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Tuesday October 8, 2024

Washington News

Washington Hotline

Direct File Available in 18 States Next Year

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently announced that Connecticut and Maine will be the 17th and 18th states to join the 2025 Direct File program.

The IRS created a Direct File Pilot Program during the 2024 filing season. Approximately 140,000 taxpayers claimed $90 million in refunds and saved an estimated $5.6 million in filing costs. The IRS has announced it is planning to expand the Direct File program for the 2025 filing season.

The IRS has invited additional states to participate in the expanded program. Oregon, New Jersey, Pennsylvania and New Mexico previously announced they will join the Direct File program. Treasury Secretary Janet Yellen stated, "After a successful pilot this Filing Season, we are pleased to expand the program as a permanent offering and welcome Connecticut as the latest new state to offer this free option to taxpayers."

About 290,000 Connecticut taxpayers will be eligible to file a basic income tax return with Direct File. The return will include W-2 wage income, Social Security income, unemployment compensation, a limited amount of interest income and some credits. Taxpayers must use the standard deduction.

Maine also will join Direct File. The Maine Department of Administrative and Financial Services noted, Direct File is a "simple, convenient, and fast system for filing their federal taxes that will spare Maine taxpayers tax preparation filing fees."

Maine currently operates a state income tax filing program. The Maine Tax Portal will not be part of 2025 Direct File but is expected to be integrated with Direct File for the 2026 filing season.

Maura Pillsbury is a representative of the Maine Center for Economic Policy. She stated, "We are incredibly excited to hear that Maine will opt into this fantastic program. This is a big win for tax fairness and will save Mainers tens of millions of dollars in filing fees and unclaimed tax credits."

The Direct File program claims a high degree of satisfaction. 90% of the Direct File users ranked their experience as "Excellent" or "Above Average."

However, several Senators expressed concern about shortcomings of the Direct File program in a July 31 letter to Commissioner Daniel Werfel. The Senators note, "We write with serious concerns regarding your agency's recent unilateral and unauthorized action to create a permanent Internal Revenue Service (IRS) Direct File tax preparation program. Despite numerous problems and objections from members of Congress, the IRS announced the launch of its permanent Direct File program on May 30, 2024."

The letter expresses multiple concerns. The Direct File program is limited to very basic returns. It excludes categories of taxpayers such as those who "own their own businesses, collect income from property and investment, or work as independent contractors, such as ride-share drivers and delivery workers."

In addition, the Direct File program is not compatible with most state tax returns. A letter from 21 state financial officers to the IRS indicated this will create "challenges for taxpayers and state treasurers and the costs of Direct File far outweigh any potential benefits it may confer to taxpayers."

There is controversy regarding the cost estimates of the program. The IRS claims that Direct File will cost $249 million each year. Alternatively, the existing Free File program involves no cost to taxpayers.

Editor's Note: Secretary Yellen is clear that Direct File is expected to be permanent. Several states have state tax filing portals and are likely to join Direct File in 2025 or 2026. The opinions by members of Congress may lead to greater efforts to correct Direct File's shortcomings.

New ERC Voluntary Disclosure Program

In Announcement 2024-30; 2024-36 IRB 1, the Internal Revenue Service (IRS) announced a new Employee Retention Credit (ERC) disclosure program. The ERC was passed during the COVID-19 pandemic to enable employers to continue paying employees during the pandemic. The employers qualified if their operations were "fully or partially suspended due to a government order, they experienced the required decline in gross receipts, or they were a recovery startup business during the relevant eligibility periods."

Because the IRS was concerned about scams and promoters, they have audited many of the ERC claims. The IRS notes "[t]hose that filed for and erroneously received the ERC face enforcement action from the IRS and are subject to assessment and collection procedures."

