On Thursday, August 15, 2024, the Assembly Appropriations Committee voted to hold SB 1501 “under submission.” According to our sources at the Capitol, this means that the bill is essentially dead, although it won’t be “officially” dead until August 31, 2024, when the legislative session ends.

This means that the hoped-for fix to the June 15 passthrough entity elective tax prepayment requirement will not happen for the 2024 tax year. Therefore, if a taxpayer failed to pay the greater of $1,000 or 50% of the amount of passthrough entity tax due for the prior year by June 15 of the current tax year, it will be ineligible to qualify to make the election for the tax year.

The FTB does not have the authority to allow for any exceptions to this prepayment requirement.

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Today, the IRS announced a second Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP). (IRS Announcement 2024-30) Notable aspects of this second ERC VDP are:

• The second ERC VDP is only available for ERC claims filed for tax periods in 2021 and for which the taxpayer received an ERC refund prior to August 15, 2024;
• Where the first ERC VDP allowed taxpayers to repay only 80% of their erroneously received ERC refunds, this second ERC VDP requires taxpayers to repay 85% of their erroneously received ERC refunds;
• Applications must be filed using IRS Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, on or before 11:59 p.m. local time on November 22, 2024; and
• Applications and any required attachments must be submitted using the IRS’s Document Upload Tool at irs.gov/dut.

Other details of the second ERC VDP are similar to the first ERC VDP, such as:

• Taxpayers must apply prior to being audited or otherwise investigated by the IRS for the ERC claimed;
• If a taxpayer used a third-party payer (e.g., a PEO) to apply for the credit, the third-party payer must submit the application for the VDP;
• Relief from civil, but not criminal, penalties for program participants;
• The requirement to execute a closing agreement; and
• The requirement to provide preparer/advisor information for those who helped prepare the taxpayer’s original ERC claim, among others.

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A new written information security plan (WISP) template has been issued by the IRS to help protect tax professionals, especially smaller practices, against continuing threats from identity thieves and data breaches. (IR-2024-208) Federal law requires that tax professionals have a WISP and they must affirmatively declare that they have one when they renew their PTIN each year. This new template can be used by tax professionals to meet this mandate.

The new version of the WISP includes several new information updates since the first version came out, including best practices for implementing multi-factor authentication for any individual accessing any information system.

The updated WISP, which is contained in IRS Publication 5708, Creating a Written Information Security Plan for your Tax & Accounting Practice, is available at:

www.irs.gov/pub/irs-pdf/p5708.pdf

The IRS also reminds tax professionals that they must report a security event affecting 500 or more people to the Federal Trade Commission (FTC) as soon as possible, but no later than 30 days from the date of discovery. This is in addition to reporting the incident to an IRS stakeholder liaison and state tax authorities. Stakeholder Liaison contact information is available at:

www.irs.gov/businesses/small-businesses-self-employed/stakeholder-liaison-local-contacts

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The IRS has announced that it will begin processing Employee Retention Credit (ERC) claims submitted prior to February 1, 2024. (IR-2024-203) Previously, the IRS had placed a moratorium on processing any claims submitted after September 13, 2023.

The IRS has also stated that:

• They will prioritize moving the outstanding “low-risk” claims out for payment and the “high-risk” claims out for denial, and will carefully examine the remaining claims;
• They have approved up to 50,000 “low-risk” ERC claims submitted prior to September 14, 2023, and will commence sending out payments on these claims starting in September;
• They have denied 28,000 “high-risk” claims representing over $5 billion in improper claims, but has confirmed that after receiving feedback from taxpayers and tax professionals approximately 10% of the denials issued were issued in error, but that the errors appear to be isolated instances; and
• Some of the denial notices failed to inform taxpayers of their appeals rights (they can request an administrative appeal or appeal directly to the U.S. District Court). The IRS has confirmed that standard appeals rights apply to these denials.

The announcement does not indicate how many backlogged ERC claims the IRS still has to process.

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The FTB has created an e-mail address exclusively for use by San Diego County taxpayers for account resolution related to disaster postponement. (FTB News Flash (August 8, 2024))

If San Diego County taxpayers received a penalty notice for the 2023 taxable year related to the disaster postponement, taxpayers or tax professionals can now submit an e-mail to:

FTBSanDiegoDisasterRelief@ftb.ca.gov

This e-mail address was designed exclusively for San Diego County taxpayers who received notices related to the disaster postponement. The following information is required to process the disaster relief request:

• Taxpayer name;
• Address during the disaster (must be principal residence or principal place of business);
• E-mail address;
• Telephone number; and
• 10-digit FTB identification number or 15-digit notice number.

