Does Your Business Take Identity Theft Seriously? How To Avoid The Business Of Scamming

Businesses need to take security threats more seriously. The fourth day of the National Tax Security Week focused largely on this issue and offered ways business practices can optimize security of businesses and deter both business and client identity theft.

You may have never thought that a business’ identity can be stolen; and indeed, it may sound odd at first, but a business has identifying information that is unique to itself. Oddly enough, among the reasons businesses should be wary of potential scammers is that scammers will often file a business’ taxes.

Potential scammers look for little snit-bits of identifying information of the business. Scammers do not need every little detail about a business to gain access, they just need some of the information that is unique to the business to commit business identity theft and file a tax return on behalf of the “business”.

Though these riveting breaches are seldom discussed unless the breach happens to larger corporations (Target in 2013 and Marriott in 2018), the most common cyberattacks are aimed at businesses that have fewer than 100 employees.

In order to curb potential threats, the Federal Trade Commission suggests that businesses adhere to the following guidelines:
• Back up important files;
• Require strong passwords for all devices;
• Encrypt devices; and
• Enable multi-factor authentication whenever possible.

The IRS is also taking precautions to better protect business information from falling into the mischievous hands of scammers. Beginning on December 13, 2020, the IRS will be redacting sensitive information from the business tax transcripts and the summary of corporate tax returns.

Additionally, the IRS is making it easier for businesses that may have had a breach of identity be proactive in these matters by filing Form 14039-B, Business Identify Theft Affidavit (the “Affidavit”). The Affidavit should be filed by the business if any of the following occurs:
• The business receives a rejection notice for an electronically filed return because a return already is on file and the business did not file it;
• Notice about a tax return that the business did not file;
• Notice about Form W-2 filed that the business did not file; and
• Notice of a balance due that the business does not believe is owed.

Although businesses can start being more proactive in ensuring there will not be major security breaches related to taxes, it is important to note that the Affidavit should not be used if the business experienced a data breach that resulted in no tax-related impact. It is also important to remember that the changes the IRS is making does not absolve the business from making the necessary changes to better protect its information.

Fortunately for businesses, there are a number of ways to strengthen the security of a business. Determining the weaknesses posed by your individual business is vital in taking action against scammers. As always, the attorneys at Vandenack Weaver are here to assist you determine potential weakness and implement changes to strengthen your business’ security.

VW Contributor: Justin A. Sheldon
© 2020 Vandenack Weaver LLC
For more information, Contact Us

Notice 2020-75: The IRS Intends to Issue Proposed Regulations to Assist with State and Local Tax (SALT) Deduction Cap

On November 9, 2020, the IRS released Notice 2020-75. With this Notice, the IRS described its intention to issue proposed regulations, in connection with the Treasury Department, which would allow a partnership or an S-corporation for tax purposes to deduct state and local taxes from their non-separately stated taxable income or loss for the tax year of payments. They would not be passed through to the partners or shareholders, where they would then be subject to the Tax Cuts and Jobs Act’s $10,000.00 limitation on state and local tax (“SALT”) deductions.

Internal Revenue Code Section 164(a) provides for the SALT deduction. The SALT cap was provided for by Section 164(b)(6). In response to the Tax Cuts and Jobs Act’s so-called “SALT cap,” many states, including Connecticut, Maryland, New Jersey, Oklahoma, Rhode Island, Wisconsin, and Louisiana, adopted laws which separately attempted to circumvent the “SALT cap” on the state level. For example, in Louisiana, Oklahoma, and Wisconsin, the solution involved entities calculating their tax base and paying state income tax; the partners and shareholders were not assessed a tax liability and were not assessed a distributive share of income for state income tax purposes.

The remaining states mentioned above took a different approach to circumvent the “SALT cap”, the work-around involved the entity paying state income tax, but retaining certain pass-through features; partners and shareholders would then receive a state income tax credit equal to all or a portion of their share of the tax paid by the entity (as an aside, of the states listed, only Connecticut’s entity taxation regime is mandatory).

