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The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

Distributions for Emergency Personal Expenses

Code Sec. 72(t)(2)(I) provides an exception to the 10 percent additional tax for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. The term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The IRS specifically noted that emergency expenses could be related to: medical care; accident or loss of property due to casualty; imminent foreclosure or eviction from a primary residence; the need to pay for burial or funeral expenses; auto repairs; or any other necessary emergency personal expenses.

The IRS provides that a plan administrator or IRA custodian may rely on a written certification from the employee or IRA owner that they are eligible for an emergency personal expense distribution. Furthermore, the IRS provides that an emergency personal expense distribution is not treated as a rollover distribution and thus is not subject to mandatory 20% withholding. However, the distribution is subject to withholding, the IRS said. If the emergency personal expense distribution is repaid, it is treated as if the individual received the distribution and transferred it to an eligible retirement plan within 60 days of distribution.

If an otherwise eligible retirement plan does not offer emergency personal expense distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is an emergency personal expense distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Distributions to Domestic Abuse Victims

Code Sec. 72(t)(2)(K) provides an exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). The guidance defines a"domesticabusevictimdistribution" as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. "Domesticabuse" is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.

As with distributions for emergency personal expenses, a retirement plan may rely on an employee’s written certification that they qualify for a domestic abuse victim distribution. Similarly, if an otherwise eligible retirement plan does not offer domestic abuse victim distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is a domestic abuse victim distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Request for Comments

The Treasury Department and the IRS invite comments on the guidance, and specifically on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

Specifically targeted by this new tax compliance effort are partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities (related parties) enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These basis shifting transactions allow closely related parties to avoid taxes.

The use of these abusive transactions grew during a period of severe underfunding for the IRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period, according to an IRS News Release.

"Using Inflation Reduction Act funding, we are working to reverse more than a decade of declining audits among the highest income taxpayers, as well as complex partnerships and corporations," IRS Commissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.

"This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long," said IRS Commissioner Danny Werfel. "We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here".

This multi-stage regulatory effort announced by the Treasury and IRS includes the following guidance designed to stop the use of basis shifting transactions that use related-party partnerships to avoid taxes:

• proposed regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold;

• proposed regulation to require taxpayers and their material advisers to report if they and their clients are participating in abusive partnership basis shifting transactions; and

• a Revenue Rulingproviding that certain related-party partnership transactions involving basis shifting lack economic substance.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," said U.S. Secretary of the Treasury Janet L. Yellen.

In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of large partnerships with average assets over $10 billion dollars and larger organizational changes taking place to support compliance efforts, including the creation of a new associate office that will focus exclusively on partnerships, S corporations, trusts, and estates.

By Catherine S. Agdeppa, Content Management Analyst

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

The concept was promoted by multiple witnesses testifying during a recent Senate Finance Committee hearing on the subject of child savings accounts and other tax advantaged accounts that would benefit children. It also is the subject of a recently released report from The Tax Foundation.

Rather than push new limited-use savings accounts, "policymakers may want to consider enacting a more comprehensive savings program such as a universalsavingsaccount," Veronique de Rugy, a research fellow at George Mason University, testified before the committee during the May 21, 2024, hearing. "Universalsavingsaccounts will allow workers to save in one simple account from which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."

She noted that, like other more focused savings accounts, like health savings accounts, it would have "the benefit of sheltering some income from the punishing double taxation that our code imposes."

De Rugy added that universal savings accounts "have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawals would stop them from addressing an emergency in their family."

Adam Michel, director of tax policy studies at the Cato Institute, who also promoted the idea of universal savings accounts. He said these accounts "would allow families to save for their kids or any of life’s other priorities. The flexibility of these accounts make them best suited for lower and middle income Americans."

He also noted that they are promoting savings in countries that have implemented them, including Canada and United Kingdom.

"For example, almost 60 percent of Canadians own tax-free savingsaccounts," Michel said. "And more than half of those account holders earned the equivalent of about $37,000 a year. These accounts have helped increase savings and support the rest of the Canadian savings ecosystem."

De Rugy noted that in countries that have implemented it, they function like a Roth account in that money that has already been taxed can be put into it and not penalized or taxed upon withdrawal.

Michel also noted that the if the tax benefits extend to corporations as they do with deposits to employee health savings accounts, "to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment into savings by those entities."

Simulating The Universal Savings Account Impact

The Tax Foundation in its report simulated how a universal savings account could work, based on how they are implemented in Canada. The simulation assumed the accounts could go active in 2025 for adults aged 18 years or older.

On a post-tax basis, individuals would be allowed to contribute up to $9,100 on a post-tax basis annually, with that cap indexed for inflation. Any unused "contribution room" would be allowed to be carried forward. Earnings would be allowed to grow tax-free and withdrawals would be allowed for any purpose without penalty or further taxation. Any withdrawal would be added back to that year’s contribution room and that would be eligible for carryover as well.

"The fiscal cost of this USA policy would be offset by ending the tax advantage of contributions to HSAs beginning in 2025," the report states. "As such, future contributions to HSAs would be given normal tax treatment, i.e. included in taxable income and subject to payroll tax with subsequent returns on contributions also included in taxable income."

In this scenario, the Tax Foundation report estimates that "this policy change would on net raise tax revenue by about $110 billion over the 10-year budget window."

As for the impact on taxpayers, the "after-tax income would fall by about 0.1 percent in 2025 and by a smaller amount in 2034, reflecting the net tax increase in those years," the report states. "Over the long run, and accounting for economic impacts, taxpayers across every quintile would see a small increase in after-tax income on average, but the top 5 percent of earners would continue to see a small decrease in after-tax income on average."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

In a report issued June 5, 2024, the federal government watchdog noted that while the agency uses AI to improve the efficiency and selection of audit cases to help identify noncompliance, "IRS has not completed its documentation of several elements of its AI sample selection models, such as key components and technical specifications."

GAO noted that the IRS began using AI in a pilot in tax year 2019 for sampling tax returns for NRP audits. The current plan is to use AI to create a sample size of 4,000 returns to measure compliance and help inform tax gap estimates, although GAO expressed concerns about the accuracy of the estimates with that sample size.

"For example, NRP historically included more than 2,500 returns that claimed the Earned Income Tax Credit, but the redesigned sample has included less than 500 of these returns annually," the report stated.

