Washington News

The Internal Revenue Service (IRS) 2024 filing season is now in full swing. The IRS encourages taxpayers to use online tools and learn about the "free help" available on IRS.gov.

IRS Commissioner Danny Werfel stated, "We have worked hard to provide better taxpayer service for people this filing season with more options to reach the IRS in convenient ways. We want taxpayers to have access to the help they need around the clock. IRS.gov's expanded tools and information make that easier for taxpayers, especially during this peak period for IRS phone lines around Presidents Day."

The IRS reports approximately 98% of taxpayers will file electronically this year. The IRS encourages everyone to file electronically and use direct deposit for a faster refund. There also are multiple free and online tax preparation options. These include the IRS Free File, the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. If taxpayers have income of $79,000 or less, the IRS Free File software can be used. Taxpayers with any level of income may use the IRS Free File Fillable Forms.

A new option for a limited number of taxpayers is the IRS Direct File program. This is available currently to federal and state employees in 12 participating states. Military members and some veterans may receive assistance from the MilTax program run by the Department of Defense.

There are multiple services on IRS.gov that also assist taxpayers.

1. IRS Online Account — If a taxpayer has a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN), an IRS Online Account can be created. This can provide information on a balance due and payment options, allow the creation of a payment plan, access prior tax returns, locate the Adjusted Gross Income number from previous tax returns and sign tax authorizations from a professional advisor.
2. Where's My Refund? — If a taxpayer has a refund pending, the "Where's My Refund?" tool on IRS.gov will provide useful information. This will explain refund status and the updated version uses plain language. If the taxpayer qualifies for an earned income tax credit (EITC) or additional child tax credit (ACTC) refund, those will start to be issued by February 27. The "Where's My Refund?" tool may enable taxpayers to find the projected refund date.
3. Interactive Tax Assistant — The IRS has updated the Interactive Tax Assistant (ITA) tool this year. Taxpayers can ask basic questions such as: Should I file a tax return? What is my filing status? Is this relative an eligible dependent? Is this income taxable? Am I eligible for a credit? Is this expense deductible?
4. Earned Income Tax Credit (EITC) — Low and moderate-income workers and families may be eligible to receive a valuable EITC tax break. The EITC Assistant on IRS.gov will help taxpayers understand eligibility, if children or relatives are qualifying, an estimated amount of the credit and preferred filing status.
5. Identity Protection PIN (IP PIN) — An excellent way to reduce the risk of identity theft is to obtain an Identity Protection PIN (IP PIN). This is a six-digit number known only to you and the IRS. You can obtain an IP PIN on IRS.gov with the "Get an IP PIN" tool.

There are several other helpful sections of IRS.gov. If you want to learn more about tax preparers, you can go to the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. A tax preparer will sign your return and include his or her preparer tax identification number (PTIN).

Editor's Note: The IRS has invested significant resources in upgrades to IRS.gov. The online tools assist millions of taxpayers each year and reduce the number of phone calls directed to IRS staff. Taxpayers are encouraged to learn about the many services available on IRS.gov.

March 22 Deadline for Employee Retention Credit (ERC)

The Internal Revenue Service (IRS) recently reminded business owners to review their Employee Retention Credit (ERC) claims. Currently, there is a voluntary disclosure program for repayment of faulty ERC claims. The March 22, 2024, deadline for this program is rapidly approaching.

In IR-2024-39, the IRS explained seven suspicious warning signs that highlight the potential for a false or fraudulent ERC claim. The IRS created a moratorium on ERC payments because of widespread fraud. A bill currently pending in Congress would enact a January 31, 2024 termination date for submitting ERC claims. The IRS has approximately one million of unprocessed ERC claims and many of these are not qualified.

IRS Commissioner Danny Werfel stated, "Many businesses were wildly misled about the qualifications, and the IRS is taking a special step to highlight common problems being seen about these claims. The IRS urges ERC claimants to get with a trusted tax professional and review their qualifications before time runs out on IRS disclosure and withdrawal programs. The 'suspicious seven' signs released today are clear red flags that ERC claimants should carefully review."

The IRS warns business owners of many promoters with "aggressive, misleading marketing that oversimplified or misrepresented eligibility rules." Commissioner Werfel also stated, "Many of these taxpayers were misled by overzealous and unscrupulous promoters taking advantage of honest taxpayers. The most beneficial time to resolve any incorrect claims is now before this special window closes."

There are seven red flags the IRS reported are most common for ERC claims:

1. Too Many Quarters — Many promoters have filed claims for employers that sought payments for all available quarters. It is rare for a company to qualify for all quarters in 2020 and 2021.
2. No Qualifying Government Orders — The ERC is available solely for businesses that were in a state with a government-mandated shutdown and that suffered the required loss in revenue or other business during that period. Many promoters are not checking to see that a business fell under a qualifying government order.
3. Too Many Employees — Some ERC claims that are based on wages paid to all employees. However, there are dollar limits, varying credits and payment amounts that differ depending on the tax period. In addition, the ERC rules are different for 2020 and 2021.
4. Supply Chain Issues — It is rare for a business to qualify for the ERC based on a supply chain disruption. Only a limited number of businesses that were severely affected may qualify.
   
5. Extended Tax Period — While the shutdown orders generally applied for parts of some quarters, the promoters take or claim the ERC for the entire quarter. Only the suspension period is qualified.
6. No Wages or Did Not Exist — Some businesses filed claims but did not pay any wages to employees. Other businesses filed claims for tax periods prior to the issuance of an employer identification number. These businesses did not exist during the eligibility period and therefore are not qualified.
7. Promoter Promises No Risk of Loss — Some promoters claimed businesses "have nothing to lose" and, therefore, should file and claim the full ERC amount. However, false or fraudulent claims could lead to repayments, penalties, interest and audit expenses.

