Washington News

With funding from the Inflation Reduction Act, the IRS is making progress toward its goal of improving phone support for the 2023 tax-filing season. On October 27, the IRS announced it hired 4,000 new customer service representatives. The 4,000 new taxpayer service representatives are in training and will be prepared to answer taxpayer questions during the 2023 filing season.

IRS Commissioner Chuck Rettig noted, "The IRS is fully committed to providing the best service possible, and we are moving quickly to use new funding to help taxpayers during the busy tax season. Our phone lines have been simply overwhelmed during the pandemic, and we have been unable to provide the help that IRS employees want to give and that the nation's taxpayers deserve. But help is on the way for taxpayers. As the newly hired employees are trained and move online in 2023, we will have more assistors on the phone than any time in recent history."

The training for the new representatives will include improving taxpayer experiences, technical account management and understanding of taxpayer rights. The IRS hopes to add another 1,000 customer service representatives by the end of 2022. The training for the new hires is projected to be completed by Presidents Day of 2023. That week is historically when the IRS experiences the highest phone call volumes.

The IRS has been permitted to use an accelerated hiring process to increase the number of new employees. Commissioner Rettig continued, "Even though we have new hires in the pipelines, our phone lines remain extremely busy. We continue to urge people to first visit IRS.gov for information related to their tax questions."

The IRS is using additional funding to hire staff in multiple areas. A prime goal for the IRS is to increase the number of employees in its Information Technology department. Commissioner Rettig concluded, "IRS employees make a difference for our nation, and we are excited that we can add more people to serve taxpayers and support the critical work of tax administration."

Donor Advised Fund Balances Grew in CA Report

The Office of the Attorney General of California recently released an audit of 57 donor advised fund (DAF) sponsors. There were three types of organizations covered by the audit including: Community Foundations, Commercial DAFs and Mission-Based DAFs. DAF sponsors all had at least $10 million in assets. There were 29 community foundations, 11 commercial organizations and 17 mission-based nonprofits.

The report was based on the prior three reporting periods. Total DAF assets of the 57 nonprofits grew by 20% per year on average, reaching $105.3 billion by the end of the third year of the audit. The highest growth rate was 35% for the mission-based DAF sponsors. The number of DAF accounts also continued to grow. Commercial DAF sponsors had the highest account growth rate at 17%.

Total DAF contributions peaked at $29.4 billion in the second year of the audit and declined to $27.4 billion in the third year. Private foundation distributions to DAFs increased from $1.1 billion in year one to $1.7 billion in year three.

The donations occurred in multiple forms. The vast majority of donations were cash or publicly traded securities. Over half of the contributions were cash and approximately one third of the total contributions were publicly traded securities. Other contributions included various business and real estate interests. Cryptocurrency gifts accounted for 0.2% of the total over the three-year period.

During the three years, DAF grants increased substantially. The total grant value increased from $12.7 billion in year one to $19.8 billion in year three. There were substantial grants from DAFs to other DAFs. These transfers increased from $1.2 billion in year one to $2.0 billion in year three. Approximately 11% of all grants were made from one DAF to another DAF.

The study tracked the DAF grant ratio. The study reviewed a breakdown of DAF grants by gift rate as a percentage of fund value. Approximately 31% of the California-based DAF sponsored funds made annual distributions less than 5%. However, over 32% of California-based DAFs sponsored funds distributed greater than 50% of assets. The median distribution was in the 10% to 25% range.

DAF sponsors reported having a disbursement policy, a self-dealing policy and a policy on advisory privileges. All sponsors informed donors that DAF grants could only be for charitable purposes. About two thirds of the organizations had a grant policy that only permitted distributions to Section 501(c)(3) organizations.

DAF sponsors noted that there are fees for management of DAFs. These costs were generally categorized as administrative, commission and investment fees. Generally, all of the reporting DAF sponsors were charging an administration fee. The commercial entities generally charged a commission for trade or sale of DAF assets.

The audit summary indicated that the average annual DAF growth was 20% over a three-year period. Commercial DAFs had the largest growth with $20 billion in contributions and $75 billion in year-end assets in the third year. Most of the gifts for the commercial DAF sponsors were public securities. About 20% of DAFs pay out less than 5% per year, though 42% of community foundation held DAFs reported paying less than 5% per year. Finally, private foundation distributions to DAF were approximately 5.3% of all contributions received

Editor's Note: Senate Finance Committee member Chuck Grassley (R-IA) has sponsored the Accelerating Charitable Efforts (ACE) Act. This act is designed to reduce the number of DAFs that distribute less than 5% of assets per year. Sen. Grassley noted, "The ACE Act is focused on ensuring that tax-deductible contributions to a foundation or a DAF reach their ultimate charitable destination within a reasonable period of time." Most DAF sponsors oppose the ACE Act. Fourteen state attorneys general wrote a letter to House and Senate leaders and criticized the ACE Act. They stated it would be more difficult for private foundations to fulfill their charitable purpose and the Act would in their view "chill charitable giving."

IRA and 401(k) Contributions in 2023

In Notice 2022-55; 2022-45 IRB 1, the IRS announced 401(k) and IRA contribution limits for 2023. The IRA limit is $6,500 in 2023. Individuals over age 50 may make a catch-up contribution of $1,000, for a total transfer of $7,500.

Traditional IRA contributions from earned income are tax deductible. The traditional IRA has two main tax benefits - contributions are tax deductible and grow tax free. If you are covered by a qualified retirement plan at your workplace, the IRA deduction may be reduced or phased out.

1. Single Taxpayers with Workplace Plan - IRA contributions for single taxpayers are phased out for persons with incomes from $73,000 to $83,000.

2. Married Couple with Workplace Plans - A couple with joint income of $116,000 to $136,000 will experience the IRA phaseout.

3. Married and No Workplace Plan - If one person has no workplace plan and the spouse is covered in his or her workplace, the phaseout on a joint return is $218,000 to $228,000.

A Roth IRA is funded with after-tax income. It grows tax free and most distributions are tax free. Roth IRA owners may withdraw contributions tax-free at any time. After the Roth IRA has been in existence for five years and the owner is over age 59½, amounts may be withdrawn tax free.

The Roth IRA phaseout limits also increase in 2023.

1. Single Individuals - The Roth IRA phaseout for single persons next year will be $138,000 to $153,000.

2. Married Couples - For married couples, the Roth IRA phaseout is $218,000 to $228,000.

Many businesses maintain a 401(k) plan and most nonprofits provide a 403(b) plan. The 2023 limit for an employee contribution to a 401(k) or 403(b) plan is $22,500. Employees over age 50 may make a catch-up addition of $7,500, for a total transfer limit of $30,000.

If your employer offers both a traditional 401(k) and a Roth 401(k) plan, you may allocate your employee contribution to one or both funds. The traditional 401(k) amounts are deductible, but the Roth 401(k) contributions are after-tax.

Editor's Note: Many employers match the employee 401(k) contributions. This is a good way to encourage employee participation in the 401(k) plan. The employer match is used to fund the employee's traditional 401(k) account. The employee may make contributions to a Roth 401(k) account up to the $22,500 or $30,000 limit, as applicable.

Applicable Federal Rate of 4.8% for November -- Rev. Rul. 2022-20; 2022-45 IRB 1 (16 October 2022)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2022. The AFR under Section 7520 for the month of November is 4.8%. The rates for October of 4.0% or September of 3.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.