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The IRS Identity Protection PIN: What is it and why do you need one?

08.12.22

Read this if you file taxes with the IRS for yourself or other individuals.

To protect yourself from identity thieves filing fraudulent tax returns in your name, the IRS recommends using Identity Protection PINs. Available to anyone who can verify their identity online, by phone, or in person, these PINs provide extra security against tax fraud related to stolen social security numbers of Tax ID numbers.

According to the Security Summit—a group of experts from the IRS, state tax agencies, and the US tax industry—the IP PIN is the number one security tool currently available to taxpayers from the IRS.

The simplest way to obtain a PIN is on the IRS website’s Get an IP PIN page. There, you can create an account or log in to your existing IRS account and verify your identity by uploading an identity document such as a driver’s license, state ID, or passport. Then, you must take a “selfie” with your phone or your computer’s webcam as the final step in the verification process.

Important things to know about the IRS IP PIN:

  • You must set up the IP PIN yourself; your tax professional cannot set one up on your behalf.
  • Once set up, you should only share the PIN with your trusted tax prep provider.
  • The IP PIN is valid for one calendar year; you must obtain a new IP PIN each year.
  • The IRS will never call, email or text a request for the IP PIN.
  • The 6-digit IP PIN should be entered onto your electronic tax return when prompted by the software product or onto a paper return next to the signature line.

If you cannot verify your identity online, you have options:

  • Taxpayers with an income of $72,000 or less who are unable to verify their identity online can obtain an IP PIN for the next filing season by filing Form 15227. The IRS will validate the taxpayer’s identity through a phone call.
  • Those with an income more than $72,000, or any taxpayer who cannot verify their identity online or by phone, can make an appointment at a Taxpayer Assistance Center and bring a photo ID and an additional identity document to validate their identity. They’ll then receive the IP PIN by US mail within three weeks.
  • For more information about IRS Identity Protection PINs and to get your IP PIN online, visit the IRS website.

If you have questions about your specific situation, please contact our Tax Consulting and Compliance team. We’re here to help.

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Read this if you are a not-for-profit organization in New Hampshire.

The New Hampshire Legislature has enacted a law that increases the revenue, gains, and support threshold to $2,000,000. This change applies to all charitable organizations with a fiscal year ending after August 6, 2022.

Under the old law, charitable organizations with revenue, gains, and other support totaling $1,000,000 or more were required to file audited financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) along with their Annual Reports and Forms 990.

Understand the requirements and revised audit threshold

Charitable organizations with revenue, gains, and other support of $2,000,000 or more will now be required to file with the Charitable Trusts Unit audited financial statements, along with their Form 990 and annual report. 

Charitable organizations with revenue, gains, and other support between $500,000 and $1,999,999 will be required to submit, with their Form 990 and annual report, a set of financial statements prepared in accordance with GAAP that may or may not be prepared by a certified public accountant.

Please note: the financial statement requirements outlined above do not pertain to private foundations.

Access the new forms

The New Hampshire Attorney General recently adopted new rules applicable to all charitable trusts, including charitable organizations and professional fundraisers. These changes include the adoption of new paper and online forms.

Effective October 7, 2022, the Charitable Trusts Unit of the New Hampshire Attorney General’s office can only accept forms submitted electronically through its website or paper forms with the date “September 2022.”

The acceptable forms are available here. Previous versions of these forms will no longer be accepted. Please contact our not-for-profit tax team if you have any questions about your specific situation. We’re here to help.

Article
Major changes to 2022 Charitable Trusts Unit filings: new rules now in effect

Read this if you are a tax-exempt organization.

The IRS recently issued proposed regulations (REG-106864-18) related to Internal Revenue Code Section 512(a)(6), which requires tax-exempt entities to calculate unrelated business taxable income (UBTI) separately for each unrelated trade or business carried on by the organization.

