Tuesday November 28, 2023
Summertime Help For Tax Extension Filers
On July 19, 2023, the Internal Revenue Service (IRS) reminded taxpayers who have filed for an extension that there are many tools and services available on IRS.gov. Millions of Americans did not file a tax return on April 18 and requested a filing extension to October 16, 2023. These individuals will benefit from a summertime start to prepare their tax return.
A great place to start is the Interactive Tax Assistant tool on IRS.gov. Taxpayers are encouraged to set up an IRS Online Account. This provides access to view tax records, make payments and gather information. After taxpayers have prepared a return, it is best to file and pay electronically.
If a taxpayer did not pay the full amount due on April 18, there may be additional penalties and interest on any overdue amounts. An extension to October 16 is a filing extension and not a tax payment extension. There is information on tax payment plans at IRS.gov/payments. If a taxpayer qualifies for a refund, the "Where's My Refund?" tool can be helpful.
An excellent way to prepare a tax return is the IRS Free File program. This is one of the more convenient ways to file an electronic return using commercial tax-preparation software.
Many taxpayers need the help of a qualified tax professional. Most of these tax professionals are qualified and provide excellent service. However, there are tips on choosing a tax professional on IRS.gov. Taxpayers should avoid a "ghost" tax return preparer who refuses to provide a Preparer Tax Identification Number (PTIN) and sign the return.
The IRS offers in-person help at Taxpayer Assistance Centers (TAC). There is a tool on IRS.gov to help taxpayers find an area office and the hours of operation. After locating a convenient TAC, taxpayers can call 844-545-5640 to set up an appointment.
Additional assistance is available through the Volunteer Income Tax Assistance (VITA) or the Tax Counseling for the Elderly (TCE) programs. These are generally available for individuals with $60,000 or less of income, persons with disabilities and limited English-speaking taxpayers.
If a taxpayer needs special assistance, the IRS website includes assistive technology. There is screen reading software, Braille displays and screen magnifying software available. Taxpayers can file IRS Form 9000, Alternative Media Preference, to receive tax notices in Braille or large print.
Members of the military may use the Department of Defense's MilTax program. This tax filing program is generally free to active military members and some veterans.
IRS Targets Employee Retention Credit (ERC) Fraud
Carolyn Schenck, IRS National Fraud Counsel, explained during a webinar on July 25, the IRS' efforts to counter Employee Retention Credit (ERC) fraud.
The ERC was created during the COVID-19 pandemic to provide a refundable tax credit to use on employer tax returns. However, the ERC has been seriously abused and now is part of the IRS "Dirty Dozen" list of schemes.
The IRS warns taxpayers there are many promoters who incorrectly claim that business owners qualify for the ERC. Many promoters request a large upfront fee. They often ignore basic rules and file for an ERC when the taxpayer is not qualified.
Lloyd Kinlaw, from the IRS Office of Fraud Enforcement, notes, "The IRS has identified widespread fraud related to the ERC, and we have really ramped up our activity to address it accordingly." The IRS notes that employers who are not receiving the proper credit must repay the entire amount of the credit. They also may be liable for interest and penalties.
The IRS units are using artificial intelligence software to identify questionable returns and highlight ERC fraud. If the fraud is suspected, the staff of the Office of Fraud Enforcement will audit the return.
There are three principal strategies the IRS has identified for fraud. First, some ERC mills create a fictitious business and claim the ERC. Second, there has been identity theft. The ERC mills use a business name that has been dormant or create a business based on a Social Security number of a deceased person. Third, the most common fraud is a business that does not qualify for the ERC, but files a false or inflated claim.
Schenck continued, "We are also evaluating cases for the proper treatment stream, meaning whether cases avail themselves to a particular penalty scheme." The IRS emphasizes that it is pursuing all enforcement options. This includes fraud penalties but there also are criminal charges under consideration for some of the most egregious offenders and third-party promoters.
House Ways and Means Committee Chair Jason Smith (R-MO) spoke at a hearing on the ERC that highlighted the problems with ERC fraud. Chairman Smith noted, "The lack of clarity and speed from the IRS created an environment where dishonest third-party companies took advantage of businesses to either bend the rules or commit outright fraud."
Subcommittee member Bill Pascrell (D-NJ) also was concerned about the ERC. He noted, "Most [ERC] claims are filed on paper and processed by hand. So, the IRS wisely directed IRA funding toward electronic filing and automated processing. Bringing tax administration into the 21st century means quicker refunds and fewer errors. We know bad actors target the [ERC]. The IRS is already seeking criminal charges and recovering billions in stolen money."
Editor's Note: IRS Commissioner Daniel Werfel commented this week at a nationwide forum. He stated, "The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining." Werfel suggested it may be appropriate for Congress to change the deadline for claiming a refund from April 15, 2025 to an earlier date to reduce the opportunity for ERC mills to continue committing fraud.
Nonprofits Benefit from Employee Retention Credit (ERC)
David L. Thompson, Vice President of Public Policy for the National Council of Nonprofits (NCN), spoke at an IRS hearing on the Employee Retention Credit (ERC) and published a written statement.
Thompson emphasized that nonprofits have benefited greatly from an "important tax incentive" provided by the ERC. He noted, "At the outset, we emphasize that the Employee Retention Tax Credit provided essential relief that enabled thousands of charitable nonprofit employers to retain employees and continue serving their communities during extremely harsh times." Thompson notes the ERC is a vital and appropriate measure for the pandemic crisis.
While the ERC was very important, Thompson explained why the nonprofit community has had substantial confusion over the provision. The 2020 ERC covered 50% of qualified wages, with a maximum of $10,000 per employee per year and had a credit of $5,000 per employee. A business did not qualify for the 2020 ERC if it received a Paycheck Protection Program (PPP) loan. The 2021 ERC covered up to 70% of qualified wages or $10,000 per employee per quarter, with a total limit of $21,000 per employee. The 2021 ERC was permitted even if the employer had received a PPP loan. Because the rules were significantly different, many nonprofits and their finance professionals were confused about ERC qualifications.
In addition, there were two specific tests for the ERC. Either a partial or full suspension lockdown under state guidelines or there was a reduction in gross revenue. The different standards have been a challenge for nonprofits to assess eligibility. The nonprofit "gross receipts" accounting is unclear and different from the PPP rules.
The result of this complexity is that ERC checks have been delayed. Many nonprofits have waited six to 12 months for their checks, even though they were properly qualified. The National Council of Nonprofits filed for a small ERC amount, and it was distributed 21 months after filing.
In addition, the complexity of the ERC and the availability of federal funds encouraged intentional fraud. While the vast majority of nonprofits properly claimed the ERC, taxpayers are "bombarded with ads claiming that employers are entitled to free money." Many of the ERC mills charge exorbitant fees and continue to hound nonprofit leaders.
Thompson notes, "Nonprofits have shared with NCN that some of these promoters have aggressively pushed their services long after being told no, filling inboxes with solicitations, making repeated calls, and seeking to secure signatures on contracts that promise quick results while charging high processing fees."
NCN agrees it was appropriate for the IRS to include the ERC on the 2023 Dirty Dozen list of tax scams. While the ERC has been a vital lifeline of support for charitable organizations, it also has been subject to significant fraud.
Applicable Federal Rate of 5.0% for August -- Rev. Rul. 2023-13; 2023-32 IRB 1 (17 July 2023)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2023. The AFR under Sec. 7520 for the month of August is 5.0%. The rates for July of 4.6% or June of 4.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."
Published July 28, 2023
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2023 IRS Dirty Dozen - Part II
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