Thursday September 21, 2023
Volunteer Income Tax Assistance Program Protected
The IRS has sponsored a Volunteer Income Tax Assistance (VITA) program for many years. It responded this week to concerns that the potential direct-file system could impact VITA. Don Dill is spokesperson for the IRS Wage and Investment Division and attended a Pittsburgh VITA program conference. He noted, "First and foremost, it is not going to be direct competition" with the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs. He continued, "It is absolutely going to be a supplement to what you are doing in your community."
Some members of the VITA community had expressed concern. Spokesperson Joanna Ain of Prosperity Now noted some concern she has heard from the industry has been along the lines of, "What is the need for VITA now that there is going to be direct free file?" The VITA community has been concerned the grant money to support volunteers would be reduced to pay for the direct-file option.
Ain continued, "For better or worse, we will always need VITA because people will always need that additional support — that additional education to do taxes." Many individuals do not feel comfortable with the tax rules. These volunteers are especially important for seniors, the disabled and people with complicated tax situations.
Dill continued, "Frankly, I think we all know that we have enough people that need our face-to-face traditional service. The more people we can send to another viable option where we know they will not be charged — that's a win for all of us."
The IRS continues to move forward with a pilot program to test a direct-file option for taxpayers. Several VITA leaders expressed an understanding that direct-file could be compatible with their program. Alpha Balde is the VITA program manager for Hispanic Unity of Florida, Inc. He noted, "Our principle is that people who should not have to pay for tax return assistance services should be able to find a mode or outlet to get their taxes done for free, whether it be VITA or TCE, Free File, direct-file — we are okay with it."
IRS Commissioner Daniel Werfel was asked to respond to concerns about direct-file, including state tax returns. He had previously noted the IRS is now reviewing options for including state tax returns in direct-file.
An ongoing issue is the reduction in volunteers who serve individuals through VITA. There were several VITA leaders who pointed out that they are working hard to enlist volunteers. The COVID-19 pandemic caused a dramatic reduction in the number of volunteers. Spokesperson Justin Chu of Prosperity Now noted, "Volunteers are coming back, but not, I think, in the numbers that we expected." These volunteers are essential because there are so many individuals who need individual assistance in preparing their returns.
The volunteer base varies across each program. While some VITA volunteers are made up of primarily retired persons, with a handful of young professionals, others like the Impact America VITA program found that 90% of their volunteers were college students. Overall, organizations note that diversification in their volunteer base is key to sustaining these programs long term.
The IRS has created a new online portal for individuals to sign up as VITA volunteers. IRS spokesperson Don Dill noted, "Candidly, volunteer recruitment has not been one of our strong points… But I do want to let each and every one of you know that we really have recommitted to trying to help you gain more volunteers."
Massive Fraud Blocks ERC Processing
On September 14, 2023, the Internal Revenue Service (IRS) published IR-2023-169 and announced it will stop processing new employee retention credit (ERC) claims. The letter stated, "To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros, aggressive marketing to ineligible applicants highlights unacceptable risk to businesses and the tax system." The moratorium on processing will continue until the end of 2023.
IRS Commissioner Daniel Werfel noted, "We believe we should only see a trickle of employee retention credit claims coming in. Instead, we are seeing a tsunami."
There are now 600,000 ERC claims pending. Most have been received during the last quarter. The IRS plans to continue to process the existing claims. However, it will not be accepting new claims until next year. Werfel concluded, "We are deeply concerned that this program is not operating in the way it was intended."
There is also an IRS program that will allow the taxpayers of the pending 600,000 claims to review and withdraw their claims. Werfel and the IRS remind taxpayers that there are potential criminal consequences for fraudulent claims.
The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act to assist businesses with significant downturns due to the COVID-19 pandemic. ERC applies to businesses who had major downturns between March 13, 2020 and December 31, 2021.
The IRS has regularly warned taxpayers about promoters who are frequently charging contingent fees based on the amount of the ERC refund. The American Institute of CPAs notes it has a professional standard that bars CPAs from charging contingency fees for most tax services.
Commissioner Werfel continued, "Although promoters advertise the ERC submissions as 'risk-free,' there are significant risks facing businesses."
Laurel Blatchford, Treasury Chief Implementation Officer for the Inflation Reduction Act, stated "There is heightened urgency to address the issue now, given the level of unscrupulous marketing and scams IRS is seeing directed at small business owners."
Deputy Treasury Secretary, Adewale O. Adeyamo, sent a letter on Sept. 14 to Senate Finance Committee Chair, Ron Wyden (D-OR). He noted the IRS is attempting to "protect honest taxpayers from scams." He asked for two specific changes. First, Congress should provide the IRS with authority to regulate paid preparers. This would reduce the number of submissions that subject taxpayers to penalties and interest. Second, he suggests Congress create rules that reduce fraud and abuse. Certain practices such as the contingency fee practice for tax advice could be an area to target legislation.
