Monthly Archives: December 2022

On March 1, 2022 we posted IRS Reminds Taxpayers To Report Gig Economy Income & Virtual Currency Transactions, where we discussed that in IR-2022-45 the Internal Revenue Service reminded taxpayers of their reporting and potential tax obligations from working in the gig economy & making virtual currency transactions.

Now the Internal Revenue Service announced on December 23, 2022, a delay in reporting thresholds for third-party settlement organizations set to take effect for the upcoming tax filing season.

As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan of 2021.

As part of this, the IRS released guidance today outlining that calendar year 2022 will be a transition period for implementation of the lowered threshold reporting for third-party settlement organizations (TPSOs) including Venmo, PayPal and CashApp that would have generated Form 1099-Ks for taxpayers.

“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. 

The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”

The American Rescue Plan of 2021 changed the reporting threshold for TPSOs. The new threshold for business transactions is $600 per year; changed from the previous threshold of more than 200 transactions per year, exceeding an aggregate amount of $20,000. The law is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member or another for a household bill.

Under the law, beginning Jan. 1, 2023, a TPSO is required to report third-party network transactions paid in 2022 with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. TPSOs report these transactions by providing individual payee’s an IRS Form 1099K, Payment Card and Third-Party Network Transactions.

The transition period described in Notice 2023-10, delays the reporting of transactions in excess of $600 to transactions that occur after calendar year 2022. The transition period is intended to facilitate an orderly transition for TPSO tax compliance, as well as individual payee compliance with income tax reporting. A participating payee, in the case of a third-party network transaction, is any person who accepts payment from a third-party settlement organization for a business transaction.

Additional details on the delay will be available in the near future along with additional information to help taxpayers and the industry. For taxpayers who may have already received a 1099-K as a result of the statutory changes, the IRS is working rapidly to provide instructions and clarity so that taxpayers understand what to do.

The IRS also noted that the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.

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The IRS has issued draft instructions for partnerships and S corporations completing 2022 Schedules K-2 and K-3. According to Thompson Reuters these draft instructions add new exceptions to the requirement to file and furnish Schedules K-2 and K-3 for tax years beginning in 2022. 

For tax years beginning in 2021, the IRS required pass-through entities (partnerships, S corporations and LLCs) with items of international tax relevance to complete Schedule K-2 and Schedule K-3 to report such items.

Schedule K-2, which is an extension of Schedule K (Form 1065 and Form 1120-S), is used to report items of international tax relevance from the operation of a partnership or S corporation.

Schedule K-3, which is an extension of Schedule K-1 (Form 1065 and Form 1120-S), is generally used by a pass-through entity to report to partners or shareholders their share of the items reported on Schedule K-2. Generally, partners and shareholders must include the information reported on Schedule K-3 on their tax or information returns.

The IRS was widely criticized by the tax community for how it handled these reporting requirements in 2021. 

As A Result Of This Criticism, The IRS Provided Additional Exceptions To The Schedule K-2 And K-3 Filing Requirement; The Domestic Filing Exception And The Form 1116 Exception.

These exceptions are found in the filing instructions for Schedules K-2 and K-3. 

Domestic Filing Exception.  Partnerships and S corporations qualify for the domestic filing exception if they meet the following criteria:

1. No or limited foreign activity. The instructions define foreign activity as (a) paying or accruing foreign income taxes; (b) foreign-source income or loss; (c) an ownership interest in a foreign partnership; foreign corporation; foreign branch or disregarded foreign entity.

   A domestic partnership is considered to have limited foreign activity when (a) its only foreign activity is passive foreign income and the partnership paid or accrued no more than $300 of creditable foreign taxes on that income and (b) such income and taxes are shown on a payee statement (such as a Schedule K-1 from another partnership or a Form 1099 furnished or treated as furnished to the partnership.

2. U.S. citizen or resident alien partners. During 2022, all a partnership's direct partners were (a) an individual who is a U.S. citizen or resident alien; (b) a decedent's estate that's not a foreign estate if all beneficiaries are U.S. citizens or resident alien individuals; (c) a domestic grantor trust if all beneficiaries and grantors are U.S. citizens or resident alien individuals; or (d) a domestic non-grantor trust if all beneficiaries are U.S. citizens or resident alien individuals.
   