IRS told GAO that it "is exploring ways to combine operational audit data with NRP audit data when developing its taxgapestimates. IRS officials also told us that if IRS can reliably combine these data for taxgap analysis, IRS might be better positioned to identify emerging trends in noncompliance and reduce the uncertainty of the estimates due to the small sample size."

The report also highlighted the fact that the agency "has multiple documents that collectively provide technical details and justifications for the design of the AI models. However, no set of documents contains complete information and IRS analyst could use to run or update the models, and several key documents are in draft form."

"Completing documentation would help IRS retain organizational knowledge, ensure the models are implemented consistently, and make the process more transparent to future users," the report stated.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service is still working on the details of how it is going to help taxpayers that may have fallen for deceptive marketing that led them to improperly receive employee retention tax credits.

The Internal Revenue Service is still working on the details of how it is going to help taxpayers that may have fallen for deceptive marketing that led them to improperly receive employee retention tax credits.

Internal Revenue Service Commissioner Daniel Werfel said that the agency is still working to figure out the process of how to help those who have already received their ERC "and now realize they believe they received it inappropriately," including how to come forward preemptively before the IRS takes collection action against them, as well as "on settlement terms for paying back in a way we hope works out for those companies economically."

He also noted the agency is working on updating its procedures "for how we review credits, how we communicate with stakeholders to make sure there’s exact clarity, and we’re even stronger in our outreach in terms of what are the issues that we see companies in thinking they’re eligible when they are not." Werfel made his comments November 14, 2023, at the AICPA & CIMA National Tax & Sophisticated Tax Conference.

The IRS already has issued procedures on how taxpayers can withdraw claims for the employee retention credit if the claim has not been processed, as well as placed a moratorium on processing claims until at least the end of year.

Werfel also used his speech to reiterate previously highlighted improvements in customer service and compliance and enforcement following the supplemental funding provided by the Inflation Reduction Act.

National Taxpayer Advocate Erin Collins also acknowledged the improvement in the wake of the issues that arose during the COVID-19 pandemic.

"The good news is the IRS is in a much better place than it was over the last three years," Collins said during the conference. "The not-so-good news is we still have a long way to go."

In particular, she targeted the continued filing of paper returns as a key contributor to delays in processing returns and other correspondence. The IRS has been working to improve the abilities to filing tax returns and other correspondence electronically as a means of speeding up the processing, and she noted that what has been accomplished thus far "is a good thing."

However, she noted that another challenge is that even if they are electronically filed, they are still manually processed and more work needs to be done to improve the technology to help get them electronically processed.

By Gregory Twachtman, Washington News Editor

The IRS has announced that calendar year 2023 would continue to be regarded as a transition period for enforcement and administration of the de minimis exception for reporting by third party settlement organizations (TPSO) under Code Sec. 6050W(e).

The IRS has announced that calendar year 2023 would continue to be regarded as a transition period for enforcement and administration of the de minimis exception for reporting by third party settlement organizations (TPSO) under Code Sec. 6050W(e). The IRS has also planned for a threshold of $5,000 for tax year 2024 to phase in implementation. Previously, in Notice 2023-10, the IRS announced that 2022 would be regarded as a transition period for the same issue. Specifically, the transition period focuses on the implementation of the amendment to Code Sec. 6050W(e) by the American Rescue Plan Act of 2021 (P.L. 117-2) that lowered the de minimis exception for TPSOs to $600.

Background

Code Sec. 6050W requires a TPSO to file an information return (Form 1099-K) each calendar year to report the annual gross amount of reportable payment transactions to the IRS and provide a copy of the return to the participating payee. A de minimis exception to this reporting requirement is provided in Code Sec. 6050W(e). Prior to the amendment by the American Rescue Plan Act, a TPSO was exempt from the reporting requirement if the gross amount that would otherwise be reported did not exceed $20,000 and the number of such transactions with that participating payee did not exceed 200. Section 9674(a) of the American Rescue Plan Act amended the de minimis exception to require a TPSO to file an information return if the gross amount of total reportable payment transactions exceeds $600, effective for tax years beginning after December 31, 2021.

Transition Period

Notice 2023-74 extends the transition period issued under Notice 2023-10 to the 2023 calendar tax year. Under the transition period, a TPSO would not be required to file Form 1099-K to report payments in settlement of third-party network transactions unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. Further, a TPSO exempt from reporting due to the transition period would not be subject to penalties under Code Secs. 6721 or 6722 for the failure to file or furnish Form 1099-K.

The transition period is limited to the amendments made by the American Rescue Plan Act to Code Sec. 6050W(e) and does not apply to other requirements under Code Sec. 6050W. In addition, the transition period does not apply to backup withholdings under Code Sec. 3406(a). TPSOs that have performed backup withholding for a payee during calendar year 2023 must file a Form 945 and a Form 1099-K with the IRS provide copies to the participating payee if total reportable payments to the payee exceeded $600.

The IRS has released the annual inflation adjustments for 2024 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2024 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2024 Income Tax Brackets

For 2024, the highest income tax bracket of 37 percent applies when taxable income hits:

• $731,200 for married individuals filing jointly and surviving spouses,
• $609,350 for single individuals and heads of households,
• $365,600 for married individuals filing separately, and
• $15,200 for estates and trusts.

2024 Standard Deduction

The standard deduction for 2024 is:

• $29,200 for married individuals filing jointly and surviving spouses,
• $21,900 for heads of households, and
• $14,600 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,300 or
• the sum of $450, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,550 for married taxpayers and surviving spouses, or
• $1,950 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2024

The AMT exemption for 2024 is:

• $133,300 for married individuals filing jointly and surviving spouses,
• $85,700 for single individuals and heads of households,
• $66,650 for married individuals filing separately, and
• $29,900 for estates and trusts.

The exemption amounts phase out in 2024 when AMTI exceeds:

• $1,218,700 for married individuals filing jointly and surviving spouses,
• $609,350 for single individuals, heads of households, and married individuals filing separately, and
• $99,700 for estates and trusts.

Expensing Code Sec. 179 Property in 2024

For tax years beginning in 2024, taxpayers can expense up to $1,220,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $3,050,000.

Estate and Gift Tax Adjustments for 2024

The following inflation adjustments apply to federal estate and gift taxes in 2024:

• the gift tax exclusion is $18,000 per donee, or $185,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $13,610,000; and
• the maximum reduction for real property under the special valuation method is $1,390,000.

2024 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2024 is $126,500.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2024 Adjustments

These inflation adjustments generally apply to tax years beginning in 2024, so they affect most returns that will be filed in 2025. However, some specified figures apply to transactions or events in calendar year 2024.

