he IRS has several options to help businesses who have discovered they have questionable ERC claims. 

  • Claim withdrawal: Given the large number of questionable claims identified in the recent review, the IRS continues to urge ineligible businesses with unprocessed claims to consider the ERC Withdrawal Program to avoid future compliance issues. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply. 
  • Amending a return: Businesses that overclaimed the ERC can amend their returns to correct the amount of their claim.

The IRS reminds businesses about these other common issues being seen. The agency has continued to issue warnings involving these seven areas:

  • Too many quarters being claimed. Some promoters have urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon, and this could be a sign of an incorrect claim. Employers should carefully review their eligibility for each quarter.
  • Government orders that don’t qualify. Some promoters have told employers they can claim the ERC if any government order was in place in their area, even if their operations weren’t affected or if they chose to suspend their business operations voluntarily. This is false. To claim the ERC under government order rules: 
    • Government orders must have been in effect and the employer’s operations must have been fully or partially suspended by the government order during the period for which they’re claiming the credit.
    • The government order must be due to the COVID-19 pandemic.
    • The order must be a government order, not guidance, a recommendation or a statement. Some promoters suggest that an employer qualifies based on communications from the Occupational Safety and Health Administration (OSHA). This is generally not true. See the ERC FAQ about OSHA communications and the 2023 legal memo on OSHA communications for details and examples. The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Employers should make sure they have documentation of the government order related to COVID-19 and how and when it suspended their operations. Employers should avoid a promoter that supplies a generic narrative about a government order.  
  • Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. The law changed throughout 2020 and 2021. There are dollar limits and varying credit amounts, and employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. The IRS urges employers to carefully review all calculations and to avoid overclaiming the credit, which can happen if an employer erroneously uses the same credit amount across multiple tax periods for each employee. For details about credit amounts, see the Employee Retention Credit – 2020 vs 2021 Comparison Chart.  
  • Business citing supply chain issues. Qualifying for ERC based on a supply chain disruption is very uncommon. A supply chain disruption by itself doesn’t qualify an employer for ERC. An employer needs to ensure that their supplier’s government order meets the requirements. Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions
  • Business claiming ERC for too much of a tax period. It’s possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter. A business in this situation can claim ERC only for wages paid during the suspension period, not the whole quarter. Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim. 
  • Business didn’t pay wages or didn’t exist during eligibility period. Employers can only claim ERC for tax periods when they paid wages to employees. Some taxpayers claimed the ERC but records available to the IRS show they didn’t have any employees. Others have claimed ERC for tax periods before they even had an employer identification number with the IRS, meaning the business didn’t exist during the eligibility period. The IRS has started disallowing these claims, and more work continues in this area as well as other aspects of ERC. 
  • Promoter says there’s nothing to lose. Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they “have nothing to lose.” Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns or represent them in an audit. 

The Department of the Treasury and the Internal Revenue Service today issued final regulations updating the required minimum distribution (RMD) rules.

The final regulations reflect changes made by the SECURE Act and the SECURE 2.0 Act impacting retirement plan participants, IRA owners and their beneficiaries. At the same time, Treasury and IRS issued proposed regulations, addressing additional RMD issues under the SECURE 2.0 Act.

While certain changes were made in response to comments received on the proposed regulations issued in 2022, the final regulations generally follow those proposed regulations.

Specifically, Treasury and IRS reviewed comments suggesting that a beneficiary of an individual who has started required annual distributions should not be required to continue those annual distributions if the remaining account balance is fully distributed within 10 years of the individual’s death as required by the SECURE Act. However, Treasury and IRS determined that the final regulations should retain the provision in the proposed regulations requiring such a beneficiary to continue receiving annual payments.

The new proposed regulations include provisions for which Treasury and IRS are soliciting public comments, including provisions addressing other changes relating to RMDs made by the SECURE 2.0 Act. For details on how to submit comments, see the proposed regulations.

promoters, social media peddling inaccurate eligibility suggestions.

Taxpayers urged to talk to a trusted tax professional, not rely on marketers or social media for tax advice

IR-2024-187, July 15, 2024

WASHINGTON — The Internal Revenue Service issued a consumer alert today following bad advice circulating on social media about a non-existent “Self Employment Tax Credit” that’s misleading taxpayers into filing false claims.

Promoters and social media are marketing something they describe as the “Self Employment Tax Credit” as a way for self-employed people and gig workers to get big payments for the COVID-19 pandemic period. Similar to misleading marketing around the Employee Retention Credit, there is inaccurate information suggesting many people qualify for the tax credit and payments of up to $32,000 when they actually do not.

