In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938 (PDF), explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency.  The frequently asked questions (“FAQs”) below expand upon the examples provided in Notice 2014-21 and apply those same longstanding tax principles to additional situations. 

Note: Except as otherwise noted, these FAQs apply only to taxpayers who hold virtual currency as a capital asset.  For more information on the definition of a capital asset, examples of what is and is not a capital asset, and the tax treatment of property transactions generally, see Publication 544, Sales and Other Dispositions of Assets.   

Q1.  What is virtual currency?

A1.  Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.  Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.  The IRS uses the term “virtual currency” in these FAQs to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.   Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes. 

Q2.  How is virtual currency treated for Federal income tax purposes?

A2.  Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.  For more information on the tax treatment of virtual currency, see Notice 2014-21.  For more information on the tax treatment of property transactions, see Publication 544, Sales and Other Dispositions of Assets. 

Q3.  What is cryptocurrency?

A3.  Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.  A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction. 

Q4.  Will I recognize a gain or loss when I sell my virtual currency for real currency?

A4.  Yes.  When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses.  For more information on capital assets, capital gains, and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

Q5.  How do I determine if my gain or loss is a short-term or long-term capital gain or loss?

A5.  If you held the virtual currency for one year or less before selling or exchanging the virtual currency, then you will have a short-term capital gain or loss.  If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss.  The period during which you held the virtual currency (known as the “holding period”) begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency.  For more information on short-term and long-term capital gains and losses, see Publication 544, Sales and Other Dispositions of Assets. 

Q6.  How do I calculate my gain or loss when I sell virtual currency for real currency?

A6.  Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your Federal income tax return in U.S. dollars.  For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

Q7.  How do I determine my basis in virtual currency I purchased with real currency?

A7.  Your basis (also known as your “cost basis”) is the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs in U.S. dollars.  Your adjusted basis is your basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars.  For more information on basis, see Publication 551, Basis of Assets.

Q8.  Do I have income if I provide someone with a service and that person pays me with virtual currency?

A8.  Yes.  When you receive property, including virtual currency, in exchange for performing services, whether or not you perform the services as an employee, you recognize ordinary income.  For more information on compensation for services, see Publication 525, Taxable and Nontaxable Income.

Q9.  Does virtual currency received by an independent contractor for performing services constitute self-employment income?

A9.  Yes.  Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee.  Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax. 

Q10.  Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?

A10.  Yes.  Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.  Consequently, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.  See Publication 15 (Circular E), Employer's Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.

Q11.  How do I calculate my income if I provide a service and receive payment in virtual currency?

A11.  The amount of income you must recognize is the fair market value of the virtual currency, in U.S. dollars, when received.  In an on-chain transaction you receive the virtual currency on the date and at the time the transaction is recorded on the distributed ledger. 

Q12.  How do I determine my basis in virtual currency I receive for services I’ve provided?

A12.  If, as part of an arm’s length transaction, you provided someone with services and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received.  For more information on basis, see Publication 551, Basis of Assets.

Q13.  Will I recognize a gain or loss if I pay someone with virtual currency for providing me with a service?

A13.  Yes.  If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss.  For more information on capital gains and capital losses, see Publication 544, Sales and Other Dispositions of Assets. 

Q14.  How do I calculate my gain or loss when I pay for services using virtual currency?

A14.  Your gain or loss is the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.  For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

Q15.  Will I recognize a gain or loss if I exchange my virtual currency for other property?

A15.  Yes.  If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss.  For more information on capital gains and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

Q16.  How do I calculate my gain or loss when I exchange my virtual currency for other property?

A16.  Your gain or loss is the difference between the fair market value of the property you received and your adjusted basis in the virtual currency exchanged.  For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

Q17.  How do I determine my basis in property I’ve received in exchange for virtual currency?

A17.  If, as part of an arm’s length transaction, you transferred virtual currency to someone and received other property in exchange, your basis in that property is its fair market value at the time of the exchange.  For more information on basis, see Publication 551, Basis of Assets.

Q18.  Will I recognize a gain or loss if I sell or exchange property (other than U.S. dollars) for virtual currency?

A18.  Yes.  If you transfer property held as a capital asset in exchange for virtual currency, you will recognize a capital gain or loss.  If you transfer property that is not a capital asset in exchange for virtual currency, you will recognize an ordinary gain or loss.  For more information on gains and losses, see Publication 544, Sales and Other Dispositions of Assets. 

Q19.  How do I calculate my gain or loss when I exchange property for virtual currency?

A19.  Your gain or loss is the difference between the fair market value of the virtual currency when received (in general, when the transaction is recorded on the distributed ledger) and your adjusted basis in the property exchanged.  For more information on gain or loss from sales or exchanges, see Publication 544, Sales and Other Dispositions of Assets.

Q20.  How do I determine my basis in virtual currency that I have received in exchange for property?

A20.  If, as part of an arm’s length transaction, you transferred property to someone and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received.  For more information on basis, see Publication 551, Basis of Assets. 

Q21.  One of my cryptocurrencies went through a hard fork but I did not receive any new cryptocurrency.  Do I have income?

A21.  A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger.  This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger.  If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.

Q22.  One of my cryptocurrencies went through a hard fork followed by an airdrop and I received new cryptocurrency.  Do I have income?

A22.  If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency. 

Q23.  How do I calculate my income from cryptocurrency I received following a hard fork?

A23.  When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency. 

Q24.  How do I determine my basis in cryptocurrency I received following a hard fork?

A24.  If you receive cryptocurrency from an airdrop following a hard fork, your basis in that cryptocurrency is equal to the amount you included in income on your Federal income tax return.  The amount included in income is the fair market value of the cryptocurrency when you received it.  You have received the cryptocurrency when you can transfer, sell, exchange, or otherwise dispose of it, which is generally the date and time the airdrop is recorded on the distributed ledger.  See Rev. Rul. 2019-24.  For more information on basis, see Publication 551, Basis of Assets.  

Q25.  I received cryptocurrency through a platform for trading cryptocurrency; that is, through a cryptocurrency exchange.  How do I determine the cryptocurrency’s fair market value at the time of receipt?

A25.  If you receive cryptocurrency in a transaction facilitated by a cryptocurrency exchange, the value of the cryptocurrency is the amount that is recorded by the cryptocurrency exchange for that transaction in U.S. dollars.  If the transaction is facilitated by a centralized or decentralized cryptocurrency exchange but is not recorded on a distributed ledger or is otherwise an off-chain transaction, then the fair market value is the amount the cryptocurrency was trading for on the exchange at the date and time the transaction would have been recorded on the ledger if it had been an on-chain transaction.