For years beginning after December 31, 2017, exempt organizations with more than one unrelated trade or business are no longer permitted to aggregate income and deductions from all unrelated trades or businesses when calculating UBTI. In August 2018, the IRS issued Notice 2018-67, which discussed and solicited comments regarding various issues arising under Code Section 512(a)(6) and set forth interim guidance and transition rules relating to that section. 

The good news
The new proposed regulations expand upon Notice 2018-67 and provide for the following:

  • An exempt organization would identify each of its separate unrelated trades or businesses using the first two digits of the NAICS code that most accurately describes the trade or business. Activities in different geographic areas may be aggregated.
  • The total UBTI of an organization with more than one unrelated trade or business would be the sum of the UBTI computed with respect to each separate unrelated trade or business (subject to the limitation that UBTI with respect to any separate unrelated trade or business cannot be less than zero). 
  • An exempt organization with more than one unrelated trade or business would determine the NOL deduction allowed separately with respect to each of its unrelated trades or businesses.
  • An organization with losses arising in a tax year beginning before January 1, 2018 (pre-2018 NOLs), and with losses arising in a tax year beginning after December 31, 2017 (post-2017 NOLs), would deduct its pre-2018 NOLs from total UBTI before deducting any post-2017 NOLs with regard to a separate unrelated trade or business against the UBTI from such trade or business. 
  • An organization's investment activities would be treated collectively as a separate unrelated trade or business. In general, an organization's investment activities would be limited to its:
     
    1. Qualifying partnership interests
    2. Qualifying S corporation interests
    3. Debt-financed property or properties 

Organizations described in Code Sec. 501(c)(3) are classified as publicly supported charities if they meet certain support tests. The proposed regulations would permit an organization with more than one unrelated trade or business to aggregate its net income and net losses from all of its unrelated business activities for purposes of determining whether the organization is publicly supported. 

The missing news: Unaddressed items from the new guidance
With the changes provided by these proposed regulations we anticipate less complexity and lower compliance costs in applying Code Section 512(a)(6). While this new guidance is considered taxpayer friendly, the IRS still has more work to do. Items not yet addressed include:

  • Allocation of expenses among unrelated trade or businesses and between exempt and non-exempt activities.
  • The ordering rules for applying charitable deductions and NOLs.
  • Net operating losses as changed under the CARES Act.

The IRS is requesting comments on numerous key situations. Until the regulations are finalized, organizations can rely on either these proposed regulations, Notice 2018-67, or a reasonable good-faith interpretation of Code Sections 511-514 considering all the facts and circumstances.
We will keep you informed with the latest developments.

If you have any questions, please contact the not-for-profit consulting team

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IRS unrelated business taxable income update: The good news and the missing news

Did you know that there was more than a 40% increase (from $4.3 billion to $6.0 billion) in civil penalties assessed by the IRS regarding employment tax, for the 2016 fiscal year?

A recent report from the Treasury Inspector General for Tax Administration calls for more cases to involve criminal investigation by the Department of Justice. This is significant because the requirements needed to prove a civil violation under Sec. 6672 are nearly identical to the requirements of a criminal violation under Sec. 7202, and a criminal violation can result, among other penalties, in imprisonment for up to five years.

The issue of employment taxes encompasses all businesses, even tax-exempt entities. For fiscal year 2016, employment tax issues were involved in over 26% of audits of exempt organizations. One main reason why employment tax is a major issue? Its role in funding our government: employment taxes make up $2.3 trillion dollars (70%) of the $3.3 trillion dollars collected by the IRS for fiscal year 2016.

And noncompliance is a major issue, with roughly $45.6 billion of unemployment taxes, interest and penalties still owed to the IRS as of December 2015. This trend of increasing noncompliance, combined with the vital role employment taxes has in funding our government helps explain why the IRS has increased focus and enforcement in this area.

Should your independent contractor truly be an employee? Did you properly report fringe benefits as taxable income to the individuals who received them? Knowing the answers to these questions can help you stay in compliance with the law. If you have any questions about your employment tax situation, or how we can help you ensure compliance on this and other tax issues, please contact your BerryDunn tax advisor.
 

