IRS Updates

The IRS has acknowledged that it had a significant backlog of unprocessed tax forms and refunds claimed on behalf of deceased taxpayers but has taken steps to resolve the issue. National Taxpayer Advocate Erin Collins said in her blog that the backlog was the result of paper Forms 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, received for 2022 and 2023 not being properly processed by the IRS. The IRS has prioritized its processing of Forms 1310 and only had about 1,100 unprocessed returns at the beginning of August.

While the IRS has added Form 1310 to its modernized e-file platform, not all Forms 1310 are supported, and some require paper filing. Unfortunately, the Forms 1310 filed for 2022 and 2023 were not properly processed. If a Form 1310 is unprocessed, the IRS can't process the associated final return and issue a refund. Because the IRS must manually issue a refund once the Form 1310 has been processed, there were significant delays in issuing the refunds for 2022 and 2023. The IRS has identified the cause of the issue and worked to decrease the backlog of unprocessed Forms 1310 and manually issue the associated refunds.

The IRS has announced additional actions it is taking to help small businesses with their employee retention credit (ERC) claims and prevent improper payments to ineligible taxpayers. The steps being taken include accelerating the payment of some ERC claims it has received and continuing its compliance work after the agency was flooded with claims following misleading marketing of the credit.

The moratorium period on new ERC claims that has been in place since September 2023 will be “shifted” and the IRS will begin processing claims filed between Sept. 14, 2023, and Jan. 31, 2024. As with the rest of its ERC inventory, the agency will focus on the highest and lowest risk claims where the IRS has a sound basis for paying or denying the claim.

The IRS is moving too quickly pay 50,000 of the claims it has received and deemed to be low risk. Payments will begin in September and another large block of low-risk claims will be processed and paid in the fall. The agency has also sent out 28,000 disallowance letters in recent weeks to businesses with claims that showed a high risk of being incorrect, preventing up to $5 billion in improper payments.

In those cases where ERC claims have been improperly denied, the IRS said it will work with taxpayers to ensure any errors are corrected. It reminded businesses with denied ERC claims that they can file an administrative appeal by responding back to the address of the denial letter. While some recent mailings omitted a paragraph highlighting the process for filing an appeal to the IRS or district court, the agency is taking steps to ensure that taxpayers receive notices with the correct language.

The IRS has released information on a new round of processing for employee retention credit (ERC) claims it received and believes have a low risk of error. However, the agency will be denying tens of thousands of high-risk claims where it concluded the taxpayer is clearly ineligible for the credit. The IRS added that 60-70% of those claims not falling into the high- or low-risk categories still show an unacceptable level of risk and additional analysis and information will be needed. During a recent review, the IRS reached the following conclusions about the ERC claims it has received:

• 10-20% show a low risk of error and are likely to be paid
• 60-70% show an unacceptable level of risk and will require additional information
• 10-20% show high-risk indicators that will be rejected

Taxpayers with ERC claims that are still being processed are being urged not to take any further action or contact the IRS. The agency said it is taking longer to process claims that it did last summer and that taxpayers should await notification from the IRS. The moratorium on new ERC claims continues.

The IRS says it is aware that some taxpayers are receiving CP14 (Balance Due, No Math Error) notices showing they have a 2023 balance despite having made payments with their returns. Taxpayers who receive the notice but paid their tax bill in full and on time electronically or by check should not respond to the notice at this time, the IRS says. The agency apologized for any inconvenience the notices may have caused, is researching the matter and will provide an update as soon as possible.

According to the IRS, taxpayers who paid electronically or by check with their 2023 return may show their accounts as pending, even though the IRS received and processed the payment through their bank. The IRS says the notice may have been initiated before the payment was processed, or the payment may have been processed, but contained errors requiring additional handling before the account could be updated.

Any assessed penalties and interest will be adjusted automatically when the taxpayer's payment is applied correctly by the IRS. However, taxpayers who paid only part of their 2023 tax due should pay the remaining balance or follow the instructions on the notice to enter into an installment agreement or request additional collection alternatives.

The IRS has closed its Direct File pilot program after more than 140,000 taxpayers in 12 states used the system to e-file returns. The IRS implemented the Direct File pilot to test the feasibility of a system that allows taxpayers to file their federal income tax returns directly with the agency for free but has not decided whether it will continue the program.

Since the pilot program began in March 2023, the IRS has collected and analyzed user data. The agency will continue its analysis and plans to issue a report on Direct File's scope, technology and taxpayer experience, customer support, state integration, costs and benefits. Over the next few weeks, the IRS will also meet with a variety of partners and stakeholders to learn more about how taxpayers interacted with the Direct File system.

By the final week of the filing season, Direct File was accepting more than 5,000 returns a day and taxpayers using the system claimed more than $90 million in refunds and reported balances due of $35 million. The states from which the most Direct File returns were accepted were California (33,328), Texas (29,099) and Florida (20,840).

