For most taxpayers, a visit, call, or letter from the IRS can be very concerning. If a taxpayer has failed to pay taxes as required, has not reported information correctly when filing tax returns and other forms, or has otherwise failed to comply with tax laws, they can face significant penalties. When a person is contacted by the IRS, this could be a sign that they will face a tax audit, and they may need to address a variety of complex financial issues as they determine how to address issues related to tax compliance. However, the IRS recently announced a policy change that may limit certain forms of contact between IRS agents and taxpayers. Namely, the IRS will no longer make unannounced visits to taxpayers in most situations.

IRS Policy Addresses Safety Concerns and Other Issues

In the past, IRS agents would occasionally visit homes or businesses without contacting taxpayers in advance. During these visits, they would address concerns about unpaid taxes or failure to file tax returns. However, in recent years, IRS agents have faced safety concerns when making these unannounced visits. Law enforcement officials have also noted the increased prevalence of tax scams in which people pose as IRS agents. Because of these concerns, the IRS has put an end to nearly all unannounced visits, effective immediately.

Instead of making unannounced visits, the IRS will contact taxpayers ahead of time and schedule meetings. An appointment letter (Letter 725-B) will be sent, and a taxpayer can then schedule a one-on-one meeting with an IRS official at a designated time and place. This can ensure that taxpayers will be prepared to address specific issues, and they can compile the necessary documentation and take steps to resolve any concerns about unpaid taxes, unfiled tax forms, or compliance with tax laws.

In California, property taxes can be a significant concern for commercial real estate owners. Depending on the assessed value of a property, these taxes can be very high, and the requirement to pay these taxes may cause financial difficulties for property owners. Due to current trends in California real estate, the value of many properties has plummeted, and some property owners may struggle to meet their obligations. However, this may present an opportunity to reassess the value of a property through changes in ownership. By understanding when the transfer of ownership of a property may affect property taxes, commercial real estate owners may be able to take steps to reduce their tax burden.

Proposition 13 and Property Tax Assessments

Property tax assessments in California are governed by Proposition 13, a law that was passed in 1978. This law set the maximum property tax rate at 1%, and it also limited the amount by which the assessed value of a property can increase from year to year. A property will have a “base year value” that is assessed based on when the property was originally purchased, when construction was last completed, or when the property changed ownership. The assessed value of a property can only increase by 2% per year, regardless of the property’s actual fair market value. 

California law also allows for temporary adjustments to a property’s assessed value to be made if the value of the property has decreased below its base year value. This may allow for reduced property taxes based on the property’s current fair market value. However, if a property increases in value at a later date to the point where it meets or exceeds the base year value, property taxes will be assessed based on the original base year value.

The popularity of cryptocurrencies such as Bitcoin and Ethereum has continued to grow in recent years, and some companies are now offering these virtual currencies as a form of compensation to their employees. Freelancers and independent contractors may also receive cryptocurrency as payment for their services. This raises an important question: are people who receive cryptocurrency as wages or payments for services required to pay income taxes? By understanding the tax laws related to virtual currency, those who receive income in this form can make sure they are paying taxes as required and avoiding potential penalties.

The IRS and Cryptocurrency

In 2014, the Internal Revenue Service (IRS) issued a notice stating that virtual currency will be treated as property for federal tax purposes. This means that the general tax principles applicable to property transactions will also apply to transactions involving cryptocurrency. When property is received as payment for performing services, it is considered to be taxable income. This income must be reported to the IRS, and it is subject to federal income tax withholding. The fair market value of the cryptocurrency on the date of receipt by the employee is used to determine the amount of income that needs to be reported. When independent contractors receive cryptocurrency as payments, they will be required to pay self-employment taxes based on the fair market value of the virtual currency when it was received.

Federal Income Taxes and Capital Gains Taxes

Employees who receive cryptocurrency as income will need to report it as part of their gross income on their federal income tax return. Employers are also required to withhold federal income taxes from the amounts paid to employees. However, the IRS does not accept payments in the form of cryptocurrency. The employer may need to withhold taxes from other income paid to an employee, or the employee may transfer funds to their employer to cover the amount of taxes that must be withheld. However, it is the employer’s responsibility to withhold taxes and pay them to the IRS, and an employer who fails to do so may face penalties.

The tax laws in the United States change regularly, and taxpayers need to be aware of new requirements that may apply to them when filing tax forms, paying taxes to the IRS, or addressing other tax-related issues. One recent change to the tax laws that may affect certain companies involves the Corporate Alternative Minimum Tax (CAMT), which was put in place by the Inflation Reduction Act of 2022. Recently, the IRS issued guidance on the requirements for this tax, and it is also allowing relief from penalties that may apply for companies that have failed to make estimated quarterly tax payments in 2023.

What Is the Corporate Alternative Minimum Tax?

The CAMT is a new tax that must be paid by certain corporations, and this requirement went into effect on January 1, 2023. Corporations that earned an average of $1 billion in annual profits over a 3-year period will be required to pay the CAMT. This tax will also be required for U.S. corporations that are subsidiaries of foreign companies, so long as a U.S. company has at least $100 million in profits and the aggregated foreign group has at least $1 billion in profits. The CAMT will not be required for S-corporations, real estate investment trusts (REITs), or regulated investment companies (RICs). These pass-through entities are not required to pay corporate taxes, and the personal income of owners or investors is taxed instead.

Corporations that are subject to the Corporate Alternative Minimum Tax are required to pay a minimum of 15% of their adjusted financial statement income (AFSI) in a taxable year. These corporations will need to calculate the regular corporate tax that would apply to their taxable income as well as the CAMT that would apply to their AFSI, and they will be required to pay the higher amount to the IRS. When calculating AFSI, certain types of deductions are allowed, including for depreciation of equipment and for state and local taxes. While net operating losses generally cannot be deducted in the current year, they can be carried forward to offset taxable income in future years. These offsets are capped at 80% of taxable income for a given year.

Business owners often rely on tax deductions to address their expenses. Deductions are available for multiple types of business expenses, and they can significantly lower a person's tax burden. However, businesses are expected to be for-profit ventures, and if a person's income-generating activities regularly result in more losses than gains, they may be classified as hobbies. This can limit the types of deductions that may be available. By understanding the IRS's hobby loss rules, taxpayers can make sure they are able to claim deductions when necessary.

When Are Activities Classified as Hobbies Rather Than Businesses?

In general, a taxpayer's activities may be classified as a hobby if they do not earn a profit during 3 of the 5 most recent years. That is, the income earned from an activity must exceed the allowable deductions for that activity in 3 out of 5 years. The applicable time periods are different for activities involving breeding, racing, training, or showing horses. In these cases, a person will only be required to earn a profit in 2 of the last 7 years.

If an activity is considered a hobby, expenses related to the activity generally are not deductible. There are some exceptions, such as deductions for mortgage interest, advertising, insurance premiums, and depreciation of property, which may be classified as miscellaneous itemized deductions taken against a taxpayer's income. However, the Tax Cuts and Jobs Act, which went into effect in 2018, does not allow miscellaneous itemized deductions to be taken. This law will remain in effect through 2025, and starting in 2026, taxpayers may once again be able to deduct certain hobby-related expenses.