Author: Carrie Christensen

KT Insights
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Avoiding Charity Scams

It is human nature to want to help others in times of need, tragedy, or disaster. Unfortunately, scammers see this as an opportunity to prey on unsuspecting people and trick them into giving to fake charities. In 2022 alone, consumers reported losing almost $8.8 billion to scams and fraud, which is up 30% from 2021, according to the Federal Trade Commission.

2023 has been a record-breaking year for natural disasters across the U.S. We have endured 23 separate weather and climate disasters so far this year. Each event has caused at least $1 billion in damage for a total of nearly $60 billion, according to the National Oceanic and Atmospheric Administration.

Here are a few tips to ensure that your dollars go to legitimate charities:

  • Donate to established charities you know and trust. Scammers will use a copycat name similar to a reputable organization to fool you, so make sure the name is exact.
  • Don’t trust your caller ID. Scammers can use technology to make any name or number appear on your phone. They can make it look like they are calling from a local number even when they are not.
  • Be wary of solicitations via email. Legitimate charities won’t include attachments in emails. Manually type out links in your Internet browser rather than clicking on them in the email. Most legitimate charities have a .org website rather than .com.
  • If you are asked to give cash, gift cards, cryptocurrency, or a wire transfer, it’s a scam. Only give using a check or credit card.

Charity scams can occur at any time, but they are very prevalent after high-profile disasters. Scammers take advantage of our emotions so remember to pause and verify those to whom you are donating. The IRS has a charity lookup tool here:  https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

If you are a victim of charity fraud, contact your state’s consumer protection office at https://www.usa.gov/state-consumer, or report fraud to the FBI at https://tips.fbi.gov/home.

And finally, pass this information on to a friend. Undoubtedly many people you know receive charity solicitations. This information could help someone else spot a potential scam.

October 9, 2023
| Carrie Christensen
KT Insights
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IRS Penalties? KT Can Help.

If you receive a notice from the IRS, know that you are not alone. The IRS sends out millions of notices to taxpayers every year. Many of these notices contain failure to file and/or failure to pay penalties. Oftentimes, the notices are incorrect and require a response from the taxpayer. But even if the penalties are justly assessed, there are options available to request a reduced penalty or penalty removal.

One option for penalty removal that may be available to you is the First Time Penalty Abatement (FTA).  FTA applies to failure to file, failure to pay, and failure to deposit penalties. To be eligible for penalty relief under FTA, you (or your business) must meet the following requirements:

  • There were no penalties assessed for the three prior tax years.
  • All filings are up to date.
  • Any tax due has been paid.

FTA is available every three years provided the requirements above are met – it is not just a one-time benefit. FTA may be requested over the phone or in writing. If FTA is not available to you, you may consider requesting penalty relief based on reasonable cause.

IRS issues can be complex, and as noted before, millions of people receive IRS notices every year. The good news is, KT has a dedicated team of professionals available to help you in dealing with the IRS. Please contact us if you have received an IRS notice and would like our assistance.

August 10, 2023
| Carrie Christensen
KT Insights
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IRS Tax Notices – Updates & Tips

The IRS recently announced that it would resume sending tax notices that were previously halted due to COVID-related processing backlogs. In addition to resuming the halted notices, the IRS has begun to send out 2022 balance due notices.

Additionally, the IRS sends notices for the following reasons:

  • To notify you of a change in your refund amount
  • To ask a question about your tax return
  • To verify your identity
  • To request more information
  • To notify you of a change made to your return
  • To notify you of delays in processing your return

Here are eight tips to keep in mind if you happen to receive an IRS notice:

