According to the IRS, there is $1.5 billion in unclaimed refunds for 2018 that will become the property of the United States government after April 18. At that time, 2018 will become a closed year. So now is the time to get tax clients to file their 2018 returns if they haven’t yet, or for tax practioners to take a closer look at already-filed returns for that year to see if there was money left on the table.
By Tom O’Saben, EA
Assistant Director, Professional Development & Outreach
U. of I. Tax School
Hello again, everybody. Tom O’Saben here from the University of Illinois Tax School coming to you with our blog of the week with one week left. The question I want to ask you today is-we’re hitting the last chance folks, are you going to leave $1.5 billion on the table? Again, for those of you who may not know me, my name is Tom O’Saben, I’m an enrolled agent, and the Assistant Director for Professional Education Outreach for Tax School. The link to my information is also found at the end of this material.
So in particular, what are we talking about today? Well, next Monday, April 18, is the last day to file or amend 2018 returns, it’s going to become a closed year, believe it or not. 2018 seems like it was just yesterday, but no, it’s about to go away. And according to the IRS, there is $1.5 billion in unclaimed refunds for 2018 that are just lying there. They are going to become the property of the United States government if claims are not made by April 18th. Now the average is $800. But imagine if your client would get $800 just out of the blue, I think they would all be happy.
Tax Cuts and Jobs Act (TCJA) Introduced
So let’s take a little trip down memory lane and talk about 2018. Remember 2018? Well, that was the first year of TCJA, the Tax Cuts and Jobs Act under former President Trump, remember that? Think about again, where you were in preparing those 2018 returns. What’s COVID? We had no idea what COVID was. And in fact, it wasn’t even in our in our vision yet, at that time when we were working on 2018 returns in the spring of 2019. What’s Zoom? I didn’t know what Zoom was in 2019, probably 99% of my clients and this might be the case for you, too. We met face to face, or they may have dropped their information off and we got on the telephone and talked to them about their returns. So let’s think about how much the world has really changed in these three brief years between 2019 when we were preparing those 2018 returns. And here we are in the spring of 2022, who could tell us what a wild strange trip it’s been, right?
Massive Change in Tax Laws Due to TCJA
So since we’re going to be talking about either preparing or amending 2018 returns, I think it’s important to revisit what we saw in 2018, with a massive change in the tax laws that came as a result of the Tax Cuts and Jobs Act. Well, let’s talk on the personal side and we’re still facing some of the backlash. And I wouldn’t really call it backlash because that’s a negative term, but let’s talk about some of the things that are still in effect because you might recall that the Tax Cuts and Jobs Act was designed to be effective tax years 2018 through 2025. And there’s been some tweaks in between which we’ll talk about, probably one of the biggest ones that we saw was the loss of the unreimbursed employee business expenses. I know my experience is this, so I’m assuming yours is the same way. That you have clients coming in maybe because of COVID-19 they are employees, but they’ve gone ahead and they’ve been working from home and they want to take some home office expenses. Well, Tax Cuts and Jobs Act took that away, or our clients who are employees, and they have a lot of mileage, for example. And they find that no, we cannot take a deduction for those expenses. I know on our Facebook page, we still have a lot of people posting that they believe or their attorney might have told the client that yes, you can deduct your unreimbursed employee business expenses. Ladies and gentlemen, unless you’re a fee based elected official or an Army Reservist, those are gone and they’re still gone.
How the CARES Act Could Potentially Affect Net Operating Rules in 2018
You might also recall that in 2018, that was the first year under the Tax Cut and Jobs Act, that net operating losses (NOL) could only be carried forward. So someone experiencing a net operating loss from 2018 could only carry it forward. Now, the CARES Act came along once COVID became a reality in 2020. The CARES Act went back and said okay, we’re going to suspend the NOL rules for now and we’re going to allow carry back for up to five years, and then we can carry forward what wasn’t burned up in those five year carry back. So my understanding is if you were going to make an NOL change to a return back in 2018 to apply the CARES Act you had a limited amount of time to take a look at that but you may want to still go back and revisit TCJA also brought us the introduction of excess business losses. If those losses were too big, they morphed into a net operating loss and would be carried forward and remember those end net operating losses and those carry forward years are limited to 80% of the income that carry forward year. But once again, we had the CARES Act, which came along and suspended the excess business losses for 2018. And in fact, allow them in full until 2021. The tax returns that we’re working with right now, excess business losses are back. And in fact, the American Rescue Plan passed by now President Biden extended the excess business loss rules for another year beyond the expiration of TCJA and 2025, through tax year 2026. So you may want to go back and take a look at a 2018 return and see if there was in fact, an excess business loss. And could we amend that 2018 return, get that thing postmarked by Monday the 18th and eliminate that excess business loss that may have been on that original return.
Also, you might recall from TCJA, we had the introduction of the qualified business income deduction, where businesses are being rewarded for making money. Remember, when Sue and I were both out teaching, we taught you about apples and bananas, those apple clients who were underneath the full phasing of the rules, we didn’t have to look at wages or unadjusted basis and assets, they would be eligible for 20% of the net profit as a deduction. If they were bananas, meaning that in order to eat a banana, you have to peel it. So those taxpayers that were in the phase in range would have to have wages or unadjusted and or an adjusted basis in assets in order to have a qualified business income deduction that is still with us. That’s still the law of the land.
Were QBID Deduction Losses Missed?