Taxpayers and tax professionals can also check MyFTB for information or they may call the FTB.

Last month, tax professionals were commenting that many of their San Diego County clients were receiving balance due/penalty due notices even though they qualified for the June 17 disaster-related postponement and filed and paid the tax due by June 17. Spidell brought this issue to the FTB’s attention and the FTB confirmed these notices were sent out erroneously. The FTB stated that due to system processing issues, these notices were generated prior to the payments being posted to taxpayer accounts.

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Today the Senate failed to pass the American Families and Worker’s Act of 2024 (TRAFWA) by a vote of 48 to 44 (it required 60 votes to pass). This is the bill that was passed by the House in January 2024 on a vote of 357 to 70. At the time the bill passed the House, it had bipartisan support, and commentators were expecting it to pass swiftly.

Had it passed, the bill would have, among other things:

• Increased the Child Tax Credit;
• Retroactively reinstated current expensing for domestic qualified research expenses, 100% bonus depreciation, and the larger business interest expense deduction;
• Significantly increased Employee Retention Credit (ERC) penalties and retroactively imposed a January 31, 2024, cutoff date for new ERC claims; and
• Provided additional disaster relief for those impacted by federally declared disasters occurring after 2019.

At this stage, it is highly unlikely that there will be any significant tax legislation passed until after the November 2024 election. However, we will keep you posted as any news develops.

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Recently we’ve heard from tax professionals with clients who mistakenly made an estimated tax payment on behalf of the entity rather than a passthrough entity elective tax payment — the question is whether these payments can be reapplied. Some FTB Tax Practitioner Hotline staff have been informing taxpayers and tax professionals that they can simply apply the estimated tax payments to the passthrough entity elective tax payment when they file the return.

We reached out to the FTB for clarification because they had previously informed us that this was not allowed. According to the FTB’s previous position, the passthrough entity elective tax payment would only be recognized if paid with Form 3893, via Web Pay as a passthrough entity elective tax payment, or by electronic funds withdrawal when using tax software.

We are pleased to report that the FTB is now allowing taxpayers to move these payments, and they stated:

“[W]hen the business representative inadvertently directs the application of a payment to be applied as an estimate payment, FTB can accommodate a request to correct the error in order to apply the payment as intended.

Any request should be submitted in writing and must include the business representative’s acknowledgment that reapplying the erroneous estimate payment to another liability may result in penalties and interest in the tax year where the payment was originally applied.

These requests can be submitted securely through a MyFTB account. Tax professionals may also contact the Tax Practitioner Hotline and speak with a representative to adjust the payment. A written request will still be required.”

The FTB recommends that the written request to reapply the estimated tax payment be done prior to the entity filing its return. The FTB will instruct Tax Practitioner Hotline staff accordingly.

This process is only available if the entity made the estimated tax payment. An individual owner’s estimated tax payment cannot be applied to the passthrough entity elective tax because that involves two different taxpayers.

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The IRS has issued final regulations updating the required minimum distribution (RMD) rules. (TD 10001; RIN 1545-BP82) The 260 pages of final regulations (including explanations) adopt most of the regulations as proposed in 2022, including the regulations that address the distribution rules for inherited IRAs.

The inherited IRA rules implementing changes made by the SECURE Act require designated beneficiaries to continue taking RMDs each year during their 10-year distribution period, ensuring that the entire account balance is distributed by the end of the 10-year period if:

• The deceased account owner had reached their required beginning date for taking RMDs at the time of their death; and
• The account beneficiaries are not one of the five types of eligible designated beneficiaries (surviving spouse, minor child, a person 10 years younger than the decedent, or a person who is disabled or chronically ill).

This rule applies to accounts inherited from decedents who passed away after 2019. However, the IRS provided transitional relief that postponed the RMD requirement prior to 2025. The final regulations make clear that that this transitional relief did not extend the 10-year deadline. This means, for example, that accounts inherited from a decedent who passed away in 2020 must be fully distributed prior to 2031.

We will be providing details on this new guidance in upcoming issues of Spidell’s Federal Taxletter® and our Tax Update Webinars.