With the issuance of Notice 2020-75, the IRS has effectively expressed its intent to approve these state-level work-arounds. The intention of the IRS was unclear up until this point, as it had previously shut down SALT deduction work-arounds involving contributions to a charitable state fund via proposed regulations.

In Notice 2020-75, the IRS has confirmed its intention to issue proposed regulations clarifying that state and local income taxes imposed on and paid by partnerships and S-corporations will be allowed to be deducted by the entities themselves. The Notice says that these taxes must be direct income taxes imposed and paid by the entity, and defines them as Specified Income Tax Payments. The Notice further indicates that the proposed regulations will allow an entity a deduction regardless of their state’s regime, be it mandatory or elective.

Additionally, the Notice states that an entity tax does not constitute an item of deduction if a partner or S-corporation shareholder takes into account the partner’s distribution share separately under Sections 702 or 1363. Specified Income Tax Payments, as they are defined by the Notice, also exclude deductions which would be disallowed by IRC Sections 703(a)(2)(B) (Partnerships) or 1363(b)(2) (S-corporations).

Whether the final regulations will be promulgated has yet to be seen. Additionally, there is concern among lawmakers that this arrangement will allow partners in a partnership or shareholders in an S-corporation to be treated more favorably than workers who earn their income through wages, as wage-earners cannot form an LLC and become sub-contractors in order to avail themselves of the deduction. Only S-corporations, partnerships, and LLCs treated as partnerships for tax purposes may take advantage of the proposed changes described by the Notice.

The proposed regulations are intended to apply to tax payments made by an entity on or after November 9, 2020, and Taxpayers may apply the rules in the Notice to Specified Income Tax Payments made in a taxable year of their entity ending after December 31, 2017. If you are a business owner, or are considering forming a business, and have any questions or concerns as to how this new Notice may affect your business taxes, you should not hesitate to reach out to our law firm’s tax professionals for a consultation or further explanation.

VW Contributor: Elena K. Whidden
© 2020 Vandenack Weaver LLC
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500 Series Notices Issued Once Again – The Hits Keep Coming

Due to COVID-19, on May 9, 2020, the 500 series notices were suspended. Now, it seems, the Internal Revenue Service (the “IRS”) has begun to issue the 500 series notices to taxpayers once again. What is a 500 series notice and what is the importunate of the IRS reissuing these notices you may ask?
The 500 series notices include three different types of notices that alert taxpayers about various stages of nonpayment – (1) the CP501, (2) the CP503 and (3) the CP504.

The CP501 Notice alerts taxpayers that they have a balance due to the IRS and their payment options.

The CP503 Notice alerts taxpayers that the IRS has not heard from the taxpayer about the unpaid balance and that the taxpayer’s property may be subject to a lien if they fail to pay.

The CP504 Notice alerts taxpayers that their remains and unpaid balance and that if not immediately paid, the IRS will levy the taxpayers state income tax refunds.

Regardless of the type of 500 series notice you receive, it is imperative that you follow the directions set forth in the notice to dispute the amount owed or to pay the balance due. If you do not successfully dispute the amount owed and you fail to pay the balance due, a penalty will be assessed, and the outstanding balance and penalty will continue to accrue interest until paid. Furthermore, once the IRS has levied your state income tax refund, if there is still a balance outstanding, the IRS will likely send you a notice of its intent to levy your other property, including: wages, bank accounts, business assets, personal assets, and social security benefits.

Now, all is not lost if you receive a 500 series notice, because there are options afforded to you that can reduce or eliminate the penalty and/or balance owed in part or even entirely. If, based on all the facts and circumstances in your situation, there exists reasonable cause for failure to pay the taxes when due, you will generally qualify for relief from penalties. Though lack of funds, in and of itself, is not a reasonable cause for failure to pay, the reason for the lack of funds may meet the reasonable cause criteria. Sound reasons, if established, may include: fire, casualty, natural disaster, pandemics, death, serious illness, incapacitation, and other reasons which establishes that you used all ordinary business care and prudence to meet your obligations. Regardless of the reason, the following facts need to be established in order to determine if the cause was reasonable:
• What happened and when did it happen?
• What facts and circumstances prevented you from paying your tax during the period you did not pay your taxes timely?
• How did the facts and circumstances affect your ability to pay your taxes?
• Once the facts and circumstances changed, what actions did you take to pay our taxes
• In the case of a business or estate, did the affected person or member have sole authority to make the payment?