Q26.  I received cryptocurrency in a peer-to-peer transaction or some other type of transaction that did not involve a cryptocurrency exchange.  How do I determine the cryptocurrency’s fair market value at the time of receipt?

A26.  If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction.  The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.  If you do not use an explorer value, you must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value. 

Q27.  I received cryptocurrency that does not have a published value in exchange for property or services.  How do I determine the cryptocurrency’s fair market value?

A27.  When you receive cryptocurrency in exchange for property or services, and that cryptocurrency is not traded on any cryptocurrency exchange and does not have a published value, then the fair market value of the cryptocurrency received is equal to the fair market value of the property or services exchanged for the cryptocurrency when the transaction occurs. 

Q28.  When does my holding period start for cryptocurrency I receive?

A28.  Your holding period begins the day after it is received.  For more information on holding periods, see Publication 544, Sales and Other Dispositions of Assets.

Q29.  Do I have income when a soft fork of cryptocurrency I own occurs?

A29.  No.  A soft fork occurs when a distributed ledger undergoes a protocol change that does not result in a diversion of the ledger and thus does not result in the creation of a new cryptocurrency.  Because soft forks do not result in you receiving new cryptocurrency, you will be in the same position you were in prior to the soft fork, meaning that the soft fork will not result in any income to you.

Q30.  I received virtual currency as a bona fide gift.  Do I have income?

A30.  No.  If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency.  For more information about gifts, see Publication 559, Survivors, Executors, and Administrators.

Q31.  How do I determine my basis in virtual currency that I received as a bona fide gift?

A31.  Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it.  For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift.  For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift.  If you do not have any documentation to substantiate the donor’s basis, then your basis is zero.  For more information on basis of property received as a gift, see Publication 551, Basis of Assets. 

Q32.  What is my holding period for virtual currency that I received as a gift?

A32.  Your holding period in virtual currency received as a gift includes the time that the virtual currency was held by the person from whom you received the gift.  However, if you do not have documentation substantiating that person’s holding period, then your holding period begins the day after you receive the gift.  For more information on holding periods, see Publication 544, Sales and Other Dispositions of Assets.

Q33.  If I donate virtual currency to a charity, will I have to recognize income, gain, or loss?

A33.  If you donate virtual currency to a charitable organization described in Internal Revenue Code Section 170(c), you will not recognize income, gain, or loss from the donation.  For more information on charitable contributions, see Publication 526, Charitable Contributions.

Q34.  How do I calculate my charitable contribution deduction when I donate virtual currency?

A34.  Your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year.  If you have held the virtual currency for one year or less at the time of the donation, your deduction is the lesser of your basis in the virtual currency or the virtual currency’s  fair market value at the time of the contribution.  For more information on charitable contribution deductions, see Publication 526, Charitable Contributions.

Q35.  Will I have to recognize income, gain, or loss if I own multiple digital wallets, accounts, or addresses capable of holding virtual currency and transfer my virtual currency from one to another?

A35.  No.  If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.

Q36.  I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts.  If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?

A36.  Yes.  You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units. 

Q37.  How do I identify a specific unit of virtual currency?

A37.  You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address.  This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.  

Q38.  How do I account for a sale, exchange, or other disposition of units of virtual currency if I do not specifically identify the units?

A38.  If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.  

Q39.  If I engage in a transaction involving virtual currency but do not receive a payee statement or information return such as a Form W-2 or Form 1099, when must I report my income, gain, or loss on my Federal income tax return?

A39.  You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return. 

Q40.  Where do I report my capital gain or loss from virtual currency?

A40.  You must report most sales and other capital transactions and calculate capital gain or loss in accordance with IRS forms and instructions, including on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.

Q41.  Where do I report my ordinary income from virtual currency?

A41.  You must report ordinary income from virtual currency on Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income (PDF), as applicable.

Q42.  Where can I find more information about the tax treatment of virtual currency?

A42.  Information on virtual currency is available at [www. IRS.gov/virtual currency].  Many questions about the tax treatment of virtual currency can be answered by referring to Notice 2014-21 (PDF) and Rev. Rul. 2019-24. 

Q43.   What records do I need to maintain regarding my transactions in virtual currency?

A43.    The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the  positions taken on tax returns.  You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.

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New payment option available to taxpayers in private debt collection program
October 9, 2019

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WASHINGTON — Internal Revenue Service officials today announced that a new payment option has been added to the private debt collection program to make it easier for those who owe to pay their tax debts.

Taxpayers now can choose the convenient option of a preauthorized direct debit to make one payment or a series of payments toward their federal tax debt. With direct debit, the taxpayer will give their written permission to the private collection agency (PCA) to authorize a payment on the taxpayer’s behalf to the U.S. Department of the Treasury. This enables the taxpayer to conveniently and securely schedule multiple payments with the ease of a single phone call with their assigned PCA.

When taxpayers choose the preauthorized direct debit option, they’ll complete and sign a written authorization which can be submitted to the PCA by mail or fax. The authorization contains the payment schedule and bank account information.

Once the PCA receives the taxpayer’s signed authorization, it will send a confirmation letter containing the details of the preauthorized direct debit. The PCA will create a check according to the payment schedule made out to the U.S. Department of the Treasury. The check is securely mailed to the IRS within 24 hours.

The new direct debit supplements existing IRS-sponsored payment options and can be changed or canceled up to one business day prior to the scheduled payment. Taxpayers can still opt to use the electronic payment options available on IRS.gov/Paying Your Taxes. Payments by check should be payable to the U.S. Treasury and sent directly to the IRS, not the PCA.

The private debt collection program, enacted by Congress, requires the IRS to contract PCAs to collect certain outstanding tax debts. In June, the IRS began assigning a small number of business accounts to PCAs.These cases meet the requirements under federal law for inclusion in the private debt collection program.

From the start of the program in April 2017 through June 13, 2019, the IRS has given four PCAs more than 1.9 million total cases that represent more than $16.2 billion of the IRS’s balance-due inventory. To date, the PCAs have assisted more than 163,000 taxpayers who either paid their balances in full or set up a payment arrangement.

Be aware of scammers

Taxpayers should be on alert for scammers and identity thieves pretending to be from a PCA.

When representatives from one of the four PCAs contacts a taxpayer, they will state that they are from one of these collection agencies: CBE, Performant, Pioneer or ConServe. These agencies will respect the Taxpayer Bill of Rights and abide by the consumer protection provisions of the Fair Debt Collection Practices Act.

Whether a taxpayer selects the preauthorized direct payment option or mails a check, the IRS reminds taxpayers to be on the lookout for scam telephone calls from anyone claiming to be collecting on behalf of the IRS.