The regulations are available at:

https://public-inspection.federalregister.gov/2024-14542.pdf

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Over the last week, we have been hearing from tax professionals that many of their San Diego County clients are receiving balance due/penalty due notices even though they qualified for the June 17 disaster-related postponement and filed and paid the tax due by June 17. Spidell brought this issue to the FTB’s attention and the FTB confirmed these notices were sent out erroneously. The FTB has stated that due to system processing issues, these notices were generated prior to the payments being posted to taxpayer accounts.

All payments have now been posted. Therefore, the FTB is advising taxpayers and tax professionals that they can sign in to their MyFTB accounts and verify that there is no balance due. For taxpayers who indicated on their returns that they were in the San Diego County disaster area, if no balance due is showing on the taxpayer’s account, then the taxpayer and their tax professional do not need to take any further action. However, taxpayers who did not indicate on their returns that they were located in the disaster area must still contact the FTB to have any penalties abated.

An FTB Tax News Flash on this issue is available at:

www.ftb.ca.gov/about-ftb/newsroom/news-releases/2024-18-erroneous-notice-of-tax-return-changes-for-tax-year-2023.html

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Updated FAQs released by FinCEN clarify that business entities that ceased to exist prior to January 1, 2024, are not required to file beneficial ownership information (BOI) reports with FinCEN.

The relief from filing for dissolved entities only applies to entities that entirely completed the process of formally and irrevocably dissolving prior to January 1, 2024. Businesses that are administratively dissolved or suspended (e.g., for failure to pay a filing fee or comply with certain jurisdictional requirements), generally do not cease to exist as a legal entity unless the dissolution or suspension becomes permanent. Until dissolution or suspension becomes permanent, these entities must file BOI reports to avoid potential penalties.

An entity created after December 31, 2023, must still file a BOI report even if it dissolved prior to January 1, 2025. These reports must be filed within 90 days of receiving actual or public notice of creation or registration if the entity was created in 2024.

An entity that files an initial BOI report and then ceases to exist is not required to file an additional report to notify FinCEN that the company is no longer in existence.

The updated FinCEN FAQs are available at:

www.fincen.gov/boi-faqs

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In addition to the budget bills we covered in our June 14 Flash E-mail (see “California budget bills pass with major tax changes”), the California Legislature has sent SB 175 to Governor Newsom for his approval. If enacted, SB 175 would eliminate the 2025 and 2026 NOL suspension and the $5 million business credit limitations contained in SB 167 if in the tax year:

• The California Department of Finance determines that there is sufficient money in the General Fund over the multiyear forecast to eliminate the limitation for that tax year; and
• The annual Budget Act provides that the credit limitation will not apply during that tax year.

The bill would also allow a taxpayer to make an irrevocable election in a tax year in which the $5 million credit limitation applies to treat the suspended credit amounts as a refundable credit. The refundable credit would be claimed equally (20% per year) over a five-year period beginning with the third taxable year after the tax year the election is made.

The Governor is expected to sign this bill.

No extension of first-year exemption from $800 annual tax

In our June 14 Flash E-mail, we also stated that the budget bills would extend the exemption from the $800 annual tax for LLCs, LPs, and LLPs if they organize or register in 2024 during their first year of doing business in California. While AB 107 did allocate money to administer the exemption, the exemption itself was not extended. This means that, absent any additional legislation enacted this year, there is no exemption from the $800 annual tax for LLCs, LPs, and LLPs that organize or register with the California Secretary of State’s Office in 2024. The first-year exemption for corporations still remains in effect.

The text of SB 175 is available at:

http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB175

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On Monday, July 1, 2024, the Assembly Revenue and Taxation Committee will hear SB 1501, the bill that would provide a fix for the current “all or nothing” June 15 passthrough entity elective tax prepayment requirement. Amendments to the bill since it was passed by the Senate are being proposed to:

• Remove the proposed 5% penalty that would be imposed against passthrough entities that failed to timely make the required June 15 payment and replace it with a 10% reduction in the amount of credit that can be claimed by the participating passthrough entity owners; and
• Allow taxpayers to still make the election whether the prepayment was not paid at all by June 15 or was underpaid by June 15 (the original version of SB 1501 only allowed those taxpayers who made no payment at all by June 15 to qualify for relief).

Even if passed by the Revenue and Taxation Committee, the bill would have to pass several more steps before it becomes law. If enacted, these changes would be effective beginning with the 2024 taxable year.

