By: Sidney Kess, CPA, J.D., LL.M. | Technology continues to expand at an ever-increasing rate and taxes are not immune from the impact of technology on the way in which things get done. Technology has affected how returns are filed, how payments for wages, goods, and services are being made, how the IRS disseminates information, and how recordkeeping is handled. Here is a roundup of some recent technology developments.
E-filing
In the tax filing season for 2013 income tax returns, the IRS reports that about 88% were filed electronically (IR-2014-56, April 24, 2014). It took more than 15 years to achieve the 80% e-filing goal by 2007 set by the Internal Revenue Service Restructuring and Reform Act of 1998, but it was achieved last year when 82.74% of 2012 returns were filed electronically. In part, this goal has been achieved because tax return preparers (those filing more than 10 tax returns) must do so electronically in most cases (www.irs.gov/Tax-Professionals/Frequently-Asked-Questions:-E-file-Requirements-for-Specified-Tax-Return-Preparers-(sometimes-referred-to-as-the-e-file-mandate).
Of the more than 131 million individual income tax returns filed through April 24, 2014, 35% were filed by individuals using their personal computers. Professionals submitted 53% of individuals’ returns electronically. Direct deposit of tax refunds is another feature of e-filing, with direct deposits accounting for nearly 81% of all refunds.
E-filing for 2013 returns is available through October 15, 2014. Late-filed returns submitted after this date must be filed on paper.
Taxpayers filing amended returns, Form 1040X, must file on paper. These returns cannot be submitted electronically.
Virtual currency
Technology has led to the creation of virtual (digital or crypto) currency. In December 2013, the National Taxpayer Advocate, Nina Olsen, renewed its 2008 suggestion that the IRS clarify the tax treatment of virtual currency (IR-2014-3, January 9, 2014). This is important because more than 10,000 merchants now accept bitcoin as payment and thousands of charities do so as well. In fact, as pointed out in the report, in the four months between July and December 2013, bitcoin usage has increased by over 75% and the market value of bitcoins in circulation increased more than ten-fold from about $1.1 billion to $12.6 billion.
The IRS has responded with guidance in question-and-answer format on the tax treatment of bitcoin and other virtual currency (Notice 2014-21, IRB 2014-16, 938). The IRS has taken the position that bitcoin and other virtual currency is property, not currency, so that general principles applicable to property transactions apply to transactions using virtual currency. Here are some of the points addressed in the guidance:
Employees paid in bitcoin or other digital currency have taxable compensation based on the fair market value of the bitcoin (determining fair market value is explained below). Essentially, these payments are viewed as in-kind payments and withholding on these payments is figured in the same way as withholding for other payments in property. There are two ways to figure withholding on these payments: add their value to regular wages for a payroll period and figure withholding taxes on the total, or withhold federal income tax on the value of the payments at an optional 25% rate for supplemental wages.
Self-employed individuals who accept payment for goods or services in bitcoin treat the payment as self-employment income based on the fair market value of the bitcoin at the time of payment. The payment is also taken into account for self-employment tax purposes. Similarly incorporated businesses include payments in virtual currency in income.
The amount reported as income is based on the fair market value of the virtual currency on the date the payment is received. If the virtual currency is listed on an exchange where an exchange rate is established by supply and demand, then this rate can be used.
Payments made via bitcoin are subject to the same information reporting requirements as payments made in regular currency. Payers must issue Form 1099-MISC to contractors when total payments for the year, including the value of the payments in bitcoin or other virtual currency, are $600 or more. If merchants accept bitcoin through a processor and have more than 200 transactions totaling more than $20,000, the processor must issue a Form 1099-K for their virtual currency transactions each year.
Previously, the government provided guidance on bitcoin for money service businesses (MSBs) that are subject to certain federal regulations (Financial Crimes Enforcement Network (FinCEN) Guidance on the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies [FIN-2013-G001, March 18, 2013]). According to this guidance, the term “currency” is limited to coin and paper money of the United States and any other country where such currency is used as legal tender. Therefore, a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB under FinCEN’s regulations. Such activity does not fit within the definition of “money transmission services” and thus is not subject to FinCEN’s registration, reporting, and recordkeeping regulations for MSBs.
The IRS and Treasury have yet to clarify the treatment of bitcoin for purposes of foreign account reporting. The National Taxpayer Advocate asked “when should digital currency holdings be reported on a Report of Foreign Bank and Financial Accounts (FBAR), or Form 8938, Statement of Specified Foreign Financial Assets?” In other words, should a digital wallet or account be treated as a foreign account for these reporting purposes?
Keeping up with the IRS
The IRS is disseminating information to the public and tax professionals through social media channels. Here are some venues:
- Facebook has information for tax professionals at https://www.facebook.com/IRS. So far, content is limited.
- IRS2go app can be used on iPhones and Android platforms. The app enables individuals to check the status of federal income tax refunds, order a tax return transcript, and connect to social media sites. The 2014 version is available (www.irs.gov/uac/New-IRS2Go-Offers-Three-More-Features?utm_medium=social&utm_source=facebook&utm_campaign=facebook_tabs).
- Tumblr is a blog providing tax information updates at http://internalrevenueservice.tumblr.com.
- Twitter at @irsnews for the general public and @irstaxpros for tax professionals.
- YouTube (https://www.youtube.com/user/irsvideaos) provides videos explaining the premium tax credit (Code Sec. 38B), tax scams, and more. The videos are in English, American Sign Language, and other languages.
However, the IRS does not contact taxpayers through email. Purported IRS communications in this manner are phishing, and are attempts to obtain taxpayers’ personal information that will be used for identity theft or to obtain tax refunds. The IRS warns taxpayers not to respond to such email and to forward the full original email to the IRS at
Electronic tools for recordkeeping
The Tax Code imposes various recordkeeping requirements in order to take deductions and other positions on tax returns. Fortunately, technology has simplified the recordkeeping process. The IRS has long-recognized the use of electronic accounting software for businesses, such as QuickBooks. The IRS has provided guidance on maintaining the integrity of these records and providing them to the IRS when requested (www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers).
While the IRS has not specifically approved of the use of commercial apps for recordkeeping, there is no reason to believe they are not a valid recordkeeping method. Look for apps that can be used on mobile devices to keep track of such items as:
- Charitable contributions
- Hours worked in a business to establish material participation for the passive activity loss rules (Code Sec. 469) and the 3.8% additional Medicare tax on net investment income (Code Sec. 1411).
- Travel and entertainment costs
- Vehicle mileage for tax-deductible purposes
Conclusion
Stay up-to-date with new technology changes that the IRS is using for consumers and tax professionals.
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