Even with private debt collection, taxpayers will not get unexpected phone calls demanding payment. Before a taxpayer is contacted, the taxpayer will receive two letters; one from the IRS and one from the PCA. Both letters will include a Taxpayer Authentication Number (TAN). The TAN will be used to authenticate the PCA and to verify the identity of the taxpayer, instead of using their social security number. Taxpayers are advised to safeguard their TAN as they would a social security number. Taxpayers can report a suspected phone scam or inappropriate behavior to the Treasury Inspector General for Tax Administration on their website at www.treasury.gov/tigta, or by calling 800-366-4484.

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September 26, 2019
IRS Tax Tip 2019-134

With scam artists hard at work all year, taxpayers should watch for new versions of tax-related scams. One such scam involves fake property liens. It threatens taxpayers with a tax bill from a fictional government agency.

Here are some details about the property lien scam that will help taxpayers recognize it:

• This scheme involves a letter threatening an IRS lien or levy.
• The scammer mails the letter to a taxpayer.
• The lien or levy is based on bogus overdue taxes owed to a non-existent agency.
• The non-existent agencies might have a legitimate-sounding name like the “Bureau of Tax Enforcement.” There is no such agency.
• This scam may also reference the IRS to confuse potential victims into thinking the letter is from a real agency.

For anyone who doesn’t owe taxes and has no reason to think they do should:

• Contact the Treasury Inspector General for Tax Administration to report the letter. The taxpayer should use their IRS Impersonation Scam Reporting web page. When reporting the scam, they should include the key words “IRS Lien.”
• Scan a document received as a letter or fax and send it to [email protected]. 
• Report it to the Federal Trade Commission using the FTC Complaint Assistant on FTC.gov.
• Report it also to the FBI’s Internet Crime Complaint Center, known simply as IC3.

Taxpayers who do owe tax or think they might owe should:

• Review their tax account information and payment options at IRS.gov. Reviewing tax account information online will show the taxpayer if they indeed owe the IRS and how much. This is the fastest way to get this information.
• Call the IRS at 800-829-1040 to confirm the notice if they’re still not sure they owe.

More information:

• Tax Scams/Consumer Alerts
• How Do You Report Suspected Tax Fraud Activity?

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September 6, 2019

IRS announces new procedures to enable certain expatriated individuals a way to come into compliance with their U.S. tax and filing obligations

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WASHINGTON – The Internal Revenue Service today announced new procedures that will enable certain individuals who relinquished their U.S. citizenship to come into compliance with their U.S. tax and filing obligations and receive relief for back taxes.

The Relief Procedures for Certain Former Citizens apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.

Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.   

The IRS is offering these procedures without a specific termination date. The IRS will announce a closing date prior to ending the procedures. Individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible so long as they satisfy the other criteria of the procedures.

These procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities may not use these procedures.

The IRS will host an on-line webinar in the near future providing additional information and practical tips for making a submission to the Relief Procedures for Certain Former Citizens.

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions.

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August 30, 2019
Here’s what tax professionals should know about creating a data security plan

Tax pros must create a written security plan to protect their clients’ data. In fact, the law requires them to make this plan. 

Creating a data security plan is one part of the new Taxes-Security-Together Checklist. The IRS and its Security Summit partners created this checklist. It helps tax professionals protect sensitive data in their offices and on their computers.

Many tax preparers may not realize they are required under federal law to have a data security plan. Each plan should be tailored for each specific office. When creating it, the tax professional should take several factors into consideration. This includes things like the company’s size, the nature of its activities, and the sensitivity of its customer information.

Creating a plan
Tax professionals should make sure to do these things when writing and following their data security plans:

• Include the name of all information security program managers.
• Identify all risks to customer information.
• Evaluate risks and current safety measures.
• Design a program to protect data.
• Put the data protection program in place.
• Regularly monitor and test the program.

Selecting a service provider
Companies should have a written contract with their service provider. The provider must:

• • Maintain appropriate safety measures. 
  • Oversee the handling of customer information review. 
  • Revise the security program as needed.

More information:

• Publication 4557, Safeguarding Taxpayer Data
• Small Business Information Security: The Fundamentals by the National Institute of Standards and Technology
• Publication 5293, Data Security Resource Guide for Tax Professionals

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Security Summit warns of new IRS impersonation email scam; reminds taxpayers the IRS does not send unsolicited emails
August 22, 2019

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WASHINGTON — The Internal Revenue Service and its Security Summit partners today warned taxpayers and tax professionals about a new IRS impersonation scam campaign spreading nationally on email. Remember: the IRS does not send unsolicited emails and never emails taxpayers about the status of refunds.

The IRS this week detected this new scam as taxpayers began notifying [email protected] about unsolicited emails from IRS imposters. The email subject line may vary, but recent examples use the phrase “Automatic Income Tax Reminder” or “Electronic Tax Return Reminder.”

The emails have links that show an IRS.gov-like website with details pretending to be  about the taxpayer’s refund, electronic return or tax account. The emails contain a "temporary password" or "one-time password" to "access" the files to submit the refund. But when taxpayers try to access these, it  turns out to be a malicious file. 

“The IRS does not send emails about your tax refund or sensitive financial information,” said IRS Commissioner Chuck Rettig. “This latest scheme is yet another reminder that tax scams are a year-round business for thieves. We urge you to be on-guard at all times.”

This new scam uses dozens of compromised websites and web addresses that pose as IRS.gov, making it a challenge to shut down. By infecting computers with malware, these imposters may gain control of the taxpayer’s computer or secretly download software that tracks every keystroke, eventually giving them passwords to sensitive accounts, such as financial accounts.

The IRS, state tax agencies and the tax industry, which work together in the Security Summit effort, have made progress in their efforts to fight stolen identity refund fraud. But people remain vulnerable to scams by IRS imposters sending fake emails or harrassing phone calls.

The IRS doesn't initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.

The IRS also doesn’t call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. See Report Phishing and Online Scams for more details.

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IRS Automatically Waives Estimated Tax Penalty for Eligible 2018 Tax Filers
August 14, 2019

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WASHINGTON — The Internal Revenue Service is automatically waiving the estimated tax penalty for the more than 400,000 eligible taxpayers who already filed their 2018 federal income tax returns but did not claim the waiver.

The IRS will apply this waiver to tax accounts of all eligible taxpayers, so there is no need to contact the IRS to apply for or request the waiver.

Earlier this year, the IRS lowered the usual 90% penalty threshold to 80% to help taxpayers whose withholding and estimated tax payments fell short of their total 2018 tax liability. The agency also removed the requirement that estimated tax payments be made in four equal installments, as long as they were all made by Jan. 15, 2019. The 90% threshold was initially lowered to 85% on Jan 16 and further lowered to 80% on March 22.

The automatic waiver applies to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments but did not claim the special waiver available to them when they filed their 2018 return earlier this year.