As we’ve previously reported, under current law, taxpayers wanting to make a passthrough entity tax election for the tax year must make a prepayment of the tax by June 15 of the tax year equal to the greater of:

• $1,000; or
• 50% of the passthrough entity tax due for the prior tax year.

The text of the current version of the bill is available at:

https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB1501

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As we previously reported, a California superior court has certified a class action suit that will provide relief to out-of-state LLCs, LPs, and corporations that were passive investors in an LLC doing business in California (see “Class action suit certified on behalf of out-of-state passive LLC investors” in the March 2024 issue of Spidell’s California Taxletter®).

The FTB has begun sending notices out to potential class members informing them that they will be part of the class unless they opt out by August 20, 2024. The notice is available on the FTB’s website at:

www.ftb.ca.gov/tax-pros/law/Bahl-Media-vs-FTB-Minimum-Tax-GateMarks-Duplex.pdf

Prior to the OTA’s precedential decision in Appeal of Jali (2019-OTA-204P), the FTB was erroneously imposing the $800 annual/minimum tax and penalties and interest against many of these taxpayers even though these entities were not considered to be “doing business” in California and were not subject to the tax.

It’s important to note that the class certified by the court only includes taxpayers that paid the tax and filed timely claims for refund. This is true even though in FTB Notice 2017-01 FTB told taxpayers that they were ineligible for refunds if they had more than a 0.2% interest in the LLC doing business in California.

The attorneys representing taxpayers in the class action suit, Amy Silverstein of Silverstein & Pomerants, LLP, and Alexandar Freeman of Calvo Fisher & Jabos, are encouraging any other taxpayers negatively impacted by the FTB’s treatment of passive activities as “doing business” to contact them. This may include taxpayers that paid the tax for any year but did not file a claim for refund, and taxpayers that did not pay the tax and have received notices from the FTB stating they owe the tax.

They can be reached at asilverstein@sptaxlaw.com and afreeman@calvojacob.com.

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The IRS is starting to process older ERC claims that were submitted prior to the September 15, 2023, moratorium date. (IR-2024-169) However, the IRS has identified tens of thousands of these pre-moratorium claims as improper claims. They will be denying those claims in the next few weeks. Then, during this summer, the IRS will begin releasing payments for the 10–20% of pre-moratorium claims that it has determined are low-risk and will begin processing the 60–70% non-high risk claims later this summer.

The IRS announcement also states:

• The moratorium placed on processing claims submitted after September 14, 2023, will remain in place for now;
• The IRS is considering reopening the Voluntary Disclosure Program at a reduced rate (aka, less favorable terms) for those with previously processed claims to avoid future compliance action by the IRS;
• There are still more than 1.4 million outstanding ERC claims, with approximately 17, 000 claims per week being filed since the moratorium was put in place; and
• Taxpayers and tax professionals should not call the IRS toll-free lines about the status of an ERC claim because IRS agents staffing these lines will not have any information concerning the status of these claims.

The IRS’s announcement is available at:

www.irs.gov/newsroom/irs-enters-next-stage-of-employee-retention-credit-work-review-indicates-vast-majority-show-risk-of-being-improper

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The Legislature has passed two budget bills (AB/SB 107 and AB/SB 167) with significant tax changes. These bills will be sent to the Governor, and he is expected to sign them. These bills include, but are not limited to, provisions that:

• Extend the first-year exemption from the $800 annual tax for LLCs, LPs, and LLPs that organize or register with the Secretary of State’s office in 2024 during their first taxable year;
• Suspend the net operating loss deduction for the 2024 through 2026 tax years for taxpayers with net business income or modified adjusted gross income of $1 million or more;
• Limit businesses from claiming more than $5 million in business credits per year during the 2024 through 2026 tax years;
• Allow cannabis businesses to continue to claim business deductions under the Personal Income Tax law for an additional five years (this is already allowed under the Corporation Tax Law);
• Clarify that businesses are prohibited from including in their sales factor apportionment formula any income or losses that are not included in the calculation of net income, effectively overruling the Office of Tax Appeals’ recent decision in Appeal of Microsoft, 2024-OTA-130; and
• Eliminate California’s automatic conformity to IRS disaster-related filing and payment postponements.

