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SOVOS TAXWIRE VIDEO (OCT 2023)


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Hello. Welcome to Sovos TaxTalk. This recording contains information from the
quarterly Sovos tax wire. I'm Wendy Walker.

I'm a solution principal at Sovos. I'm a subject matter expert in information
reporting and withholding. I have been working in this industry for over
eighteen years. I've led tax reporting and tax withholding teams in global
financial institutions.

The Sovos taxwire is a quarterly newsletter where I provide you with brief
insights into federal and state changes and issues that we're tracking here at
sovos that might impact your withholding and information reporting processes.

This tax talk is meant to help break that information down further for you I
hope that these details are valuable for you and your organization.

Let's start with key regulatory updates. There's a lot of enforcement and
regulatory activity occurring with respect to digital asset transactions.

Starting with this federal court order to track in to turn over their user
transactions for the tax year's twenty sixteen through twenty twenty. Now we've
seen these John Doe summonses in the past. They were sent to coinbase, they were
sent to Fit stamp, Circle. And for Kraken, the IRS sought all platform users'
information from twenty sixteen to twenty twenty including names, tins, date of
birth, phone numbers, and the government was legally awarded this information
back in twenty twenty one, but Kraken didn't turn over the information.

So after some more legal battles, Finally in February of this year, the
government filed something known as a notice of enforcement, and the court
awarded the enforcement at the end of June. So I expect that taxpayers may begin
receiving notices related to those summons, right next spring from the IRS.

Revenue ruling twenty twenty three dash fourteen, it clarified that many what
many in the industry had already suspected. And that is that when taxpayers earn
rewards related to proof of stake protocols, This is ordinary income. And for
tax reporting, that means it's box three of form ten ninety nine miscellaneous.
It's other income.

A lot of companies were already reporting this way, but there were a lot that
weren't. So, this just clarifies how the I that the IRS does treat this as
ordinary income. And revenue rulings are just the IRS's way of saying, Hey, we
know these transactions are already occurring in the industry, and these are the
requirements.

They it doesn't require them to change the law. So they're not gonna say
effective this date or that date. This is now. It's just saying, hey, this is
how they should be reported. So, we're gonna see how this shakes up for the
twenty twenty three reporting season, especially for those, companies that maybe
weren't reporting these rewards to their clients at all.

And last, we saw that IRS finally release the proposed regulations for changes
to code section sixty forty five and these were passed back in the
infrastructure bill in twenty twenty one. Basically, this, change includes
requirements for exchanges and other third parties to report what eventually
will be a new ten ninety nine for digital asset trans that they facilitate for,
you know, their clients. It requires cost basis reporting for assets going back
to twenty twenty one. So that means that if you are a broker that reports a
twenty twenty five sale of digital assets, you have to report basis if you have
that asset on your platform as of twenty twenty one.

That's crazy. Right? Exchanges probably don't have data from twenty twenty one.
Maybe by the time this twenty twenty five comes, they may not even have it for
you know, to all of twenty twenty two. And so, you know, to have that make them
go back to twenty one, especially, in the years beyond is is gonna be a
difficult exercise.

And this is effective with twenty twenty five transactions. So that means ten
ninety nine reporting in early twenty twenty six to the recipient to the IRS and
to the states.

I expect that by the time the public comment period closes, which I think is,
this week, that the treasury, the IRS have to take in all those comments from
the public They have to make changes to the regulations, send that back through
an approval process. We probably won't see final regulations, until maybe June
of twenty twenty four.

The industry is gonna push hard for at least an eighteen month implementation I
saw this week coinbase issued a letter to, the government, you know, comments to
the government saying that they needed, you know, at least twenty four to thirty
six months. To implement the changes. So I could see the treasury granting a
delay, to make this effective maybe with twenty twenty six transactions, which
would mean reporting doesn't even start maybe until twenty twenty seven.

But we shall see how this one plays out.