“The IRS is taking this step to help affected taxpayers,” said IRS Commissioner Chuck Rettig. “This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed.”

Refunds planned for eligible taxpayers who paid penalty

Over the next few months, the IRS will mail copies of notices CP 21 granting this relief to affected taxpayers. Any eligible taxpayer who already paid the penalty will also receive a refund check about three weeks after their CP21 notice regardless if they requested penalty relief. The agency emphasized that eligible taxpayers who have already filed a 2018 return do not need to request penalty relief, contact the IRS or take any other action to receive this relief.

For those yet to file, the IRS urges every eligible taxpayer to claim the waiver on their return. This includes those with tax-filing extensions due to run out on Oct. 15, 2019. The quickest and easiest way is to file electronically and take advantage of the waiver computation built into their tax software package. Those who choose to file on paper can fill out Form 2210 and attach it to their 2018 return. See the instructions to Form 2210 for details.

Because the U.S. tax system is pay-as-you-go, taxpayers are required by law to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by having tax withheld from paychecks, pension payments or Social Security benefits, making estimated tax payments or a combination of these methods.

Like last year, the IRS urges everyone to do a “Paycheck Checkup” and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change. Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two wage earner households, employees with nonwage sources of income and those with complex tax situations.

To get started, check out the new Tax Withholding Estimator, available on IRS.gov. More information about tax withholding and estimated tax can be found on the agency’s Pay As You Go web page, as well as in Publication 505.

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August 13, 2019
IRS Tax Transcript Availability Update

The IRS has updated some IRS.gov content to clarify issues regarding changes to the tax transcript distribution methods. As you may recall, in lieu of faxing tax transcripts, we will send certain transcripts into practitioners’ e-Services secure mailbox. However, there is a time limit for those transcripts to be available in your mailbox. To avoid having to repeat your request, print or download the transcript immediately from your mailbox. Our new language on the About the New Tax Transcript page is highlighted below in yellow:

Employer Information for Tax Return Preparation and Electronic Filing

If you are a taxpayer seeking to file a current or prior year tax return or a tax professional preparing a current or prior year return for a client, please remember that all financial entries on all transcript types are fully visible. If you are seeking a missing Form W-2 or Form 1099 information, there is a process for obtaining those current-year documents.

If an unmasked Wage & Income transcript is necessary for tax return preparation and electronic filing, a tax professional may contact the Practitioner Priority Service line. An unmasked Wage and Income Transcript will fully display employers’ names, addresses and Employer Identification Numbers (EINs) needed for tax software preparation and for electronic filing. If the tax professional has proper taxpayer authorization, but it's not on file, they  can  fax the authorization to the IRS assistor and an unmasked Wage and Income transcript will be sent to the practitioner’s Secure Object Repository (SOR), available through e-Services. Tax professionals must have an e-Services account and pass Secure Access authentication to use the SOR option.

PLEASE NOTE: The requested transcript will remain in the SOR for a limited time. The transcript automatically will  be removed from the SOR after three days once you view it or after 30 days if it is not viewed.  Print or save the transcript if you want to keep a copy.

The unmasked Wage and Income Transcript also is available to those tax professionals with e-Services accounts, approved authorization and access to the Transcript Delivery Service. Reminder: Circular 230 practitioners, i.e. attorneys, Certified Public Accountants and Enrolled Agents, can create an e-Services account and obtain TDS access. Unenrolled practitioners must either be responsible parties or delegates users on the E-File application.

Alternatively, taxpayers or other third parties who require an unmasked transcript for tax return preparation or filing may contact the IRS, present proper authentication to prove their identities and an unmasked transcript will be mailed to the taxpayer’s address of record.

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August 6, 2019
IRS launches new Tax Withholding Estimator; Redesigned online tool makes it easier to do a paycheck checkup

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WASHINGTON — The Internal Revenue Service today launched the new Tax Withholding Estimator, an expanded, mobile-friendly online tool designed to make it easier for everyone to have the right amount of tax withheld during the year.

The Tax Withholding Estimator replaces the Withholding Calculator, which offered workers a convenient online method for checking their withholding. The new Tax Withholding Estimator offers workers, as well as retirees, self-employed individuals and other taxpayers, a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.

“The new estimator takes a new approach and makes it easier for taxpayers to review their withholding,” said IRS Commissioner Chuck Rettig. “This is part of an ongoing effort by the IRS to improve quality services as we continue to pursue modernization and enhancements of our taxpayer relationships.”

The IRS took the feedback and concerns of taxpayers and tax professionals to develop the Tax Withholding Estimator, which offers a variety of new user-friendly features including:

• Plain language throughout the tool to improve comprehension.
• The ability to more effectively target at the time of filing either a tax due amount close to zero or a refund amount.
• A new progress tracker to help users see how much more information they need to input.
• The ability to move back and forth through the steps, correct previous entries and skip questions that don’t apply.
• Enhanced tips and links to help the user quickly determine if they qualify for various tax credits and deductions.
• Self-employment tax for a user who has self-employment income in addition to wages or pensions.
• Automatic calculation of the taxable portion of any Social Security benefits.
• A mobile-friendly design.

In addition, the new Tax Withholding Estimator makes it easier to enter wages and withholding for each job held by the taxpayer and their spouse, as well as separately entering pensions and other sources of income. At the end of the process, the tool makes specific withholding recommendations for each job and each spouse and clearly explains what the taxpayer should do next.

The new Tax Withholding Estimator will help anyone doing tax planning for the last few months of 2019. Like last year, the IRS urges everyone to do a Paycheck Checkup and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change.

Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations.

To get started, check out the Tax Withholding Estimator on IRS.gov.

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August 1, 2019
Tax Security 2.0 – A ‘Taxes-Security-Together’ Checklist

IRS, Security Summit partners urge tax professionals to review their practices, enhance safeguards to protect taxpayer data

IRS YouTube Videos:

• Tax Security 2.0: Taxes-Security-Together Checklist: English

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WASHINGTON — Leaders from the IRS, state tax agencies and the tax industry today called on tax professionals nationwide to take time this summer to review their current security practices, enhance safeguards where necessary and take steps to protect their businesses from global cybercriminal syndicates prowling the Internet.

Despite major progress by the IRS and the Security Summit partners against identity theft, evolving tactics continue to threaten the tax community and the sensitive data of taxpayers. 

To help combat this, the Security Summit partners created a new “Taxes-Security-Together” Checklist to serve as a starting point for tax professionals. Beginning next week, the IRS and Summit partners will issue a series of five Tax Security 2.0 news releases highlighting “Taxes-Security-Together” Checklist action items.   