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The IRS cares about employment tax—why you should too.

Many of my hospital clients have an increased incidence of providing temporary housing for locums, temps and some employees and, as a result, have questions regarding the proper tax reporting to these individuals.   

First things first: the employment status of the individual needs to be determined before anything else.

If the person is an independent contractor (for example, a locum paid through an agency), a Form 1099-Misc usually needs to be filed for payments made to the individual (or agency) of $600 or more. A 1099-Misc is not required in the following circumstances:

  • The payment is made to a corporation or a tax-exempt organization.
  • Payments for travel reimbursement are excluded as long as they are paid under an accountable plan (which itself can be another topic for a blog). For example, an independent contractor submits a timely expense report to you with their lodging receipts for reimbursement. The amounts for the expense reimbursement do not have to be included on the 1099-Misc. If you pay the travel expenses directly or provide the housing, you also do not have to include these payments on the 1099-Misc.

If the individual is an employee, you should follow the guidance in IRS Publication 15-B, which can be found on www.irs.gov.

The basic rule of thumb is that every fringe benefit provided to an employee is a taxable benefit unless there is an exclusion listed in Publication 15-B.

The lodging exclusion begins on page 15 (of the 2016 publication), and there is an example regarding a hospital listed near the bottom of that page in the left column. For lodging to meet the exclusion, it must pass three tests:

  1. The lodging must be furnished on your business premises. I’ve seen some guidance that allowed the exclusion when the lodging was in close proximity to the business premise (within a mile, etc.).
     
  2. The lodging is furnished for the employer’s convenience. The employer furnishing the lodging to the employee must have a substantial business reason for doing so other than to provide the employee with additional pay. For example, the employee is on call for emergencies 4 or 5 days a week, so must live in close proximity to the hospital.
     
  3. The employee must accept the lodging as a condition of employment. The employer must require the employee to accept the lodging because they need to live on your business premises to be able to properly perform their duties. We recommend including this condition of employment directly in the employee’s written employment contract.

If lodging does not meet all three of these tests, then it must be treated as a taxable fringe benefit with the appropriate payroll taxes withheld from the employee’s pay.

If you are also providing meals, the discussion on employer-provided meals also begins on page 15 of Publication 15-B, with the discussion for meals provided on your business premises starting on page 16.

A discussion related to transportation benefits begins on page 18. We have also had some questions from clients regarding transportation. For example, one client had an employee who dropped down to part-time status and moved from Maine to Florida. The employee agreed to continue working at the hospital one week a month, and the hospital agreed to pay for the flight back and forth. The individual continued to be treated as an employee. The flight is the employee’s commuting expense, and there is no exclusion for reimbursement of commuting expenses. Therefore, the flights had to be included in the employee’s compensation and reported on his W-2.

Many of these taxable benefits are being paid through an accounts payable system rather than payroll, and so can be easily missed. Withholding for these benefits at each pay period is much easier to accomplish rather than all at once at year end. It’s important for your HR department to communicate with the payroll office whenever unusual employment terms and benefits are being offered to employees to ensure proper tax treatment.

Article
When it comes to temporary housing for hospital employees, IRS publication 15-B can be your friend

This is our second of five articles addressing the many aspects of business valuation. In the first article, we presented an overview of the three stages of the value acceleration process (Discover, Prepare, and Decide). In this article we are going to look more closely at the Discover stage of the process.

In the Discover stage, business owners take inventory of their personal, financial, and business goals, noting ways to increase alignment and reduce risk. The objective of the Discover stage is to gather data and assemble information into a prioritized action plan, using the following general framework.

Every client we have talked to so far has plans and priorities outside of their business. Accordingly, the first topic in the Discover stage is to explore your personal plans and how they may affect business goals and operations. What do you want to do next in your personal life? How will you get it done?

Another area to explore is your personal financial plan, and how this interacts with your personal goals and business plans. What do you currently have? How much do you need to fund your other goals?