To read the text of the bills, search by bill number at:

https://go.spidell.com/e/837113/faces-billSearchClient-xhtml/5xkg9g/2083677850/h/y2SMEJjLhnhMxONQVU1aHDYTVkZMcFiLN1VbWNi-INY

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Monday, June 17, 2024, is the due date for the 2024 passthrough entity elective tax prepayment. Taxpayers must make the prepayment in order to preserve their right to make the passthrough entity tax election on their 2024 tax return.

Remember that making the June 17 payment does not lock in the taxpayer to actually making the election on their return. If the taxpayer decides not to make the election, they can apply the prepayment to other taxes owed on their return. Any amount remaining will be refunded after the entity’s return is processed.

The prepayment must equal the greater of:

• $1,000; or
• 50% of the passthrough entity tax due for the prior year.

If the entity did not make the election in the prior year, they only have to pay the $1,000 amount.

If the taxpayer did make the election in 2023, we recommend that the taxpayer add a “cushion” to the 50% amount for the prior year in case the taxpayer discovers that they underpaid the amount due for the prior year.

As the law is currently written, there is no exception to the 50% threshold or for late payments, no matter the reason and no matter how small the shortfall. Although SB 1501, if enacted, would provide some relief from the 50% threshold requirement, it has not yet passed the California Assembly, and after that would still need to be signed by the Governor to become law. In the interim, taxpayers should plan on complying with the law as is currently in effect.

The payment can only be made by:

• Check, with Form FTB 3893, Pass-Through Entity Elective Tax Payment;
• Web-Pay (make sure the taxpayer indicates the payment is for the 2024 passthrough entity tax); or
• Electronic funds withdrawal, using tax preparation software.

For additional information on SB 1501, see our previous Flash E-mail, “Passthrough entity elective tax prepayment fix may be coming.”

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We’ve received inquiries from numerous tax professionals asking why their clients are receiving CP14 notices indicating a balance due even though the clients can substantiate they timely paid all tax due.

The IRS has confirmed that there is a nationwide delay in processing payments, resulting in erroneous balance due notices being sent when there is in fact no tax due.

The IRS is advising tax professionals and their clients to wait six to eight weeks to see if the payments are posted before contacting the IRS. If payments are not posted after this six- to eight-week period, the tax professional or client will have to provide proof of payment to the IRS to ensure that no penalties are imposed.

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In response to entertainment and tax industry inquiries regarding loan-out corporations, the EDD has clarified that it “is not taking action to ban these companies in California.” However, the EDD failed to provide any real guidance as to how owners of the loan-out corporations can qualify to be treated as employees of the loan out corporation and not the employee of the business that contracts with the loan-out corporation.​​​​​

California’s ABC test was designed to ensure that most workers are classified as employees of hiring businesses, unless specified exemptions apply. For purposes of loan-out corporations involved in the entertainment industry, the business-to-business exemption and the professional services exemption may possibly apply in various scenarios. There are also provisions of California’s Unemployment Insurance Code that may provide some relief. However, these exemptions are very fact specific and leave many loan-out corporations targets for extensive and costly audits.

We will cover the various options that loan out corporation owners may want to explore to ensure they are complying with California law in terms of ensuring that they are not treated as employees of hiring businesses in an upcoming issue of Spidell’s California Taxletter® as well as our Federal and California Tax Update seminars and webinars. Nonetheless, this is clearly a very gray area, and we will continue to report as news develops.

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Last week, several tax professionals reached out to us concerning communications their clients had received from a chapter of the International Alliance of Theatrical Stage Employees.

Cast & Crew Payroll had been told by the EDD that EDD is refusing to recognize the use of loan out corporations and that the payments to the loan out corporations should have been treated as wages to the loan out corporation owners. Cast & Crew Payroll stated that this will force payroll providers to treat loan out corporation owners in California as employees and pay the loan out corporation owners directly for their services, with full income tax withholding and payment of employee and employer taxes on all income the owners earn.

Since the enactment of AB 5 and its adoption of the ABC worker classification test, there has been a lot of speculation as to the impact of AB 5 on payments to loan out corporations.

We have reached out to the EDD to see if there is any official guidance on this issue and are awaiting a response. We will send a Flash E-mail as soon as we receive additional information from the EDD.