The 2024 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2023 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2024 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2023 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The SECURE 2.0 Act (P.L. 117-328) made some retirement-related amounts adjustable for inflation beginning in 2024. These amounts, as adjusted for 2024, include:

• The catch up contribution amount for IRA owners who are 50 or older remains $1,000.
• The amount of qualified charitable distributions from IRAs that are not includible in gross income is increased from $100,000 to $105,000.
• The limit on one-time qualified charitable distributions made directly to a split-interest entity is increased from $50,000 to $53,000.
• The dollar limit on premiums paid for a qualifying longevity annuity contract (QLAC) remains $200,000

Highlights of Changes for 2024

The contribution limit has increased from $22,500 to $23,000 for employees who take part in:

• -401(k),
• -403(b),
• -most 457 plans, and
• -the federal government’s Thrift Savings Plan

The annual limit on contributions to an IRA increased from $6,500 to $7,000.

The catch-up contribution limit for individuals aged 50 and over is subject to an annual cost-of-living adjustment beginning in 2024 but remains $1,000.

The income ranges increased for determining eligibility to make deductible contributions to:

• -IRAs,
• -Roth IRAs, and
• -to claim the Saver's Credit.

Phase-Out Ranges

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• -For single taxpayers covered by a workplace retirement plan, the phase-out range is $77,000 to $87,000, up from between $73,000 and $83,000.
• -For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $123,000 to $143,000, up from between $116,000 and $136,000.
• -For an IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $230,000 and $240,000, up from between $218,000 and $228,000.
• -For a married individual covered by a workplace plan filing a separate return, the phase-out range remains between $0 and $10,000.
• The phase-out ranges for Roth IRA contributions are:
• -$146,000 and $161,000, for singles and heads of household,
• -$230,000 and $240,000, for joint filers, and
• -$0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• -76,500 for joint filers,
• -$57,375 for heads of household, and
• -$38,250 for singles and married separate filers.

The IRS reminded taxpayers who may be entitled to claim Recovery Rebate Credit (RRC) to file a tax return to claim their credit before the April-May, 2024 deadlines. It has been estimated that certain individuals are still eligible to claim RRC for years 2020 and 2021. The deadlines to file a return and claim the 2020 and 2021 credits are May 17, 2024, and April 15, 2025, respectively. Additionally, the IRS reminded that taxpayers must first file a tax return to make their RRC claims irrespective of income slab and source of income.

The IRS reminded taxpayers who may be entitled to claim Recovery Rebate Credit (RRC) to file a tax return to claim their credit before the April-May, 2024 deadlines. It has been estimated that certain individuals are still eligible to claim RRC for years 2020 and 2021. The deadlines to file a return and claim the 2020 and 2021 credits are May 17, 2024, and April 15, 2025, respectively. Additionally, the IRS reminded that taxpayers must first file a tax return to make their RRC claims irrespective of income slab and source of income.

The Recovery Rebate Credit, is a refundable credit for those who missed out on one or more Economic Impact Payments such as stimulus payments which were issued in 2020 and 2021. The persons eligible to claim the 2020 and 2021 RRC must:

• have been a U.S citizen or U.S resident alien in the respective year;
• not have been a dependent of another taxpayer for the respective year;
• have a social security number issued before the due date of the tax return which is valid for employment in the U.S;
• for 2021 RRC- have a valid social security number as above or claim a dependent who has a Social Security number issued by the due date of the tax return, or claim a dependent with an Adoption Taxpayer Identification Number.

For qualified taxpayers who require one-on-one tax preparation help, they can avail the same through the Free tax return preparation assistance available on the IRS website. The IRS urges people to look into possible benefits available to them under the tax law. People can make use of their IRS Online Account also to keep track of payments due to them.

The Internal Revenue Service is looking to improve its customer service metrics as well as improve its technology offerings in the coming tax filing season.

The Internal Revenue Service is looking to improve its customer service metrics as well as improve its technology offerings in the coming tax filing season.

Building on the supplemental funding from the Inflation Reduction Act, the IRS has already seen improvements to its phone service and is now looking to improve on it.

"Massive investments in customer service mean taxpayers will get the information and support they deserve," Department of the Treasury Secretary Janet Yellen said November 7, 2023, during an event at IRS headquarters.

For the 2024 tax filing season, the IRS is committed to maintaining the 85 percent level of service it achieved in the 2023 filing season on the agency’s main taxpayer help line. It also is targeting a hold time of five minutes or less while offering 95 percent call back availability when projected wait times are expected to exceed 15 minutes.

IRS Commissioner Daniel Werfel, speaking at the event, also highlighted a trust target.

"This past filingseason, 84 percent of taxpayers who interacted with our phone assisters stated that this interaction increased their trust in the IRS," Werfel said. "That’s up from 70 percent two years ago. In the coming filingseason, we want to continue to again [the Office of Management and Budget’s] trust goal of 75 percent."

Yellen also highlighted how the "Where’s My Refund?" tool will be improved for the coming season, including incorporating "conversational voice-bot technology to help taxpayers get answers more quickly, and it will provide clearer and more detailed information so taxpayers can address barriers to processing their returns and receive their refunds quickly."

She also said that Taxpayer Assistance Centers increase the hours of face-to-face assistance provided by more than 8,000 hours compared to what was provided in the 2023 filing season.

Yellen also stated that the IRS has met a technology goal and in the 2024 filing season, taxpayers will be able to "digitally upload all correspondence and responses to notices instead of mailing them. … The impact will be significant and far reaching. Taxpayers will save time and effort. The IRS will reduce errors and storage costs and will speed up processing time for the system as a whole."

Additionally, there will be 20 more forms that taxpayers can electronically file in the 2024 filing season.

Yellen and Werfel also reiterated recent announcements on compliance and enforcement efforts and committed to continuing to ensure everyone is paying their fair share of taxes owed.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service announced the launch of the first phase of rolling out business taxpayer accounts, as well as enable taxpayers to respond to notices online.

The Internal Revenue Service announced the launch of the first phase of rolling out business taxpayer accounts, as well as enable taxpayers to respond to notices online.

In an October 20, 2023, statement, the agency announced that the first phase will allow "unincorporated sole proprietors who have an active Employer Identification Number to set up a business tax account, where they can view their business profits and manage authorized users."