If a business has deposited a payment, the IRS will accept a repayment of 80% of the ERC amount. If the check has not been cashed or deposited, the business may withdraw the claim and return the check. Businesses that take advantage of the voluntary disclosure program may avoid future repayments, interest and penalties.

The ERC frequently asked questions (FAQs) on IRS.gov is also helpful. The IRS emphasizes that for 2020 and the first two calendar quarters of 2021, there was qualification with the required level of business downturn or a government shutdown order. For the third quarter of 2021, there must be a government shutdown order, a specified decline in gross receipts or the business was considered a recovery startup business. During the fourth quarter of 2021, only recovery startup businesses are eligible.

National Council of Nonprofits (NCN) Concerns on DAF Proposed Regulations

In REG-142338-07, the Department of Treasury published proposed regulations on donor advised funds (DAFs). On February 12, 2024, the National Council of Nonprofits (NCN) sent a letter to the IRS expressing concerns that the proposed regulations "may inadvertently increase the compliance burden on DAF sponsors and DAF donors, and therefore may result in unnecessary burdens on the flow of philanthropic dollars to the work of charitable organizations."

NCN represents over 30,000 organizational members. Many of the organizational members are DAF custodians and potential DAF recipients. The NCN letter highlights several potential issues that could limit DAF giving.

The proposed regulations define what entities qualify as a DAF and private foundations may be donors for the purpose of that definition. In Notice 2017-73, the IRS highlighted the question of whether a nonoperating private foundation could make distributions to a DAF and if there should be mandatory distribution rules applied. NCN notes there must be clarity on this issue to limit a decline in private foundation transfers to DAFs.

A major definition is the "donor-advisor" with respect to a DAF. However, an investment advisor who provides investment management advice is also classified as a donor-advisor. The only exception to this rule is an investment advisor who provides advice to the entire sponsoring organization and charges uniform fees to all DAFs of the custodian.

NCN notes this is a "trap for the unwary" because the payment of any compensation to an investment advisor who represents the individual in his or her personal investments and also invests the individual's DAF is subject to an "automatic excess benefit transactions under Section 4958, the tax on deemed distributions under Section 4966, and the tax on prohibited benefits under Section 4967."

This trap could subject both the donor and the sponsoring organization to major taxable distribution penalties. This limitation could severely reduce gifts of investment assets to DAFs.

The proposed regulations also define "advisory privileges." NCN recognizes the preamble notes that earmarking a donation for a particular fund does not create an advisory privilege. However, there are restricted gifted agreements that might enable the donor to have subsequent advisory rights. If those rights are not exercised, that fund should not constitute a DAF. Under the proposed regulations, this could require all the record-keeping and rules of a DAF, even though the advisory rights are not exercised. NCN recommends that this should be categorized as a DAF only if there is an actual exercise of the advisory rights.

A single identified organization is an exception to the DAF. However, this exception will not apply to private foundations, disqualified supporting organizations, foreign organizations or noncharitable organizations. Because many foreign organizations or other organizations create "Friends of" entities, this would subject these types of organizations to the unnecessary record-keeping and regulatory expenses associated with DAFs.

Furthermore, there are many "fiscal sponsorship arrangements" that could also be included by the proposed regulations. A qualified tax-exempt organization and a third party may jointly participate in a charitable project or activity. If the qualified nonprofit has complete control over the funds, this is a deductible arrangement. However, Proposed Regulation Section 53.4966-1 could require compliance with DAF rules, even if the donor provides some nonbinding recommendations.

NCN notes that, if there is a single organization or project receiving funds, this should be an exception under the "single identified charitable purpose" provision. The regulations should recognize that many of these arrangements are temporary in nature and therefore should be an exception. In addition, the "Friends of" organizations should also have provisions that would permit them to be exempted from the definition of a DAF.

The proposed regulations also include multiple provisions that relate to taxable distributions. The regulations define a DAF distribution as "any grant, payment, disbursement, or transfer, whether in cash or in kind from a donor advised fund." However, there are many circumstances where there are market value payments to vendors and service providers. The vendors and service providers furnish "necessary goods and services that are a component of the charitable purpose." While it is important that the nonprofit follow expenditure responsibility provisions, the regulations should permit payments on commercially reasonable terms to vendors and service providers and these should not be considered taxable distributions.

The proposed regulations also are overly inclusive on attempts to reduce "political campaign intervention." The preamble indicates that distributions may not be used for "attempts to influence legislation" but this provision could have a chilling effect on many grants. Multiple qualified charities that do not engage in partisan, election-related activities, but do appropriately advocate policies that are for the public benefit may be impacted. The services provided may include education that encourages members to exercise their right to vote and similar public activities. The proposed regulations should create exceptions that permit reasonable advocacy for public purposes.

Finally, there is an "anti-abuse" rule in Proposed Regulation Section 53.4966-5 that may create extraordinary compliance burdens. Many organizations make grants to "Friends of" organizations that use the grants for various charitable purposes. These subsequent grants are outside the control of the DAF sponsor. The proposed regulations should not penalize innocent organizations for use of funds by nonprofit grant recipients.

Applicable Federal Rate of 5.0% for March -- Rev. Rul. 2024-4; 2024-9 IRB 1 (14 February 2024)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2024. The AFR under Sec. 7520 for the month of March is 5.0%. The rates for February of 4.8% or January of 5.2% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% 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."