“The IRS, the states and the private sector tax industry have taken major steps to protect taxpayers and their data,” said IRS Commissioner Chuck Rettig. “But a major risk remains, regardless of whether you are the sole tax practitioner in your office or part of a multi-partner accounting firm. To help with this, we assembled a security checklist to assist the tax community. We hope tax professionals will use our checklist as a starting point to do everything necessary to protect their client’s data.”

The Security Summit — a partnership between the IRS, states and the private-sector tax community — started in 2015 to combat identity theft and protect taxpayers. Key IRS data show the Summit continues making major progress against tax-related identity theft. Between 2015 and 2018, key indicators showed:

• The number of taxpayers who reported to the IRS that they were victims of identity theft fell 71 percent. In 2018, the IRS received 199,000 identity theft affidavits from taxpayers compared to 677,000 in 2015. This was the third consecutive year this number declined.

• The number of confirmed identity theft returns stopped by the IRS declined by 54 percent, falling from 1.4 million in 2015 to 649,000 in 2018.

As the Summit has increased the tax community’s defenses against identity theft and refund fraud, cybercriminals continue to evolve. Increasingly, they look to data thefts at tax professionals’ offices to obtain large amounts of sensitive taxpayer data. Thieves then use stolen data from tax professionals to create fraudulent returns that are harder to detect.

The ‘Taxes-Security-Together’ Checklist

The Summit partners urge the tax community to review these basic security steps this summer. Some tax pros may routinely overlook these checklist items and others need to regularly revisit them. The steps are not only important for tax practitioners, but for taxpayers as well. Everyone has a responsibility to protect sensitive data.

The Taxes-Security-Together checklist highlights key security features 

   *Deploy the “Security Six” measures:

• Activate anti-virus software.
• Use a firewall.
• Opt for two-factor authentication when it’s offered.
• Use backup software/services.
• Use Drive encryption.
• Create and secure Virtual Private Networks.

   *Create a data security plan:

• Federal law requires all “professional tax preparers” to create and maintain an information security plan for client data. 
• The security plan requirement is flexible enough to fit any size of tax preparation firm, from small to large. 
• Tax professionals are asked to focus on key risk areas such as employee management and training; information systems; and detecting and managing system failures.

   *Educate yourself and be alert to key email scams, a frequent risk area involving:

• Learn about spear phishing emails.
• Beware ransomware.

   *Recognize the signs of client data theft:

• Clients receive IRS letters about suspicious tax returns in their name.
• More tax returns filed with a practitioner’s Electronic Filing Identification Number than submitted. 
• Clients receive tax transcripts they did not request.

   *Create a data theft recovery plan including:

• Contact the local IRS Stakeholder Liaison immediately.
• Assist the IRS in protecting clients’ accounts.
• Contract with a cybersecurity expert to help prevent and stop thefts. 

Security Summit partners/tax professionals urge review

“The states and our partners have made progress in the fight against tax-related identity theft, but criminals continue to evolve. We cannot let our guard down in this fight because our common enemy is well-funded, technologically skilled and savvy about state and federal tax processes,” said Sharonne Bonardi, president of the Board of Trustees of the Federation of Tax Administrators and Deputy Comptroller in Maryland. “To make this work, we need help from individual tax professionals across the nation.”

Checklist marks third year of Summit campaigns aimed at tax professional community

This year’s Tax Security 2.0 effort involving the Security Checklist is the third summer campaign in a row involving the Summit partners. The effort follows feedback and recommendations from the Electronic Tax Administration Advisory Committee (ETAAC) that encouraged the Summit partners to expand and intensify outreach efforts to the tax professional community on identity theft and security issues. 

This year’s campaign also coincides with this summer’s IRS Nationwide Tax Forums, which will again feature a major focus on security protection for tax professionals. The sessions will provide continuing education credits for sessions led by experts from inside and outside the IRS. The American Coalition for Taxpayer Rights also will again sponsor special sessions with experts from the Pell Center for International Relations and Public Policy at Salve Regina University in Rhode Island. 

Last year, Summit education effort focused on Protect Your Clients, Protect Yourself: Tax Security 101. In 2017, the campaign highlighted email schemes in Don’t Take the Bait.

Separate Summit initiatives focus on identity theft awareness for individual taxpayers and consumer alerts for developing tax scams and schemes. 

Resources available for tax professionals

Tax professionals also can get help with security recommendations by reviewing IRS Publication 4557, Safeguarding Taxpayer Data, and Small Business Information Security: the Fundamentals by the National Institute of Standards and Technology.

Publication 5293, Data Security Resource Guide for Tax Professionals, provides a compilation of data theft information available on IRS.gov. Also, tax professionals should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media.

Tax Security 2.0 – A ‘Taxes-Security-Together’ Checklist – Step 1

IRS, states and industry outline ‘Security Six’ protections to help tax professionals and taxpayers be safer online

IRS YouTube Videos:
Tax Security 2.0, The Taxes-Security-Together Checklist – English

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WASHINGTON — Using a new “Taxes-Security-Together” Checklist, the Internal Revenue Service and the Security Summit partners urged tax professionals to review critical security steps to ensure they are fully protecting their computers and email as well as safeguarding sensitive taxpayer data.

The Security Summit partners – the IRS, states and tax industry – urge tax professionals to take time this summer to give their data safeguards a thorough review. To help the tax community, the Summit created a “Taxes-Security-Together” Checklist as a starting point for analyzing office data security.

In the first of a five-part weekly series, the initial step on the checklist involves the “Security Six” protections. These steps fall into several major security categories. 

“These six steps are simple actions that anyone can take,” said IRS Commissioner Chuck Rettig. “The important thing to remember is that every tax professional, whether a sole practitioner or a partner in a large firm, is a potential target for cybercriminals. No tax business should assume they are too small or too smart to avoid identity thieves.”

Although the Security Summit – a partnership between the IRS, states and the private-sector tax community – is making major progress against tax-related identity theft, cybercriminals continue to evolve, and data thefts at tax professionals’ offices continue. Thieves use stolen data from tax practitioners to create fraudulent returns that are harder to detect.

The Security Summit partnership urges tax professionals across the nation to remember these basic steps to help in the battle against identity theft.

Deploy the ‘Security Six’ steps for basic protections

The following are the basic protections that everyone, especially tax professionals handling sensitive data, should deploy:

1. Anti-virus software

Although details may vary between commercial products, anti-virus software scans computer files or memory for certain patterns that may indicate the presence of malicious software (also called malware). Anti-virus software (sometimes more broadly referred to as anti-malware software) looks for patterns based on the signatures or definitions of known malware from cyber criminals. Anti-virus vendors find new issues and update malware daily, so it is important that people have the latest updates installed on their computer, according to the U.S. Computer Emergency Readiness Team (US-CERT), a division of the Department of Homeland Security.

