In addition to being part of our annual reporting season, March has been a full month as we are also monitoring some of the legislation and agency guidance that has been enacted or issued to combat the economic and human toll brought about by COVID-19. There are numerous tax provisions in the several relief packages, and we thought we would highlight a few of these. Plus, we have a note on the crypto tax summit that occurred seemingly over a lifetime ago (but it was only at the beginning of March) and an assortment of IRS form and publication updates related to tax information reporting. We hope you are keeping well.
A. COVID-19 Tax Relief Updates
1. Federal Income Tax Return Filing and Payment Deadlines. After some back-and-forth, the Treasury has announced in Notice 2020-18 that the deadline for taxpayers filing 2019 federal income tax returns and paying taxes due on such returns has been postponed from April 15, 2020 to July 15, 2020. There is no extension in the notice, however, for brokers and other payors with respect to the filing of tax information returns (e.g., Forms 1099 and Forms 1042-S) to the IRS and providing tax statements to recipients. Those deadlines remain (but see below regarding FFI Form 8966 reporting).
New FAQs added by the IRS on its website on March 25 also clarify that individuals have until July 15, 2020 to make IRA contributions for the 2019 tax year. Thus, brokers may need to account for this as well as the possibility that customers may defer attending to their tax filings until July and there may be increased volume for customer support past the usual April filing season. Moreover, as the postponement is for federal income tax filings only and any state or local tax relief may differ, customer support may need to attend to state and local tax reporting questions from customers separate from federal ones or simply customers confused as to the various changing deadlines.
Another interesting note on the tax filing and payment extension in the FAQs is that while first quarter estimated taxes due April 15, 2020 now have an extended due date of July 15, 2020, there has been no extension of second quarter estimated taxes due June 15, 2020. Without additional changes, taxpayers will encounter the odd situation where the second quarter estimated tax payment will be due before the first quarter.
2. Foreign Financial Institutions Form 8966 FATCA Reports. In an updated FAQ dated March 25, 2020, the IRS is extending relief to foreign financial institutions (Participating FFIs and Reporting Model 2 FFIs) with respect to their Form 8966 FATCA filings. Form 8966 is generally used by financial institutions to report ownership interests of U.S. persons in certain financial accounts. The deadline for those filings has been extended from March 31, 2020 to July 15, 2020.
3. Tax Credits for Small Businesses Paid Sick Leave and Child Care Leave. In an information release dated March 20, 2020, the Treasury has also provided initial guidance on how small businesses can claim credits to help pay for required paid sick leave and paid child care leave of employees as provided under the Families First Coronavirus Response Act.
4. The CARES Act. Congress has now passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which is expected to provide some $2 trillion in aid related to the new coronavirus pandemic. Among the tax provisions in the Act are the 2020 recovery rebates to individuals ($1200 for single filers and $2400 for those filing joint returns plus $500 for each qualifying child, all subject to income limitations), elimination of penalty for certain early withdrawals from retirement plans (with options to subsequently repay such amounts to the plans to avoid income tax on the distributions), relief under net operating loss rules, a fix to the qualifying investment property depreciation rules, above-the-line deductions for up to $300 of contributions to qualifying charities (meaning you can deduct this even if you take the standard deduction), employee retention credits, deferral on payment of certain payroll and self-employment taxes, and changes to the section 163(j) interest expense deduction limits.
For those interested in the recovery rebates, the mechanism outlined in the CARES Act is to provide this technically as a tax credit for 2020. U.S. resident individuals would generally be eligible for a tax credit against 2020 tax liability in the amount of $1,200 if single (or $2,400 if filing jointly), with an additional $500 for each qualifying child. However, if the taxpayer’s adjusted gross income (AGI) exceeds $75,000 if single (or $112,500 if head of household or $150,000 for joint filers), the credit would be reduced by 5% of the excess until the credit is eliminated. Thus, for joint filers without children, the credit would be eliminated for those with AGI that exceeds $198,000.
In order to distribute cash to taxpayers as soon as possible, the Act provides for “advance refunds” to taxpayers based generally on their AGI as reflected in their 2019 tax returns (or 2018 if the 2019 tax return has not been filed). When taxpayers file their 2020 tax return, the advance refunds would reduce the amount of the 2020 recovery rebate credit, but it appears only to zero (so if the rebate calculated on 2019 AGI is higher than 2020, it appears at least at this point that there is no repayment of the excess).