  1. Don’t panic. You are not alone. The IRS mails millions of notices to taxpayers each year. Oftentimes, there is a simple resolution.
  2. Don’t ignore the IRS. If the IRS says you didn’t pay enough tax, interest and penalties will be included in the balance due notice. Notices have a deadline for responding. If you ignore the notice, the penalties and interest will continue to grow.
  3. Read the notice thoroughly. Each notice has specific instructions telling you what you need to do to resolve the issue.
  4. Double check the numbers. When a notice includes changes by the IRS to your tax account, review the information and compare it with your original return. The IRS does make mistakes.
  5. If you disagree, speak up. If you don’t agree with the notice, it’s important to respond promptly. The notice will include instructions on how to respond if you disagree. Depending on the notice, response options may include mailing a written letter, calling the IRS, faxing the IRS, or uploading documents online at IRS.gov. The option to upload documents online is new this year.
  6. Keep good records. Keeping good records of your tax returns and supporting documents is highly recommended even if you never hear from the IRS. When it comes to IRS notices, you’ll also want to keep copies of any notices and all follow-up communications.
  7. Be alert for scams. Scammers use mail, telephone, and email to impersonate the IRS and steal people’s personal information and money. They have successfully stolen millions of dollars from unsuspecting taxpayers. The IRS initiates most contacts through the mail delivered by the USPS. The IRS will not contact you by email, text messages, or social media channels to request personal or financial information. For more information on how to figure out if you are being scammed, visit irs.gov/newsroom/tax-scams-consumer-alerts.

Know when to seek professional help. If you receive a notice and are unsure how to proceed, reach out to your tax advisor at Ketel Thorstenson. We have a team of IRS correspondence experts available to help you with your IRS notice.

July 20, 2023
| Carrie Christensen
KT Insights
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Extension

Tuesday, April 18, 2023, is the federal deadline for filing your 2022 individual income tax return. This is also the last day to request a six-month filing extension. An important thing to note is that this is only an extension to file, not an extension to pay. Any tax due for 2022 is due by April 18th. If you expect to owe for 2022, you should send a payment to the IRS for the estimated amount due with your extension form. Payments made after April 18th are subject to penalties and interest. Additionally, if you do not file an extension, late filing penalties will apply if you owe tax.

April 11, 2023
| Carrie Christensen
KT Insights
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Research & Development Expense Capitalization – What Does This Mean for Your Business?

A provision included in the Tax Cuts and Jobs Act of 2017 requiring businesses to capitalize research and development (R&D) expenses went into effect for tax year 2022. Prior to the implementation of this tax provision, businesses could fully deduct R&D expenses incurred during the year. The new rules require the expenses to be capitalized and deducted over a five-year period for R&D expenses incurred within the U.S., or fifteen years for R&D expenses incurred outside the U.S.

Impact of R&D Capitalization Rule

Delayed R&D deductions may mean higher taxable income in 2022. To make it even worse – the capitalization rules require a mid-year convention which means only a tenth of R&D expenses incurred in 2022 will be deductible on a 2022 tax return. The remaining expenses will be deducted over the next four and a half years. Businesses not aware of this change may be surprised to see higher taxable income and higher tax liabilities for 2022. The new rules may cause cash flow issues for some businesses as the full amount spent on R&D expenses in 2022 does not proportionately reduce taxable income.

R&D Tax Credit Still Available

On the bright side, the R&D tax credit is still available to help mitigate some of the pain associated with capitalizing R&D expenses. The R&D tax credit is generally about 6% of qualified R&D expenses incurred during the tax year. It is important to note, while claiming the R&D tax credit is optional, capitalizing R&D expenses is not. If your business elects not to take the R&D tax credit and has R&D expenses on the books, those expenses must still be capitalized.

As with most tax provisions, the rules are complex.  Reach out to your tax advisor at Ketel Thorstenson to see how these rules impact your business.

March 14, 2023
| Carrie Christensen
KT Insights
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Avoid IRS Notices

Do This When Paying Your Taxes Online to Avoid IRS Notices

Last tax season we saw an influx of “balance due” IRS CP14 notices. In many of these cases, the taxes had already been paid online at IRS.gov. Receiving inaccurate notices from the IRS is frustrating for both you the taxpayers and for us the tax professionals.

The IRS CP14 issue occurs when married filing jointly taxpayers do not follow the IRS’s unwritten rule. The unwritten rule is, when filing jointly, all payments for a balance due must be made in the name and Social Security number of the primary taxpayer. The primary taxpayer is the taxpayer listed first on the return, with the secondary (or spouse) taxpayer listed second.

The IRS is aware of this issue and published a statement on July 27, 2022, stating that they were researching the issue and would provide an update as soon as possible. We have yet to see an update. As such, we fear that we may see a recurrence of incorrect notices this tax season. To avoid receiving a CP14 notice this summer, we recommend that all balance due (and estimated tax payments) be made in the name and Social Security number of the primary taxpayer. 

