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:
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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;
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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
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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
Move over hybrids - buyers of Volkswagen and Mercedes diesel vehicles now qualify for the valuable alternative motor vehicle tax credit. Previously, the credit had gone only to hybrid vehicles. Now, the IRS has qualified certain VW and Mercedes diesels as "clean" as a hybrid.
Move over hybrids - buyers of Volkswagen and Mercedes diesel vehicles now qualify for the valuable alternative motor vehicle tax credit. Previously, the credit had gone only to hybrid vehicles. Now, the IRS has qualified certain VW and Mercedes diesels as "clean" as a hybrid.
Qualifying vehicles
The IRS has designated the following diesel-powered vehicles as advanced lean-burning technology motor vehicles that qualify for the alternative motor vehicle tax credit:
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The 2009 VW Jetta TDI sedan and TDI sportwagen models; and
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The 2009 Mercedes-Benz GL320, R320 and ML320 Bluetec models.
The credit amounts vary depending on the vehicle's fuel economy. The credit amounts for each vehicle are as follows:
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2009 VW Jetta TDI sedan and TDI sportwagen: $1,300 credit;
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2009 Mercedes ML320 Bluetec: $900;
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2009 Mercedes R320 Bluetec: $1,550; and
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2009 GL320 Bluetec: $1,800.
VW's diesels went on sale in August, while the Mercedes Bluetec models are expected to go on sale beginning this October.
The alternative motor vehicle tax credit, generally
The alternative motor vehicle tax credit is a lucrative tax credit for purchasers of qualifying automobiles. But, just as the situation is with hybrids, the full amount of the credit for each vehicle is available only during a limited period. The dollar value of the tax credit will begin to be reduced once the manufacturer sells 60,000 vehicles that qualify for the tax credit. Additionally, the credit is available only to the original purchaser of a new, qualifying vehicle. As such individuals who lease the vehicle are not eligible for the credit - the credit is allowed only to the vehicle's owner, such as the leasing company.
Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th advance lean burn technology motor vehicle or hybrid passenger automobile or light truck. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
The credit - as Congress has allotted so far - may only be taken for qualified vehicles purchased before the end of 2010.
If the IRS had its way, every worker would be classified as an employee and every employer would pay employment taxes on their wages. Employment taxes are a huge chunk of government revenue and they're easier to collect than other taxes. However, not all workers are employees. Some are independent contractors, others are statutory employees and still others may be partners
If the IRS had its way, every worker would be classified as an employee and every employer would pay employment taxes on their wages. Employment taxes are a huge chunk of government revenue and they're easier to collect than other taxes. However, not all workers are employees. Some are independent contractors, others are statutory employees and still others may be partners. The line between employee and independent contractor is often murky and frequently employers misclassify workers. If you misclassify your workers, you are liable for back employment taxes. To ease the pain, the law provides a safe harbor and the IRS has a special settlement program.Safe harbor As soon as the IRS begins a worker classification audit, it is suppose to advise the employer if it qualifies for "Section 530 relief." Section 530 of the Revenue Act of 1978 is a safe harbor for employers that believed their workers were not employees and they were not responsible for employment taxes. If you qualify for the safe harbor you are generally free from paying back taxes. However, you must agree to treat your workers as employees from here on out and pay future payroll taxes. To qualify for the safe harbor, you have to meet some important tests:·--You had a reasonable basis for not treating the worker as an employee;·--Treatment was consistent; and·--You filed all required Forms 1099 with the IRS.Over the years, the IRS and the courts have articulated in guidance and decisions what is a reasonable basis to treat a worker as an independent contractor. If an employer's practice is similar to longstanding industry practice or if it relied on IRS guidance or court decisions, it may be able to show it had a reasonable basis to treat workers as independent contractors.Some reasons are never reasonable. Examples are lower labor costs and treating a worker as an independent contractor solely because the worker requests it.Consistent treatment is also important. This means that you treated all workers performing similar tasks the same. If you treated some as employees and some as independent contractors, you will fail the consistent treatment test.--Example. ABC Co. has 30 mechanics on its payroll. They all perform identical duties. Twelve of the mechanics are treated as employees and ABC Co. issues W-2s to them. Eighteen mechanics are treated as independent contractors and ABC Co. issues 1099s. This is inconsistent treatment and ABC Co. is ineligible for Section 530 relief.Finally, you must have filed all of the required forms with the IRS. This means Forms 1099 for independent contractors. If you didn't file these forms, you cannot seek relief under the Section 530 safe harbor.Special settlement programIf you treated workers consistently and had a reasonable basis for not treating the workers as employees, the IRS likely will accept 25 percent of the employment tax due instead of 100 percent. You also have to agree to treat the workers as employees in the future.The outcome isn't so good if you can't show you had a reasonable basis not to treat the workers as employees. In this case, the IRS will demand 100 percent of the employment tax due.The worker classification settlement program is entirely voluntary and employers are free to reject whatever offer the IRS makes. One good feature about the program is that the offer stays open even after the employer rejects it. The IRS allows employers to reconsider offers and accept them later in the examination process.Worker misclassification disputes are complicated and the IRS has a strong track record of winning them. If you have questions about the classification of your workers, or the IRS has already contacted you, give our office a call. Together, we can map out a strategy to save you from a potentially huge bill for back employment taxes.