In reality, the underlying credit being referred to in social media isn’t called the “Self Employment Tax Credit,” it’s a much more limited and technical credit called Credits for Sick Leave and Family Leave. Many people simply do not qualify for this credit, and the IRS is closely reviewing claims coming in under this provision so people filing claims do so at their own risk.

“This is another misleading social media claim that’s fooling well-meaning taxpayers into thinking they’re due a big payday,” said IRS Commissioner Danny Werfel. “People shouldn’t be misled by outlandish claims they see on social media. Before paying someone to file these claims, taxpayers should consult with a trusted tax professional to see if they meet the very limited eligibility scenarios.”

People who were self-employed can claim Credits for Sick and Family Leave only for limited COVID-19 related circumstances in 2020 and 2021; the credit is not available for 2023 tax returns. The IRS is seeing repeated instances where taxpayers are incorrectly using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to incorrectly claim a credit based on income earned as an employee and not as a self-employed individual.

To qualify for the Sick and Family Leave Credits, self-employed workers have to meet a variety of technical reasons in 2020 and 2021 that didn’t allow them to work, including caring for an individual subject to a quarantine or isolation order. The IRS has a detailed set of FAQs describing the very technical requirements for meeting this provision of the law.

The IRS is seeing some similarities to marketing around this “Self Employment Tax Credit” similar to aggressive promotion of the Employee Retention Credit. Both are technical credits that have been mischaracterized by some as a way for average taxpayers to get a big government payment. In reality, these are very limited credits that have a variety of complex requirements before people can qualify.

The IRS urges people to check with a trusted tax professional before filing for any “Self Employment Tax Credit” or any other questionable tax claim circulating on social media.

The IRS has previously warned taxpayers about misuse of the Sick and Family Leave Credits stemming from various tax scams and inaccurate social media advice that led thousands of taxpayers to file inflated refund claims during the past tax season.

In addition to the Sick and Family Leave Credit, the IRS warned taxpayers not to fall for these scams centered around the Fuel Tax Credit and household employment taxes. The IRS has seen thousands of dubious claims come in where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims.

The IRS continues to urge taxpayers to avoid these scams as myths continue to persist that these are ways to obtain a huge refund. Many of these scams were highlighted during this spring’s annual Dirty Dozen series, including the Fuel Tax Credit scam, bad social media advice and “ghost preparers.”

“These improper claims have been fueled by social media and people sharing bad advice,” Werfel said. “Scam artists constantly prey on people’s hopes and try to use the complexity of the tax system to convince people there are secret ways to get a big refund. All of these scams illustrate that it’s important to carefully review the tax return for accuracy before filing and rely on the advice of a trusted tax professional, not someone trying to make a quick buck or a questionable source on social media.”

As part of continuing efforts to combat dubious Employee Retention Credit (ERC) claims, the IRS is sending letters to thousands of taxpayers notifying them of disallowed ERC claims. The IRS is rejecting claims to entities that did not exist or did not have paid employees during the period of eligibility.

These letters are part of 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.

Taxpayers must fi rst apply rental real estate losses from
rental activities they own and actively participate in
against other non-real estate passive income for the
year. If there is still an excess passive loss generated
by the real estate rental activity, the taxpayer may
then offset up to $25,000 of passive activity losses and
credits from the activity against active income. This
exception is available only to individual taxpayers or
their estates for tax years ending less than two years
subsequent to the date of death.
This $25,000 offset is reduced or phased out as the
taxpayer’s modifi ed adjusted gross income (MAGI)
exceeds $100,000. Section 469 requires that the
$25,000 offset be reduced by 50% of the taxpayer’s
MAGI in excess of $100,000. Thus, a taxpayer with
MAGI of $150,000 or more will not be allowed to
deduct any passive rental real estate losses currently, as
the entire $25,000 will be phased out and suspended.
For the purposes of this exception, MAGI is
computed by disregarding:
• Taxable social security and Railroad Retirement
Benefi ts.
• The exclusion for qualifi ed U.S. savings bond
interest used to pay higher education expenses.
• The exclusion for employer adoption assistance
payments.
• Passive activity income or loss on Form 8582.
• Any overall loss from publicly traded partnerships.
• Rental real estate losses allowed to real estate
professionals.
• Deductions for contributions to IRAs and pension
plans.
• The deduction for one-half of self-employment
taxes, interest on student loans, and higher
education expenses.
• Deductions attributable to domestic production
activities.

