IRS helps taxpayers by providing penalty relief on nearly 5 million 2020 and 2021 tax returns; restart of collection notices in 2024 marks end of pandemic-related pause

From IRS News 12/19/2023

WASHINGTON – In a major step to help people who owe back taxes, the Internal Revenue Service today announced new penalty relief for approximately 4.7 million individuals, businesses and tax-exempt organizations that were not sent automated collection reminder notices during the pandemic.

The IRS will be providing about $1 billion in penalty relief. Most of those receiving the penalty relief make under $400,000 a year.

Due to the unprecedented effects of the COVID-19 pandemic, the IRS temporarily suspended the mailing of automated reminders to pay overdue tax bills starting in February 2022. These reminders would have normally been issued as a follow up after the initial notice. Although these reminder notices were suspended, the failure-to-pay penalty continues to accrue for taxpayers who did not fully pay their bills in response to the initial balance due notice.

Given this unusual situation, the IRS is taking several steps in advance of resuming normal collection notices for tax years 2020 and 2021 to help taxpayers with unpaid tax bills, including some people who have not received a notice from the IRS in more than a year.

To help taxpayers as the normal processes resume, the IRS will be issuing a special reminder letter starting next month. The letter will alert the taxpayer of their liability, easy ways to pay and the amount of penalty relief, if applied. The IRS urges taxpayers who are unable to pay their full balance due to visit IRS.gov/payments to make arrangements to resolve their bill.

The IRS is also taking steps to waive the failure-to-pay penalties for eligible taxpayers affected by this situation for tax years 2020 and 2021. The IRS estimates 5 million tax returns — filed by 4.7 million individuals, businesses, trusts, estates and tax-exempt organizations — are eligible for the penalty relief. This represents $1 billion in savings to taxpayers, or about $206 per return.

As a first step, the IRS has adjusted eligible individual accounts and will follow with adjustments to business accounts in late December to early January, and then trusts, estates and tax-exempt organizations in late February to early March 2024. Nearly 70 percent of the individual taxpayers receiving penalty relief have income under $100,000 per year.

The IRS is releasing Notice 2024-7, which explains how the agency is providing failure-to-pay penalty relief to eligible taxpayers affected by the COVID-19 pandemic to help them meet their federal tax obligations.

“As the IRS has been preparing to return to normal collection mailings, we have been concerned about taxpayers who haven’t heard from us in a while suddenly getting a larger tax bill. The IRS should be looking out for taxpayers, and this penalty relief is a common-sense approach to help people in this situation,” said IRS Commissioner Danny Werfel. “We are taking other steps to help taxpayers with past-due bills, and we have options to help people struggling to pay.”

This penalty relief is automatic. Eligible taxpayers don’t need to take any action to get it. Eligible taxpayers who already paid their full balance will benefit from the relief, too; if a taxpayer already paid failure-to-pay penalties related to their 2020 and 2021 tax years, the IRS will issue a refund or credit the payment toward another outstanding tax liability.

The penalty relief only applies to eligible taxpayers with assessed tax under $100,000. Eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations that filed certain Forms 1040, 1120, 1041 and 990-T income tax returns for tax years 2020 or 2021, with an assessed tax of less than $100,000, and that were in the IRS collection notice process — or were issued an initial balance due notice between Feb. 5, 2022, and Dec. 7, 2023. The IRS notes the $100,000 limit applies separately to each return and each entity. The failure-to-pay penalty will resume on April 1, 2024, for taxpayers eligible for relief.

Taxpayers who are not eligible for this automatic relief also have options. They may use existing penalty relief procedures, such as applying for relief under the reasonable cause criteria or the First-Time Abate program. Visit IRS.gov/penaltyrelief for details.

If the automatic relief results in a refund or credit, individual and business taxpayers will be able to see it by viewing their tax transcript. The IRS will send the first round of refunds starting now through January 2024. If a taxpayer does not receive a refund, a special reminder notice may be sent with their updated balance beginning in early 2024. Taxpayers with questions on penalty relief can contact the IRS after March 31, 2024.

Help for taxpayers needing assistance
The IRS reminds taxpayers that there are a number of payment options and online tools that can help taxpayers with unpaid tax debts, whether it’s a new tax bill or a long-standing tax debt for an unfiled return.

“The IRS wants to help taxpayers and provide them easy options to deal with unpaid tax bills and avoid additional interest and penalties,” said Werfel. “People receiving these notices should remember that there are frequently overlooked options that can help them set up an automatic payment plan or catch up with their tax filings. Making additional improvements in the collection area will be an important focus for the IRS going forward as we continue and accelerate our transformation work.”

Following funding from the Inflation Reduction Act, it’s now easier for taxpayers to get assistance with tax bills with new self-help tools, like the IRS Document Upload Tool, improved phone service with callback features and the addition of bots that can answer simple questions, set up or modify a payment plan and request a transcript. The IRS also encourages taxpayers to get an IRS Online Account, where they can see information about an unpaid tax bill or apply for an online payment plan.

