Tax reform increases fines, penalties and more

A breakdown of more changes that impact you

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Danette Holguin, EA

It’s May. Summer is just around the corner and your tax return is behind you. Or, is it? Even though the Tax Cuts and Jobs Act (TCJA) was passed nearly a year and a half ago, we’re still feeling the impact of various changes from the new law – particularly when it comes to the administrative side of handling your taxes. So, even though you’ve filed your 2018 return, and maybe you’re not super tax savvy, there are still a few items you should keep on your radar.

Fines and penalties

Tax credits. Fines and penalties have increased because of tax reform. As of November 7, 2018, there is a penalty of $520 per credit for errors on tax returns claiming certain credits. Your tax preparer would be the one subject to these fines and penalties, so expect your professional to take a closer look at these on your return:

  • Earned Income Tax Credit
  • Child Tax Credit
  • Additional Child Tax Credit
  • American Opportunity Credit

These fines now also apply to returns filed under the head of household status.

Don’t miss: An in-depth look at how tax reform is impacting you

Business returns. If you are not current on your business returns, you should get those filed ASAP. That late filing fee is also going up to $200 per partner or shareholder per month, even if your business isn’t profitable. You’ll also face a heftier fine if you’re late issuing K-1s to your partners or shareholders – $270 per late K-1.

More information requirements

Another tax reform change that will impact you – your tax advisor may ask for more information than they’ve requested in the past. That’s because there is more responsibility on your tax preparer to make sure all necessary and correct documentation is collected for your return so that the appropriate numbers can be reported and confirmed. You’ll need to submit all matching documents you receive and information. For example, taking your business mileage on your Schedule C.

In the past, you may have just told the number to your tax preparer. Now, more support is required to substantiate the information you’re giving. Let’s say you just bought a new Tahoe and you want to write the whole thing off for your business. Your tax preparer is going to need a mileage log from you showing 100% business use – they can’t just take your word for it. You’ll need the odometer reading from the beginning of the year as well as the end of the year. Luckily, there are apps out there to help with this.

Rental activities are another tax item you may need to provide more information on. There’s a box on Schedules C, E and F to mark if you issue any Form 1099s. In the past, this may have been checked as “no” for your return, but it could now be “yes” because of the new Section 199A deduction – a.k.a. the 20% deduction on qualified business income. You’ll need to let your tax preparer know who you’ve paid/issued 1099s to such as attorneys, accountants or other contracted workers because it may help you get this deduction.

Providing extra information and documentation may seem like a nuisance, but your tax preparer is protecting both of you by asking for all this.

Questions? Make an appointment with Danette

Power of attorney

There’s quite a few changes going on with this thanks to tax reform. In the past, your tax advisor could take your signed power of attorney (POA), call the IRS, fax the documentation over to an agent and receive the requested information within an hour or so. Earlier this year, changes to the process added a seven to 10 day filing period for the POA and involved mailing the information to you (the taxpayer) instead of faxing it to your tax preparer.

As of April 15, 2019, the IRS is no longer mailing forms to taxpayers. Your tax preparer will still fax the POA and wait seven to 10 days for it to be on file, then he or she will access the IRS e-Services to pull the requested information. The IRS is going this route to beef up efforts to protect taxpayers’ identities. This will eliminate the possibility of someone intercepting your mail and using your personal information to steal your identity.

Inflation adjustments

Another change to come from tax reform is the method the IRS uses to calculate inflation. The new method uses the “chained” consumer price index (CPI) to determine when to adjust tax brackets and eligibility for deductions. The chained CPI makes inflation appear lower, meaning brackets will be adjusted to increase at a slower rate. Why is this a big deal? The regular consumer price index, which the IRS previously used to calculate inflation, is what many businesses base raises on. So, your salary may increase faster than the inflation adjustments and put you in a higher tax bracket. For a breakdown of the 2019 inflation adjustments, check out our blog.

What’s next?

Ultimately, these new rules are meant to protect you as a taxpayer and knowing about them and complying will help you avoid penalties as well as unwanted notices from the IRS. The states probably won’t be far behind with similar changes. We’ll keep you updated. As always, if you have questions, reach out to your Henry+Horne professional tax advisor.

Danette Holguin, EA, Manager, specializes in the preparation and review of tax returns for individuals and trusts. You can reach her at DanetteH@hhcpa.com or (480) 839-4900.