Seniors Warned of Rising Impersonation Scams, IR-2024-164 The IRS has issued a warning about the increasing threat of impersonation scams targeting seniors. These scams involve fraudsters posing as government officials, including IRS agents, to steal s...
The IRS has providedguidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domesticabusevictimdistributions. 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 hasprovidedguidanceon two exceptions to the 10 percent additional tax underCode Sec. 72(t)(1)foremergencypersonal expensedistributionsanddomesticabusevictimdistributions. 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 underCode Sec. 72(t)and request comments to be submitted on or before October 7, 2024.
DistributionsforEmergencyPersonal Expenses
Code Sec. 72(t)(2)(I)provides an exception to the 10 percent additional tax for adistributionfrom an applicable eligibleretirementplan to an individual foremergencypersonal expenses. The term"emergencypersonal expensedistribution"means anydistributionmade from an applicable eligibleretirementplan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or familyemergencyexpenses. The IRS specifically noted thatemergencyexpenses 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 necessaryemergencypersonal 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 anemergencypersonal expensedistribution. Furthermore, the IRS provides that anemergencypersonal expensedistributionis not treated as a rolloverdistributionand thus is not subject to mandatory 20% withholding. However, thedistributionis subject to withholding, the IRS said. If theemergencypersonal expensedistributionis repaid, it is treated as if the individual received thedistributionand transferred it to an eligibleretirementplan within 60 days ofdistribution.
If an otherwise eligibleretirementplan doesnotofferemergencypersonal expensedistributions, the IRS indicated that an individual may still take an otherwise permissibledistributionand treat it as such on their federal income tax return. The individual claims on Form 5329 that thedistributionis anemergencypersonal expensedistribution, in accordance with the form’s instructions. The individual has the option to repay thedistributionto an IRA within 3 years.
DistributionstoDomesticAbuseVictims
Code Sec. 72(t)(2)(K)provides an exception to the 10 percent additional tax for an eligibledistributionto adomesticabusevictim(domesticabusevictimdistribution). Theguidancedefines a"domesticabusevictimdistribution"as anydistributionfrom an applicable eligibleretirementplan to adomesticabusevictimif made during the 1-year period beginning on any date on which the individual is avictimofdomesticabuseby a spouse ordomesticpartner."Domesticabuse"is defined as physical, psychological, sexual, emotional, or economicabuse, including efforts to control, isolate, humiliate, or intimidate thevictim, or to undermine thevictim’s ability to reason independently, including by means ofabuseof thevictim’s child or another family member living in the household.
As withdistributionsforemergencypersonal expenses, aretirementplan may rely on an employee’s written certification that they qualify for adomesticabusevictimdistribution. Similarly, if an otherwise eligibleretirementplan doesnotofferdomesticabusevictimdistributions, the IRS indicated that an individual may still take an otherwise permissibledistributionand treat it as such on their federal income tax return. The individual claims on Form 5329 that thedistributionis adomesticabusevictimdistribution, in accordance with the form’s instructions. The individual has the option to repay thedistributionto an IRA within 3 years.
Request for Comments
The Treasury Department and the IRS invite comments on theguidance, 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 toemergencypersonal expensedistributionsand procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference toNotice2024-55.
On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing taxloopholes and stopping abusivepartnershiptransactions used by wealthy taxpayers to avoid paying taxes.
On June 17, 2024, theU.S. Department of the Treasuryand theInternal Revenue Serviceannounced a new regulatoryinitiativefocused on closingtaxloopholesand stoppingabusivepartnershiptransactionsused by wealthy taxpayers to avoid payingtaxes.
Specifically targeted by this newtaxcompliance effort arepartnershipbasis shiftingtransactions. In thesetransactions, a single business that operates through many different legal entities (related parties) enters into a set oftransactionsthat manipulatepartnershiptaxrules to maximizetaxdeductions and minimizetaxliability. These basis shiftingtransactionsallow closely related parties to avoidtaxes.
The use of theseabusivetransactionsgrew during a period of severe underfunding for theIRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that theseabusivetransactions, 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 anIRSNews 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 complexpartnershipsand corporations,"IRSCommissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.
"This announcement signals theIRSis accelerating our work in thepartnershiparena, which has been overlooked for more than a decade and allowedtaxabuse to go on for far too long,"saidIRSCommissioner 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 payingtaxes. Billions are at stake here".
