This newsletter highlights some of the most recent federal and state tax updates in the month of April 2023.
Federal Tax Updates April 2023
Supreme Court Decision on FBAR penalties.
On February, 28, 2023, the Supreme Court handed down its decision in Bittner v. United States. They held that the maximum penalty of $10,000 for non-willful failure to report foreign financial accounts on FinCEN Form 114 (FBAR form), applies on a per-report basis and not on per-account basis.
This favorable decision for taxpayers clears up the ambiguity in the application of penalties under the Bank Secrecy Act.
The Report of Foreign Bank and Financial Accounts (FBAR) is an annual report, to be filed by every US citizen, resident and domestic legal entity having a financial interest in or signature or other authority over one or more financial accounts located outside the United States if the aggregate value of those foreign financial accounts exceeds $10,000 at any time during the calendar year.
Note that the 2022 FBAR needs to be filed by April, 18, 2023. It must be filed electronically using the BSA E-Filing System website. An automatic extension, for those unable to file by the due date, is granted to October 16th, 2023.
Taxpayers should also be aware of other reporting requirements triggered by holding foreign assets.
Form 8938, Statement of Specified Foreign Financial is used by US taxpayers to report foreign assets, investments and accounts, if the total value of these holdings exceeds the designated reporting thresholds outlined in the instructions to the form. The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114.
Individuals and domestic entities must check the requirements and reporting thresholds of each form to determine if they should file Form 8938 or FinCEN Form 114, or both.
Employees Retention Credit Claims – IRS warning.
On March 7, 2023 , the IRS issued a warning urging taxpayers to carefully review the Employee Retention Credit (ERC) guidelines before trying to claim the credit as promoters continue pushing ineligible people to file for this benefit.
The ERC is a refundable tax credit designed for businesses which continued paying employees while completely or partially shut down due to the COVID-19 pandemic or businesses which had significant declines in gross receipts from March 13, 2020 through September 30, 2021. Recovery startup businesses are also eligible for the ERC in the fourth quarter of 2021. Taxpayers who have not yet filed a claim for the ERC can do so on an amended employment tax return (Form 941) for the relevant period.
Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in a requirement to repay the credit along with penalties and interest.
Extension of Time to File for those in Federally Declared Disaster Areas
May 15th is the due date for filing Form 990-series returns for most tax-exempt organizations. However, disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal returns and make tax payments.
The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA) as a disaster area in these three states. The current list of eligible localities and other details for each disaster are always available on the Tax Relief in Disaster Situations page on IRS.gov.
The additional relief postpones various tax filing and payment deadlines, including those for most calendar-year 2022 returns, until Oct. 16. This relief applies to 2023 estimated tax payments, normally due on April 18th, June 15th and September 15th. It also applies to the quarterly payroll and excise tax returns normally due on January 31st, April 30th and July 31st.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief.
However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS for a filing, payment or deposit date falling properly made within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.
State Tax Updates April 2023
State Pass- Through Entity (PTE) tax
The Pass-through Entity (PTE) tax is an entity-level income tax that partnerships (other than publicly traded partnerships under IRC 7704) and Subchapter S corporations may elect to pay on behalf of owners of the entity. This payment reduces federal taxable income for the entity and the partners/members/ shareholders of the pass-through entity are allowed a credit for their share of the PTE tax paid. The ability to make a PTE election is available for tax years ending on or after December 31, 2021, and beginning prior to January 1, 2026.
The American Institute of CPAs has compiled a detailed chart providing the information and guidance on each state, their PTE tax rates, legislation details, etc. The Institute has also issued a state map which provides links and details of the states that have enacted or proposed PTE level tax.
Maryland updated its pass-through entity tax election date for 2023 tax year. The recently released instructions to Form 511 for tax years beginning after December 31, 2022, require that the election must be made, if at all, with the first estimated tax payment of the tax year by April 17th, 2023. The election made with the first estimated payment is irrevocable.
Virginia tax update
On February 27th. the Virginia Department of Taxation issued Bulletin 23-1 which explains the conformity adjustments to federal legislation for 2022 state income tax returns.
During the 2023 General Assembly Session, legislation was enacted to advance Virginia’s date of conformity to the Internal Revenue Code from December 31, 2021 to December 31, 2022. This legislation allows Virginia to conform to certain key provisions of the Inflation Reduction Act of 2022 (“IRA”) and the Secure 2.0 provisions of the Consolidated Appropriations Act of 2023 (“CAA”). The Bulletin also notes areas where Virginia will continue to deconform from Federal legislation.
Taxpayers are urged to read this Bulletin prior to preparing 2022 Virginia returns.