Tuesday November 28, 2023
September is Disaster Preparedness Month
The fall season may involve hurricanes, tornadoes, floods, fires, earthquakes and other natural disasters. September is a good month to focus on safeguarding your essential documents. You should create a list for preparedness and secure your important documents.
If you are in a natural disaster, having a file of important documents will be important. Relief by the Federal Emergency Management Agency (FEMA) and other disaster agencies may depend on your ability to recover records and submit an application.
Each individual should gather important documents and place them in water and fireproof containers or a bank safe deposit box. There are several categories of important documents to collect.
- Personal Identification — Personal items include birth certificates, passports, Social Security cards, Medicare cards, driver's licenses and marriage certificates.
- Financial Documents — You should collect all of your bank and investment statements. These may include the statements for your IRA, 401(k), 403(b) or other retirement plans. It is helpful to retain at least three years of your income tax returns (some individuals keep six years) and titles and registrations for your cars, trucks, RVs, boats and other vehicles. You should have a copy of your home, auto, life, health and other insurance policies as well.
- Real Estate Records — If you are a homeowner, you will want to retain a deed to the property and mortgage agreements. If you own other real estate, you may also have lease or rental agreements. It is important to keep records of your home improvements such as the addition of solar panels or battery backup system.
- Estate Documents — Each individual should have a will. For some individuals a living trust may be advisable. You may also have an advance healthcare directive or a durable power of attorney for finances. It is good to retain copies of the beneficiary designations for your retirement plans, insurance and financial pay–on–death (POD) accounts. In some states, you also may have real estate pay–on–death accounts. You can avoid probate on most estate property through your beneficiary designations. You should retain copies of all these documents in your disaster preparedness file.
- Medical Records — Your medical information could include your health insurance, immunization records, a list of your prescription medications and any other important medical history.
- Education and Employment — It is helpful to retain copies of diplomas and education transcripts. If you have any work-related licenses or professional certificates, those records should be included in your file.
- Personal Records — Many individuals keep digital copies of family photos. If you served in the military, you should safely store your service and honorable discharge records. If you have become a United States citizen, you should keep a record of the naturalization papers.
- Emergency Contacts — It is helpful to have a list of emergency contacts. These will frequently be family members. You also may wish to list the names and contact information for your doctors, financial planner, attorney or other advisor.
As individuals discovered during the Lahaina fire in Maui, you may not have a great deal of warning time before an evacuation. Many Lahaina residents had five minutes or less notice they would need to flee. If you know the location of your cash and valuables, you will be able to gather them quickly and then evacuate.
Editor's Note: It is good to review your natural disaster preparedness plan each September and update these files. Many individuals also have a senior parent or other relative in assisted living or a nursing home. You can provide a great service to them with an annual checkup on their important documents.
IRS Promises Audits of 1,600 Millionaires
This week, Internal Revenue Service (IRS) Commissioner Danny Werfel stated that the IRS is allocating a portion of the Inflation Reduction Act (IRA) funding to audit approximately 1,600 millionaires. These individuals each owe in excess of $250,000 in past-due taxes each. Collectively, Werfel notes they owe "hundreds of millions of dollars in taxes."
Commissioner Werfel stated, "These are sweeping and historic changes that will alter the landscape of our compliance work."
During recent years, the IRS has reduced the number of audits for affluent taxpayers due to staff reductions. As a result of reduced audits, the "tax gap" between what is owed and the amount paid has increased. Former IRS Commissioner Charles Rettig indicated that the tax gap each year could now be approaching $1 trillion.
While the specific tax gap amount is uncertain, Commissioner Werfel notes it is a large number. He indicates that the program will start with audits of 75 large partnerships. These are hedge funds, real-estate investment partnerships, publicly-traded partnerships and law firms with an average of $10 billion in assets each.
Werfel acknowledges these audits are complicated because affluent taxpayers have very-skilled CPAs and tax attorneys. The IRS believes that new artificial intelligence capabilities will enable it to find opportunities to collect additional revenue. Werfel continued, "But we absolutely believe this is the right thing to do to make sure there is tax fairness."
