet their deadlines and payroll obligations,” said Eric Hylton, Commissioner, Small Business/Self Employed Division. “But each year some employers fall prey to unscrupulous third-parties that fail to send the IRS the taxes entrusted to them. We are vigilant in pursuing these third parties, but too often their clients – the employers − are left on the hook. The IRS wants all employers to take the necessary steps to protect themselves.”

Like employers who handle their own payroll duties, employers who outsource this function are in most instances still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee shares of Social Security and Medicare taxes. This is true even if the employer forwards tax amounts to the third party to make the required deposits or payments.

One third-party arrangement that can reduce this risk is the certified professional employer organization (CPEO). Unlike other third parties, in most circumstances, the CPEO is solely liable for paying the customer's employment taxes, filing returns and making deposits and payments for the taxes reported with regard to wages and other compensation it pays to its employees. More information on CPEOs can be found on IRS.gov.

Other third parties, such as payroll service providers (PSPs) and reporting agents (RAs) may also be right for many employers. A reporting agent is a PSP that has informed IRS of its relationship with its client (via Form 8655, Reporting Agent Authorization, which is signed by the client). A reporting agent is required to deposit its client’s taxes via the Electronic Federal Tax Payment System and is authorized to exchange information with IRS on behalf of its client, such as to resolve an issue.

For an overview of how the roles and obligations of PSPs, reporting agents and CPEOs differ from one to another, see the Third Party Arrangement Chart on IRS.gov.

“Employers should remember to watch out and do due diligence to help safeguard themselves – and their employees − from a payroll service provider failing to do what the law requires,” Rettig said.

“IRS Criminal Investigation is committed to investigating all tax criminals, especially professionals who have fiduciary responsibilities and violate the trust of their clients,” said Don Fort, Chief of IRS Criminal Investigation. “Those parties who do violate that trust may go to jail, but the defrauded employers’ problems are just beginning. There is no substitute for continued diligence in ensuring something so important is done right. Your employees are counting on you.”

The IRS urges employers to take a number of steps to protect themselves from unscrupulous third parties.

WASHINGTON – With millions of Americans now receiving taxable unemployment compensation, many of them for the first time, the Internal Revenue Service today reminded people receiving unemployment compensation that they can have tax withheld from their benefits now to help avoid owing taxes on this income when they file their federal income tax return next year.

By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.

Withholding is voluntary. Federal law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. To do that, fill out  Form W-4V, Voluntary Withholding Request (PDF), and give it to the agency paying the benefits. Don’t send it to the IRS. If the payor has its own withholding request form, use it instead.

If a recipient doesn’t choose withholding, or if withholding is not enough, they can make quarterly estimated tax payments instead. The payment for the first two quarters of 2020 was due on July 15. Third and fourth quarter payments are due on Sept. 15, 2020, and Jan. 15, 2021, respectively. For more information, including some helpful worksheets, see Form 1040-ES and Publication 505, available on IRS.gov.

Here are some types of payments taxpayers should check their withholding on:

Recipients who return to work before the end of the year can use the IRS Tax Withholding Estimator to make sure they are having enough tax taken out of their pay. Available only on IRS.gov, this online tool can help any worker or pension recipient avoid or lessen their year-end tax bill or estimate the refund they want.

In January 2021, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment compensation they received during 2020 in Box 1, and any federal income tax withheld in Box 4. Taxpayers report this information, along with their W-2 income, on their 2020 federal tax return. For more information on unemployment, see Unemployment Benefits in Publication 525.

WASHINGTON — The Internal Revenue Service and Security Summit partners today reminded tax professionals that federal law requires them to have a written information security plan.

Amid continuing security threats during COVID-19, the IRS, state tax administrators and the nation’s tax industry − working together as the Security Summit − also recommended practitioners create an emergency response plan should they experience a data theft. Contacting the IRS is step one in the plan to quickly protect tax professionals and their clients.

Making a plan for protecting data and reporting theft is the last of a five-part series called Working Virtually: Protecting Tax Data at Home and at Work. The special Security Summit initiative spotlights basic security steps for all practitioners, but especially those working remotely or social distancing in response to COVID-19.

“COVID-19 has changed the way many of us work, and more tax professionals are working from home. With these changes, there are new risks from cybercriminals. Our special Security Summit series was designed to give you critical information protect your clients and protect your business,” said IRS Commissioner Chuck Rettig.

“We all have a role in protecting taxpayer data, and the tax professional community is a critical part of that effort,” Rettig added. “It’s more important than ever to take appropriate security precautions, protect remote work sites, use two-factor authentication and plan ahead for all possibilities.”

Tax Pros: Create a Security Plan to meet FTC requirement

Federal law administered by the Federal Trade Commission requires all “professional tax preparers” to create and maintain a written information security plan that is appropriate to the firm’s size and complexity.