A backdoor Roth contribution is used by taxpayers
whose MAGI is too high for a direct Roth IRA
contribution because the MAGI limit does not apply
to Roth conversions. When this occurs, taxpayers can
still make a nondeductible traditional IRA contribution
by April 15 of the following tax year to be treated as a
contribution on Dec. 31 for the current tax year, then
convert it immediately to a Roth IRA. However, the
catch is that some of the amount could be taxable when
they make the conversion. The idea with a backdoor
Roth contribution is that none of the conversion will
be taxable since it generally stems from nondeductible
traditional IRA contributions.

Compliance efforts continue involving high-wealth groups, corporations, partnerships   

WASHINGTON – As part of continuing compliance efforts under the Inflation Reduction Act, the Internal Revenue Service today announced the agency has surpassed the $1 billion mark in collections from high-wealth taxpayers with past-due taxes.

As part of larger efforts taking place, the IRS has stepped up activity specifically on 1,600 individuals whose incomes were more than $1 million per year and who each owed the IRS more than $250,000 in recognized tax debt. Since last fall, this IRS compliance effort has generated more than $1 billion in collections from this group, with work continuing in this area.

“With this collection activity, the IRS passed an important milestone in our effort to improve compliance and ensure fairness in the tax system,” said IRS Commissioner Danny Werfel. “Our increased work in this area means these past-due tax bills from high-end taxpayers are no longer being left on the table, like they were too often in the past.”

“Years of funding declines meant the IRS couldn’t get to money that we knew was owed, but we simply didn’t have the resources or staffing to collect,” Werfel added. “Funding from the Inflation Reduction Act is reversing a decade-long decline in our compliance work, including increasing our compliance work involving the wealthiest individuals and groups with tax issues. The collection results achieved in less than a year reveal the magnitude of what can be achieved over the long run as our Inflation Reduction enforcement continues to ramp up in the months ahead.”

Werfel noted that Inflation Reduction Act resources continue to help in a variety of areas. In addition to  improving taxpayer service during the successful 2024 filing season, the IRS has focused IRA resources on expanded enforcement work to pursue complex partnerships, large corporations and high-income, high-wealth individuals who do not pay overdue tax bills.

“We continue working to add staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law,” Werfel said. “At the same time, we are focused on improving our taxpayer service for hard-working taxpayers. The additional resources the IRS received under the Inflation Reduction Act are making a difference, both for taxpayers who play by the rules and those who don’t.”

Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated maneuvers that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is continuing to take action to close this gap. 

Today’s announcement involves a segment of high-income individual taxpayer cases. Last fall, the IRS ramped up efforts to pursue high-income, high-wealth individuals who failed to pay a tax bill. These high-end collection cases are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt.

Out of a total of 1,600 of these cases, the IRS has assigned 1,500 to revenue officers, with over $1 billion collected so far. The $1 billion collected through spring represents payments from over 1,200 individuals, with the IRS anticipating the figure to grow in the months ahead.

IRS continues work on high-wealth non-filers, complex partnerships, large corporations

The IRS has a variety of other efforts underway to improve tax compliance in overlooked areas where the agency did not have adequate resources prior to Inflation Reduction Act funding.

Earlier this year, the IRS announced a new effort focused on high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017. Non-filers receive IRS compliance letters alerting them that the IRS is aware of their missing return and encouraging them to file or contact the IRS. The new initiative involves more than 25,000 people with more than $1 million in income, and over 100,000 people with incomes between $400,000 and $1 million between tax years 2017 and 2021.

These are all cases where the IRS has received third party information—such as through Forms W-2 and 1099s—indicating these people received income in these ranges but failed to file a tax return. Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that didn’t allow these cases to be worked. With new Inflation Reduction Act funding available, the IRS now has the capacity to do this core tax administration work.

The IRS anticipates having more details related to this non-filer initiative later this year.

Other elements of the agency’s renewed compliance focus include:

  • Abusive use of partnerships. Last month, the IRS announced a new series of steps to combat abusive partnership transactions that allow wealthy taxpayers to avoid paying what they owe.
  • Activities involving large corporations and partnerships. These efforts include opening examinations of 76 of the largest partnerships in the U.S., representing a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. Other activities include expanding the large corporate compliance (LCC) program.
  • Aircraft use. In February, the IRS announced plans to begin dozens of audits involving personal use of business aircraft. The audits will focus on aircraft usage by large corporations, large partnerships and high-income taxpayers. The IRS will examine whether the use of jets is being properly allocated between business and personal use.

New IRS teams being established; new guidance designed to stop partnerships from using sophisticated tax-free transactions that lack economic substance

IR-2024-166, June 17, 2024

WASHINGTON — As part of ongoing efforts to focus more attention on high-income compliance issues, the Internal Revenue Service announced today a new series of steps to combat abusive partnership transactions that allow wealthy taxpayers to avoid paying what they owe.