And I also want you to be aware of that we still have QBL’s, qualified business losses, which are carried forward and will offset any qualified business income in the carry forward year. But in this case, we’re going back and looking at did we miss a QBID deduction possibly in 2018? Would that be a reason to file an amended return, or in fact, filing an original return for 2018. But on this page, as we’re here right now, as laws have changed TCJA remember that if you’re going to file an original return for 2018, we do have the loss of the unreimbursed employee business expenses. NOLS can in fact be carried back, thanks to the CARES Act, which changed TCJA temporarily. 2018 we don’t have excess business losses for that originally filed return. The CARES Act suspended excess business loss rules for 2018, 19, and 20. And we do have QBID. But remember, again, we have to determine are they apples or bananas, based on the amount of income that the taxpayer had for that year, their adjusted gross income, was it above those phase ends, I believe, one 157, five and 315 were those original numbers. Once you got above those numbers, then they became bananas. And we were going to have to look for wages and unadjusted basis in assets.
Reference the 2018 Federal Tax Workbook
I’ll tell you as you’re looking at 2018 rules, it may be important to go to the U of I Tax School website and take a look at our 2018 materials. You may in fact have a quick finder or a textbook to refer back to, it’d be important to have those assets resources at your disposal. If you’re going to go ahead and try to hurry up and either file an original 2018 return or in fact amend – remembering again for 2018 and as my reference to have resources such as our Federal Tax Workbook from 2018. Also, either a tax book or tax finder, or maybe IRS resources from the time remember that they were there were new tax brackets that were introduced by TCJA, that 10% bracket, and then maximum 37% bracket capital gains treatment. By the way, those tax brackets are still in effect. They’re the ones we’re using today. They’ve just been adjusted for inflation. Remember that the TCJA also introduced that flat 21% tax for C-corps again, that is still in effect still 21% flat and there is no 35% I’ll call it that penalty rate for personal service corporations. They also receive 21%. Also in that first year of TCJA we had 100% bonus depreciation. Now that was an irrevocable decision. You were in by default, but your client could have in fact elected out and that decision either way, was an irrevocable decision. It’s still with us, but it’s going to start soon phasing out.
What About Q-Zone?
TCJA also brought us Q-Zone opportunities to defer gains. Well, it’s too late to do that on an amended or an originally filed 2018 return because you might recall that taxpayers had 190 days after they realize a capital gain, to reinvest that into a qualified opportunity zone fund, and defer the recognition of that gain until the filing of the 2025 return. So certainly, the six-month period has ended long before now. But nonetheless, you may have clients that have these gains deferred, it may be a reminder to you that oh, yeah, we have that client that went ahead and did a Q-Zone fund. And we’ll be looking at that coming up. But the point I want to make is going back and either amending or filing an original 2018 return, I want you to be reminded that the Q-Zone opportunities were there. But we can’t elect those now, we had to do within 180 days after the let’s call it the date of closing of the sale on any capital gain.
What can we do to help our clients with 2018 returns?
We’ve been preaching for some time now about setting up their online accounts. And you may have noticed recently, the IRS has kind of gotten away from the facial recognition set up to get that online account. But you may have to get a transcript, you may be meeting with a client now and say I don’t know where anything is for 2018. So we may want to really rock and roll because we only got a week to go ahead and try to get their transcripts by having access to their online information. If you’re going to request a transcript, there’s no way your clients going to have that in paper before Monday the 18th. But I also want to caution you that when we have access to their strict transcript material, it’s not going to help us with state withholding. Typically, the reported information regarding W2’s, or 1099’s will not reflect any state withholding. So the more chance that your client has to gather that information, the original information, the better off you’re going to be in being able to prepare, prepare a return that will benefit the client, instead of that year slamming shut.
To the best of my knowledge, the returns will need to be mailed in, there’s no provision I’m aware of to e-file original or amended returns that far back, my understanding is amended returns the latest we can go back as 2019. And as far as e-filing an original return, I think these are all going to have to be paper returns, I would probably also suggest that, you know clients go ahead and perhaps get returned receipt, because it will probably be any anywhere from 12 to 18 months for these original or amended 2018 returns to be processed. The IRS is just that understaffed. I don’t have to really go into how much we’re aware of how overwhelmed the service actually is. So helping our clients to get their information together as quickly as possible. Is there a chance if we have some some free time? I know you’re laughing at me right now I said how do I have any free time in the last week of filing season. But maybe you’re sitting there looking at a 2021 return and your client has a big increase in income? We’ve seen quite a bit of that this year. And they’re thinking, boy, I wish I wouldn’t have made a certain depreciation decision. For example, as I’m showing here on the slide back in 2018. Well, I’ve already told you that we can’t change a bonus decision. But what if we didn’t use bonus back in 2018? We opted out and we elected Section 179? Could we amend that 2018 return and opt out of Section 179 or reduce the amount of 179 election we made in 2018? And the answer is yes. Now that’s going to impact the returns all the way flowing through. So we’re going to have to look at 19 and 20 as well. But is it a possibility to get a do over on a 2018 return?
So here we are folks, one week left to go. I’m just trying to find a way for us to not leave any money on the table that belongs to our taxpayers. So getting them off the Schneid to get that 2018 return filed if it hasn’t been done yet. Or perhaps you get that second look and to do a do over on the 2018 return. Again, we’re here for you. We have one week left to go. Take a deep breath. Follow the old mantra of how to eat an elephant, which is one bite at a time. And for all of us here at the University of Illinois Tax School, this is Tom O’Saben, saying we’ll say goodbye for just a while.
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