In addition, the FTC-required information security plan must be appropriate to the nature and scope of the company’s activities and the sensitivity of the customer information it handles. A plan for a sole tax practitioner would differ from a multi-partner, global firm.

Tax professionals working from home must ensure that client data is protected just as it would in an office setting.

According to the FTC, each company, as part of its plan, must:

Please note: The FTC currently is re-evaluating the Safeguards Rule and has proposed new regulations. Be alert to any changes in the Safeguards Rule and its effect on the tax preparation community.

IRS Publication 4557, Safeguarding Taxpayer Data (PDF), details critical security measures that all tax professionals should enact. The publication also includes information on how to comply with the FTC Safeguards Rule, including a checklist of items for a prospective data security plan. Tax professionals are asked to focus on key areas such as employee management and training; information systems; and detecting and managing system failures.

The IRS also may treat a violation of the FTC Safeguards Rule as a violation of IRS Revenue Procedure 2007-40, which sets the rules for tax professionals participating as an Authorized IRS e-file Provider.

Create a Data Theft Response Plan; Report Data Thefts to the IRS

Tax professionals who experience a data theft should report the crime to the IRS immediately so that actions can be taken to protect taxpayers – and the firm. The Security Summit partners recommend practitioners create a response plan so that actions can be taken quickly, and contact information is readily available.
If a client or the firm are the victim of data theft, immediately:

Find more information at Data Theft Information for Tax Professionals.

In addition to trying to steal client data, thieves may try to steal a tax practitioner’s identity as well, using their PTINs, EFINs and CAF numbers to file fraudulent returns or steal even more information. Thieves may even try to impersonate the tax practitioner to obtain tax transcripts or other tax records.

Practitioners should routinely check their IRS e-Services E-File Application to see a weekly count of tax returns filed with their Electronic Filing Identification Numbers or EFIN. Excessive filings are a sign of data theft. E-File applications also should be kept up to date.

Circular 230 practitioners also can review weekly the number of tax returns filed using their Preparer Tax Identification Number or PTIN. Again, excessive filings are a sign of data theft.

Preparers with Centralized Authorization File, or CAF numbers, that enable third party access to tax information or representation should keep those records updated. Practitioners should notify the IRS when they no longer need third-party authorization for clients.

Additional resources

Tax professionals also can get help with security recommendations by reviewing the recently revised IRS Publication 4557, Safeguarding Taxpayer Data (PDF), and Small Business Information Security: the Fundamentals (PDF) by the National Institute of Standards and Technology.

Publication 5293, Data Security Resource Guide for Tax Professionals (PDF), provides a compilation data theft information available on IRS.gov. Also, tax professionals should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media or visit Identity Theft Central at IRS.gov/IdentityTheft.

WASHINGTON – This week the Treasury Department and the Internal Revenue Service will send interest payments to about 13.9 million individual taxpayers who timely filed their 2019 federal income tax returns and are receiving refunds.

The interest payments, averaging about $18, will be made to individual taxpayers who filed a 2019 return by this year’s July 15 deadline and either received a refund in the past three months or will receive a refund. Most interest payments will be issued separately from tax refunds.

In most cases, taxpayers who received their refund by direct deposit will have their interest payment direct deposited in the same account. About 12 million of these payments will be direct deposited.

Everyone else will receive a check. A notation on the check − saying “INT Amount” − will identify it as a refund interest payment and indicate the interest amount.

By law, these interest payments are taxable and taxpayers who receive them must report the interest on the 2020 federal income tax return they file next year. In January 2021, the IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10.

This provision is different from the long-standing 45-day rule, generally requiring the IRS to add interest to refunds on timely-filed refund claims issued more than 45 days after the return due date.

Instead, this year’s COVID-19-related July 15 due date is considered a disaster-related postponement of the filing deadline. Where a disaster-related postponement exists, the IRS is required, by law, to pay interest, calculated from the original April 15 filing deadline, as long as an individual files a 2019 federal income tax return by the postponed deadline − July 15, 2020, in this instance. This refund interest requirement only applies to individual income tax filers − businesses are not eligible.

Interest is paid at the legally prescribed rate that is adjusted quarterly. The rate for the second quarter  ending June 30 was 5%, compounded daily. Effective July 1, the rate for the third quarter dropped to 3%, compounded daily.

Where the calculation period spans quarters, a blended rate applies, consisting of the number of days falling in each calendar quarter. No interest will be added to any refund issued before the original April 15 deadline.

For more information, visit IRS.gov.

WASHINGTON — Marking a major milestone in tax administration, the Internal Revenue Service announced today that taxpayers can now submit Form 1040-X electronically with commercial tax-filing software.