The IRS noted that the business tax accounts will expand to allow taxpayers "to view letters or notices, request transcripts, add third parties for power of attorney or tax information authorizations, schedule or cancel tax payments, and store bank account information."

The business tax accounts were enabled by the agency’s receiving of supplemental funding from the Inflation Reduction Act.

Another technology improvement announced allowing taxpayers to respond online to notices, something that previously required responses via mail.

"During the filing season 2023, taxpayers were able to respond to 10 of the most common notices for credits like the Earned Income and Health Insurance Tax Credits online, saving them time and money," the agency reported, adding that as of September 29, 2023, it has received more than 32,000 responses to notices via the online tool.

Additionally, the IRS will now accept electronic submissions for three forms via a mobile device-friendly forms. Those forms include:

• Form 15109, Request for Tax Deferment;
• Form 14039, Identity Theft Affidavit; and
• Form 14242, Reporting Abusive Tax Promotions and/or Preparers

The next form expected to have a mobile-friendly option later this fall is Form 13909, Tax-Exempt Organization Complaint, and at least 20 more of the most-used tax forms will have mobile device availability in early 2024, the IRS stated.

"An estimated 15 percent of Americans rely solely on mobile phones for their internet access – they do not have broadband at home – so it is important to make forms available in mobile-friendly formats," the agency sad.

For tax professionals, their online accounts also received enhancements, including helping practitioners manage their active client authorizations on file with the Centralized Authorization File database as well as the ability to view their client’s tax information, including balance due.

By Gregory Twachtman, Washington News Editor

For 2024, the Social Security wage cap will be $168,600, and social security and Supplemental Security Income (SSI) benefits will increase by 3.2 percent. These changes reflect cost-of-living adjustments to account for inflation.

The Internal Revenue Service could release as soon as today the process that businesses can use to withdraw employee retention credit claims.

The Internal Revenue Service could release as soon as today the process that businesses can use to withdraw employee retention credit claims.

The move comes in the wake of the agency announcing that it is halting the processing of new ERC claims until at least the beginning of 2024 and scrutinizing existing claims due to the prevalence of suspected fraudulent claims following a spike in claims in 2023 coupled with the saturation marketing by so-called ERC mills. Thus far, the IRS closer examination of claims has led to thousands already being submitted for auditing.

As part of the heightened scrutiny of claims, the IRS said it would create a process by which businesses would have the ability to withdraw claims before they are processed if they do a more thorough review and determine the claim is not actually a valid claim for the credit that was created as part of the CARES Act to help businesses that may have lost income retain employees during the COVID-19 pandemic.

"I learned this morning that there is going to be an announcement tomorrow [October 19, 2023] on the withdrawal process initiative that the Service is going to be initiating," Linda Azmon, special counsel at the IRS’s Tax Exempt and Government Entities Division, said October 18, 2023, during a session of the American Bar Association’s Virtual 2023 Fall Tax Meeting.

Azmon said that "taxpayers who have not received their claims for refund will be entitled to participate in this process," adding that there is "going to be specific procedures that taxpayers can follow to request their withdrawal of their claims for refund."

She did not provide any specific information on what the process entails, but noted that requesting a withdrawal "means that a taxpayer is requesting that the amended return not be processed at all. And it’s going to be required that the complete return be withdrawn." This is limited to taxpayers who have not had their claim processed, have not received their check or who have the check but have not yet cashed it.

One of the reasons a taxpayer may want to withdraw a claim is "taxpayers have been advised that the only way the Service can recapture claims for refund is through the erroneous refund procedures," she said. "That usually means the service asks for the funds back and if they don’t receive it, the Service asks [the] Department of Justice to bring suit within two years of the payment."

But Azmon points out that taxpayers being told this are being given information that is not entirely correct, as the agency has issued final regulations that allow the IRS to treat an erroneous refund as an underpayment of tax subject to the regular assessment and administrative collections procedures.

"This is a way for the service to recover funds that a taxpayer should have received in an efficient way without the cost of litigation," she said. "And it still provides the administrative processing rights for taxpayers to dispute their claims" without the cost of litigation.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service detailed how it is proceeding with a pilot program that will allow taxpayers to file their taxes directly on the IRS website as an option along with doing an electronic file or working through a tax professional or other third-party tax preparer.

The IRS released substantial new guidance regarding the new clean vehicle credit and the used clean vehicle credit. The guidance updates procedures for manufacturer, dealer and seller registrations and written reports; and provides detailed rules for a taxpayer’s election to transfer a credit to the dealer after 2023. The guidance includes:

The IRS released substantial new guidance regarding the new clean vehicle credit and the used clean vehicle credit. The guidance updates procedures for manufacturer, dealer and seller registrations and written reports; and provides detailed rules for a taxpayer’s election to transfer a credit to the dealer after 2023. The guidance includes:

• -- Rev. Proc. 2023-33, which is scheduled to be published on October 23, 2023, in I.R.B. 2023-43;
• -- NPRM REG-113064-23, which is scheduled to published in the Federal Register on October 10, 2023; and
• -- IRS Fact Sheet FS-2023-22, which updates the IRS Frequently Asked Questions (FAQs) for the clean vehicle credits.

The proposed regs are generally proposed to apply to tax years beginning after they are published in the Federal Register. However, the proposed regs for transferring credits to dealers are proposed to apply beginning on January 1, 2024, which is when the transfer election becomes available. Proposed regs for treating the omission of a correct vehicle identification number (VIN) as a mathematical or clerical error would also apply to the Code Sec. 45W clean commercial vehicle credit. They are proposed to apply to tax years beginning after December 31, 2023.

Comments are requested. Rev. Proc. 2022-42 is superseded in part.

Proposed Regs for the Clean Vehicle Credits

For purposes of the new clean vehicle credit, the used clean vehicle credit, and the commercial clean vehicle credit, the proposed regs would treat a taxpayer as having omitted the required correct vehicle identification number (VIN) for the vehicle if the VIN is missing from the taxpayer’s return or the number reported on the return is an invalid VIN. An invalid VIN is a number that does not match any existing VIN reported by a qualified manufacturer. A taxpayer would also be treated as omitting the VIN if the provided VIN is not for a qualified vehicle for the year the credit is claimed.

With respect to the new clean vehicle credit and the used clean vehicle credit, the proposed regs would clarify that taxpayer must file an income tax return for the year the clean vehicle is placed in service, including a Form 8936, Clean Vehicle Credits. The taxpayer is treated as having omitted the vehicle’s correct VIN if the VIN on the taxpayer’s return does not match the VIN in the seller’s report. In addition, a dealer under the proposed regs would not include persons licensed solely by a U.S. territory. To facilitate direct-to-consumer sales, a dealer generally could make sales outside the jurisdiction where it is licensed; however, it could not make sales at sites outside its own jurisdiction.