If you are still mailing checks to the IRS, we encourage you to try one of the online payment options available at IRS.gov/payments. The IRS is still inundated with backlogs of mail, so paying online will ensure that your payment is received and posted to your account in a timely fashion. Paying online is fast, easy, and secure, and you can pay from your bank account, debit card, credit card, or digital wallet.

Whichever method you choose, be sure to make the payment in the primary taxpayer’s Social Security number if you are filing jointly to avoid receiving an erroneous balance due notice from the IRS down the road.

January 30, 2023
| Carrie Christensen
KT Insights
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New IRS Penalty Relief

On August 24, 2022, the IRS announced that it will waive and refund late filing (Failure to File) penalties for taxpayers who filed their 2019 and/or 2020 tax returns late. The penalty relief applies to 2019 and 2020 individual, corporate, and partnership returns. Note that the relief does not apply to Failure to Pay penalties.

The Failure to File Penalty is based on how late you file your tax return after the due date or extended due date. For personal returns, the Failure to File Penalty is 5% of the unpaid taxes for each month that a return is late, and such penalty will not exceed 25% of your unpaid taxes.

If you have already paid failure to file penalties to the IRS for tax years 2019 or 2020, you do not need to do anything to receive your refund. The penalty relief is automatic. The IRS will be automatically refunding the penalties by the end of September. According to the IRS, more than $1.2 billion in refunds will be refunded to almost 1.6 million taxpayers.

If you have not yet filed your 2019 or 2020 returns, you can still qualify for penalty relief if you file by September 30, 2022. 

The late filing penalty relief also applies to late filed 1099s. Eligible 2019 1099s must have been filed by August 3, 2020 and eligible 2020 1099s must have been filed by August 2, 2021.

The penalty relief is designed to allow the IRS to focus its efforts on processing backlogged tax returns and taxpayer correspondence to help the agency return to normal operations for the 2023 filing season.

August 29, 2022
| Carrie Christensen
KT Insights
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Internal Revenue Service – Income Tax Notice Urgent Update – CP14

The IRS has begun sending CP14 Income Tax Notices to certain taxpayers reporting an income tax balance due plus interest and penalties for tax year 2021. If you receive one, do not panic. Many of these notices have been sent in error. The IRS is not correctly posting tax payments made to the taxpayer’s account. This includes payments paid online at irs.gov as well as paper checks mailed to the IRS. The notices are erroneously reporting tax due which has already been paid by the taxpayer. Additionally, the notices are calculating interest and penalties beginning on 4/15/22 when the payment due date was 4/18/22. Apparently, the IRS forgot to update their computers with the actual tax due date.

The IRS has admitted that this is a systemwide issue and is currently investigating which taxpayers were impacted. At this point, our IRS Stakeholder Liaison recommends holding off on responding to the notices if you have already paid the tax due by 4/18/22. We anticipate that the IRS will correct the issue on its own and no action is necessary from the taxpayer at this time. 

If you would receive a second notice from the IRS, it will need to be addressed.  Please reach out to your KT advisor if you have any concerns.

June 23, 2022
| Carrie Christensen
KT Insights
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Refresher on Principal Residence Gain Exclusion

With residential real estate markets surging, significant unrealized gains are piling up for many homeowners. If you are thinking about selling your principal residence, you may be wondering about the tax implications. The good news is that tax laws allow you to exclude a home sale gain of up to $250,000 for unmarried taxpayers and up to $500,000 for married taxpayers.

Gain Exclusion Basics

Ownership and Use Tests – To take full advantage of the principal residence gain exclusion, you must pass two tests: the ownership test and the use test. Note that the two tests are completely independent, meaning that the periods of ownership and use need not overlap.

  • Ownership Test: You must have owned the home for at least two years out of the five-year period ending on the sale date. 
  • Use Test: You must have used the home as your principal residence for at least two years out of the five-year period ending on the sale date. You can pass this test by living in the house for 730 days combined out of a five-year period. The days do not need to be consecutive.

What Counts as a Principal Residence?