The IRS has initiated civil and criminal actions against business owners who filed erroneous ERC claims. In Announcement 2024-3, 2024-2 IRB 364, the IRS announced an initial ERC Voluntary Disclosure Program (VDP). Over 2,600 taxpayers applied for this first ERC VDP before it ended on March 22, 2024. The first disclosure program allowed a participant to retain 20% of the claimed ERC amount. The disclosure program also solved the problem of adjusting the income tax expense for tax returns.

The new Voluntary Disclosure Program is based on an assumption that the participants may retain 15% of the claimed ERC amounts. The disclosure program is available for 2021 tax periods and for employers who used a third-party payer to claim the ERC. The IRS states that the new ERC Voluntary Disclosure Program is intended to "settle erroneous, yet non-willful ERC claims." If a taxpayer is subject to criminal liability, then he or she should check out the IRS Criminal Investigation Voluntary Disclosure Practice.

The ERC is limited to the 2021 tax periods and there are multiple requirements. The participant must not be under criminal investigation, the IRS must not have received whistleblower information about noncompliance, there may not be an IRS employment tax examination underway, the participant must not have been notified that an ERC is subject to being recaptured and the participant must not have received an IRS demand for repayment of all or part of the ERC.

The Voluntary Disclosure Program is available for individuals or for employers who used a third-party payer and filed using the employer identification number (EIN) of the third party. The third-party payer must submit the application for the Voluntary Disclosure Program.

To qualify for VDP, a participant must not have been eligible for ERC but incorrectly applied for a 2021 ERC payment. The employer must return 85% of the claimed ERC to the Department of the Treasury. The employer will not be required to repay the overpayment interest. If the full payment of the 85% of the claimed ERC is paid, there will be no underpayment interest to the IRS.

While an IRS settlement eliminates the ability to claim an ERC, participants also do not have to "reduce wage expense with respect to any of the previously claimed ERC." Therefore, they do not have to file Administrative Adjustment Requests (AARs). The participant "has no income with respect to the resolution of the employment tax obligation by remittance of payment of only 85% of the claimed ERC, including both the refundable and non-refundable portions."

The IRS agrees that it will not assert civil penalties against an employer who participates in the ERC Voluntary Disclosure Program.

How To Apply for ERC Voluntary Disclosure Program

In IR-2024-213, the IRS explains the specific procedures for applications for the new Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP). First, the application deadline is November 22, 2024. Employers whose applications are accepted by the IRS must agree to repay 85% of the ERC amount. The program applies only to the tax periods in 2021, not to the ERC from tax periods in 2020.

If the employer cannot repay the full 85% of the ERC amount, there may be an installment agreement set up on a case-by-case basis. If the installment agreement is created, the employer will "be required to pay penalties and interest in connection with an alternative payment arrangement such as an installment agreement."

One facet of the program requires the employer to provide the IRS with the name, address, telephone number and details about services provided by advisors or tax preparers who assisted with their ERC claim.

The IRS emphasizes that this is not an option for employers who applied for the first ERC VDP for the same tax periods. The employer must not be under a criminal investigation, must not be subject to an IRS employment tax examination, may not have received IRS Letter 6577-C, Employee Retention Credit (ERC) Recapture, has not filed an amended return previously to eliminate ERC and has not received information in an IRS enforcement action that the employer is not in compliance.

To enter the program, the employer must file IRS Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program. This may be submitted on IRS.gov through the IRS Document Upload Tool. The employers who outsource payroll must submit the VDP application through their third-party payroll organization. The application would be submitted with the employer identification number (EIN) of the third party.

After the application is submitted, an IRS employee will contact the employer. If the application is approved, the IRS will mail a closing agreement. At the time that the closing agreement is accepted, the employer must pay 85% of the ERC. The IRS recommends using the Electronic Federal Tax Payment System (EFTPS) to make the payment. If payments are made under an installment agreement, there may also be penalties and interest.

Applicable Federal Rate of 4.8% for September: Rev. Rul. 2024-17; 2024-36 IRB 1 (15 August 2024)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2024. The AFR under Sec. 7520 for the month of September is 4.8%. The rates for August of 5.2% or July of 5.4% 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 August 16, 2024
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