Resumption of collection notices begins in 2024
In January, the IRS will begin sending automated collection notices and letters to individuals with tax debts prior to tax year 2022, and businesses, tax exempt organizations, trusts and estates with tax debts prior to 2023, with exceptions for those with existing debt in multiple years. These notices and letters were previously paused due to the pandemic and high inventories at the IRS but will gradually resume during the next several months. Current tax year 2022 individual and third quarter 2023 business taxpayers began receiving automated collection notices this fall as the IRS took steps to return to business as usual.

The pause in collection mailings affected only follow-up reminder mailings. The IRS did not suspend the mailing of the first, or initial, balance due notices for taxpayers such as the CP14 and CP161 notices.

The pause meant that some taxpayers who have long-standing tax debt have not received a formal letter or notice from the IRS in more than a year while some of this older collection work has been paused. To help the taxpayers in this category as the normal processes resume, the IRS will be issuing a special reminder letter to them starting next month.

This reminder letter will alert the taxpayer of the liability and will direct them to contact the IRS or make alternative arrangements to resolve the bill. Tax professionals and taxpayers will see these reminder letters in the form of letter LT38, Reminder, Notice Resumption.

This letter will remind taxpayers about their tax liability, giving them an opportunity to address the tax issue before the next round of letters are issued. After receiving the reminder mailing, these taxpayers with long-standing unresolved tax issues will receive the next notice, informing them of a more serious step in the tax collection process.

The IRS urges taxpayers to carefully read any letter or notice they receive before calling the IRS. There are also important resources available to get help for tax debt on IRS.gov.

The IRS will issue these balance due notices and letters in gradual stages next year to ensure taxpayers who have questions or need help are able to reach an IRS assistor. This will also provide additional time for tax professionals assisting taxpayers.

Here’s what taxpayers should know about possible penalties and interest
Taxpayers who owe tax and don’t file on time may be charged a failure-to-file penalty. This penalty is usually 5 percent of the tax owed for each month or part of a month that the tax return is late, up to 25 percent.

The failure-to-pay penalty applies if a taxpayer doesn’t pay the taxes they report on their tax return by the due date or if the taxpayer doesn’t pay the amount required to be shown on their return within 21 calendar days of receiving a notice demanding payment (or 10 business days if the amount is greater than $100,000).

The IRS is required by law to charge interest when a tax balance is not paid on time. Interest cannot be reduced due to reasonable cause. Interest is based on the amount of tax owed for each day it’s not paid in full. The interest is compounded daily, so it is assessed on the previous day’s balance plus the interest. Interest rates are determined every three months and can vary based on type of tax; for example, individual or business tax liabilities. More information is available on the interest page of IRS.gov.

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IRS clarifies rules for new corporate alternative minimum tax

From IRS letter dated 12/15/2023

WASHINGTON — The Department of Treasury and the Internal Revenue Service today issued Notice 2024-10 to provide additional interim guidance on the new corporate alternative minimum tax (CAMT).

Previously, the IRS issued Notice 2023-64, which clarifies and supplements Notice 2023-07 and Notice 2023-20 issued earlier this year. Treasury and IRS anticipate that forthcoming proposed regulations will be consistent with this interim guidance.

The Inflation Reduction Act created the CAMT, which imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of large corporations for taxable years beginning after Dec. 31, 2022. The CAMT generally applies to large corporations with average annual financial statement income exceeding $1 billion.

Today’s guidance provides rules for determining the AFSI of a U.S. Shareholder when a controlled foreign corporation (CFC) pays a dividend to the U.S. Shareholder or another CFC.

The guidance also modifies and clarifies the rules in Notice 2023-64 for determining the applicable financial statement of a corporation that is included in a consolidated tax return.

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IRS: 2024 Flexible Spending Arrangement contribution limit rises by $150

From IRS posting 12/8/2023

WASHINGTON — During open enrollment season for Flexible Spending Arrangements (FSAs), the Internal Revenue Service reminds taxpayers that they may be eligible to use tax-free dollars to pay medical expenses not covered by other health plans through their FSA.

For 2024, there is a $150 increase to the contribution limit for these accounts.

An employee who chooses to participate in an FSA can contribute up to $3,200 through payroll deductions during the 2024 plan year. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax.

If the plan allows, the employer may also contribute to an employee’s FSA. If the employee’s spouse has a plan through their employer, the spouse can also contribute up to $3,200 to that plan. In this situation, the couple could jointly contribute up to $6,400 for their household.

For FSAs that permit the carryover of unused amounts, the maximum 2024 carryover amount to 2025 is $640. For unused amounts in 2023, the maximum amount that can be carried over to 2024 is $610.

It’s important for taxpayers to annually review their health care selections during health care open enrollment season and maximize their savings.

Eligible employees of companies that offer a health flexible spending arrangement (FSA) need to act before their medical plan year begins to take advantage of an FSA during 2024. Self-employed individuals are not eligible.