If you have been financially impacted by COVID-19, you may satisfy the reasonable cause exception and have the penalty waived.

If you have received a 500 series notice and believe that the amount does not accurately reflect what you owe or if you have been impacted by the pandemic, or any other reason, the attorneys of Vandenack Weaver can assist you.

VW Contributor: Justin A. Sheldon
© 2020 Vandenack Weaver LLC
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Economic Impact Payments – What You Need to Know

The Internal Revenue Service has extended the deadline for individuals to claim an Economic Impact Payment by five weeks to help individuals who have not received a stimulus payment. The Get My Payment tool explains that users have until November 21 Midnight ET to request their economic impact payment. Eligible individuals can also visit and use the Get My Payment tool to find out the status of their Economic Impact Payment. This tool will show if a payment has been issued and whether the payment was direct deposited or sent by mail. Get My Payment tool might give a user the option of providing their bank account information to receive their payment by direct deposit. For example, if an individual’s payment was sent by mail and the Post Office was unable to deliver it. An individual must file a 2019 tax return to receive the payment if required to do so. The IRS provides an online database of authorized e-file providers for individuals to electronically file their tax return.

Important security features when using the Get My Payment tool
• Before using the Get My Payment tool, an individual must verify their identity by answering security questions.
• If the answers to the security questions do not match IRS records after multiple attempts, the user will be locked out of the tool for 24 hours. This is for security reasons. Those who can’t verify their identity won’t be able to use Get My Payment. If this happens, people should not contact the IRS.
• If the tool returns a message of “payment status not available,” this may mean the IRS can’t determine the person’s eligibility for a payment right now. There are several reasons this could happen. Two common reasons are:
o A 2018 or 2019 tax return is not on file and the agency needs more information or,
o The individual could be claimed as a dependent on someone else’s tax return.
• In some cases, if a taxpayer has filed their 2019 tax return but the IRS hasn’t processed it yet, they may receive “payment status not available.” Taxpayers who’ve already filed a tax return don’t need to take any action. The IRS continues to issue Economic Impact Payments as tax returns are processed.

While millions of Americans have received their economic impact payments, some may have to provide additional information to the IRS to get their payments. Questions regarding eligibility requirements, requesting an economic impact payment, calculating an economic impact payment and more can be answered here.

Individuals who are not required to file a tax return
There is a tool for Non-Filers: Enter Payment Info Here to register for a payment. To be eligible to fill out the non-filer application, an individual must be eligible for an Economic Impact Payment and the individual is not required to file federal income tax returns for 2018 and 2019 for any reason including:
• The individual’s income is less than $12,200
• The individual is married filing jointly and together the income is less than $24,000, and
• The individual has no income.

Individuals who can be claimed as a dependent on someone else’s tax return should also not use the non-filer tool. The IRS underscores that individuals should not use this tool if they are filing a 2019 tax return. If an individual was required to file a 2019 tax return but they used the Non-Filer tool, this could delay processing their tax return and their Economic Impact Payment. More information about non-filers can be accessed here.

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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IRS Releases Part 4 and 5 of a Five-Part Security Summit Tips for Tax Professionals during COVID-19

This article wraps up the last of the ​Security Summit’s​ five-part series called Working Virtually: Protecting Tax Data at Home and at Work. ​As a refresher, the Security Summit is made up of the Internal Revenue Service (“IRS”), state tax agencies, and private-sector tax industry officials. The impetus for releasing this five-part series was to equip ​tax practitioners with specific strategies to assess and secure their home and office data, due to the fact that many tax professionals are not working from home.​ ​This article explains the fourth and fifth tips that the Security Summit issued. The fourth tip reminds tax practitioners to be alert of and avoid phishing scams. The fifth tip reminds tax professionals that federal law requires them to have a written information security plan. The Security Summit further recommends that practitioners create an emergency response plan if they experience a data theft.