B. Crypto Tax Summit
As noted in our prior month’s newsletter, the IRS hosted a crypto tax summit on March 3. It appeared to be more of an information exchange session rather than a forum for new tax guidance. Among the issues discussed were the different types of crypto assets and whether the principle of taxing them under the rubric of property accommodates the various crypto asset types, whether information reporting obligations might be imposed on institutions such as crypto exchanges and potential challenges in doing so, accuracy of crypto tax calculators, the Schedule 1 question on crypto transactions and the potential for a central repository for crypto transactional data. There is a Forbes article that provides some highlights.
C. IRS Forms and Publications Updates
1. Form 1042-S Instructions (for 2020). The instructions for Form 1042-S filings for 2020 (forms filed in 2021) have been released. Among the items of note is the deletion of several Chapter 3 status codes: Codes 01 (U.S. Withholding Agent – FI), 02 (U.S. Withholding Agent – Other), and 34 (U.S. Withholding Agent – Foreign branch of FI). As stated in prior-year instructions, the IRS intends that withholding agents enter the Chapter 3 status code applicable to their specific classification (e.g., corporation or partnership) rather than these generic codes. These withholding agent codes are now deleted for clarity and the example appearing at the end of the instructions has been updated to reflect this. Withholding agents should confirm that their reporting systems are aligned in terms of withholding agent Chapter 3 status codes.
In addition, there is a change to Chapter 3 status code 19. Code 19 which previously was used for Government or International Organization will now to be used only for International Organization. The 2020 form adds two new Chapter 3 status codes for foreign governments: Codes 36 (Foreign Government – Integral Part) and 37 (Foreign Government – Controlled Entity). These new codes need to be reflected on 2020 Forms 1042-S, if applicable.
2. Form 1120-F Instructions (for 2019). The IRS has finally released the instructions for 2019 Form 1120-F. Form 1120-F is generally used by non-U.S. corporations to report U.S. tax liabilities, but it is also used by financial institutions that have obtained Qualified Derivatives Dealer (QDD) status to report with respect to their QDD activity. The instructions confirm that for 2019 QDDs are to utilize a new Schedule Q for Form 1120-F to report QDD-related information instead of a statement attachment as in prior years. (Form 1042 reporting for QDDs will also require a separate Schedule Q.)
3. General Instructions for Certain Information Returns (2020). Also released in March are the 2020 General Instructions for Certain Information Returns. These instructions provide additional IRS guidance for completing and filing various tax information reporting forms, including the Form 1099 and Form 1098 series. These instructions are for use in 2020 tax year filings (to be made in 2021).
4. Publication 1220 Updated. IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, for Tax Year 2019 has been updated as of March 16, 2020.
Per Exhibit 2 of Pub. 1220, the March 16, 2020 updates include the following:
|3/16/2020||Part A Sec. 12 .02 Participation in CF/SF Program Page 24||Revised to state: State Coordinators need to contact their IRS Government Liaison to request a state be added or deleted to the CF/SF program. Requests must be submitted by January 1st and the request will be implemented the following tax year. For example: To be added or deleted to the CF/SF program for tax year 2020, the request would need to be submitted by January 1, 2020.|
|3/16/2020||Part B Sec 1 .04 Revise Current TCC Information Page 32||Revised to state: If your business has been assigned a new EIN, you are required to submit a Fill-in Form 4419 on the FIRE System at https://fire.irs.gov/ for assignment of a new TCC.|
|3/16/2020||Part B Sec 5 .02 FIRE System Internet Security Technical Standards Page 38||Removed Internet Security Standards TLS 1.1 and TDES 168-bit (FIPS-46-3)|
|3/16/2020||Part B. | Data Communication Page 38 and 40||Removed all references on externals closing bad files. This option will be removed from the FIRE System in April, 2020|
5. Publication 1281 on Backup Withholding Update. There is an updated March 2020 version of IRS Publication 1281, BACKUP WITHHOLDING FOR MISSING AND INCORRECT NAME/TIN(S). The publication provides withholding agents guidance on procedures related to backup withholding when there is a missing on incorrect TIN for a customer, including processes and data formats relating to IRS “B” notices.
6. QI FAQs Updated. The IRS has updated two FAQs within the Certifications and Periodic Reviews section of the FAQs on its website for qualified intermediaries, withholding foreign partnerships and withholding foreign trusts. The update relates to two questions (Q.5 and Q.18) related to forming consolidated compliance groups (CCGs).