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As we previously reported, for San Diego County storm victims, the FTB is reinstating the pre-2023 disaster relief postponement procedures. Taxpayers who qualify for the June 17, 2024, disaster-related filing and payment postponement for San Diego County (due to the storms and flooding in January 2024) must indicate when they file their California tax return that they qualify for relief by either:

• Following the instructions in their tax software to enter disaster information; or
• For those paper filing, by writing “San Diego flood disaster” in blue or black ink at the top of their tax return.
  (FTB Tax News Flash (May 17, 2024))

• Go to Screen 4, Electronic Filing;
• Go to the e-file PDF/Miscellaneous section;
• Under the Miscellaneous subsection, enter the disaster relief explanation (e.g., San Diego County flood) in the Disaster relief explanation field.

Note: The entry above will be passed into the electronic California individual tax return when the state return is electronically filed.

In the Lacerte business, fiduciary, and exempt entity products, the user input is in a similar location as the above. However, the e-file capability for the Disaster relief explanation field for these entities will be added on an upcoming production release currently planned for Thursday, May 30th.

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The U.S. House of Representatives has passed the Federal Disaster Tax Relief Act of 2023 (H.R. 5863). If enacted, the bill would:

• Allow taxpayers who were subject to damages from hurricanes, wildfires and other federally declared disasters that occurred after February 25, 2021, to claim disaster-related losses without itemizing such deductions;
• Remove the requirement that such losses must exceed 10% of a claimant’s adjusted gross income to claim the disaster-related loss;
• Exclude from gross income any amount received by an individual after 2019 and before 2025 as compensation for expenses or losses incurred due to a qualified wildfire disaster, to the extent the losses were not already covered by insurance or other sources; and
• Exclude specified relief payments received by taxpayers for losses resulting from the East Palestine, Ohio, train derailment on February 3, 2023.

Similar provisions are also contained in the Tax Relief for American Families and Workers Act (TRAFWA). However, given the lack of movement in the Senate on the TRAFWA, the disaster relief provisions were moved separately out of the House in H.R. 5863. According to news sources, there is support to pass H.R. 5863 in the Senate. We will send another Flash E-mail should this occur.

The text of the bill is available at: www.congress.gov/bill/118th-congress/house-bill/5863/text

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The FTB is informing taxpayers who qualify for the June 17, 2024, disaster-related filing and payment postponement for San Diego County (due to the storms and flooding in January 2024) that when they file their California tax return they must indicate that they qualify for relief by either:

• Following the instructions in their tax software to enter disaster information; or
• For those paper filing, by writing “San Diego flood disaster” in blue or black ink at the top of their tax return.
  (FTB Tax News Flash (May 17, 2024))

For the 2023 filing season, when the vast majority of California was eligible for disaster-related filing postponement, this step was not required. However, for these San Diego County storm victims, the FTB is reinstating the pre-2023 disaster relief procedures.

If taxpayers have already filed without completing this step, they will receive a late-filing, late-payment, or estimated tax underpayment notice. These taxpayers should contact the FTB at the number listed on the notice for relief.

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A U.S. Court of Appeals has reversed the Tax Court’s decision in Farhy, in which the Tax Court ruled the IRS could not collect close to $500,000 in penalties assessed against the taxpayer for willfully failing to file Form 5471 for the 2003–2010 tax years. (Farhy v. Comm.(May 3, 2024) U.S. Court of Appeals for the D.C. Circuit, Case No. 23-1179)

The appellate court ruled that the fixed penalty imposed under IRC §6038(b) (currently starting at $10,000 per form per year and can increase to $60,000 per form per year, depending on the length of noncompliance to paying the initial penalties) can be assessed and collected by the IRS using the standard notice and demand procedures. The Tax Court had ruled the IRS did not have such authority and that the IRS was limited to collecting such penalties under a civil action brought by the Department of Justice but could not assess and collect the tax through the standard notice and demand procedures.

In so ruling, the appellate court did not go as far as the IRS’s position that all penalties imposed under the Internal Revenue Code can be assessed and collected by the IRS through the standard notice and demand procedures. However, the court applied a much broader analysis than that used by the Tax Court in determining whether a penalty can be assessed and collected by the IRS when the penalty provision is not imposed under a specific chapter of the Code or does not specifically state it is assessable by the IRS.

Bottom line: The IRS can now assess and collect the penalty under IRC §6038(b). However, other penalties not imposed under Subtitle F, Chapter 68 of the Internal Revenue Code, including other foreign reporting penalties, must be evaluated in light of the appellate court’s reasoning in Farhy to determine whether they may be assessed and collected by the IRS or must be pursued in a civil action by the Department of Justice. We will have to wait to see if Farhy appeals the decision to the U.S. Supreme Court.