New Rules for Used Clean Vehicle Credit

The proposed regs would clarify that a vehicle’s eligibility for the used vehicle credit is not affected by a title that indicates it has been damaged or an otherwise a branded title. In addition, the used vehicle credit could not be divided among multiple owners of a single vehicle. With respect to the MAGI limit for eligible taxpayers, if the taxpayer's filing status for the tax year differs from the taxpayer's filing status in the preceding tax year, the taxpayer would satisfy the limit if MAGI does not exceed the threshold amount in either year based on the applicable filing status for that tax year. These last two rules are consistent with earlier proposed regs for the new clean vehicle credit.

The proposed regs would provide a first transfer rule, under which a qualified sale must be the first transfer of the previously-owned clean vehicle since August 16, 2022, as shown by the vehicle history of such vehicle, after the sale to the original owner. The rule would ignore transfers between dealers. The taxpayer generally could rely on the dealer’s representation of the vehicle history; however, taxpayers would also be encouraged to independently examine the vehicle history to confirm whether the first transfer rule is satisfied.

Under the proposed regs, a used vehicle’s sale price would include delivery charges, as well as fees and charges imposed by the dealer. The sale price it would not include separately-stated taxes and fees required by law, separate financing, extended warranties, insurance or maintenance service charges.

Cancellation of Sale, Return of Clean Vehicle, and Resale of Clean Vehicle

The proposed regs would clarify that a taxpayer cannot claim a clean vehicle credit if the sale is canceled before the taxpayer places th vehicle in service (that is, before the taxpayer takes delivery). The credits also would not be available if the taxpayer returns the vehicle within 30 days after placing it in service. A returned new clean vehicle would no longer qualify as a new clean vehicle. However, a returned used clean vehicle could continue to qualify for the credit if the vehicle history does not reflect the sale and return. A vehicle’s return would nullify any election the taxpayer made to transfer the credit for the vehicle.

Under the proposed regs, a taxpayer acquires a clean vehicle for resale if the resale occurs withing 30 days after the taxpayer places the vehicle in service. The resold vehicle would not qualify for either credit. If the taxpayer elected to transfer the credit, the election remains valid after the resale; thus, the credit is recaptured from the taxpayer, not from the dealer.

Taxpayers returning or reselling a clean vehicle more than 30 days after the date the taxpayer placed it in service would generally remain eligible for the applicable clean vehicle credit for purchasing the vehicle. Any election to transfer the taxpayer’s credit to the dealer also remains in effect. The returned or resold vehicle would not remain eligible for either credit. However, the IRS could disallow the credit if, based on the facts and circumstances, it determines that the taxpayer purchased the vehicle with the intent to resell or return it

Taxpayer's Election to Transfer Clean Vehicle Credit to Dealer

A taxpayer that elects to transfer a credit to a registered dealer must transfer the entire amount of the allowable credit. Each taxpayer may transfer a total of two credits per year (either two new clean vehicle credits, or one new clean vehicle credit and one used clean vehicle credit). This is the case even if married taxpayers file a joint return. A transfer election is irrevocable.

Under the proposed regs, the amount of a clean vehicle credit an electing taxpayer could transfer could exceed the electing taxpayer’s regular tax liability; and the amount of a transferred credit would not be subject to recapture merely because it exceeds the taxpayer’s tax liability. The dealer’s payment for the transferred credit, whether in cash or as a partial payment or down payment for the vehicle, is not includible in the electing taxpayer’s gross income. To ensure that the credit properly reduces the taxpayer’s basis in the vehicle, the electing taxpayer is treated as repaying the payment to the dealer as part of the purchase price of the vehicle.

Both the electing taxpayer and the dealer must make detailed disclosures and attestations. Some of these disclosures must be made to the other party, and some must be made through the IRS Energy Credits Online Portal. All must be made no later than the time of the sale. A taxpayer cannot transfer any portion of the new clean vehicle credit that is treated as part of the general business credit.

A seller or a registered dealer must retain records of transferred credits for at least three years after the taxpayer makes the credit transfer election or a seller files its report for the sale.

Manufacturer, Dealer and Seller Registration and Report Requirements

Clean vehicle manufacturers, sellers and dealers must register through an IRS Energy Credits Online Portal that should be available on the IRS website later this month. A representative of the manufacturer, seller or dealer will have to create or sign into an account on irs.gov. Registration help is available at www.irs.gov/registerhelp. Manufacturers, sellers and dealers may check IRS.gov/cleanvehicles for updates.

Taxpayers and sellers may rely on information and certifications by a qualified manufacturer providing that a vehicle is eligible for the new clean vehicle credit or the used clean vehicle credit. However, this reliance is limited to information regarding the vehicle’s eligibility for the applicable credit.

Rev. Proc. 2023-33 details the required registration information for sellers and dealers. The IRS will confirm the information or notify the seller or dealer that it has been unable to do so. If the IRS accepts a dealer registration, it will issue a unique dealer identification number. If the IRS rejects the registration, the dealer may request administrative review.

s for a qualified manufacturer’s written agreement with and a dealer’s written reports to the IRS before January 1, 2024, manufacturers and sellers may still use the procedures described in Rev. Proc. 2022-42. However, as of January 1, 2024, qualified manufacturers must have entered into written agreements with the IRS via the IRS Energy Credits Online Portal, even if they previously registered and filed written agreements under Rev. Proc. 2022-42. Also as of January 1, 2024, qualified manufacturers and sellers must use the Portal to file their required reports to the IRS.

A seller must file its report within three calendar days of the sale, and provide a copy to the taxpayer within another three days. If the information in the report does not match information in IRS records, the IRS may reject the report and notify the seller. The seller must notify the buyer within three calendar days. If the IRS rejects a seller report, a dealer will not be eligible for advance credit payments. A seller must also use the Portal to update or rescind information for a scrivener’s error or the cancellation of a sale as promptly as possible (the seller must also file a new report noting the return of a vehicle). The seller must notify the buyer within three calendar days and provide a copy of the updated or rescinded report.