Tip 4: Avoiding Phishing Scams
What should tax practitioners be on the lookout for to spot potential phishing scams? First, phishing emails can have an urgent message. For example, cybercriminals can send an email impersonating human resources or an administrator asking for the recipient to update their password or other personal information by clicking on a link. The link will then take the individual to a fake site that feigns the appearance of a trusted source requesting them to insert personal information. Or, the email could contain an attachment for the recipient to click on that instead downloads malware on their computer. Now cybercriminals are capitalizing on COVID-19 fears ​by presenting themselves as providers of face masks or personally protective equipment in short supply. Tax professionals should beware of emails from criminals posing as potential clients. Tax practitioners should thus stay vigilant in scanning all emails and urge on the side of caution rather than clicking on any email attachment or any link in an email. When in doubt, taxpayers and tax preparers can forward suspicious emails posing as the IRS to

Lastly, because phishing scams are commonplace, and often successful, the Security Summit urges tax professionals to educate all office personnel about the dangers and risks of opening suspicious emails – especially during the COVID-19 period.

Tip 5: Make a Plan for Protecting Data and Reporting Theft
The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley ACT, requires that tax professionals have a written security plan in place to safeguard their client’s tax data. This federal law is administered and enforced by the Federal Trade Commission (“FTC”). The FTC underscores that a tax preparer’s security plan must be appropriate to the company’s size and complexity, the nature and scope of its activities, and the sensitivity of the customer information it handles. Therefore, a security plan for a solo tax practitioner would differ from a global firm’s security plan. On the other hand, the FTC does have requirements that apply to all tax companies, irrespective of their size and complexity.

Each tax institution must:
● Designate one or more employees to coordinate its information security program;

● Identify and assess the risks to customer information in each relevant area of the company’s operation, and evaluate its effectiveness of the current safeguards for controlling these risks;

● Design and implement a safeguards program, and regularly monitor and test it;

● Select service providers that can maintain appropriate safeguards, making sure the contract requires them to maintain safeguards, and oversee their handling of customer information; and

● Evaluate and adjust the program in light of relevant circumstances, including changes in the firm’s business or operations, or the results of security testing and monitoring.

Failure to have a data security plan may result in an FTC investigation. The IRS may also treat a violation of the FTC safeguards rule as a violation of the IRS Revenue Procedure 2007-40 which stipulates the rules for tax professionals participating as an Authorized IRS e-file Provider.

On July 10, 2019, the IRS created this ​youtube video​ to reiterate that all tax preparers must have a written security plan. The video also reiterates the basic requirements for how tax preparers can safeguard taxpayer data. And, as an additional tool, you can revisit the “Taxes-Security-Together” Checklist​ the Security Summit rolled out during the 2019 summer as a starting point for analyzing office data security. You can also look at IRS ​Publication 4557, Safeguarding Taxpayer Data (PDF)​, which details critical security measures that all tax professionals should enact. Finally, the Security Summit noted that the FTC is currently re-evaluating the Safeguards Rule and has proposed new regulations. Therefore, tax preparers should be alert to any changes in the Safeguards Rule and its effect on the tax preparation community.

Creating a Data Theft Response Plan; Report Data Thefts to the IRS
The Security Summit also recommends that all tax practitioners create a response plan so that they have steps in place should they experience a data theft. If a client or the tax firm are the victim of data theft, the Security Summit states that they should immediately:

Report it to the ​local IRS Stakeholder Liaison​. ​Stakeholder Liaisons will notify IRS Criminal Investigation and others within the agency. Speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in clients’ names and will assist through the process.

Email the Federation of Tax Administrators at ​Get information on how to report victim information to the states. Most states require that the state attorney general be notified of data breaches. This notification process may involve multiple offices.