IRS compliance work continues to accelerate in this complex area of law following Inflation Reduction Act funding. As part of this, the agency is announcing a new dedicated group in the Office of Chief Counsel specifically focused on developing guidance on partnerships, including closing loopholes. The office will work closely with a new pass-through work group being established in the IRS Large Business and International division that will be formally established this fall.

The IRS and the Department of the Treasury today also issued three pieces of guidance focused on partnerships following discoveries by IRS audit teams. Currently, the IRS has tens of billions of dollars of deductions claimed in these transactions under audit.

The new guidance is designed to stop the use of “basis shifting” transactions that use related-party partnerships to avoid taxes. In these complex moves, high-income taxpayers and corporations strip basis from assets they own where the basis is not generating tax benefits and then move the basis to assets they own where it will generate tax benefits without causing any meaningful change to the economics of their businesses. These basis shifting transactions allow closely related parties to avoid taxes.

Treasury estimates these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period.

“This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long,” said IRS Commissioner Danny Werfel. “We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here.”

Using IRA funds, the IRS is increasing audits on complex partnerships, and the issues covered in this guidance will emerge as an important focus area.

The IRS is looking at these issues in current audits and will equip examiners to identify these issues on other partnership returns identified for examination as part of either the Large Partnership Compliance (LPC) program, partnership audit campaigns or other selection methods.

In addition, the new guidance provides greater clarity to taxpayers and examiners. And when final regulations are issued, the increased reporting requirements under the Transactions of Interest (TOI) announced today would give the IRS greater awareness of these arrangements, which are difficult to identify from the face of the tax return.

Werfel noted the guidance today is another sign that IRS compliance activity involving partnerships is accelerating and is needed given indications that marketing to promote basis-shifting transactions is increasing.

“In essence, basis shifting amounts to a shell game where sophisticated tax maneuvers take place by shifting the basis of assets between closely related entities, ultimately allowing these complex partnership arrangements to hide from a tax bill,” Werfel said. “These complicated maneuvers take time and resources for the IRS to uncover. The new guidance is aimed at telling promoters that the IRS considers these transactions inappropriate, and we are bringing new Inflation Reduction Act resources into play to beef up our compliance work in the overlooked partnerships and pass-throughs area.”

Partnerships are part of a category of pass-through organizations under the federal tax code. Pass-throughs include entities such as partnerships and S-corporations. These groups are not subject to the corporate income tax; instead, income is “passed through” onto the income tax returns of the individual or corporate owners and taxed at their income tax rates. Partnerships and other pass-throughs are frequently used by higher-income groups and can be complex tax arrangements.

During the past decade, IRS budget cuts have made it harder for the agency to focus compliance resources on partnerships. Tax filings from pass-through businesses with more than $10 million in assets jumped to nearly 300,000 filings in 2019, 70% more than 2010. At the same time, audit rates fell from 3.8% in 2010 to 0.1% in 2019.

To counter these continuing compliance concerns, the IRS is using funding from the Inflation Reduction Act to strengthen enforcement among high-income taxpayers and corporations, with a special focus on partnerships. The IRS continues to work to add more top talent to help improve compliance work in this area.

The IRS has already announced a series of steps to improve compliance involving high-income individuals and partnerships, including launching audits on 76 of the largest partnerships with average assets over $10 billion that includes hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and many other industries. The IRS announced today that these complex audits are proceeding and in various stages of the process. These audits can take years depending on the size and complexity of the partnerships.

As part of the increased focus on this area, IRS Chief Counsel Margie Rollinson announced the creation of new Associate Office that will focus exclusively on partnerships, S-corporations, trusts and estates.

“This new Associate office will allow the Chief Counsel organization to focus more directly on this complex area of the tax law and allow more attention to legal guidance and other priorities in the partnership arena,” Rollinson said.

The Associate Office will be drawn from the current Passthroughs and Special Industries (PSI) Office. The “Special Industries” piece of Chief Counsel’s former PSI Office will form a new Associate office as well to focus on energy, credits and incentives and excise taxes, joining another office that has been focused on clean energy guidance.

The new Chief Counsel office will work in close coordination with IRS business units. This includes LB&I, which earlier announced plans to establish a special work group focused on pass-throughs, including complex partnerships. Although work has already started in this area, LB&I plans to formally establish the new work group this fall.

Werfel noted that for the new workgroups in both Counsel and LB&I, the IRS plans to bring in outside experts with private-sector experience regarding pass-throughs to work alongside the expert in-house knowledge of current IRS employees.