Editor's Note: The IRS has historically discouraged the use of contingency fees for tax professionals. This suggested bar on tax contingency fees is designed to reduce the incentive for tax preparers to claim improper credits. AICPA President Barry Melancon acknowledged that the IRS decision is drastic, but he noted that it is necessary. Melancon stated, "While there are still valid claims to be processed, these bold measures are necessary to combat widespread ERC fraud."
Congress Reviews Nonprofit Political Speech Guidelines
House Ways and Means Committee Chair, Jason Smith (R-MO), and Oversight Subcommittee Chair, David Schweikert (R-AZ), have been reviewing IRS policies on the political campaign speech of nonprofits. They have sent a request for information to multiple organizations with experts who study political speech and its regulation by Congress. There are limits on the activities of Section 501(c)(3) organizations and social welfare groups exempt under Section 501(c)(4).
The Ways and Means Committee has received responses from organizations that both affirm the current policies and express major concerns about potential issues that could impact free speech.
David Keating of the Institute for Free Speech noted, "The Internal Revenue Service knows little about First Amendment protections for free political speech. This is understandable, even if it is inexcusable. The agency's mission 'is to provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and to enforce the law with integrity and fairness to all.' Regulating political speech is far afield of its mission."
Keating expressed concern that the regulation should not be under Section 501(c), but organizations that actually are political action committees should be regulated under Section 527. He notes, "This approach would also recognize that in a democracy, political education and persuasion aimed at the public not only should but must fall within the definition of 'social welfare' and 'educational' activities that constitute exempt activities under Section 501(c)(4)."
The primary concern is that direct lobbying for qualified candidates to office is campaign intervention and is not promotion of general social welfare. However, Keating is concerned that the regulations could drag "the IRS further into the thicket of political regulation, a tangle from which it — and the Service's reputation for neutral, nonpartisan revenue collection — may never recover."
Congress is reviewing whether there should be clarification on the political activities of Section 501(c)(4) groups. Keating noted it is very difficult to create meaningful guidelines. In his opinion, most of the potential guidelines are unconstitutionally vague. These vague guidelines cause serious problems because nonprofits do not understand the boundaries. Vague regulation has a chilling effect on speech because nonprofits understandably are uncertain where the limits are and therefore become hesitant to speak.
Keating continued, "Regulation of political speech should err on the side of avoiding such chill by providing objective rules that can be uniformly applied and clarity in a manner that maximizes the free exchange of ideas guaranteed by the First Amendment."
Since 2015, there has been a provision of all major appropriations bills that precludes the IRS from issuing specific guidance on political activity by Section 501(c)(4) groups. Keating suggests that it is now time to drop this guidance ban.
Congress is also asking whether there should be additional disclosure by Section 501(c) organizations. The disclosures would be designed to reduce the ability of foreign nationals to influence U.S. elections. The Institute for Free Speech opposes these additional disclosures. Keating observes the U.S. Supreme Court has limited similar mandatory disclosures in campaign ads.
On the opposing side of the regulation issue, the Citizens for Responsibility and Ethics in Washington (CREW) expressed concern about the sheer amount of funding that is now flowing through Section 501(c)(4) organizations. Because of the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission, "Tax-exempt organizations that are not required to disclose their contributors, particularly those organized under Section 501(c)(4), have played a significantly increased role in the funding of American elections, resulting in serious gaps in the American public's knowledge about who is seeking to influence their votes and their elected leaders."
Under current guidelines, Section 501(c)(4) organizations must devote 50% or less of their funds to political activities. However, CREW explains that many Section 501(c)(4) entities are able to create offsetting spending through other goals and still comply with the 50% limit. CREW suggests that some of these Section 501(c)(4) entities are primarily in existence to elect specific individuals.
Between 2010 and 2017, the IRS conducted 226 examinations of nonprofits who had questionable political act campaign activity. Only 14 of these examinations were Section 501(c)(4) groups. CREW notes, "While there are certainly legislative and regulatory changes that could help address concerns about the exploitation of loopholes to use tax-exempt organizations to influence American elections without disclosing funding sources, more vigorous enforcement by the IRS of the current rules related to political activity by nonprofit organizations is also essential."
CREW suggests the Section 501(c)(4) limit on political activity should be reduced below 50%. It also favors repealing the ban on IRS action to regulate Section 501(c)(4) organizations.
Editor's Note: The key issue is the potential for foreign nations to actively attempt to effect U.S. elections. There have been widespread media reports during the past two presidential elections that certain foreign nations were very active on social media with the goal of influencing the election. This activity on social media and direct funding of similar efforts through Section 501(c)(4) nonprofits by foreign nationals is prompting the review. The challenge for Congress is to understand how to reduce the impact of foreign nationals and foreign money on elections without limiting the free speech rights of nonprofits.
Applicable Federal Rate of 5.4% for October Rev. Rul. 2023-18; 2023-41 IRB 1 (15 September 2023)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2023. The AFR under Sec. 7520 for the month of October is 5.4%. The rates for September of 5.0% or August of 5.0% 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."
Published September 15, 2023
September is Disaster Preparedness Month
IRS Explores Direct E-File
Companies May Repay Employee Student Loans
IRS Highlights Improved Customer Service
Tax Preparers Must Recognize Data Theft