Advance Credit Payments to Dealers

When a buyer elects to transfer a clean vehicle credit to a dealer, the advance credit program allows the dealer to receive payment of the credit before the dealer files its tax return. The proposed regs would clarify that the advance payments are not included in the dealer’s income and they may exceed the dealer’s tax liability. The dealer cannot deduct the payment made to the electing taxpayer. The advance payment is included in the amount realized by the dealer on the sale of the clean vehicle. If the dealer is a partnership or an S corporation, the advance payment is not treated as exempt income.

To receive advance credit payments, the registered dealer must be an eligible entity under the proposed regs. An eligible entity is a registered dealer that submits additional registration information and is in dealer tax compliance. The IRS will conduct dealer tax compliance checks before disbursing an advance credit payment, and also on a continuing and regular basis.

Dealer tax compliance means that, for all tax periods during the most recent five tax years, the dealer has filed all of its required federal information and tax returns, including for federal income and employment tax; and paid all federal tax, penalties, and interest due at the time of sale (or is current on its obligations under any installment agreement with the IRS). The dealer must also retain information related to the vehicle sale or credit transfer for at least three years. A dealer that does not satisfy this test may still be a registered dealer, but it cannot be an eligible entity until the tax compliance issue is resolved.

The dealer that receives the transferred credit must provide the qualified vehicle’s VIN, the seller report, and the required taxpayer disclosure information through the IRS Energy Credits Online Portal. The IRS will disburse advance payments of the credits only through electronic payments; it will not issue any paper checks.

The IRS may suspend a registered dealer’s eligibility to participate in the advance payment program for sever reasons, including the provision of inaccurate information regarding eligible for the credit; failure to satisfy dealer tax compliance requirements; and failure to properly use the IRS Energy Credits Online Portal. The IRS will notify the dealer of its suspension, and give the dealer an opportunity correct the errors. If a suspended dealer does not correct the errors withing one year, the IRS will revoke its registration.

The IRS may also revoke a dealer’s registration to receive transferred credits and its eligibility for the advance payment program for failure to comply with the registration or tax compliance requirements, for losing its dealer license, for providing inaccurate information, for failing to retain required records for three years, or if it is suspended three times in the preceding year. The IRS will notify the dealer within 30 days of its decision to revoke eligibility for the advance payment program, and the dealer may request administrative review of the decision. The dealer may re-register after one year, but will be permanently barred after three revocations.

The proposed regs would provide that a dealer could not administratively appeal the IRS’s decisions relating to the suspension or revocation of a dealer’s registration unless the IRS and the IRS Independent Office of Appeals agree that such review is available and the IRS provides the time and manner for the review.

Comments Requested

The IRS requests comments on the proposed regs. Comments and requests for a public hearing must be received by December 11, 2023. They may be mailed to the IRS, or submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-113064-23).

Effect on Other Documents

Rev. Proc. 2023-33 supersedes in part Rev. Proc. 2022-42, I.R.B. 2022-52 , 565.

Proposed Regulations, NPRM REG-113064-23

Rev. Proc. 2023-33

FS-2023-22

IR-2023-186

The IRS has released the 2023-2024 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

The IRS has released the 2023-2024 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS), and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2023-2024 special per diem rates are:

• $309 for travel to any high-cost locality, and
• $214 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

The IRS provided guidance on the new energy efficient home credit, as amended by the Inflation Reduction Act of 2022 (P.L. 117-169). The guidance largely reiterates the statutory requirements for the credit, but it provides some new details regarding definitions, certifications and substantiation.

The IRS provided guidance on the new energy efficient home credit, as amended by the Inflation Reduction Act of 2022 (P.L. 117-169). The guidance largely reiterates the statutory requirements for the credit, but it provides some new details regarding definitions, certifications and substantiation.

Definitions

For purposes of the requirement that a home must be acquired from an eligible contractor, a home leased from the contractor for use as a residence is considered acquired from the contractor. However, a home the contractor retains for use as a residence is not acquired from the contractor. A manufactured home may be acquired directly from the contractor, or indirectly from an intermediary that acquired it from the contractor and then sold or leased it to a buyer for use as a residence, or to intervening intermediaries that eventually sold it to a buyer for use as a residence.

For a constructed home, the eligible contractor is the person that built and owned the home and had a basis in it during its construction. For a manufactured home, the eligible contractor is the person that produced the home and owned and had a basis in it during its production.

The United States includes only the states and the District of Columbia.

Certifications

A dwelling unit that is certified under the applicable Energy Star program is considered to meet the program requirements for purposes of the credit. Similarly, a dwelling unit that is certified under the Zero Energy Ready Home (ZERH) program is deemed to meet the requirements for the credit for a ZERH. The ZERH program in effect for purposes of the credit is the one in effect as of the date identified on the Department of Energy’s ZERH webpage at https://www.energy.gov/eere/buildings/doe-zero-energy-ready-home-zerh-program-requirements.

The eligible contractor must obtain the appropriate Energy Star or ZERH certification before claiming the credit. The contractor should keep the certification with its tax records, but does not have to file it with the return that claims the credit.

Rules for homes acquired before 2023, under which eligible certifiers could certify a home and contractors could use approved software to calculate a new home’s energy consumption, do not apply to a home acquired after 2022.

Substantiation

To substantiate the credit, the contractor must retain in its tax records, at a minimum, the home's Energy Star or ZERH certification, including its date; and records sufficient to establish:

1. the address of the qualified home and its location in the United States;
2. the taxpayer’s status as an eligible contractor;
3. the acquisition of the home from the taxpayer for use as a residence, including the name of the person who acquired it; and
4. if applicable, proof that the prevailing wage requirements were met.

However, for a manufactured home the contractor sells to a dealer, a safe harbor allows the contractor to rely on a statement by the dealer to establish the date the home was acquired, its location in the United States, and its acquisition for use as a residence. The statement must:

1. Specify the date of the retail sale of the manufactured home, state that the dealer delivered it to the purchaser at an address in the United States, and provide that the dealer has no knowledge of any information suggesting that the purchaser will use the manufactured home other than as a residence;
2. Provide the name, address and telephone number of the dealer and any intervening intermediaries; and
3. Declare, under penalties of perjury, that the dealer statement and any accompanying documents are true, correct and complete.

Effect on Other Documents

Notice 2008-35, 2008-1 CB 647, and Notice 2008-36, 2008-1 CB 650, are obsoleted for qualified homes acquired after December 31, 2022.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be raised for slaughter, held for sporting purposes or be poultry.

