Season's Greetings from the Beverly & Bucker Team!
We hope that everyone meets this season with good health. We are looking forward to what we hope will be a return to normal and are excited for the minimal changes this tax season. Our staff would like to thank our wonderful clients who have displayed empathy and kindness over the past few years while we navigated the pandemic and all of the complications that came with it. There are a few changes this year, but overall, this tax season will be significantly easier than in years past. And if additional changes are made in the coming months, we will update this Newsletter as needed.
Aside from a few small changes to account for inflation, such as an increase in the standard deduction and a slight credit increase, the changes this year are minimal. These variations will have very little affect on returns, however, if you have any questions, please feel free to contact our office by phone or email.
Last Tax Season brought the introduction of the 1099-K filing requirement. Just like last year, our clients who received $600 or more through cash-sharing apps like Venmo, Zelle, and PayPal will receive a Form 1099-K by mail or through the app. If you receive this form, please include it with your tax documents as we will not be able to complete your return without it. If you believe you received $600 or more through a cash-sharing app but did not receive a Form 1099-K, please contact the company. Please be prepared to explain where the funds came from and what they were used for to determine how the amount should be applied on the Tax Return.
For our Virginia clients who are over the age of 55 and receive military retirement, starting this tax season, you may be able to claim a subtraction for certain military benefits of up to $10,000. This means that qualifying recipients may receive up to $10,000 of military retirement pay tax-free. Qualifying benefits include military retirement income received for service in the US Armed Forces or paid to the surviving spouse of a veteran under the Survivor Benefit Plan program. If you have questions concerning this change, please contact our office or consult the Virginia Department of Taxation website.
Now that we've covered any changes in tax code, here's what you can expect in our office. As we continue to prioritize the safety of our staff and clients, we encourage anyone who does not require a face-to-face appointment to use our Drop Off option. Many of our clients used this method for the first time during the pandemic and found that it was easier and much faster than waiting for an available appointment time. The Tax Return will be prepared in your absence and our staff will contact you when it has been completed. If you are dropping off your Tax Return but would still like to discuss your concerns with a Tax Preparer, a Phone Appointment option is now available! To schedule a Phone Appointment, please contact our office or select the Phone Appointment option on our website when scheduling. Due to IRS guidelines, we are not able to use online phone call platforms such as Zoom, FaceTime, Google Chats, or Signal. These third-party calling platforms do not provide the level of security required for discussing sensitive personal information. For clients who are able to Drop Off Tax Documents, we would like to make sure you are aware of our variety of Drop Off methods.
Drop Offs:
As always, Tax Documents can be mailed to our office, dropped off with our staff during our office hours, or dropped off after hours via the mail slot beside our front door. We also have a contact-free, digital option available. If you would like to virtually submit your documents, please contact our office via phone or email to request a link to our secure, Document Sharing Portal. Upon request, a link will be sent to you via email. This link will be randomly generated and, for your security, should not be shared. Once you have received the link, you will be able to upload your documents to our Secure Portal, at which point our staff will be notified and will be able to view your documents to prepare your Tax Return. Please do not email sensitive documents to our office or submit them via Facebook. These are not secure options to submit sensitive information. If you have any questions concerning our Digital Drop Off method or any of our other methods for receiving documents, please let us know. When mailing documents, we request that you mail copies, not original documents. Original documents that are lost in the mail are difficult to replace so, if possible, please only mail copies.
No matter how you Drop Off this year, please include your Name, Phone Number, Address, and a list of any changes in family structure such as Marriage, sale of a property, or changes in the number of Dependents. If you have questions concerning what documents to include when dropping off, our staff will be more than happy to assist.
Appointments:
For our clients who necessitate a face-to-face appointment, please schedule either through our website or by phone. We ask that if you or someone in your household is experiencing Covid-related symptoms to please wear a mask during your appointment. Our front desk staff will have extras available. If you or someone in your household has tested positive for Covid-19 or RSV within four days of your appointment, please contact our office to reschedule.
Client Organizers:
Client Organizers are available! These are helpful tools that list what documents we will require to prepare your Tax Return. Client Organizers are based off of the information you provided to our office for the prior Tax Year, so they will not include any information that has changed since we last saw you. With Client Organizers, we will include an additional checklist that outlines any changes in Tax Code for the upcoming year. If you are new to our office this year, Welcome! We have blank Client Organizers available for you in our office and on our website in "Info Center." While they will not have a list of documents that you have used for prior Tax Returns, they will have a summation of documents you may need to bring in depending on your needs. If you have any questions or would like to request a Client Organizer, please contact our office.
I would like to, once again, thank our amazing clients. Our team is excited to assist with the approaching tax season and we're looking forward to seeing everyone. We hope everyone has a great New Year and we look forward to working together in 2024!
Ryan Beverly E.A.
Beverly & Bucker Inc.
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:
-
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;
-
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
-
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