In other regulatory updates, the IRS released updates to pub fifteen eighty six.
This is the publication that describes how a filer can explain reasonable cause
for penalty abatement purposes when they reported information returns to the IRS
with missing or incorrect named tens or they reported that information late or
using incorrect formats.

The notable updates for this year include first the typical annual inflationary
increases for penalty rates. And since inflation has been so high, we saw some
pretty big increases if you see on this slide here. From both the daily in both
the daily penalties, as well as the, in each tranche for the maximum penalty
caps.

It jumps from two hundred and fifty thousand alone for the max cap filed for
returns after August first. I remember when the Max Cat for August one was all
in two hundred fifty thousand.

So these are big jumps you know, in these maximum, cap numbers. The other
notable thing in the publication is the clarification that was added for filers
of ten ninety five B and C forms, the Affordable Care Act forms. Treasury and
IRS finalized the regs for one dot sixty fifty five dash one, which was
effective on December fifteen of twenty twenty two. And then they also finalized
treasury reg three zero one dot sixty fifty six dash one.

And this was effective for March on March eighth of this year.

Those both of those final regulation, re regulations contained among other
things, final rules for how the forms ten ninety five B and C have to be
delivered to the recipient, and the timeliness of delivering those return. And
so that, of course, impacts the late filing, the way the IRS would assess
penalties according to the details here in Pub fifteen eighty six. And the other
update that was here in the publication for these filers was that the IRS
provided the tin solicitation rules for these forms. So first, they said If you
report a missing ten on a ten ninety five b, the penalty doesn't apply as long
as you report a date of birth on the form. But if you don't, then you have to be
able to prove to the IRS that you have been soliciting for a correct ten at
least once every year since the relationship was established.

And for an incorrect ten for both the ten ninety five BNC forms.

Same thing. The penalty can be waived if the filer can demonstrate that they've
been trying to solicit for the ten at least once annually.

And then for both of the forms, the solicitation requirements here are a bit
different than they are for ten ninety nines or ten ninety nine r's. You know,
they're they're different for the different form types. And for these forms, the
IRS clarified here in the publication that they don't need filers don't need to
send a solicitation to all of the covered individuals that might have incorrect
tin combinations.

The Pub clarifies that you only need to send it to the response individual
individual for the medical plan. They also clarify that you don't have to
solicit, at all if there is if you the coverage has been terminated for the
responsible individual or the coverage individual that's being reported as
erroneous on the notice.

So lots of updates there for ACA filers in the pub this year.

The other update was the annual release of the publication twelve twenty, which
was late last month. This was the publication that describes the electronic
filing requirements for forms ten ninety nine, ten ninety eight, other
information returns.

There are notable updates here, including reminders, to note about the change in
the electronic filing thresholds per the TD ninety nine seventy two regulations.

I talked about this in the tax talk earlier this year.

There's also a lot of information in the pub about the new ten ninety nine
filing system called iris. It you know, encouraging filers to use the new
system. And then there's information about the new transmitter controls code,
the TCC processes, which you can no longer do through that old paper form forty
four nineteen. Instead, you have to go through the IR application for TCC system
with the IRS, in order to, you know, access fire, iris, and a number of other
IRS systems.

And then the pub also added two new states for participating in the combined
federal state filing program. But alas, please verify with the state whether the
information is accurate. So to be clear, you can't rely on the IRS for your
state reporting requirements.

The states issue their respective state reporting requirements, but here The
publication, the annual twelve twenty indicates that Pennsylvania and DC are
being added to the list of states this year. But here at sovos, we've already
verified with the state of Pennsylvania that they are not going to participate
in this. So even though the IRS is publishing that in the twelve twenty, we've
been told by Pennsylvania, we will still need to file directly with the state.
So, please make sure that you verify.

We're still trying to verify with DC. If you're a sovos client, If you utilize
civil solutions for ten ninety nine reporting, then, you know, for IRS returns
to the IRS and state, We are tracking those details for you. We are calling the
States. We and DC.