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The IRS has published final regulations that adopt without change the reduction of the user fee to apply for or renew a preparer tax identification number (PTIN) from $21 to $11, not including the contractor fee. (TD 9997) The final regulations are effective 30 days after the date of the final regulation’s publication in the Federal Register. The contractor fee is $8.75 (reduced from $9.75 in 2023).

In 2023, the IRS released proposed regulations that reduced the user fees paid by tax preparers to obtain a PTIN. (TD 9980) The IRS devised a new cost model for calculating the PTIN fee following the decision in Steele v. United States ((September 25, 2023) U.S. District Court, District of Columbia, Case No. 1:14-cv-1523-RCL), which determined that the PTIN fee the IRS was charging preparers was too high.

Today the California Senate passed SB 1501, which would allow entities to qualify to make the passthrough entity tax election even if they do not satisfy the June 15 prepayment requirement. This is the first step toward the bill’s enactment. Next it will be sent to the Assembly and, if passed by the Assembly, it still must be signed by the Governor.

Taxpayers and tax professionals who would like to see this bill passed should contact their state assembly members as well as the Governor’s office.

The text of the bill is available at:

https://go.spidell.com/e/837113/-xhtml-bill-id-202320240SB1501/5x67dk/2007029044/h/6HY5L-Mj5YNjlRmMewkJyoleR6N057bF-KQniC9niSU

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FinCEN has released updated FAQs regarding the beneficial ownership information (BOI) reporting requirements. While many of these new and updated FAQs do not provide any real new insights or only apply to a limited number of businesses, the following two welcome clarifications are included:

• Homeowners associations (HOAs) may or may not be reporting companies for BOI reporting purposes. HOAs are only reporting companies if they are created by filing a document with the Secretary of State or similar office. HOAs designated as an IRC §501(c)(4) social welfare organization are exempt from the reporting requirements, whereas HOAs not designated as an IRC §501(c)(4) social welfare organization must file a BOI report, unless otherwise exempt; and
• An organization created in 2024 that that is exempt from the BOI reporting requirements but loses its exemption prior to January 1, 2025, has until the later of the following dates to file its BOI report:
  • January 1, 2025; or
  • 30 calendar days from the date it loses its exemption.

Unfortunately, FinCEN did not answer one of the most commonly asked questions: “Is an entity created prior to 2024 that dissolves prior to January 1, 2025, required to file a report by January 1, 2025?” Spidell believes the answer is no, but we’ve been waiting for definitive guidance from FinCEN on this issue.

The updated FAQs are available at:

www.fincen.gov/boi-faqs

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The IRS has issued Notice 2024-35, announcing that they intend to issue final regulations related to the SECURE Act’s inherited retirement account rules and that RMDs for certain inherited retirement accounts must begin in 2025.

A major point of contention contained in the proposed regulations that were issued on February 24, 2022, relates to the RMD rules for designated beneficiaries. These beneficiaries are subject to a 10-year distribution rule for retirement accounts inherited from taxpayers who died after December 31, 2019.

Under the proposed regulations, if the decedent had begun taking RMDs, then designated beneficiaries are subject to an RMD requirement during the 10-year distribution period rather than taking the total distribution by the tenth year. Due to confusion resulting from this proposed change, the IRS has delayed its implementation over the last two years. Now, Notice 2024-35 delays the implementation of this provision one more year and provides that the IRS’s final regulations will require designated beneficiaries to begin taking RMDs in 2025.

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In response to our inquiry regarding a possible postponement, the FTB issued the following statement:

“FTB is tracking official announcements from the IRS on any income tax relief for presidentially declared disasters in California. Aside from the tax relief announcement for San Diego County issued on February 27, 2024, we have not seen any additional official announcements from the IRS for the state of California.

It is important to note, the Governor’s request for federal assistance for these nine counties was for Public Assistance only. Typically, the IRS does not extend the due date for public assistance only.

San Diego County is the only county that has an extension to June 17.

April 15 remains and will remain the due date for these nine counties for California income tax purposes.”

Should the IRS issue any postponement announcement we will send another Flash E-mail.

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On Saturday, April 13, 2024, President Biden issued a major disaster declaration for specified California counties. The declaration “authorizes federal funding for state, tribal, and eligible local governments and certain nonprofits.” However, it does not contain business and individual relief. It is unclear at this point whether this declaration will result in the IRS and FTB granting tax filing and payment postponement relief.