Once users have installed an anti-virus package, they should scan their entire computer periodically by doing:

• Automatic scans – Most anti-virus software can be configured to automatically scan specific files or directories in real time and prompt users at set intervals to perform complete scans.
• Manual scans – If the anti-virus software does not automatically scan new files, users should manually scan files and media received from an outside source before opening them. This manual process includes:

o    Saving and scanning email attachments or web downloads rather than opening them directly from the source.

o    Scanning portable media, including CDs and DVDs, for malware before opening files.

Sometimes the software will produce a dialog box with an alert that it has found malware and asks whether users want it to “clean” the file (to remove the malware). In other cases, the software may attempt to remove the malware without asking first. 

When selecting an anti-virus package, users should learn about its features, so they know what to expect. Keep security software set to automatically receive the latest updates so that it is always current.

A reminder about spyware, a category of malware intended to steal sensitive data and passwords without the user’s knowledge: Strong security software should protect against spyware. But remember, never click links within pop-up windows, never download “free” software from a pop-up, never follow email links that offer anti-spyware software. The links and pop-ups may be installing the spyware they claim to be eliminating.

A reminder about phishing emails: A strong security package also should contain anti-phishing capabilities. Never open an email from a suspicious source, click on a link in a suspicious email or open an attachment – or else you could be a victim of a phishing attack and you and your clients’ data could be compromised  

2. Firewalls

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

Firewalls may be broadly categorized as hardware or software. While both have their advantages and disadvantages, the decision to use a firewall is far more important than deciding which type you use:

• Hardware – Typically called network firewalls, these external devices are positioned between a computer and the internet (or another network connection). Hardware-based firewalls are particularly useful for protecting multiple computers and control the network activity that attempts to pass through them. 
• Software – Most operating systems include a built-in firewall feature that should be enabled for added protection even if using an external firewall. Firewall software can also be obtained as separate software from a local computer store, software vendor or ISP. If downloading firewall software from the internet, make sure it is from a reputable source (such as an established software vendor or service provider) and offered via a secure website.

While properly configured firewalls may be effective at blocking some cyber-attacks, don’t be lulled into a false sense of security. Firewalls do not guarantee that a computer will not be attacked. Firewalls primarily help protect against malicious traffic, not against malicious programs (malware), and may not protect the device if the user accidentally installs malware. However, using a firewall in conjunction with other protective measures (such as anti-virus software and safe computing practices) will strengthen resistance to attacks.

The Security Summit reminds tax pros that anti-virus software and firewalls cannot protect data if computer users fall for email phishing scams and divulge sensitive data, such as usernames and passwords. The Summit reminds the tax community that users, not the software, is the first-line of defense in protecting taxpayer data.

3. Two-factor authentication

Many email providers now offer customers two-factor authentication protections to access email accounts. Tax professionals should always use this option to prevent their accounts from being taken over by cybercriminals and putting their clients and colleagues at risk.

Two-factor authentication helps by adding an extra layer of protection beyond a password. Often two-factor authentication means the returning user must enter credentials (username and password) plus another step, such as entering a security code sent via text to a mobile phone. The idea is a thief may be able to steal the username and password but it’s highly unlikely they also would have a user’s mobile phone to receive a security code and complete the process.

The use of two-factor authentication and even three-factor authentication is on the rise, and tax preparers should always opt for a multi-factor authentication protection when it is offered, whether on an email account or tax software account or any password-protected product. 

IRS Secure Access, which protects IRS.gov tools including e-Services, is an example of two-factor authentication. 

Tax pros can check their email account settings to see if the email provider offers two-factor protections.

4. 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 that now comes 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.  

5. 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.

6. Virtual Private Network

If a tax firm’s employees must occasionally connect to unknown networks or work from home, establish an encrypted Virtual Private Networks (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.

How to get started with the ‘Security Six’ 
All tax professionals also should review their professional insurance policy to ensure the business is protected should a data theft occur. Some insurance companies will provide cybersecurity experts for their clients.

These experts can help with technology safeguards and offer more advanced recommendations.  

Having the proper insurance coverage is a common recommendation from tax professionals who have experienced data thefts.

Additional resources

Tax professionals also can get help with security recommendations by reviewing the recently revised IRS Publication 4557, Safeguarding Taxpayer Data, and Small Business Information Security: the Fundamentals by the National Institute of Standards and Technology.

Publication 5293, Data Security Resource Guide for Tax Professionals, provides a compilation data theft information available on IRS.gov. Also, tax professionals should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media.

The Taxes-Security-Together Checklist

During this special Security Summit series, the checklist highlights these key areas for tax professionals:

• Deploy “Security Six” basic safeguards
• Create data security plan
• Educate yourself on phishing scams
• Recognize the signs of client data theft
• Create a data theft recovery plan, and call the IRS immediately

Tax Security 2.0 – A ‘Taxes-Security-Together’ Checklist – Step 2

IRS, Security Summit partners remind practitioners that all ‘professional tax preparers’ must create a written data security plan to protect clients

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WASHINGTON — The IRS, state tax agencies and the nation’s tax industry today reminded all “professional tax preparers” that federal law requires them to create a written information security plan to protect their clients’ data.

The reminder came as the IRS and its Security Summit partners urged tax professionals to take time this summer to review their data security protections. To help them in this complex area, the Summit created a special “Taxes-Security-Together” Checklist as a starting point.

“Protecting taxpayer data is not only a good business practice, it’s the law for professional tax preparers,” said IRS Commissioner Chuck Rettig. “Creating and putting into action a written data security plan is critical to protecting your clients and protecting your business.”

Creating a data security plan is the second item on the “Taxes-Security-Together” Checklist. The first step for tax professionals involved deploying the “Security Six” basic steps to protect computers and email.

Although the Security Summit -- a partnership between the IRS, states and the private-sector tax community -- is making major progress against tax-related identity theft, cybercriminals continue to evolve, and data thefts at tax professionals’ offices remain a major threat. Thieves use stolen data from tax practitioners to create fraudulent returns that can be harder for the IRS and Summit partners to detect.

Create a data security plan under federal law 

The Security Summit partners noted that many in the tax professional community do not realize they are required under federal law to have a data security plan. 

The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley (GLB) Act, gives the Federal Trade Commission authority to set information safeguard regulations for various entities, including professional tax return preparers. According to the FTC Safeguards Rule, tax return preparers must create and enact security plans to protect client data. Failure to do so may result in an FTC investigation. The IRS also may treat a violation of the FTC Safeguards Rule as a violation of IRS Revenue Procedure 2007-40, which sets the rules for tax professionals participating as an Authorized IRS e-file Provider.

The FTC-required information 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. According to the FTC, each company, as part of its plan, 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 the 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, make 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. 

