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IRS Announces Starting Date for Filing 2023 Returns

The Internal Revenue Service (IRS) announced that the filing season will officially open on January 29, 2024. At that time, it will start accepting and processing 2023 tax returns. The IRS expects taxpayers will file approximately 129 million individual returns.

With funding from the Inflation Reduction Act, the IRS claims it will offer improved taxpayer service this year. IRS Commissioner Daniel Werfel stated, "As our transformation efforts take hold, taxpayers will continue to see marked improvement in IRS operations in the upcoming filing season. IRS employees are working hard to make sure that new funding is used to help taxpayers by making the process of preparing and filing taxes easier."

The IRS has enhanced a number of resources for taxpayers. There will be an expansion of the callback feature. This is intended to reduce the phone wait time to speak with an IRS representative. There are several changes on, such as an improved "Where's My Refund?" tool.

The IRS also plans to launch the pilot of Direct File. The Direct File initial pilot is expected to be available in states that do not require payment of state income taxes. It also will be limited to simple tax situations.

A potential issue is whether Congress will make last–minute changes to the child tax credit or other provisions. Bridget Roberts is the leader of the IRS Direct File program. At a January 10 tax conference, she noted, "We are aware that it is out there. We are waiting to see." Roberts continued that the impact of Congress on the Direct File program "will depend on the scope of the changes and how sweeping those changes might be."

The IRS Direct File team believes it will be able to manage any last–minute changes. Nina Olson is a representative of the Center for Taxpayer Rights and a former National Taxpayer Advocate. She noted that there have been filing seasons that required last-minute changes. She stated, "But they get it done. And it is amazing to watch."

The Direct File project has been created in cooperation with Code for America (COA). Gabriel Zucker of COA believes the Direct File team could manage changes. The Code for America organization is also working on state tax integration for the pilot program. Zucker stated the IRS and partners have "done a lot of incredible work under a lot of pressure, very quickly."

Editor's Note: It is logical for the Direct File pilot program to focus on basic tax returns and avoid the issue of state taxes by only serving states without an income tax. Based upon your editor's three decades of experience in publishing charitable tax software, it is best to start small and then move forward. Given the scope and complexity of the U.S. tax system, a full-fledged system with state return integration is still two to five years in the future.

New Client Scams Target Tax Preparers

Each January there is a substantial increase in the number of hackers targeting tax preparers. The IRS and Security Summit partners have issued a new warning for this year. Identity thieves are launching many attacks targeting accounting groups and tax-preparation firms. There have already been multiple reports of new scams attacking tax preparers.

IRS Commissioner Danny Werfel stated, "These intricate email scams pose a real risk to tax professionals and the taxpayers they represent. Cybercriminals try to capitalize on tax season by masquerading as real taxpayers looking for help. What they really want to do is to help themselves to the sensitive client data of tax professionals. We urge tax professionals and their employees to be extra cautious when receiving unexpected email solicitations and avoid clicking on links or opening attachments."

The IRS received over 400 reports of business email compromises (BEC) or business email spoofing (BES) last year. These reports are sent to [email protected].

New scams become more sophisticated each year. A hacker generally will ask tax professionals or preparers if they are available to offer services. There will frequently be three to four emails in which the hacker is building an online relationship with the tax preparer. The third or fourth email may include an offer of information needed to understand the requested tax service with a link. The link would access a hacker website that downloads malware to the computer of the tax preparer. The malware enables the hacker to gain access to the tax preparer's client information.

The hacker may research the clients of the tax preparer and create a profile that matches a typical client or claim to be a friend or relative of an existing client. After building that relationship and encouraging the tax preparer to "help prepare their taxes," the hacker will attempt to trick the taxpayer into clicking on a link.

An example email could be as follows:

Hello Tax Preparer,

My name is Mary Smith. I am searching for a new CPA to help handle my taxes. Is it safe to say that you are accepting new clients for the 2024 tax season? Do you assist with IRS representation? I may have an issue with my return from last year. If you are able to help, we could arrange an in-person or virtual meeting to discuss my situation. I also can provide you with my tax documents. Please explain how we can move forward.