We have reached out to and are awaiting additional guidance from the IRS. We anticipate that should the IRS provide postponement relief, the FTB will as well.  At this late stage we advise taxpayers to be ready to file and make payments today. However, we will update you as soon as we have additional information.

The counties in which federal governmental assistance has been approved are:

• Butte;
• Glenn;
• Los Angeles;
• Monterey;
• San Luis Obispo;
• Santa Barbara;
• Santa Cruz;
• Sutter; and
• Ventura.

The President’s declaration is available at:

www.whitehouse.gov/briefing-room/presidential-actions/2024/04/13/president-joseph-r-biden-jr-approves-california-disaster-declaration-7/

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The FTB is sending Middle Class Tax Refund (MCTR) debit card recipients who have not activated their cards an activation reminder letter that includes instructions on how taxpayers can activate their debit cards. These letters have generated questions about whether they are fraudulent.

If your client received a letter from the FTB that states “Activate your Middle Class Tax Refund Card now,” and directs them to call (800) 240-0223 or visit https://mctrpayment.com/, the letter is legitimate.

The MCTR program distributed over 16.8 million payments to provide relief to Californians beginning in 2022. However, the FTB has noted that there are many MCTR debit card recipients who have not yet activated their MCTR cards or who have not used their MCTR funds. The cards were mailed by Money Network between October 2022 and October 2023.

Funds are available for a limited time and must be used before the program expires on April 30, 2026.

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The chair of the California Senate’s Revenue and Taxation Committee, Senator Steve Glazer, has introduced California SB 1501, which would allow entities to qualify to make the passthrough entity tax election even if they do not satisfy the June 15 prepayment requirement.

If enacted, SB 1501 would, retroactive to taxable years beginning on or after January 1, 2024, authorize a qualified passthrough entity (partnership, S corporation, or LLC taxed as a partnership or S corporation) to make a passthrough entity tax election without making the requisite June 15 prepayment, but only if the taxpayer pays a penalty equal to 5% of the elective tax due plus interest. The penalty would have to be paid by the due date of the original return without regard to any extensions.

This bill, if enacted, would provide welcome relief to many taxpayers who may have inadvertently failed to satisfy the June 15 prepayment requirement.

Taxpayers and tax professionals who would like to see this bill passed should contact their legislators.

The text of the bill is available at:

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB1501

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A federal district court judge dismissed the California Trucking Association’s case against the application of AB 5 and the ABC worker classification test to the trucking industry. (California Trucking Association v. Bonta (March 15, 2024) U.S. Dist. Ct., Southern Dist. of Calif., Case No. 3:18-cv-02458-BEN-DEB) This means that interstate truckers are subject to the ABC test and will likely be treated as employees of motor carrier companies rather than independent contractors unless one of the exemptions from the ABC test applies, such as the business-to-business exemption.

In his decision, the judge noted, “Remedying complexities and perceived deficiencies in AB 5 are the kind of work better left to the soap box and the ballot box than to the jury box.”

The court’s decision is available at:

www.caltax.com/files/2024/ctavbonta.pdf

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A U.S. District Court has ruled that FinCEN’s beneficial ownership reporting mandate enacted as part of Corporate Transparency Act (Public Law 116-283) constituted Congressional overreach and therefore is unconstitutional and cannot be enforced against the plaintiffs who brought the case.  (National Small Business United v. Yellen (March 1, 2024) U.S. Dist. Ct., North. Dist. Of Ala., Case No. 5:22-cv-1448-LCB)

The plaintiffs are Isaac Wilkes, a small business owner, and National Small Business United, a trade organization representing 65,000 members, including Isaac Wilkes.

In a press release issued on March 4, 2024, FinCEN stated that in compliance with the court’s order, it will not enforce the beneficial ownership reporting requirements against the plaintiffs, indicating that all other reporting companies are still subject to the reporting mandate.

This means that unless a business is a member of the National Small Business United, it must still comply with the reporting mandate. For additional information concerning the reporting requirements, see our January 2, 2024, flash e-mail “FinCEN releases beneficial ownership information report.”

The court’s decision is available at: www.govinfo.gov/content/pkg/USCOURTS-alnd-5_22-cv-01448/pdf/USCOURTS-alnd-5_22-cv-01448-0.pdf

FinCEN’s news release is available at: https://fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448

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