Cyber attackers could also steal a tax practitioner’s identity too. Tax practitioners should
regularly check their IRS e-Services e-File Application to see a weekly count of tax returns filed with their Electronic Filing Identification Number (“EFIN”). Excessive filings are a sign of data theft. E-file applications should also be kept up to date. Circular 230 practitioners also can review weekly the number of tax returns filed using their Preparer Tax Identification Number (“PTIN”). Excessive filings are also a sign of data theft.

As always, tax professionals should take advantage of the additional resources the IRS provides related to security recommendations and questions in ​Publication 4557 Safeguarding Taxpayer Data​ (PDF), as well as the National Institute of Standards and Technology (NIST’s) Small Business Information Security: The Fundamentals​ (PDF).

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
For more information, Contact Us

IRS Releases Part 3 of a Five-Part Security Summit Tips for Tax Professionals

On August 6, 2020 the Internal Revenue Service (IRS), in partnership with the Security Summit, issued the third part of their five-part series providing tips for tax professionals to thwart off cyber-security attacks during COVID-19. This week the advice was focused on virtual private networks (VPN). A VPN ensures your location stays private, your data is encrypted, and you can surf the web anonymously.

To understand how a VPN works, it is important to understand the basic transaction that occurs when individuals browse the internet. For example, when an individual types in their browser they are entering the website’s domain name. A domain name designates the name of the website’s IP address. Every computer and device accessing the internet also has an IP address as well. When an individual types in into their internet browser they are sending their data into the internet until it reaches the server. Then that server translates the data and sends the website that individuals has requested to visit. During these transactions, however, individuals are not only sending  requests to visit various websites, they’re also sending out their computer’s IP address and other information too. This allows the potential for hackers to intercept a person’s information. The use of a VPN will protect an individual’s information from being intercepted. A VPN creates a tunnel that encrypts information. A VPN is essential for any business because it provides a safe way to transmit data between a remote user via the Internet and the business network.

Chuck Rettig, the IRS Commissioner noted that “We continue to see tax pros fall victim to attacks every week. Failure to use VPNs risks remote takeovers by cyberthieves, giving criminals access to the tax professional’s entire office network simply by accessing an employee’s remote internet.”

However, finding a legitimate vendor to purchase a VPN from can be difficult. Carefully review various companies that offer VPN services and be sure to choose a service that includes all the capabilities that will meet your needs.

And, while not stated in the IRS’s tip for this week, it is also important to know that while a VPN is necessary, it is not a magical privacy shield that will completely insulate any company from vulnerabilities to cyberattacks. For example, a VPN cannot protect you against a website setting a tracking cookie on your device that will then alert other websites about you. A VPN also cannot protect you against a website that sells your email address to a third-party data broker.

Lastly, the IRS tip for this week also includes the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) advice regarding VPNs:

  • Update VPNs, network infrastructure devices and devices being used to remote into work environments with the latest software patches and security configurations.
  • Alert employees to an expected increase in phishing attempts.
  • Ensure information technology security personnel are prepared to ramp up these remote access cybersecurity tasks: log review, attack detection, and incident response and recovery.
  • Implement multi-factor authentication on all VPN connections to increase security. If multi-factor is not implemented, require teleworkers to use strong passwords
  • Ensure IT security personnel test VPN limitations to prepare for mass usage and, if possible, implement modifications—such as rate limiting—to prioritize users that will require higher bandwidths.

As always, tax professionals should take advantage of the additional resources the IRS provides related to security recommendations and questions in Publication 4557 Safeguarding Taxpayer Data (PDF), as well as the National Institute of Standards and Technology (NIST’s) Small Business Information Security: The Fundamentals (PDF).

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
For more information, Contact Us

IRS Releases Part 2 of a Five-Part Security Summit Tips for Tax Professionals

On July 28, 2020 the Internal Revenue Service (IRS), in partnership with the Security Summit, issued the second part of their five-part series providing tips for tax professionals to thwart off cyber-security attacks during COVID-19. The second tip is for tax professionals to use multi-factor authentication to protect client accounts. The notice also provides a reminder that beginning in 2021, all tax software providers will be required to offer multi-factor authentication options on their products that “meet higher standards.”