The IRS also plans to audit 500 partnerships with net worth of $10 million or more. It will focus on partnerships with cryptocurrency assets and foreign bank accounts.
An increased level of audits is important for the IRS because of the Senate and House negotiations over the annual budget. The challenge for the IRS is that the staffing has decreased in the departments in charge of the audits.
The Large Business and International Division had a net loss of 82 revenue agents last year, with 97 employees parting ways and only hiring 15 new revenue agents. The Small Business/Self-Employed Division had a net loss of 186 revenue agents. During the past decade, the IRS has not been able to reach its goal of 90,000 full-time employees. While it did hire 5,000 customer-service agents, Werfel acknowledges it will need to hire skilled staff for the audits of the 1,600 millionaires.
Editor's Note: Artificial intelligence may help. However, the IRS continues to be short of revenue agents. In addition, the new agents will take time to learn their necessary skills. Revenue agents will be facing the highly qualified CPAs and attorneys of affluent taxpayers.
ERC Claims May Be Audited
The employee retention credit (ERC) was created during the COVID-19 pandemic. Congress determined it would be good to refund a portion of employer taxes for businesses that suffered substantially during the economic downturn.
Because the opportunity to apply for the ERC payments is still open and there are billions of federal dollars available, a substantial industry of ERC promoters has arisen. While most of the ERC claims are legitimate, the sheer scale of the program has led to a significant number of fraudulent ERC claims.
IRS Commissioner Werfel notes that many promoters do not file correct claims and ignore multiple deductions in the claimed amount. Some of these claims are merely inaccurate, but others are fraudulent. In July, a New Jersey tax preparer was arrested for preparing 1,300 false returns that claimed $124 million in fraudulent ERC payments.
On July 26, Commissioner Werfel noted the IRS cleared a backlog of ERC claims. The IRS is now focused on auditing questionable claims. Improperly claimed ERCs must be repaid and repayment could cause major problems for small businesses that have spent these amounts.
Former IRS Commissioner Charles Rettig suggested there may be opportunities for lenience if the payment was taken by the business in good faith, even though the ERC promoter was not honest. Because the ERC qualification was quite complex, many business owners were vulnerable to the promises and high-pressure pitches of ERC promoter mills.
The problem for many small businesses is that ERC claims were frequently from $200,000 to $400,000 in value. If the small business has spent most of this and is required to repay the ERC amount, this could be a substantial problem.
Former National Taxpayer Advocate, Nina Olson, suggested that taxpayers who did operate in good faith but were victimized by a promoter may be able to make an offer in compromise (OIC). This could allow them to settle their obligation for a reduced amount. Olson, currently the Executive Director at the Center for Taxpayer Rights stated, "You really have to look at the type of taxpayer that you have got and their subjective ability."
Other tax attorneys caution that there is significant risk. Professor Steve R. Johnson of the Florida State University College of Law, formerly a senior attorney at the IRS Office of Chief Counsel, noted, "There are plenty of situations in which people, for reasons more or less understandable, have gotten themselves into trouble. You make a bad decision; you pay for it."
There are a number of individuals and small business owners who were vulnerable to these aggressive claims. However, former IRS Commissioner Rettig notes that in taking the ERC amount, they may have been unfairly competing against honest businessowners who were disadvantaged because they did not want to take an improper credit.
Olson concluded it is important for the IRS to communicate the risk for small businesses. The IRS should "Really go on the airwaves...get your media people out talking to local papers."
Editor's Note: Over 90% to 96% of ERC claims are likely to be honest and correct. However, the sheer scale of billions of available federal dollars invites fraud. Some CPAs report they advised clients that their businesses were not qualified. However, the business owners listened to ERC promoters, filed applications and collected improper amounts. These CPAs likely advised clients with questionable ERC payments to save the funds in case the IRS requires repayment.
Applicable Federal Rate of 5.0% for September -- Rev. Rul. 2023-16; 2023-37 IRB 1 (15 August 2023)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2023. The AFR under Sec. 7520 for the month of September is 5.0%. The rates for August of 5.0% or July of 4.6% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% 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."