IRS regulations say you must evaluate all the facts and circumstances to determine whether or not a property is your principal residence for gain exclusion purposes. If you occupy more than one residence during the same year, the general rule is that the principal residence for that particular year is the one where you spent the majority of time during the year. Other relevant factors can include:

  • Where you work
  • Where family members live
  • The address used on your income tax return, driver’s license, auto registration, and voter registration
  • Mailing address for bills and correspondence

Special Considerations if You are Married

  • If you are married and file separately, you and your spouse can potentially qualify for two separate $250,000 exclusions.
  • If you are married and file jointly, you qualify for the $500,000 exclusion if
    • Either you or your spouse pass the ownership test for the property and
    • Both you and your spouse pass the use test
  • If you are married and file jointly, it is possible for both you and your spouse to individually pass the ownership and use tests for two separate residences. In this case, you and your spouse would qualify for two separate $250,000 exclusions.

Special Rule for Unmarried Surviving Spouses – An unmarried surviving spouse can claim the larger $500,000 exclusion for sale of a principal residence that occurs within two years after the spouse’s death, assuming all other requirements were met immediately before the spouse died.

Anti-Recycling Rule – The exclusion is generally available only when you have not excluded an earlier gain within the two-year period ending on the date of the later sale. In other words, you generally cannot recycle the gain exclusion privilege until two years have passed since you last used it. You can claim the larger $500,000 joint-filer exclusion only if neither you nor your spouse have used the exclusion on an earlier sale within the two-year period. If one spouse claimed the exclusion within the two-year window, but the other did not, the exclusion is limited to $250,000.

When to “Elect Out” of the Gain Exclusion Privilege – You always have the option to “elect out” of the gain exclusion and report the sale profit as a taxable gain. You can retroactively elect out by amending a previously filed return within the three-year period beginning with the filing deadline for the year-of-sale return. This may be beneficial when you have two principal residence sales within a two-year period, with the later sale producing a larger gain.

Prorated Gain Exclusion

What happens if you sell your home for a large profit after living there for only 18 months instead of the required two years? Or what if you sell your home less than two years after excluding a gain from the sale of a previous residence? The good news is that the IRS allows a prorated (reduced) gain exclusion in certain circumstances when the ownership and use tests or anti-recycling rules discussed above are not met. The prorated exclusion may be large enough to shelter the entire gain. The prorated gain exclusion only applies when the premature sale is due primarily to one of the following reasons:

  • A change in place of employment – A premature sale is automatically considered to be primarily due to a change in place of employment if the distance between the new place of employment and the former residence is at least 50 miles more than the distance between the former place of employment and the former residence.
    • Note that if you are self-employed and work out of your home, you pass this test if you purchase a new home at least 50 miles from your old home.
    • If you can’t pass the 50-mile automatic rule, you can still pass this test by obtaining documentation showing the premature sale was primarily due to your change in place of employment, assuming the facts so indicate.
  • Health reasons – You pass this test if your move is to
    • Obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or
    • Obtain or provide medical or personal care for a qualified individual who suffers from a disease, an illness, or an injury
  • Specified unforeseen circumstances – A premature sale is generally considered to be due to unforeseen circumstances if the primary reason for the sale is the occurrence of an event that you could not have reasonably anticipated. Under the safe-harbor rule, a premature sale is deemed to be due to unforeseen circumstances if any of the following events occur:
    • Involuntary conversion of the residence
    • A natural or man-made disaster or acts of war or terrorism resulting in a casualty to the residence
    • Death of a qualified individual
    • A qualified individual’s cessation of employment, making him or her eligible for unemployment compensation
    • A qualified individual’s change in employment or self-employment status that results in the taxpayer’s inability to pay housing costs and reasonable basic living expenses for the taxpayer’s household
    • A qualified individual’s divorce or legal separation under a decree of divorce or separate maintenance
    • Multiple births resulting from a single pregnancy of a qualified individual

As you can see, there is much to know about the principal residence gain exclusion. If you are considering selling your principal residence and have questions regarding the tax implications, consult your KTLLP advisor to discuss your unique situation.

June 8, 2022
| Carrie Christensen
KT Insights
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Tax Tips: Extension Deadline

This year Tax Day returns to its regularly scheduled deadline with individual returns being due April 18th.  The extra three days are a result of IRS offices being closed on April 15th in observance of Emancipation Day.  If you are not able to file your tax return by the deadline, you can file for a six-month extension.  The most important thing to know about filing an extension is that it is an extension to file, but not to pay.  If you owe for 2021, you still need to pay that to the IRS by April 18th or be subject to penalties and interest. 

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry.

April 12, 2022
| Carrie Christensen