Multi-factor authentication, sometimes referred to as two-factor authentication, allows for additional authentication factors than just entering in a password to verify a user’s identity. Two-factor authentication requires the user to provide their password and an additional step to access their account. Sometimes, a user will receive a text message with a one-time password, or perhaps the user is asked a knowledge-based question that they previously set up, such as “what is your mother’s maiden name.” However, given the sophistication of cyber-criminals ability to exploit known weaknesses in passwords, the two-factor authentication is not always full-proof. An example of a stronger multi-factor authentication process would be where the user has to input their password and then has to provide biometric sign-in solution, such as scanning their fingerprint, voice recognition, or facial recognition. In this second example, the multi-factor authentication creates a more robust defense against unauthorized access due to the uniqueness of the biometric authentication.

Part two in this series also references easy ways for tax professionals to download authentication apps offered through Google Play and the Apple Store. Use a search engine for “Authentication apps” to learn more. The guidance reminds tax professionals to incorporate multi-factor authentication with all accounts, including cloud storage providers, as well as social media outlets.

Lastly, tax professionals should take advantage of the additional resources the IRS provides related to security recommendations and questions in Publication 4557 Safeguarding Taxpayer Data (PDF), as well as the National Institute of Standards and Technology (NIST’s) Small Business Information Security: The Fundamentals (PDF).

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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IRS Releases Part 1 of a Five-Part Security Summit Tips for Tax Professionals

On July 21, 2020 the IRS and Security Summit partners issued specific guidance to assist tax professionals with implementing basic security measures. The Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) are urging organizations remain in a heightened state of alertness as cybercriminals remain active during COVID-19 and prey on vulnerabilities during this time. The IRS state tax agencies and nation’s tax industry created a five-part series called Working Virtually: Protecting Tax Data at Home and at Work.

Due to the fact that many tax professionals are working from home, this five-part series is designed to walk practitioners through various strategies to assess and secure their home and office data. The first recommendation that was released on July 21 outlines six basic security steps, “Security Six,” that every tax professional should take whether they are working in the office or remotely. This series will continue each Tuesday and end on August 18.

The “Security Six” protections that everyone, especially tax professionals handling sensitive data, should use are:

  1. Anti-virus software. It is essential that professionals purchase anti-virus software that scans computer files or memory for certain patters that can detect the presence of malicious software, also known as malware. Tax professionals should educate themselves on the type of anti-virus software, also called anti-malware software package that they purchase. Additionally, it is best practice to configure the anti-virus software so that it automatically scans specific files or directories in real time, rather than the individual performing their own manual scan. Tax professionals also should keep security software set to automatically receive the latest updates to ensure it is always current.

While anti-virus software should protect against spyware, a type of malware that steals    sensitive data and passwords without the user’s knowledge, individuals should never:

  • click links with pop-up windows, nor
  • download “free” software from a pop-up, nor
  • follow links that offer anti-spyware software.

This advice also pertains to phishing emails. Never open an email from a suspicious        source, click on a link in a suspicious email or open an attachment.

  1. Firewalls provide protection against outside attackers by shielding a computer or network from malicious or unnecessary web traffic and preventing malicious software from accessing systems. Firewalls can be configured to block data from certain suspicious locations or applications while allowing relevant and necessary data to pass through, according to CISA.

Properly installing a firewall is not full proof, however. Cybercriminals love phishing- don’t become the bait! Firewalls cannot protect data if an employee clicks on a link sent in a scam email or text message, or accidently installs malware. Stay vigilant when scanning emails and text messages, and make sure your employees are also aware of phishing and malware.

  1. Two-factor authentication. Two-factor authentication is a free security feature that gives a user an extra layer of protection from being hacked, even if a cybercriminal obtains access to a user’s password. That is because, in addition to entering in the password, a user is prompted to enter a security code sent via text message.