Best regards,

Tax Hacker

The second email will continue to explore the possibility of this person becoming a new client. The third or fourth email would include a link with the phrase, "Click Here to View My Document."

Many tax preparers are lulled into a sense of security after two or three friendly emails and will click on the link that downloads the malware.

Cybercriminals may also impersonate a state tax agency, tax software company that is used by the tax preparer or a financial institution. These impersonations also may involve two or three introductory emails before the email with the malware link is included.

If a tax professional does suffer a data breach, it is important to respond promptly. You should notify the IRS Stakeholder Liaison, who will pass on the report to the IRS Criminal Investigation Section. You should also notify the local office of the Federal Bureau of Investigation. It also may be important to report to your state attorney general.

All tax professionals are required to have a written security plan. The site offers assistance on the development of a Written Information Security Plan (WISP).

Proposed DAF Investment Advisor Rule Controversy

In REG-142338-07 (11/14/2023), the IRS published proposed regulations on donor advised funds. The IRS has spent 17 years developing the proposed regulations. Attorney Carlyn McCaffrey spoke on January 8 at the Heckerling Institute on Estate Planning in Miami and discussed a controversial provision in the proposed DAF regulations.

A donor advised fund (DAF) is maintained by many public charities. Donors may make gifts and the charity has legal ownership of the assets, but the donor is given the right to make recommendations on charitable grants. McCaffrey notes the IRS has a policy of looking "at DAFs with suspicion." This suspicious nature is reflected in the new regulations. Part of the preamble to the regulations is titled "Taxes on Taxable Distributions from Donor Advised Funds under Section 4966."

A key section defines the Donor-Advisor under Sec. 4966(d)(2)(A). The proposed regulations incorporate Sec. 4958(f)(8)(B) and notes that an investment advisor who "provides investment advice with respect to, both assets maintained in a DAF and the personal assets of a donor to that DAF (personal investment advisor) would be a donor-advisor with respect to the DAF while serving in that dual capacity, regardless of whether the donor appointed, designated, or recommended the personal investment advisor."

This is the case unless the investment advisor provides services to all DAFs of the organization. If the investment advisor's fees apply "uniformly to all of those DAFs, the investment advisor would properly be viewed as providing services to the sponsoring organization as a whole."

However, the proposed regulations explanation states, "The Treasury Department and the IRS agree that a personal investment advisor that is considered a donor-advisor would be subject to the excess benefit transaction rules of Sec. 4958(c)(2) if he or she received a grant, loan, compensation, or similar payment from the DAF."

McCaffrey notes that there is a 25% tax on the excess benefit transaction. The proposed regulations essentially define compensation paid to a personal investment advisor as subject to the 25% tax. McCaffrey stated, "If this is finalized, it will give the DAFs sponsored by the charitable arms of major financial institutions a significant advantage over funds that are sponsored by community foundations."

Because all investments for the charitable subsidiary of financial firms are managed by the financial firm, representatives of that firm are able to permit clients to create DAFs and still manage and be compensated for the fund management.

However, this would not apply to most community foundations, religious foundations and other DAF sponsors. Because the personal investment advisor only manages the investments for a specific donor, he or she would be subject to the 25% excess benefit tax. This provision could eliminate the option for investment advisors to manage DAF funds for their clients.

Editor's Note: The IRS has extended the comment period for the proposed regulations to February 15, 2024. The IRS will receive a significant number of comments about this provision from community foundations who have relationships with personal investment advisors.

Applicable Federal Rate of 5.2% for January -- Rev. Rul. 2024-2; 2024-2 IRB 1 (18 December 2023)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2024. The AFR under Sec. 7520 for the month of January is 5.2%. The rates for December of 5.8% or November of 5.6% 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 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."

Published January 12, 2024

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