The third leg of the value acceleration “three-legged stool” is business goals. How much can the business contribute to your other goals? How much do you need from your business? What are the strengths and weaknesses of your business? How do these compare to other businesses? How can business value be enhanced? A business valuation can help you to answer these questions.

A business valuation can clarify the standing of your business regarding the qualities buyers find attractive. Relevant business attractiveness factors include the following:

  • Market factors, such as barriers to entry, competitive advantages, market leadership, economic prosperity, and market growth
  • Forecast factors, such as potential profit and revenue growth, revenue stream predictability, and whether or not revenue comes from recurring sources
  • Business factors, such as years of operation, management strength, customer loyalty, branding, customer database, intellectual property/technology, staff contracts, location, business owner reliance, marketing systems, and business systems

Your company’s performance in these areas may lead to a gap between what your business is worth and what it could be worth. Armed with the information from this assessment, you can prepare a plan to address this “value gap” and look toward your plans for the future.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Next up in our value acceleration series is all about what we call the four C's of the value acceleration process. 

Article
The discover stage: Value acceleration series part two (of five)

This is the first article in our five-article series that reviews the art and science of business valuation. The series is based on an in-person program we offer from time to time.  

Did you know that just 12 months after selling, three out of four business owners surveyed “profoundly regretted” their decision? Situations like these highlight the importance of the value acceleration process, which focuses on increasing value and aligning business, personal, and financial goals. Through this process, business owners will be better prepared for business transitions, and therefore be significantly more satisfied with their decisions.

Here is a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

The Discover stage is also called the “triggering event.” This is where business owners take inventory of their situation, focusing on risk reduction and alignment of their business, personal, and financial goals. The information gleaned in this stage is then compiled into a prioritized action plan utilized in future stages.

In the Prepare stage, business owners follow through on business improvement and personal/financial planning action items formed in the discover stage. Examples of action items include the following:

  • Addressing weaknesses identified in the Discover stage, in the business, or in personal financial planning
  • Protecting value through planning documents and making sure appropriate insurance is in place
  • Analyzing and prioritizing projects to improve the value of the business, as identified in Discover stage
  • Developing strategies to increase liquidity and retirement savings

The last stage in the process is the Decide stage. At this point, business owners choose between continuing to drive additional value into the business or to sell it.

Through the value acceleration process, we help business owners build value into their businesses and liquidity into their lives.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Read more! In our next installment of the value acceleration blog series, we cover the Discover stage.

Article
The process: Value acceleration series part one (of five)

On November 8, 2022, Massachusetts voters approved a constitutional amendment to alter the state’s flat 5% income tax to add a 4% surtax on annual income exceeding $1 million. The so-called “millionaires tax,” also referred to as the “Fair Share Amendment,” is effective for tax years beginning on or after Jan. 1, 2023. The annual income level subject to the surtax would be adjusted yearly to reflect increases in the cost of living.

This measure is expected to bring in revenue of between $1.2 and $2 billion annually. The proceeds from the increased tax collections will support state budgets in the areas of education, roads, bridges, and public transportation. The measure passed with 52% voter support and is the sixth attempt to change the state’s flat income tax rate since 1962. This amendment is expected to affect about 0.6% of the state’s population, or about 20,000 taxpayers.

If you expect your income to exceed $1 million in 2023 and have questions regarding the recent legislation, please contact a member of our state and local tax team.

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Massachusetts voters pass "Millionaires tax"

The Pennsylvania Commonwealth Court (one of Pennsylvania’s appellate-level courts) has unanimously ruled that the Pennsylvania Department of Revenue (the Department) could not assert nexus against out-of-state online businesses that sell merchandise through Amazon’s Fulfillment by Amazon (FBA) program. (Online Merchants Guild v. Hassell, Commonwealth Court of Pennsylvania, No. 179 M.D. 2021, September 9, 2022).