We're pushing them to put clarifications in their own. Twenty twenty three
guidance about this topic. So, we'll keep you posted as the states start to
release their requirements for the upcoming twenty twenty three season.

Trends on the rise. So over the last first, starting with government agency
system modernizations, Over the last few years, we've seen a huge push towards
system modernization across the federal and state governments. And this year is
no different. The Social Security administration has moved to the ID. Me
credentialing portal which is a move that the IRS made last year for
authenticating users that access a variety of their systems.

But authentication isn't the only modernization.

We've seen platform refreshes by social security administration to a more
modernized looked and feel. We saw the IRS launch the individual online account
feature for taxpayers like you and I They launched the IRS system, and they've,
systems. They've launched other systems that automate the intake of a variety of
different taxpayer requests.

And we've seen this at the state level too. Oregon began a multi year to
migration to the new Francis online system a few years ago this year, they
continue to roll out changes.

Maine moved to the new main tax portal last year significantly improved the way
in which information can be submitted. An exchange with their taxpayers.

These changes don't come without headaches for all of us, though. Changes in
processes to deliver payments, Returns, changes in file formats, the data that's
required, changes to logins and passwords, that's just some of the impacts to us
as third party filers or users of the systems you, if you're not using us, for
these different services.

It's a trend that's not going away. It's best to be proactive watching for these
in in jurisdictions where you file where you deliver tax payments so that you
can minimize those impacts to your filing season just by getting ahead of the
changes.

Trends iris. What's next?

IRS continues to roll out updates to this new ten ninety nine filing system.
Earlier this year in January, they launched the system for twenty twenty two
filing.

You could manually create returns and it really was geared for self employed
individuals or small businesses.

This year, the IRS has hinted that they'll released, and and by the way, they
were already, supporting the forms ten ninety nine on the platform. This year
IRS has hinted that they will release support for the ten ninety eight series of
forms, and they've also been working to develop a more automated system to
system delivery method for larger software filing companies like sobus.

Today, you can only upload a CSV file of, like, a to a hundred records. Or as I
said, you can manually create ten ninety nines on the system.

So, you know, this system to system upload or or transfer a data should say, is
it really, you know, the next step in allowing larger businesses access to the
iris system? Just to note IRS has not publicly released any information about
the sunset of fire or information about discontinuing any port on fire so we
continue to work in tandem with them building the new formats so that we can be
ready to pivot away from fire when they do.

Lending the IRS beyond the IRA, the inflation reduction act. Remember, the
inflation reduction act gave the IRS eighty billion dollars, but funding the IRS
has been a theme these last few months. Again, especially because there's been a
lot of calls to claw back the IRA funding to defund the IRS and so forth. The
taxpayer advocate, in her FY twenty four objectives report to Congress, she
released this past quarter. She cited concerns for tax payers, like you and I,
if Congress continues to defund annual appropriations that are needed just to
keep the IRS ship afloat every year. This doesn't include enhancing the systems,
that, you know, was imagined through, the taxpayer first active twenty eighteen
as well as the inflation reduction act.

Also, the etAC annual report to Congress was also released this quarter This is
a report that's written by industry people, state government leaders. They urged
Congress to provide steady funding in annual appropriations to the IRS in order
to provide increases in taxpayer experience to safeguard, taxpayer information.

The IRS themselves have noted several great changes as a result of the funding
that they got from the IRA in their year year one report card They touted
increases of almost seventy percent in their service levels.

The the new online portal for individuals, the iris system, the accelerated
response times, just because they were able to leverage digital scanning So, you
know, lots of reasons that everybody wants the government to continue to fund
the IRS. Right? They need annual appropriations plus they're leaning on that
additional IRA funding for the next ten years to modernize and to improve their
service. And, you know, when the government takes away some of the, you know,
appropriations or doesn't give them inflationary increases, these are things
that you know, or just they're gonna keep eating into those IRA funds that were
meant to improve our service.