Second, the taxpayer must have held the converted livestock for:

• draft,
• dairy, or
• breeeding purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

• ends on August 31 in or after the last year of the four-year replacement period, and
• does not include any weekly period of drought.

What Areas are Suffering from Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

http://droughtmonitor.unl.edu/Maps/MapArchive.aspx

However, the IRS also provided a list of areas where the year ending on August 31, 2023, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

With the Internal Revenue Service announcing more details on how it will be targeting America’s wealthiest taxpayers, Kostelanetz’s Megan Brackney offered up some advice on preparing for increased compliance activity.

With the Internal Revenue Service announcing more details on how it will be targeting America’s wealthiest taxpayers, Kostelanetz’s Megan Brackney offered up some advice on preparing for increased compliance activity.

The first step, especially for those that fall within the agency’s announced parameters for who is being targeted, is to review recent tax filings. The agency announced in September it would be targeting large partnerships.

"I would say to look back over the last three years because that’s the typical statute of limitations period for the IRS to audit and assess, maybe look back even a little bit longer," Brackney, partner at the law firm, said in an interview.

In particular, she recommended a focus on major financial transactions.

"Look at significant transactions and make sure that you have all the substantiation because a lot of times, the issue isn’t so much a legal question or anything to complex," she continued. "It’s just whether or not you know [for example if] the partnership sold an asset, do they actually have records that substantiate their basis?"

Brackney expects that after the agency completes its work on the largest partnerships, it will continue this kind of compliance work on those high earning partnerships that may be outside of the original targeted thresholds.

Other things to start thinking about if you are a large partnership is how you plan to respond to an audit if you end up targeted for enforcement action by the IRS, especially if you have significant transactions that might draw extra scrutiny. Some questions to ponder are whether you have the in-house expertise to handle an audit or if you plan on going to an outside source.

"Nobody is going to do those things until they are actually audited, but its good to start thinking about it and planning it," she said. "And if you do have a really significant transaction, maybe go ahead and have someone take a look at it already to make sure it is properly documented."

She also suggested that if a partnership finds an error as they look back on their own to go ahead and correct it with the IRS before the agency "is poking around and looking at it."

Training Concerns

And while the IRS is moving forward with its plans to audit high earning partnerships, Brackney expressed some concerns relative to agent training.

She recalled a few years ago when the IRS announced global high net worth audits program that ended up collecting very little.

"Most of those audits resulted in no change letters," Brackney said, "which is wild because you audit a normal middle-class taxpayer with a Schedule C business, you are going to have a change [and] not because anybody is trying to cheat. There is going to be something that they can’t substantiate."

She said it was hard to understand how most of the global high net worth audits had no changes, and expressed some concerns that this could happen again, but is hopeful that with the agency’s supplemental funding from the Inflation Reduction Act will come proper training to handle the complexities of reviewing these tax returns.

"I support the IRS being fully funded," she said. "It’s good for tax administration and it makes a fairer society because it’s not like people are just getting away with stuff because the IRS doesn’t have the resources."

By Gregory Twachtman, Washington News Editor

The IRS has cautioned taxpayers to be vigilant about promotions involving exaggerated art donation deductions that may target high-income individuals and has also provided valuable tips to help people steer clear of falling into such schemes. Taxpayers can legitimately claim art donations, but dishonest promoters may employ direct solicitation to make unrealistically promising offers. In a bid to boost compliance and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area.

The IRS has cautioned taxpayers to be vigilant about promotions involving exaggerated art donation deductions that may target high-income individuals and has also provided valuable tips to help people steer clear of falling into such schemes. Taxpayers can legitimately claim art donations, but dishonest promoters may employ direct solicitation to make unrealistically promising offers. In a bid to boost compliance and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area.

Also, the IRS has employed various compliance tools, including tax return audits and civil penalty investigations, to combat abusive art donations. Taxpayers, especially high-income individuals, are advised to watch out for aggressive promotions. Additionally, following Inflation Reduction Act funding the IRS has intensified the efforts to ensure accurate tax payments from high-income and high-wealth individuals.

The Service has advised taxpayers to watch-out for the following red flags:

• Be wary of purchasing multiple works by the same artist with little market value beyond what promoters claim.
• Watch for specific appraisers arranged by promoters, as their appraisals often lack crucial details.
• Taxpayers are responsible for accurate tax reporting, and engaging in tax avoidance schemes can lead to penalties, interest, fines, and even imprisonment.
• Charities should also be cautious not to inadvertently support these schemes.

In order to to properly claim a charitable contribution deduction for an art donation, a taxpayer must keep records to prove:

• Name and address of the charitable organization that received the art.
• Date and location of the contribution.
• Detailed description of the donated art.

Also, The IRS has a team of trained appraisers in Art Appraisal Services who provide assistance and advice to the IRS and taxpayers on valuation questions in connection with personal property and works of art.

Finally, the taxpayers can report tax-related illegal activities relating to charitable contributions of art using:

• Form 14242, Report Suspected Abusive Tax Promotions or Preparers, to report a suspected abusive tax avoidance scheme and tax return preparers who promote such schemes.
• They should also report fraud to the Treasury Inspector General for Tax Administration at 800-366-4484.

Amid a growing number of scams and fraudulent activity surrounding the Employee Retention Credit, the Internal Revenue Service will stop processing new claims, effective immediately, at least through the end of the year.

Amid a growing number of scams and fraudulent activity surrounding the Employee Retention Credit, the Internal Revenue Service will stop processing new claims, effective immediately, at least through the end of the year.

"We are deeply concerned that this program is not operating in a way that was intended today, far from the height of the pandemic in 2020 and 2021," IRS Commissioner Daniel Werfel said during a September 14, 2023, conference call with reporters. "We believe we should see only a trickle of employee retention claims coming in. Instead, we are seeing a tsunami."

Werfel said the agency has received about 3.6 million claims by taxpayers taking advantage of the program and there are more than 600,000 that have yet to be processed, "virtually all of which were received within the last 90 days. That means about 15 percent of all ERCclaims received since the start of the program three and half years ago have been received in the last 90 days. That’s an incredibly large number to have so far beyond the pandemic and nearly two years after the time periods covered by the program."

He attributed the spike in claims to emergence and prevalence of so-called ERC mills.

"This great program to help small businesses has been overtaken by aggressive promoters," Werfel said. "The ads are everywhere. The program has become the centerpiece for unscrupulous marketing and profits from pushing taxpayers to claim a credit that they would not be eligible for."