This multi-stage regulatory effort announced by theTreasuryandIRSincludes the following guidance designed to stop the use of basis shiftingtransactionsthat use related-partypartnershipsto avoidtaxes:
proposed regulationsunder existing regulatory authority to stop related parties in complexpartnershipstructures from shifting thetaxbasis of their assets amongst each other to takeabusivedeductions 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 inabusivepartnershipbasis shiftingtransactions; and
aRevenue Rulingproviding that certain related-partypartnershiptransactionsinvolving basis shifting lack economic substance.
"Treasuryand theIRSare focused on addressing high-endtaxabuse from all angles, and the proposed rules released today will increasetaxfairness and reduce the deficit,"said U.S. Secretary of theTreasuryJanet L. Yellen.
In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of largepartnershipswith 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 onpartnerships, S corporations, trusts, and estates.
By Catherine S. Agdeppa, Content Management Analyst
A savingsaccount with the tax benefits of a health savingsaccount or an educations savingsaccount 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.
Asavingsaccountwith the tax benefits of a healthsavingsaccountor an educationssavingsaccountbut 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 recentSenateFinanceCommitteehearingon the subject of childsavingsaccountsand other tax advantagedaccountsthat would benefit children. It also is the subject of a recently releasedreportfrom The Tax Foundation.
Rather thanpushnew limited-usesavingsaccounts,"policymakers may want to consider enacting a more comprehensivesavingsprogram such as auniversalsavingsaccount,"Veronique de Rugy, a research fellow at George Mason University, testified before thecommitteeduring the May 21, 2024, hearing."Universalsavingsaccountswill allow workers to save in one simpleaccountfrom which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."
She noted that, like other more focusedsavingsaccounts, like healthsavingsaccounts, it would have"the benefit of sheltering some income from the punishing double taxation that our code imposes."
De Rugy added thatuniversalsavingsaccounts"have a benefit that they do not discouragesavingsfor 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 ofuniversalsavingsaccounts. He said theseaccounts"would allow families to save for their kids or any of life’s other priorities. The flexibility of theseaccountsmake them best suited for lower and middle income Americans."
He also noted that they are promotingsavingsin countries that have implemented them, including Canada and United Kingdom.
"For example, almost 60 percent of Canadians own tax-freesavingsaccounts,"Michel said."And more than half of thoseaccountholders earned the equivalent of about $37,000 a year. Theseaccountshave helped increasesavingsand support the rest of the Canadiansavingsecosystem."
De Rugy noted that in countries that have implemented it, they function like a Rothaccountin 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 healthsavingsaccounts,"to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment intosavingsby those entities."
Simulating TheUniversalSavingsAccountImpact
The Tax Foundation in its report simulated how auniversalsavingsaccountcould work, based on how they are implemented in Canada. The simulation assumed theaccountscould 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."
The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the taxgapneeds more documentation and transparency, the U.S. Government Accountability Office stated.
The Internal Revenue Service’s use of artificial intelligence in selectingtaxreturns for National Research Programauditsthat areused toestimatethetaxgapneedsmore documentation andtransparency, the U.S.Government Accountability Officestated.
In areportissued June 5, 2024, the federal government watchdog noted that while the agency usesAIto improve the efficiency andselectionofauditcases to help identify noncompliance,"IRS has not completed its documentation of several elements of itsAIsampleselectionmodels, such as key components and technical specifications."
GAOnoted that the IRS began usingAIin a pilot intaxyear 2019 for samplingtaxreturns for NRPaudits. The current plan is to useAIto create a sample size of 4,000 returns to measure compliance and help informtaxgapestimates, althoughGAOexpressed concerns about the accuracy of theestimateswith that sample size.
"For example, NRP historically included more than 2,500 returns that claimed the Earned IncomeTaxCredit, but the redesigned sample has included less than 500 of these returns annually,"the report stated.
IRS toldGAOthat it"is exploring ways to combine operationalauditdata with NRPauditdata when developing itstaxgapestimates. IRS officials also told us that if IRS can reliably combine these data fortaxgapanalysis, IRS might be better positioned to identify emerging trends in noncompliance and reduce the uncertainty of theestimatesdue 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 theAImodels. 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.