IRA beneficiaries subject to the 10-year payout period are not required to take required minimum distributions in 2024, according to IRS Notice 2024-35. The SECURE Act of 2019 provides that most non-spouse beneficiaries of IRA owners who die after 2019 are subject to a 10-year payment rule with a required beginning date (RBD) that is usually April 1 of the year after the owner turns 73. The IRS required that the annual RMDs be paid in years 1-9 of the 10-year period if the IRA owner died on or after the date the RMDs were required to begin.

The IRS had previously excused annual RMDs for non-spouse beneficiaries of IRA owners who died in 2020 or later for 2021-2023. The agency also excused annual RMDs for 2022 and 2023 for beneficiaries who inherited in 2021 after the owner's RBD and 2023 RMDs for those who inherited in 2022 after the owner's RBD. Notice 2024-35 adds an additional year of relief so taxpayers who inherited after 2019 and subject to the 10-year payout rule won't be required to receive annual RMDs before 2025, but will be required to do so beginning that year.

The IRS has announced that it plans to begin dozens of audits related to the personal use of business aircraft after conducting few examinations of aircraft use for the past decade due to a lack of resources. The audits will focus on whether the usage of aircraft by large corporations, large partnerships and high-income taxpayers is being properly allocated between business and personal use. The number of audits could increase in the future based on the initial results and as the IRS continues hiring examiners.

The examinations are part of a larger effort by the IRS to ensure large corporations, large partnerships and high-income individual filers pay the taxes they owe. The agency has already collected $482 million as part of its efforts to recoup taxes owed by 1,600 millionaires. The IRS is also pursuing multi-million-dollar balance sheet discrepancies at partnerships and ramping up audits of more than 75 of the largest partnerships using artificial intelligence.

The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide to help small businesses meet the new beneficial ownership information (BOI) reporting rules that go into effect Jan. 1, 2024. The guide contains answers to key questions, interactive flowcharts, checklists and other items to help companies determine whether they need to file a BOI report.

The reports include information on the entity, beneficial owners and company applicants. A beneficial owner is usually an individual who owns or controls at least 25% of a company or has substantial control over it. A company applicant is generally the person primarily responsible for filing the documents to register the company.

Reports must be filed electronically using FinCEN's secure filing system beginning Jan. 1, 2024, but reporting companies created before that date will have until Jan. 1, 2025, to file their initial BOI report. Companies created or registered to do business after registration begins will have 30 days to file after receiving notice of its creation or registration.

The Tax Relief for American Families and Workers Act, which passed the House on Jan. 31, awaits consideration in the Senate  There is strong belief that the bill will pass.

What this means, however, is that there would be retroactive tax law changes which will change the tax returns we are currently working on.  The IRS has stated that it takes them about 6 weeks to update their systems once there is a law change.

Therefore, we will be holding any e-filing of tax returns until we have one of two answers:

1. The bill doesn’t pass, Or

2. The bill does pass which we will not be e-filing until the IRS updates their systems, at least after March 1.

• Effective January 1, 2024, Milwaukee County sales and use tax rate increases from 0.5% to 0.9%.
• Effective January 1, 2024, city of Milwaukee imposes a new 2% sales and use tax.

2023 Wis. Act 12 authorized the city of Milwaukee and Milwaukee County to enact ordinances to impose the new city sales and use tax and increase the Milwaukee County sales and use tax rate.

Who Must Pay County and City Sales and Use Tax?

Sellers:
• All sellers registered to collect Wisconsin sales and use tax must also collect the county tax if making taxable sales to locations in Milwaukee County and the city tax if making taxable sales to locations in
the city of Milwaukee, regardless of where the seller is located.
• Sellers report county and city sales and use taxes on the Wisconsin sales and use tax return. Most sellers are required to file and pay using My Tax Account, the department's online filing and payment
system at revenue.wi.gov.

Purchasers:
• All purchasers that store, use, or consume taxable products and services in Milwaukee County or the city of Milwaukee must pay the 5% state, county, and city use tax, as applicable, if the seller does not
collect the taxes.
• Purchasers may report and pay use tax to the department on their sales and use tax return if the seller does not charge sales tax. If a purchaser is not registered to file sales and use tax returns, they may report the use tax on their individual Wisconsin income tax return or Form UT-5, Consumer's Use Tax Return.

View the Wisconsin Dept of Revenue Milwaukee Sales and Use Taxes FACT SHEET here.

Penalty relief for tax years 2020 and 2021
The IRS has announced 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.

In February 2022, the IRS suspended the mailing of automated reminders to pay overdue tax bills, but the failure-to-pay penalty continued to accrue for taxpayers who did not fully pay their bills in response to the initial balance due notice.

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.

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.

This penalty relief is automatic. 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. 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.

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 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.