   
3. Partner/shareholder notification. Partnerships must notify their partners no later than two months before the due date (without extension) for filing the partnership's 2022 return that partners will receive a Schedule K-3 from the partnership only if the partner requests the schedule. For calendar year partnerships, this notification must be provided to partners by January 15, 2023. This notice can be provided electronically or by mail. S corporation shareholders must receive this notification no later than the date the S corporation furnished Schedule K-1 to the shareholder. The notice can be attached to the Schedule K-1 and should state that shareholders will not receive Schedule K-3 unless the shareholder requests schedule.
4. No Schedule K-3 requests by the one-month date. The partnership or S corporation doesn't receive a request from any partner or shareholder for Schedule K-3 on or before the one-month date. The one-month date for calendar-year partnerships and S corporation for the 2022 tax year is February 15, 2023.

Form 1116 Exception. A domestic partnership that doesn't meet all the above requirements may still avoid filing Schedules K-2 and K-3 under the Form 1116 exception. The Form 1116 exception applies (1) if the partnership's partners are eligible for the Form 1116 exemption and (2) the partners notify the partnership that they are eligible for the exemption by the one-month date.

If only some of the partnership's partners notify the partnership that they are eligible for the Form 1116 exemption ("exemption notice"), the partnership doesn't need to complete the Schedule K-3 for those partners. However, the partnership must complete Schedules K-2 and K-3 for the other partners to the extent it doesn't qualify for the domestic.

If the pass-through entity doesn't meet the domestic filing exception because the creditable foreign taxes paid or accrued by the partnership are greater than $300, it may be advisable to have each partner state (in writing) whether they meet the Form 1116 exemption for the tax year. Partners meet the Form 1116 exemption if they had less than $300 of creditable foreign taxes paid or accrued for the tax year (or $600 for those filing as married filing jointly).

According to the instructions, a pass-through entity that doesn't receive an exemption notice from a partner or shareholder must presume such partner or shareholder would have to file a Form 1116 or Form 1118, Foreign Tax Credit (Corporations) to claim the credit. In this circumstance, the pass-through must complete Schedules K-2 and K-3, including Parts II and III, accordingly.

Practitioners with partnership and S corporation clients that may qualify for the domestic filing exception to filing Schedules K-2 and K-3 must send out notices to partners and shareholders no later than January 15, 2023.

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On October 29, 2019 we ORIGINALLY posted The IRS is Now Criminally Prosecuting Employers For Failure To Pay Withheld Payroll Taxes! where we discussed that the IRS is stepping up criminally prosecuting business owners for failing to turn over withheld payroll taxes.

The November 2022 Lowlights From DoJ include the following employment tax prosecutions:

1. The sole shareholder and president of an Iowa landscaping and construction company, pleaded guilty to evading payment of his company's employment taxes. The company withheld approximately $1 million in payroll taxes but failed to pay over that amount to the IRS. While the shareholder, Kevin Alexander, admitted that he was liable for paying the company's taxes, he sought to conceal some of his assets from the IRS. 
2. The former operator of several Key West staffing agencies, Oleksandr Morgunov, pleaded guilty to defrauding the IRS out of more than $7.9 million in employment taxes. Under Morgunov the staffing agencies facilitated the employment of individuals not authorized to work in the U.S.
3. The former owner of two car rental companies, Ari Weingrad, pleaded guilty to willfully failing to pay over withheld employment taxes to the IRS. Weingrad knew he was responsible for collecting, accounting for and paying over withheld payroll taxes, but willfully failed to remit them.
4. Yigal Ziv, who owned and operated a software company, pleaded guilty to employment tax violations. Ziv was responsible for withholding employment taxes from his employees and filing his business's quarterly employment tax returns. However, although Ziv withheld taxes from his employees' wages, he didn't remit those taxes to the IRS. In addition, he failed to file employment tax returns. 

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for a FREE Tax HELP Contact Us at:

www.TaxAid.com or www.OVDPLaw.com 

or Toll Free at 888-8TaxAid

Read more at: Tax Times blog