At this time last year, US taxpayers were gearing up for their first tax filing season under the new Tax Cuts and Jobs Act (TCJA). Everyone was wondering what their taxes would look like and what to expect under the new tax laws. We released a series of articles and conducted webinars to provide transparency and help answer those questions. Now, as we enter year two of the TCJA (and for those with the Repatriation Tax, year three), we find that many taxpayers are unaware that big changes are still being made. There are five things you should know about filing your 2019 tax return in 2020.
#1: The “Postcard” Tax Return is Evolving—There is Yet Another New Format for 2019 Tax Returns
The 2018 tax return was intended to resemble a postcard. It took the information reported on the old two-page Form 1040 (used for tax years 2017 and earlier) and divided it into numerous sections and schedules. The result was a new 2018 Form 1040 that was roughly the size of a postcard, plus six additional new forms and schedules that contained the remaining information previously covered on the old two-page Form 1040.
The IRS received feedback from both taxpayers and tax preparers that the “postcard” format was awkward and hard to follow. To understand how certain numbers were calculated, one had to dig deeper into Schedules 1 through 5 to connect the dots.
The new proposed 2019 format partially reverts to the two-page 2017 format but still includes three additional schedules instead of six. This hybrid approach may be somewhat easier to follow, but you will still need to look carefully at the attached schedules to confirm the numbers are correct.
#2: The IRS Has Added More “Yes-No” Questions to the Tax Return, Which Merit Close Attention When Filing Your 2019 Tax Return
The IRS is notorious for hiding “informational” questions throughout individual tax returns that can haunt taxpayers later.
For example, at the bottom of Schedule B (the form where you report your interest and dividend income), for many years, the IRS has required you to check a box if you had a foreign bank account of ANY size. And another box if you had foreign accounts over $10,000. And yet another box if you had ownership in a foreign trust, which includes certain types of foreign pensions.
Later, the IRS uses questions like these as support its case that a taxpayer purposefully hid accounts and fraudulently failed to declare them. Not seeing the question or missing checking the boxes is not a valid excuse. Also, by forcing you to answer the questions, the IRS is issuing a subtle reminder that you can’t claim ignorance of the tax rules and treatments for these items.
The 2019 tax return has several new informational questions, which lay the groundwork for future IRS cases.
For example, at the top of Schedule 1, Additional Income, all taxpayers must now answer a yes-or-no question to indicate whether you had cryptocurrency transactions in 2019. The IRS released initial guidance on cryptocurrencies in 2014 and extensive guidance in 2019. Now, all taxpayers are assumed to be up to speed on the requirements. The challenge is, certain taxpayers who own Bitcoin or other cryptocurrencies may have had reportable or taxable transactions without even realizing their tax impact.
Another example is the new Schedule D, Capital Gains, and Losses. At the top of the form, the 2019 return now asks whether you sold an investment in qualified opportunity funds.
It’s important to take the time to carefully read through all forms and schedules to make sure that these informational questions are properly answered. Failure to do so can lead to significant informational penalties (see # 4 below).
#3: The IRS Has Finally Added New Forms That Were Missing from the 2018 Tax Returns—or That Weren’t Finalized Until Late in the Filing Season
The IRS did not get a lot of time after the TCJA was passed to prepare the forms for the 2018 tax return. Both the IRS and states were operating in “emergency mode,” fleshing out details and making decisions as quickly as possible to allow taxpayers to file their 2018 tax returns on time.
As a result, throughout 2019, the IRS introduced new regulations, revenue rulings, and updates to forms.
This meant that businesses and individuals with complicated filings, such as interests in foreign corporations, Repatriation Tax reporting, and/or the new GILTI tax, were generally unable to file until late in 2019. Their returns were delayed to the very end of the tax filing season to allow for IRS guidance to be issued and for updates to properly take hold in commercial tax software.
In particular, taxpayers with Form 5471, which is commonly required to report ownership in foreign corporations, saw major changes and updates. The form and its additional schedules now represent a full-blown corporate tax return by itself.