The agency said in a September 14, 2023, press release that it will process claims already received, but as of today, there will be no new claims processed for the pandemic-era relief program aimed to help small businesses remain in operation while dealing with potential economic hardships due to the COVID-19 pandemic.

However, for those who have filed claims, they can expect longer wait times for the financial relief offered by the credit as the agency conducts more detailed compliance reviews of the claims that have been filed.

And that compliance work as already begun. Werfel stated that as of July 31, 2023, the IRS Criminal Investigation Division has initiated 252 investigations involving more than $2.8 billion worth of potentially fraudulent ERC claims. Fifteen of those cases have resulted in federal charges, with six cases resulting in convictions, and an average sentence of 21 months for those reaching the sentencing phase. He also stated that the agency has referred thousands of claims for audit.

"With the stricter compliance reviews in place during this period, existing ERCclaims will go from a standard processing goal of 90 day to 180 days – and much longer if the claim faces further review or audit," the agency stated in the press release. "The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim."

To help taxpayers who may have fallen victim to an ERC mill, the IRS will be introducing programs in the coming weeks and months to help taxpayers. First, the agency will be providing a process under which taxpayers with unprocessed claims can withdraw those claims. To help taxpayers in self-reviewing their already submitted claims or who may be thinking about submitting claims when the IRS begins processing new claims again, the agency on September 14, 2023, released an updated eligibility checklist. The process to withdraw a claim will be finalized soon.

For those who have had their claims processed, received money and then later received a determination that they were in fact ineligible for the credit, the IRS will be offering a settlement program to help taxpayers pay back funds they should not have received due to eligibility reasons. Details on the settlement program will be released in coming months.

This help may be needed because the IRS recognizes that a business or tax-exempt group c"ould find itself in a much worse financial position if you have to pay back the credit than if the credit was never claimed in the first place," Werfel said.

Werfel is encouraging those who have submitted claims to do an independent verification of eligibility with a trusted tax professional to ensure they were in fact eligible for the credit and if they were not, be ready to take the steps to withdraw the claim if it hasn’t been paid or to look for the settlement program if necessary.

By Gregory Twachtman, Washington News Editor

The Department of the Treasury is reaching out to Congress to get the appropriate tools to combat the wave of Employee Retention Credit fraud and other future issues.

The Department of the Treasury is reaching out to Congress to get the appropriate tools to combat the wave of Employee Retention Credit fraud and other future issues.

In a September 14, 2023, letter to Senate Finance Committee Chairman Ron Wyden, the agency made two specific requests. First, the IRS asked for authority to regulate paid preparers, which it sated "could help protect taxpayers from penalties, interest, or avoidable costs of litigation that result from the poor-quality advice they receive."

Second, the IRS asked for legislation specific to the ERC, but it was more vague in what it wants, asking Congress "to consider other ways to help reduce fraud and abuse associated with the ERC, while protecting honest taxpayers. For example, legislating targeting contingency fee practices would help prevent overzealous promoters from profiting off small businesses."

During a September 14, 2023, conference call with reporters, Laurel Blatchford, chief implementation officer of the Inflation Reduction Act at the Treasury Department, said that having the ability to regulate paid preparers would make it easier to target ERC mills that have popped up in recent months.

"Congress should pass legislation making clear these mills have to play by the same rules as other professionals who prepare returns for taxpayers," Blatchford said. "These mills may claim they aren’t paid preparers, but they receive compensation for their advice."

And while the IRS and Treasury could promulgate regulations for something like banning contingency fees that would prevent mills from collecting a portion of the money refunding through the credit,"a legislative prohibition takes effect far more quickly."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service detailed plans on some of the high-income taxpayers that will be targeted for more compliance efforts in the coming fiscal year.

The Internal Revenue Service detailed plans on some of the high-income taxpayers that will be targeted for more compliance efforts in the coming fiscal year.

IRS Commissioner Daniel Werfel, during a September 7, 2023, teleconference with reporters, said that the new compliance push "makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,"adding that the agency will simply be enforcing already-existing laws.

Werfel stated that the IRS will be "pursuing 1,600 millionaires who owe at least $250,000. … The IRS will have dozens of revenue officers focused on these high-end collection cases in fiscal year 2024,"which begins on October 1, 2023. "This group of millionaires owes hundreds of millions of dollars in taxes, and we will use Inflation Reduction Act resources to get those funds back."

He also said that the agency will be making a “dramatic shift” on large partnerships.

"These are some of the most complex cases the IRS faces, and it involves a wide range of activities and industries where it’s been far too easy for tax evaders to cut corners,"Werfel said.

To help with this effort, Werfel highlighted that the agency will be using expanded artificial intelligence programs and additional Inflation Reduction Act resources to help with the audit process for large complex partnerships.

"The selection of these partnership returns for review is the result of groundbreaking collaboration among experts in data sciences and tax enforcement," Werfel said. "They have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risks in the area of partnership tax, general income tax, and accounting and international tax in a segment that historically has been subject to limited examination coverage."

The AI will be used to help spot trends that might not be obvious and help the agency determine which partnerships are at the greatest risk of noncompliance, starting with 75 specific partnerships with assets of more than $10 million.

"These are some of the largest [partnerships] in the U.S. that the AI tool helped us identify," Werfel said. "These organizations will be notified of the audit in the coming weeks. These 75 organizations represent a cross section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries."

Werfel also noted that starting in October, "hundreds of partnerships will receive a special compliance alert from us in the mail. The alert relates to what we have identified as an ongoing discrepancy on balance sheets involving partnerships with over $10 million in assets," adding that taxpayers filing partnership returns are showing more and more discrepancies in recent years. Approximately 500 partnerships will be receiving this mailing.

"We will need to do more in the partnership arena," Werfel said. "But this is historic. And these are examples of how the Inflation Reduction Act funding will make a difference and help ensure fairness in the tax system."

Other areas that will get compliance attention in the coming fiscal year include those with digital assets, high-income taxpayers who use foreign banks to avoid disclosure and related tax obligations, as well as a previously announced effort to target the construction industry where companies are using subcontractors, which are shell corporations, to engage in tax fraud. The agency will also be targeting scammers such as the current trend of Employee Retention Credit mills.

Werfel also noted that there are ongoing efforts to keep hiring people to conduct these enforcement actions.

"We know we need to make more progress in our hiring efforts, as we will be accelerating these," Werfel said. "This is particularly important given our aging workforce and the relatively high attrition rate among IRS employees."

By Gregory Twachtman, Washington News Editor