The FTC says the requirements are designed to be flexible so that companies can implement safeguards appropriate to their own circumstances. The Safeguards Rule requires companies to assess and address the risks to customer information in all areas of their operations.

Please note: The FTC currently is re-evaluating the Safeguards Rule and has proposed new regulations. Be alert to any changes in the Safeguards Rule and its effect on the tax preparation community.

IRS Publication 4557, Safeguarding Taxpayer Data, details critical security measures that all tax professionals should enact. The publication also includes information on how to comply with the FTC Safeguards Rule, including a checklist of items for a prospective data security plan. Tax professionals are asked to focus on key areas such as employee management and training; information systems; and detecting and managing system failures. 

Additional data protection provisions may apply

The IRS and certain Internal Revenue Code (IRC) sections also focus on protection of taxpayer information and requirements of tax professionals. Here are a few examples:

• IRS Publication 3112 - IRS e-File Application and Participation, states: Safeguarding of IRS e-file from fraud and abuse is the shared responsibility of the IRS and Authorized IRS e-file Providers. Providers must be diligent in recognizing fraud and abuse, reporting it to the IRS, and preventing it when possible. Providers must also cooperate with the IRS’ investigations by making available to the IRS upon request information and documents related to returns with potential fraud or abuse.
• IRC, Section 7216 - This IRS code provision imposes criminal penalties on any person engaged in the business of preparing or providing services in connection with the preparation of tax returns who knowingly or recklessly makes unauthorized disclosures or uses information furnished to them in connection with the preparation of an income tax return.
• IRC, Section 6713 - This code provision imposes monetary penalties on the unauthorized disclosures or uses of taxpayer information by any person engaged in the business of preparing or providing services in connection with the preparation of tax returns.
• IRS Revenue Procedure 2007-40 - This legal guidance requires authorized IRS e-file providers to have security systems in place to prevent unauthorized access to taxpayer accounts and personal information by third parties. It also specifies that violations of the GLB Act and the implementing rules and regulations put into effect by the FTC, as well as violations of non-disclosure rules addressed in IRC sections 6713 and 7216, are considered violations of Revenue Procedure 2007-40. These violations are subject to penalties or sanctions specified in the Revenue Procedure.

Many state laws govern or relate to the privacy and security of financial data, which includes taxpayer data. They extend rights and remedies to consumers by requiring individuals and businesses that offer financial services to safeguard nonpublic personal information. For more information on state laws that businesses must follow, consult state laws and regulations.

Where to report data theft for the IRS, states

To notify the IRS in case of data theft, contact the appropriate local IRS Stakeholder Liaison.

In some states, data thefts must be reported to various authorities. Email the Federation of Tax Administrators at [email protected] to get information on how to report victim information to the states.

Additional resources

Tax professionals also can get help with security recommendations by reviewing the recently revised IRS Publication 4557, Safeguarding Taxpayer Data, and Small Business Information Security: the Fundamentals by the National Institute of Standards and Technology.

Publication 5293, Data Security Resource Guide for Tax Professionals, provides a compilation of data theft information available on IRS.gov. Also, tax professionals should stay connected to the IRS through subscriptions to e-News for Tax Professionals and Social Media. 

The Taxes-Security-Together Checklist

During this special Security Summit series, the checklist highlights these key areas for tax professionals:

• Deploy “Security Six” basic safeguards
• Create data security plan
• Educate yourself on phishing scams
• Recognize the signs of client data theft
• Create a data theft recovery plan, and call the IRS immediately

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August 1, 2019

IRS: Truckers should e-file highway use tax return by Sept. 3

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WASHINGTON — The Internal Revenue Service today issued a reminder for owners of most heavy highway vehicles that the time to file Form 2290, Heavy Highway Vehicle Use Tax Return, began July 1, 2019.

The highway use tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more. This generally includes large trucks, truck tractors and buses. The tax is based on the weight of the vehicle and a variety of special rules apply. These special rules are explained in the instructions to Form 2290.

In 2019, the IRS expects to receive almost 900,000 Heavy Highway Vehicle Use Tax Returns. Though some taxpayers have the option of filing Form 2290 on paper, taxpayers with 25 or more taxed vehicles must e-file Form 2290.

The deadline to file Form 2290 and pay the tax is Sept. 3, 2019, for vehicles used on the road during July. Truckers have the additional time since the normal deadline of Aug. 31 falls on a Saturday this year and Monday, Sept. 2, is a federal holiday.

The IRS encourages all owners to take advantage of the speed and convenience of e-file and paying any tax due. There is no need to visit an IRS office because the form can be filed and any required tax payment can be made online. Filers can use a credit or debit card to pay the Heavy Highway Vehicle Use Tax. Visit IRS.gov for a list of IRS-approved e-file providers and to find an approved provider for Form 2290 on the 2290 e-file partner’s page.

Generally, e-filers receive their IRS-stamped Schedule 1 electronically minutes after filing. They can then print the Schedule 1 and provide it to their state department of motor vehicles, without visiting an IRS office.

For those who want face-to-face service, all IRS Taxpayer Assistance Centers now operate by appointment and taxpayers can call 844-545-5640 to schedule one. See the Taxpayer Assistance Center page on IRS.gov for details.

The IRS will host a webinar, “Understanding Form 2290-Heavy Highway Vehicle Use Tax,” Aug. 15 at 2 p.m. Eastern time. Pre-register for this free 60-minute webinar. Closed captioning is available. Tax professionals can earn one continuing professional education credit for attending.

For more information about the highway use tax, visit the Trucking Tax Center at IRS.gov/trucker.

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July 31, 2019

IRS, Treasury issue guidance on making or revoking the bonus depreciation elections 

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WASHINGTON — The Internal Revenue Service today issued a Revenue Procedure (LINK) allowing a taxpayer to make a late election, or to revoke an election, under section 168(k) for certain property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during its taxable year that includes September 28, 2017.

The Tax Cuts and Jobs Act made several changes to bonus depreciation. For example, the additional first year depreciation deduction percentage was increased from 50 to 100 percent. The property eligible for the additional first year depreciation deduction was expanded to include certain used depreciable property and certain film, television, or live theatrical productions; the placed-in-service date was extended to before January 1, 2027. Finally, the date on which a specified plant is planted or grafted by the taxpayer was extended to before January 1, 2027.

There are three additional first year depreciation deduction elections. A taxpayer can elect not to deduct the additional first year depreciation for all qualified property that is in the same class of property and placed in service by the taxpayer in the same tax year.   Secondly a taxpayer can elect to deduct 50-percent, instead of 100-percent, additional first year depreciation for all qualified property acquired after September 27, 2017, and placed in service by the taxpayer during its taxable year that includes September 28, 2017.