For the 2019 tax return, we now have additional forms and schedules to consider. Prime examples are Forms 8995 and 8995-A for the Qualified Business Income Deduction. Sole proprietors and pass-through entities may now have to complete three additional pages with four different parts to properly qualify for this deduction.
#4: The IRS is Being Very Aggressive with Automatic $10,000 Late-Filing Penalties for International Informational Forms
During calendar year 2019, the IRS started to become very aggressive with the assessment and enforcement of $10,000 late-filing penalties for certain informational forms. Examples include Forms 3520 and 3520-A, which are used to report ownership in foreign trusts, certain foreign pensions, and certain ISAs or Superannuation Funds, as well as beneficiaries of foreign trusts.
In previous years, the IRS took this same stance on Forms 5471 and FinCEN Form 114 (FBAR).
In 2019, the IRS issued a general alert to all taxpayers, announcing its intent to crack down on late filing of international informational forms. This alert came in the form of a special campaign, and such campaigns usually precede targeted action by the IRS.
As a result, taxpayers should assume that any form that has a penalty of $10,000 or more for late- or non-filing is fair game for IRS enforcement in 2020.
In general, you should take significant care to make sure that all extensions and tax returns are timely filed if your returns contain Forms 8938, 5471, 5472, 926, 965, 8992, 3520, 3520-A, 8854, and/or 8865.
And guess what? The IRS doesn’t accept excuses. It expects taxpayers to know the deadlines and requirements to complete their international informational filings. And it doesn’t accept the excuse that a taxpayer wasn’t advised properly by his or her professional tax preparer. The IRS takes the position that taxpayers bear the ultimate responsibility for their returns and filings and cannot delegate that duty to their preparer.
One other point to consider: as we recently discussed, the US government will begin receiving a significant amount of information under FATCA starting on January 1, 2020, and throughout the rest of calendar year 2020 from foreign financial institutions. The IRS will be looking for this information to be reported on individual taxpayers’ returns. If the IRS does not see this information on taxpayers’ returns (or the amounts don’t match), the IRS may issue notices that range from penalties to audits.
#5: Many Taxpayers Will Have Paid Too Little in Their 2019 Withholdings or Estimated Payments and Will Be Subject to Penalties
This past year, on 2018 tax returns, the IRS gave taxpayers a break on underpayment penalties. It recognized that not only did tax rates change during 2018 but also, the amount of tax that employers withheld from employee paychecks dropped. As a result, in some cases, 2018 withholdings on salaries were too low, and certain taxpayers unexpectedly owed more tax than expected when they filed their 2018 returns.
To give taxpayers a break, the IRS provided a “one-time” waiver for the underpayment penalty if taxpayers had paid in at least 85% of their total tax via 2018 withholding and/or 2018 quarterly estimated tax payments. (Usually, the threshold is 90%.)
The IRS also advised taxpayers whose withholdings were too low to contact their employers to increase their withholdings. Many taxpayers have not done so. Thus, we expect that many taxpayers may be subject to underpayment penalties on their 2019 tax returns.
There has been some discussion that the IRS may grant a waiver again in 2019. However, taxpayers should not rely on last year’s waiver as indicative of how the IRS will approach the 2019 tax return.
The last quarter of the calendar year (October to December) is generally the best time for taxpayers or their tax representatives to perform estimated tax payment calculations to ensure that adequate taxes have been paid via withholding, estimated tax payments, or a combination of the two.
You can then make a final 2019 estimated tax payment, if needed, before January 15, 2020, using the 2019 Form 1040-ES, 4th Quarter Estimated Tax Payment voucher.
When determining whether an additional 2019 tax payment is needed to avoid underpayment penalties, you should consider any special circumstances from changes in the tax law. An additional payment may be needed if, for instance:
- You or your business is required to make annual Repatriation Tax payments under the eight-year installment plan
- You or your business is subject to the GILTI tax (or any type of Subpart F income)
- You qualified for the QBI deduction in 2018 but do not qualify in 2019
- You are an employee, and you owed additional tax on your 2018 tax returns because your employer reduced your withholding rate in 2018, but you haven’t yet requested that your employer adjust your withholding rates
- You had a significant increase in income at the end of the calendar year.