So, you know, lot of calls for funding the IRS quarter.

Watch outs.

So earlier this year, I talked about the e file regulations in TD ninety nine
seventy two that were finalized. They changed the E file requirements for
information returns, but it also requires businesses to file the form ten forty
two. The withholding tax return, elect electronically beginning with twenty
twenty three returns that will be filed on March fifteen twenty twenty four. The
IRS requires this form ten forty two for twenty twenty three to be filed
electronically for twenty twenty three season in their modernized e file system.

And this requires an XML formatted file of data. There's an issue with the way
that the IRS has designed the E file process in the modernized E file system, at
least for filers that claim credits on line sixty seven of form ten forty two.
Filers that claim a credit on that line are also required to patch, the
corresponding forms ten forty two s that contain the withholding amounts to
substantiate the claim of the credit. While the IRS hasn't developed really a
practical method for a business to submit those ten forty two s copies.

Right now, You would have to wait until you receive them until sometime after
March fifteenth when you were already required to file your ten forty two. So
you'd have to wait until you receive your ten forty two s's that had
withholding, and then you would have to somehow transfer that into that XML data
to be able to attach it to your ten forty two because you wanted to claim a
credit. So, you know, industry, software failures, We're not sure why they
didn't make this a PDF attachment. We already attach ten ninety nine pdfs in
that application for other reasons.

So industry software filers. We've been pushing the IRS to get this to be a PDF
attachment so that the electronic filing process is practical and realistic for
filers that claim a credit on this line sixty seven.

Okay.

A draft w nine form was released with an October twenty twenty three revision
date. This is gonna ultimately replace the current version which is dated
October of twenty eighteen.

The change on the form is that the line three was split and a new line three b
checkbox was added. This box should be selected if You are a partnership, trust,
or a state that's completing this form, and you're submitting this form to a
partnership, trust, or estate, and you have foreign partners or beneficiaries.

This is super confusing.

It's super confusing language. They are trying to get information on foreign
people that are earning US income through US pass through entities, pass through
entities, partnerships trust the states. So they're trying to get in information
on foreign people that are behind those types of entities because ultimately
they wanna share that information with the tax authorities associated with those
foreign owners. We haven't seen the form instructions yet or instructions for
the request or a form w nine The IRS is asking for, comments. It might the
common period should be closing soon on this one might already be closed. So
hopefully you submitted comments in the comment period. But as of now, this is
super confusing language.

A reminder about changes to w nine forms. You don't need to make any process
changes or even think about it until, I mean, need to think about it, but you
don't need to make one until a final version of the form and the instructions
are released. Even then, typically, you have a grace period of about six months
from the date of the final, form where I should say the version on the form to
implement the new version into your processes. And typically, You don't have to
go back and replace older versions of w nine's with newer versions only when
somebody changes that infer the information on that older version would you need
to collect the new version of the form. So for now, You don't need to do
anything, but watch for the IRS to release the instructions, start thinking
about where in your organization you might need to replace the form, for
operational purposes, in the coming year.

E state regulatory updates and trends. Starting with Maine.

Maine announced that the state is going to follow IRS e file requirements for
the upcoming reporting season.

MRS rule eight zero three income tax withholding reports and payments requires
payers to file electronically in Maine if they file at least ten ten federal
form w two and ten ninety nines, or if applicable through the combined federal
state filing program.

Maine also released a draft of their twenty twenty three filing specifications
for information returns. They have updated the language to require all forms ten
ninety nine to be filed electronically in the new main tax portal. Now
previously, the language required very specific to ninety nines to be filed with
Maine. So this change in the language to require all ten ninety nines means that
we're going to have to add the ten ninety nine NEC and the ten ninety nine k,
into the filing requirements for directly filing with Maine.