Finally, a taxpayer can elect to deduct additional first year depreciation for any specified plant that is planted after September 27, 2017 and before January 1, 2027, or grafted after and before those dates to a plant that has already been planted.  If the taxpayer makes this election, the additional first year depreciation deduction is allowable for the specified plant in the taxable year in which that plant is planted or grafted. 

The Revenue Procedure applies to these elections for the taxable year that includes September 28, 2017.  If a taxpayer did not make these elections timely for that taxable year, the Revenue Procedure allows the taxpayer to make late elections by filing an amended return or a Form 3115 for a limited period of time.  If a taxpayer did make these elections timely for that taxable year, the Revenue Procedure also allows the taxpayer to revoke the elections by filing an amended return or a Form 3115 for a limited period of time.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

EA Inactivation and Termination Letters

This year’s enrolled agent renewal cycle has finished and we are now beginning our annual clean-up of those who have SSNs ending in 0, 1, 2, or 3 and did not renew.

Those who did not renew during the 2016 and 2019 cycles will be moved to terminated status. (2,700+)

Those who did not renew during the 2019 cycle will be moved to inactive status. (4,900+)

Letters will be sent to all beginning this week advising them of our action.

Anyone in inactive status can still submit a late renewal for approval; with proof of CE.

Anyone in terminated status must re-take the Special Enrollment Exam to apply for re-enrollment.

If an EA disagrees and has a record of previously renewing their EA status, they should contact 855-472-5540 

IRS has begun sending letters to virtual currency owners advising them to pay back taxes, file amended returns; part of agency’s larger efforts

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WASHINGTON — The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. 

"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS Commissioner Chuck Rettig. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."

The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.

Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them. 

Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

Virtual currency is an ongoing focus area for IRS Criminal Investigation.

IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.

The IRS anticipates issuing additional legal guidance in this area in the near future.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

More information on virtual currencies can be found on IRS.gov. 

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July 23, 2019

Tax professionals specializing in estate and trust returns must have a Preparer Tax Identification Number (PTIN) and renew it annually. The PTIN is required of paid professionals who prepare or assist in preparing certain federal tax returns, which includes Form 1041, U.S. Income Tax Return for Estates and Trusts. Failing to enter a PTIN or entering an expired or suspended PTIN can result in a $50 penalty per return and could cause processing delays for clients.

The IRS urged the estate and trust community, especially financial institutions offering services to clients, to ensure that staff who prepare or assist in preparing Forms 1041 have PTINs. PTINs cannot be shared among staff. Each paid professional must have his or her own PTIN. Obtaining or renewing a PTIN takes only a few minutes and can be done online. Preparers can obtain a PTIN for 2019 now and renew that PTIN between October and December for 2020. Visit www.irs.gov/ptin to start.

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July 12, 2019

Time is running out for some combat-injured veterans to claim tax refunds of up to $3,200  

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WASHINGTON — The Internal Revenue Service is reminding veterans who received disability severance payments after 1991 and claimed it as income that time may be running out to claim their refund.

Veterans should take action soon if they received a notice (letters 6060-A and 6060-D) and have not already filed Form 1040X, Amended U.S. Individual Income Tax Return, to claim a refund or credit of the overpayment attributable to the disability severance payment should do so soon. 

“We appreciate the service and sacrifice of our nation’s combat-injured veterans, and the IRS is pleased to help deliver refunds under this special provision,” said IRS Commissioner Chuck Rettig. “Time is running out this month for many people who qualify for this refund. We urge combat-injured veterans to take time review the provisions to see if they are eligible.”

The Combat-Injured Veterans Tax Fairness Act of 2016 provides that most veterans who received a one-time, lump-sum, disability severance payment when they separated from military service are entitled to a refund if that payment was claimed as income. The payment must have been received after Jan. 17, 1991, and before Jan. 1, 2017. Eligible veterans should have received a mailed notice from the Department of Defense in July of 2018 explaining how to claim their tax refunds.

Some veterans have yet to act    

Deadlines are soon approaching as the time available for claiming these tax refunds is limited to:

• One year from the date of the Department of Defense notice, or
• Three years after the due date for filing the original return for the year the disability severance payment was made, or
• Two years after tax was paid for the year the disability severance payment was made.

Veterans claiming their refund have the normal limitations period for claiming a refund or one year from the date of their letter from the DoD, whichever expires later. As taxpayers can usually only claim tax refunds within three years from the due date of the return, this alternative time frame is especially important since some of the claims may be for refunds of taxes paid as far back as 1991. While many veterans have claimed their refunds in the past year, many others have not, and time is running short. 

Two options for claiming the tax refund:

• Option 1: File a claim based on the actual amount of the overpayment attributable to your lump sum disability severance payment, or
• Option 2: Choose to claim the standard refund amount listed below that corresponds to the year the disability severance payment was made. Simply write “Disability Severance Payment” on Form 1040X, line 15, and enter the standard refund amount listed below on line 15, column B, and on line 22, leaving the remaining lines blank.

Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X and carefully following the instructions. An original return is not necessary if the information for that tax year available. Veterans without the required information to complete the Form 1040X, you can request a transcript online at IRS.gov/transcript. 

Option 2, claiming a standard refund amount, is the easiest way to request a refund because it does not require finding the original tax return or requesting information about the return from the IRS. It may result in a larger or smaller refund based on the actual amount from the return. The standard refund amounts are:

• $1,750 for tax years 1991 – 2005
• $2,400 for tax years 2006 – 2010
• $3,200 for tax years 2011 – 2016

Special Instructions

Carefully follow the instructions in the notice mailed by the Department of Defense in July 2018:

• Complete and file IRS Form 1040X, Amended U.S. Individual Income Tax Return, for the tax year the disability severance payment was made
• Write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of the Form 1040X
• All amended returns are filed on paper, so veterans should mail their completed Form 1040X, with a copy of the DoD letter, to:

Internal Revenue Service
333 W. Pershing Street, Stop 6503, P5
Kansas City, MO  64108 

Eligible but never received a DoD notice 

Veterans who did not receive the notice from the Department of Defense and received a disability severance payment after Jan. 17, 1991, that was reported as taxable income, can still file a claim. They must include the necessary documentation to file with their Form 1040X. Veterans should contact the National Archives, National Personnel Records Center, or the Department of Veterans Affairs to obtain the required documentation for submission with their Form 1040X. 

The IRS has posted detailed information on IRS.gov. Veterans with questions about claiming a tax refund for disability severance payment, can call the IRS toll free at (833) 558-5245 ext. 378 between 7 a.m. and 7 p.m. local time (Alaska and Hawaii follow Pacific time).

With scam artists hard at work all year, taxpayers should be on the lookout for a surge of evolving phishing emails and telephone scams.