Two-factor authentication is a basic security feature all professionals must use. Three-     factor authentication is even in use. Tax software providers, email providers and others that require online accounts now offer customers two-factor authentication protections to access email accounts. Using the two-factor authentication options offered by tax   software providers is critical to protect client data stored within those systems. Tax pros also can check their email account settings to see if the email provider offers two-factor protections.

  1. Backup software/ services.  Critical files on computers should routinely be backed up to external sources. This means a copy of the file is made and stored either online as part of a cloud storage service or similar product. Or, a copy of the file is made to an external disk, such as an external hard drive with multiple terabytes of storage capacity. Tax professionals should ensure that taxpayer data that is backed up also is encrypted – for the safety of the taxpayer and the tax pro.
  1. Drive encryption. Given the sensitive client data maintained on tax practitioners’ computers, users should consider drive encryption software for full-disk encryption. Drive encryption, or disk encryption, transforms data on the computer into unreadable files for an unauthorized person accessing the computer to obtain data. Drive encryption may come as a stand-alone security software product. It may also include encryption for removable media, such as a thumb drive and its data.
  1. Virtual Private Network. This is critical for practitioners who work remotely. If a tax firm’s employees must occasionally connect to unknown networks or work from home, establish an encrypted Virtual Private Network (VPN) to allow for a more secure connection. A VPN provides a secure, encrypted tunnel to transmit data between a remote user via the Internet and the company network. Search for “Best VPNs” to find a legitimate vendor; major technology sites often provide lists of top services.

Review professional insurance policy

The guidance also reminds tax professionals to review their professional insurance policy to see if their business is protected should a cyberattack occur.

As a final note, tax professionals should seek out addition security best practices as recommended by the  IRS Publication 4557, Safeguarding Taxpayer Data (PDF), and Small Business Information Security: The Fundamentals (PDF) by the National Institute of Standards and Technology.

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
For more information, Contact Us

IRS Issues Final Regulations Providing Relief for Certain Tax-Exempt Organizations

On May 26, 2020, the Treasury Department and the IRS issued final rules (T.D. 9898) stating that certain tax-exempt groups will no longer be required to provide the names and addresses of major donors on annual returns filed with the IRS. These regulations specify that only organizations described in section 501(c)(3) and section 527 organizations are required to continue to provide names and addresses of contributors on their Forms 990 (Return of Organization Exempt From Income Tax), Forms 990- EZ (Short Form Return of Organization Exempt From Income Tax), and Forms 990-PF (Return of Private Foundation). Most of the information filled out on these annual returns in available for public inspection.

Charitable Organizations (501(c)(3))’s and Political Organizations (Section 527)

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual. Organizations descried in 501(c)(3) are referred to as charitable organizations and such charitable organizations are barred from taking any action in an attempt to influence legislation as a substantial part of its activities, and this cannot participate in any campaign activity for or against political candidates.

This Treasury Decision revises §1.6033-2(a)(2)(ii)(F) to provide that organizations described in section 501(c)(3) generally are required to provide names and addresses of contributors of more than $5,000.  Similarly, §1.6033-2(a)(2)(iii)(D) is revised to remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to the following organizations:

  • Social and recreation clubs per 501(c)(7)
  • Fraternity Beneficiary Societies and Associations per 501(c)(8), and
  • Domestic Fraternal Societies and Associations per 501(c)(10).

Political organizations that are tax-exempt under section 527 of the code will also still have to report contributor names and addresses. A 527 group is created primarily to influence the selection, nomination, election, appointment, or defeat of candidates to federal, state, and local office. These final regulations also clarify that section 527 organizations with gross receipts greater than $25,000 generally are subject to the reporting requirements under section 6033(a)(1) as if they were exempt from taxes under section 501(a).

Social welfare organizations (501(c)(4)) and Business Leagues (501(c)(6))

Under the final regulations, social welfare organizations and business leagues are not required to provide donor names and addresses. The following organizations qualify as social welfare organizations under 501(c)(4):

  • Civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare;
  • Local associations of employees, where membership is limited to the employees of a designated person in a particular municipality, and the net earnings are used exclusively tor charitable, educational, or recreational purposes; and
  • Certain organizations that engage in substantial lobbying activities (i.e. the National Rifle Association, the American Civil Liberties Union, and Citizens United).