As IRS e-filing has grown during the past 30 years, the 1040-X, Amended U.S. Individual Income Tax Return, has been one of the last major individual tax forms that needed to be paper filed. Today’s announcement follows years of effort by the IRS, and the enhancement allows taxpayers to quickly electronically correct previously filed tax returns while minimizing errors.

“The ability to file the Form 1040-X electronically has been an important long-term goal of the IRS e-file initiative for many years,” said Sunita Lough, IRS Deputy Commissioner for Services and Enforcement. “Given the details needed on the form, there have been numerous challenges to add this form to the e-file family. Our IT and business operation teams worked hard with the nation’s tax industry to make this change possible. This is another success for IRS modernization efforts. The addition helps taxpayers have a quicker, easier way to file amended returns, and it streamlines work for the IRS and the entire tax community.”

Making the 1040-X an electronically filed form has been a goal for the tax software and tax professional industry for years. It's been a continuing recommendation from the Internal Revenue Service Advisory Council (IRSAC) and Electronic Tax Administration Advisory Committee (ETAAC).

Currently, taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form.

Since the tax-filing software allows users to input their data in a question-answer format, it simplifies the process for them. It also makes it easier for IRS employees to answer taxpayer questions since the data is entered electronically and submitted to the agency almost simultaneously.

“Adding the 1040-X to the e-filing portfolio provides a better experience for the taxpayer, all around. It makes submitting an amended return easier and it allows our employees to process it in a more efficient way,” said Ken Corbin, the IRS Wage and Investment commissioner and head of the division responsible for processing these returns. 

For the initial phase, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. Additional improvements are planned for the future.

About 3 million Forms 1040-X are filed by taxpayers each year.

Taxpayers still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Those filing their Form 1040-X electronically and on paper can use the "Where's My Amended Return?" online tool to check the status of their amended return.

WASHINGTON — More than 1 million Individual Taxpayer Identification Numbers are set to expire at the end of 2020 as the Internal Revenue Service completes the expiration of ITINs assigned prior to 2013. The IRS continues to urge affected taxpayers to submit their renewal applications early to avoid refund delays next year. 

Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years and those issued before 2013 will expire. This year ITINs with middle digits 88 will expire Dec. 31, 2020. Additionally, ITINs with middle digits 90, 91, 92, 94, 95, 96, 97, 98 or 99, that were assigned before 2013 and have not already been renewed, will also expire at the end of the year. 

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. ITIN holders who have questions should visit the ITIN information page on IRS.gov and take a few minutes to understand the guidelines. 

The IRS continues a nationwide education effort to share information with ITIN holders. To help taxpayers, the IRS offers a variety of informational materials, including flyers and fact sheets, available in up to seven languages, including English, Spanish, Chinese, Russian, Vietnamese, Korean and Haitian/Creole on IRS.gov. 

Who should renew an ITIN

Family option remains available

Taxpayers with an expiring ITIN have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return. 

How to renew an ITIN

To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason for needing an ITIN on the Form W-7. See the Form W-7 instructions for detailed information. 

Spouses and dependents residing outside of the U.S. only need to renew their ITIN if filing an individual tax return, or if they qualify for an allowable tax benefit (e.g., a dependent parent who qualifies the primary taxpayer to claim head of household filing status.) In these instances, a federal return must be attached to the Form W-7 renewal application. 

There are three ways to submit the Form W-7 application package. Taxpayers can:

Avoid common errors now and prevent delays next year

Federal tax returns that are submitted in 2021 with an expired ITIN will be processed. However, certain tax credits and any exemptions will be disallowed. Taxpayers will receive a notice in the mail advising them of the change to their tax return and their need to renew their ITIN. Once the ITIN is renewed, applicable credits and exemptions will be restored, and any refunds will be issued. 

Additionally, several common errors can slow down some ITIN renewal applications. These mistakes generally center on:

The IRS urges any applicant to check over their form carefully before sending it to the IRS. As a reminder, the IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents other than U.S. military personnel overseas. The dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:

To expand ITIN services, the IRS encourages individuals to apply for the Acceptance Agent Program

To increase the availability of ITIN services nationwide, particularly in communities with high ITIN usage, the IRS continues to actively recruit Certifying Acceptance Agents and accepting applications year-round. Interested individuals are encouraged to review all CAA program changes and requirements and submit an application to become a CAA. 

For more information, visit the ITIN information page on IRS.gov.

Rev. Rul. 2020-16 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274.  

The rates are published monthly for purposes of sections 42, 382, 412, 642, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code. 

Rev. Rul. 2020-16 will be published in Internal Revenue Bulletin 2020-37 on Sept. 8, 2020.

Notice 2020-64 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the Internal Revenue Code. In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), as reflected by the application of § 430(h)(2)(C)(iv).

Notice 2020-64 will be published in Internal Revenue Bulletin 2020-36 on Aug. 31, 2020