Expenses to consider

Throughout the year, taxpayers can use FSA funds for qualified medical expenses not covered by their health plan. These can include co-pays, deductibles and a variety of medical products. Also covered are services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.

Before enrollment (if an employer offers an FSA), review any expected health care expenses projected for the year. Participating employees should plan for healthcare activities when they calculate their contribution amounts. Consider:

  • Updating medicine cabinet with necessary supplies.
  • Big ticket expenses.
  • Seasonal needs such as allergy products, sunscreen or warm steam vaporizers.
  • Routine checkups or visits with specialists that regular insurance plans do not cover.
  • Many over-the-counter items that are FSA eligible.
  • Eye exams or dental visits: Out-of-pocket costs for dental and vision care are also covered by an FSA.

Employers are not required to offer FSAs. Interested taxpayers should check with their employer to see if they offer an FSA. More information about FSAs can be found at IRS.gov in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

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Be aware of the ERC solicitor due to the following

IRS expands work on aggressive Employee Retention Credit claims; 20,000 disallowance letters being mailed, more action and voluntary disclosure program coming

WASHINGTON — As part of continuing efforts to combat dubious Employee Retention Credit (ERC) claims, the Internal Revenue Service is sending an initial round of more than 20,000 letters to taxpayers notifying them of disallowed ERC claims. IRS is disallowing claims to entities that did not exist or did not have paid employees during the period of eligibility to prevent improper ERC payments from being made to ineligible entities.

The letters are being sent as the IRS continues increased scrutiny of ERC claims in response to misleading marketing campaigns that have targeted small businesses and other organizations. The IRS mailing is the latest in an expanded compliance effort that includes a special withdrawal program for those with pending claims who realize they may have filed an inaccurate tax return. Later this month, a separate voluntary disclosure program will be unveiled allowing those who received questionable payments to come in and avoid future IRS action.

After an initial review this fall, the IRS determined that a large block of taxpayers did not meet basic criteria for the credit. Starting this week, taxpayers who are ineligible for the credit will begin receiving copies of Letter 105 C, Claim Disallowed.

This group of letters will cover taxpayers ineligible for the ERC either because their entity did not exist or did not have employees for the time period when the credit was claimed.

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” said IRS Commissioner Danny Werfel. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”

“As we continue our audit and criminal investigation work involving the Employee Retention Credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional. If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action.”

Following concerns about aggressive ERC marketing from tax professionals and others, the IRS announced Sept. 14 a moratorium on processing new ERC claims through at least the end of 2023. The IRS noted that enhanced compliance reviews of existing claims submitted before the moratorium is critical to protect against fraud and also to protect businesses and organizations from facing penalties or interest payments stemming from bad claims pushed by promoters.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods.

In July, the IRS said it was shifting its focus to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS has hundreds of criminal cases being worked, and thousands of ERC claims have been referred for audit.

20,000 letters focus on two ERC problem areas

The mailing reflects just part of the ongoing IRS review of these claims. In this group, two categories of claims have been identified and are being disallowed:

  • Entity not in existence during period of eligibility: The ERC applies to qualified wages for periods between March 13, 2020, and Dec. 31, 2021. Entities established after Dec. 31, 2021, are not entitled to the ERC under the law passed by Congress.
  • There are no paid employees during the period of eligibility: The ERC is intended as a credit against qualified wages paid. Entities that did not pay any wages are not eligible for ERC.

The IRS respects taxpayer rights, and the disallowance letter will explain that a taxpayer that disagrees with the disallowance can respond with documentation that supports their eligibility or claim amount, or they can file an administrative appeal.

The disallowance letters that identify ineligible claims before they’re paid serve several purposes that help taxpayers and tax administration. They:

  • Help ineligible taxpayers avoid audits, repayment, penalties and interest,
  • Protect taxpayers by preventing an incorrect refund from going to an ERC promoter, and
  • Save IRS resources by disallowing incorrect credits before they enter the audit process.

The IRS plans additional letters beyond the disallowance letters. Plans are also being finalized for a special voluntary disclosure program involving ERC claims that will be announced later this month.

The IRS is also continuing to review ERC claims and may request more information from taxpayers to support their ERC claim.

IRS reminder: Still time to withdraw pending ERC claims

The IRS is also continuing to accept and process requests to withdraw a taxpayer’s full ERC claim under the special withdrawal process. Taxpayers have until at least the end of the year to request a withdrawal.

This withdrawal option allows certain employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest and penalties. Employers that submitted an ERC claim that has not yet been paid can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible. They can also withdraw their claim if they’ve received a check but have not yet deposited or cashed it.

The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest.

During this period, the IRS warns taxpayers to use extreme caution before applying for the ERC as aggressive maneuvers continue by marketers and scammers. In addition, the IRS continues to urge taxpayers who submitted claims to review the ERC requirements and talk to a trusted tax professional about their eligibility amid misleading marketing around the credit.

For more information on ERC eligibility, see the ERC frequently asked questions and the ERC Eligibility Checklist, which is available as an interactive tool or as a printable guide.

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