And note Yes. Maine participates in the combined federal state, but
unfortunately, guys, the main is the combined federal state won't satisfy your
filing requirements in Maine. Maine is one of these states that requires even
though they participate. They specifically state.

Even though we participate, you're required to file a copy of those returns
directly in the main tax portal, in lieu of relying on CFS.

So, note that you're you've gotta add the NEC and the K forms and that all of
your returns need to be filed directly with the state of Maine.

Massachusetts released proposed regulations related to winnings from sports
wagers.

The state is proposing that all winnings from sports Wagers are subject to the
same Massachusetts income tax withholding rules as winnings from wages placed at
in person gaming establishments.

In addition, the state has also proposed requiring income tax withholding on
winnings in excess of six hundred dollars that are not otherwise subject to
withholding under the federal tax law.

Missouri has changed their process for withholding refund requests.

Effective, this year overpayments are no longer going to be automatically rolled
forward to the next payment period. So as a result, refunds have to be request
said separately, from the state, referencing the period that you you need a
refund for and you're going to use via for, form eighty forty eight fifty four
to request that those refunds.

Rhode Island is now going to base interest raised interest rates on tax type
rather than continuing a flat rate across the board. So this means that
delinquent withholding taxes are now gonna be subject to an eighteen percent
interest rate All other, taxes that are delinquent are subject to a twelve
percent interest rate. Additionally, interest paid of overpayments of tax of
taxes. So if you're getting a refund back, the interest paid on those
overpayments has increased to six point two five percent. It was previously
three point two five percent.

State watch outs.

Another state watch out that I wanted to go through is that a lot of states are
still going through a variety of portal and process changes this year. And for
the next couple of years. And this slide, I'm summarizing for you some of the
changes to watch out for.

South Carolina and Arkansas are going through.

They're gonna go to all new systems.

Not sure of the impact just yet, but those are the dates on the slides here.

From experience over the last several years, would states modernize? I said on
some earlier slides, you know, you need to watch out for file format changes,
filing requirement changes, logins, password changes.

We'll be watching these states to see how they might impact tax withholding for
those of you that are are, withholding clients.

Colorado, Connecticut have already migrated some parts of their tax processes to
new systems. They let us know earlier in the year that there will be changes to
the twenty twenty three filing formats So we're watching for their specs to be
released for the twenty twenty three reporting season.

Kentucky has spent all year integrating multiple tax systems into one. They
don't seem to in think that that's going to impact withholding and reporting
process that we've used previously, but that seems unlikely in my experience.

Maryland indicates that they will no longer participate in the combined federal
state for next year twenty twenty four because that's when they're gonna go to
their new tax system, and they will issue a direct filing format at that time.
So this is a state that's gonna lead leave the combined federal state filing
program because they're gonna go to a new system for twenty twenty four, and
they will be issuing a new direct filing format at this time. I at that time,
and I imagine that'll impact withholding tax payments and returns. We just
haven't heard yet.

Oregon.

This year is like year three or four of Oregon's modernization project to
Francis.

This year, filers are now required to file the form OQ for withholding tax
information in Francis. You cannot use the old Oregon payroll re reporting
system anymore.

Pennsylvania started transitioning to my path last year And this year, the IRS
Pub twelve twenty says that Pennsylvania is participating in the combined
federal state, but we have not been successful full in verifying that with the
state themselves. They've actually indicated that they're not doing that. So
I'll have to wait and see what they actually published in their twenty twenty
three requirements to know for sure. That's the same for DC by the way who also
Pub twelve twenty says that they'll participate in the CFSF, but we'd need to
wait to verify that until they actually release their twenty twenty three
specifications for for filing season this year.

Alright.

That wraps it up for this quarter's tax talk. Thank you so much for your
partnership. Thank you for being clients of sovos. I hope that you found this
information valuable for you and your teams, and I'll see you soon and talk to
you again next quarter. Thanks again.