Additionally, the Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, under 501(c)(6), so long as they are not organized for profit and no part of the net earnings are used for the benefit of any private shareholder or individual. Organizations that qualify under 501(c)(6) are also allowed to engage in some political activity.

Commentators in favor of the IRS’s decision not to collect names and addresses of substantial donors to some tax-exempt organizations discussed the concern that supporters of certain organizations would face harassment if their status as contributors was publicly revealed. This would produce a “chilling effect,” discouraging potential contributors from giving to certain tax-exempt organizations and rise to a violation of a first amendment violation with regards to freedom of speech and freedom of association. On the other hand, critics asserted that the new rules will lead to an increase in the flow of money into U.S. elections through organizations described in section 501(c)(4) and (6). The IRS quashed this criticism and underscored section 6103 of the Code generally prohibits the IRS from disclosing any names and addresses of organizations’ substantial contributors to federal agencies for non-tax investigations, including campaign finance matters, except in narrowly prescribed circumstances.

As a final note, all tax-exempt organizations are required to maintain records regarding their substantial contributions, irrespective if they have to follow the annual reporting requirement. Still, states have the authority to impose their own reporting requirements as both the Treasury Department and the IRS expect each state to “determine the appropriateness of the burdens it may impose in light of its own tax administration needs.”

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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Buyers Beware: Buying Real Estate Subject to Unpaid IRS Taxes

When purchasing real estate, it is important to be diligent in whether the seller owes unpaid taxes to the IRS.  In certain situations, the IRS can collect prior owner’s taxes from you the buyer of the real estate, even though the seller incurred those taxes.  A recent United States District Court, District of Nevada demonstrates this issue.

In the case of Shirehampton Drive Trust v. JP Morgan Chase Bank, No. 2:16-cv-02276 (D. Nev. 2019), the owner obtained a mortgage to purchase real estate property.  The owner later fell behind and failed to pay their monthly homeowner’s association (HOA) dues, and the HOA recorded a notice of delinquent assessment lien on the property.  The HOA then foreclosed on the property.  Shirehampton Drive Trust (Shirehampton), the plaintiff, purchased the property from the foreclosure sale and sued JP Morgan Chase Bank (the bank) to quiet title to the real property, and the bank filed a counter claim on the same grounds.  The IRS became involved as well and removed the case to Federal Court, filing a claim of its own on the grounds that the previous owner had outstanding unpaid Federal taxes.

Federal IRS Tax Liens arise by an operation of law when taxes are assessed.  Once the IRS records the tax debt, it has an interest in the taxpayer’s property, which generally includes real estate.  The IRS lien is generally made in the local county records and must be recorded to generally be valid.

The issue hung on which lien was superior, the IRS or the HOA lien.  Generally, the “first in time, first in right” rule applies, looking to the timing of when the liens were filed.  Shirehampton argued that the HOA lien was superior and thus they purchased the lien clear of the IRS Federal Tax Lien.  The IRS argued the HOA lien wasn’t perfected before the Federal Tax Lien, as under Nevada state law, the HOA lien would not be perfected until after notice was sent to the owner of the delinquent assessment.  The US District Court for the State of Nevada ruled for the IRS in that the IRS lien filed on May 1, 2009 was before the date the delinquent assessment was sent to the prior owner on July 24, 2009, even though the owner became delinquent of the HOA dues on March 1, 2009.  As notice of the lien was not perfected in being sent to the previous property owner, the IRS’ lien was superior.  Thus, Shirehampton purchased the property subject to the IRS’ lien and had to pay those unpaid taxes of the previous owner.

When dealing with tax issues and liens when buying property it is important to consult a tax attorney that can help you understand the consequences of liens encumbering the property, and not end up paying the unpaid taxes of the previous owner!

VW Contributor: Ryan Coufal
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