Case details 

The Online Merchants Guild case is one of the first state court decisions since the US Supreme Court’s Wayfair decision to apply Due Process Clause nexus to internet sellers. The main issue before the court was whether non-Pennsylvania merchants that sell through Amazon’s FBA program are subject to the sales tax and personal income tax (PIT) provisions of the state’s tax code because Amazon stored their merchandise inventory in warehouses located in Pennsylvania. Fulfillment by Amazon is a service that allows businesses to outsource order fulfillment to Amazon. Businesses send products to Amazon fulfillment centers and when a customer makes a purchase, Amazon picks, packs, and ships the order. Ever since the US Supreme Court’s Quill decision, the Due Process Clause’s “minimum contacts” nexus has only required an out-of-state business to have purposefully availed itself of a state’s market, including purely economic connections with the state. 

Ultimately, the court held that the Department failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA program have sufficient contacts with the state. The court reasoned the connections to the state were shown to be limited to the storage of merchandise by Amazon in one of Amazon’s Pennsylvania warehouses. As such, FBA sellers do not have sufficient contacts with the state such that the Department can mandate they collect and remit sales tax or pay PIT.

While analyzing the specific facts of this case, the court indicated that an FBA seller has no control over its merchandise once Amazon receives the inventory. Applying the Due Process Clause and the so-called stream-of-commerce theory, the court stated that it is “hard pressed to envision how, in these circumstances, an FBA merchant has placed its merchandise in the stream of commerce with the expectation that it would not be purchased by a customer located in [Pennsylvania], or has availed itself of [Pennsylvania’s] protections, opportunities, and services.”

The court also addressed the Department’s authority of its nexus-auditing policy of issuing Business Activity Questionnaires (BAQs) to the FBA sellers. The 2021 BAQ indicates that a business may be subject to tax due to the storage of merchandise in one of Amazon’s Pennsylvania warehouses. The Department argued that the BAQ was merely a “demand for information.” The court disagreed with the Department. The BAQ indicates that “[f]ailure to provide the information requested will result in additional enforcement actions,” language that clearly suggests the existence of pending enforcement actions according to the court. The court was critical of the Department’s arguments, stating that the Department’s statutory investigative powers apply to the records of taxpayers, not individuals or entities the Department suspects may be taxpayers. The court went on to say that the Department does not have “unfettered authority to seek business information from any person or entity it desires for the purpose of determining its status as a taxpayer.”

Insights

  • The Department did not appeal to Pennsylvania’s Supreme Court “as of right” within 30 days. As such, the Commonwealth Court’s precedential opinion will likely be the final word in the nexus saga for Amazon FBA sellers in Pennsylvania, especially due to the fact that Amazon now collects sales tax on Pennsylvania sales. From the Department’s perspective, the outcome of this case is limited to a narrow situation—Amazon FBA sellers. If there is another fact pattern where a business is aware of its inventory in the state, it is possible nexus may be asserted by the state.
  • The tax period at issue in Online Merchants Guild preceded the enactment of Pennsylvania’s marketplace facilitator nexus statute. Although most states’ marketplace facilitator nexus laws have existed for several years, it is possible that other states will continue to attempt to collect sales tax from marketplace sellers for periods before the enactment of those laws.
  • The outcome of this case is limited to sales tax and PIT. It did not address Pennsylvania’s corporate net income tax (CNIT). Pennsylvania’s CNIT imposition statute includes an “owning property in the state” provision. Would the decision under the same fact pattern, but for CNIT purposes, have been different? Without a legislative amendment, businesses should analyze their specific facts and circumstances, apply Pennsylvania’s CNIT rules, and address whether they have nexus in the state for CNIT purposes.
  • This case was originally prompted by a trade association (Online Merchants Guild) in response to a Business Activities Questionnaire (BAQ) request it received as part of the Department of Revenue’s voluntary disclosure program for retailers with inventory in Pennsylvania in 2021. As a result of the decision, we expect the Department to update their administrative guidance on this topic.

Written by Ilya Lipin, Melissa Myers and Zach Lutz. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com

Article
Pennsylvania: Remote sales via Amazon FBA did not create sales tax and personal income tax nexus.