“This is an area where the IRS has not had the resources to keep pace with growth in the number of partnerships and the sophisticated tax maneuvers taking place,” Werfel said. “We are continuing to accelerate our work in this area. We need to hone-in on areas where we believe non-compliance has proliferated during the last decade of IRS budget cuts, and partnerships represent an area where complex business structures have allowed millionaires and high-income earners to avoid paying what they legally owe while average taxpayers play by the rules.”

The Internal Revenue Service today highlighted a number of options available to help taxpayers who missed the April deadline to file their 2023 federal income tax return.

To help struggling taxpayers, the IRS has important payment programs that can help those who have trouble paying the amount owed and special first-time penalty relief for those who qualify.

The IRS reminded people that paying what they can as soon as possible will limit penalty and interest charges, which can grow quickly under the tax laws. The interest rate for an individual’s unpaid taxes is currently 8%, compounded daily. The late-filing penalty is generally 5% per month and the late-payment penalty is normally 0.5% per month, both of which max out at 25%.

If a return is filed more than 60 days after the due date, the minimum penalty is either $485 or 100% of the unpaid tax, whichever is less. The failure to pay penalty rate is generally 0.5% of unpaid tax owed for each month or part of a month until the tax is fully paid or until 25% is reached. The rate is subject to change. For more information, see Penalties on IRS.gov.

However, taxpayers can limit late-payment penalties and interest charges by paying their tax electronically. The fastest and easiest way to do that is with IRS Direct Pay, a free service available only on IRS.gov. Several other electronic payment options are also available. Visit Make a payment for details.

File and pay what they can to reduce penalties and interest

Taxpayers should file their tax return and pay any taxes they owe as soon as possible to reduce penalties and interest. An extension to file is not an extension to pay. An extension to file provides an additional six months with a new filing deadline of Oct. 15. Penalties and interest apply to taxes owed after April 15 and interest is charged on tax and penalties until the balance is paid in full.

Some may qualify for penalty relief

Anyone who receives a penalty notice from the IRS should read it carefully and follow the instructions for requesting relief. Visit Penalty relief for information on the types of penalties, requesting penalty relief and appealing a penalty decision.

Taxpayers who have filed and paid on time and have not been assessed any penalties for the past three years often qualify to have the penalty abated. See the First-time penalty abatement page on IRS.gov. A taxpayer who does not qualify for this relief may still qualify for penalty relief if their failure to file or pay on time was due to reasonable cause and not willful neglect.

In addition to penalties, interest will be charged on any tax not paid by the April 15 due date and any assessed penalties. Interest stops accruing as soon as the balance due is paid in full. The law does not allow for interest abatement based on reasonable cause or first-time relief.

Having trouble paying? IRS has options to help

By filing by the deadline, taxpayers avoid failure to file penalties – even if they’re unable to pay. For those who owe federal taxes, the IRS has a number of payment options available.

Taxpayers that are unable to pay in full by the tax deadline should still file their tax return, pay what they can and explore a variety of payment options available for the remaining balance. The IRS offers several options to help them meet their tax obligation, including applying for an online payment plan.

Taxpayers can receive an immediate response of payment plan acceptance or denial without calling or writing to the IRS. Online payment plan options include:

  • Short-term payment plan – The total balance owed is less than $100,000 in combined tax, penalties and interest. Additional time of up to 180 days to pay the balance in full.
  • Long-term payment plan – The total balance owed is less than $50,000 in combined tax, penalties and interest. Pay in monthly payments for up to 72 months. Payments may be set up using direct debit (automatic bank withdraw) which eliminates the need to send in a payment each month, saving postage costs and reducing the chance of default. For balances between $25,000 and $50,000, direct debit is required.

Though interest and late-payment penalties continue to accrue on any unpaid taxes after April 15, the failure to pay penalty is cut in half while an installment agreement is in effect. Find more information about the costs of payment plans on the IRS’ Additional information on payment plans webpage.

Some taxpayers get automatic extensions

Some taxpayers automatically qualify for extra time to file and pay taxes due without penalties and interest, including:

  • Taxpayers in certain disaster areas. There’s no need for these taxpayers to submit an extension; extra time is granted automatically due to the disaster. Information on the most recent tax relief for disaster situations is available on IRS.gov.
  • U.S. citizens and resident aliens who live and work outside of the United States and Puerto Rico.
  • Members of the military on duty outside the United States and Puerto Rico, and those serving in combat zones.

Adjust withholding to prevent tax “surprises”

Taxpayers should check their withholding every year to protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.

The Tax Withholding Estimator helps individuals bring the tax they pay closer to what is owed. Wage earners can assess their income tax, credits, adjustments and deductions, and determine whether they need to change their withholding by submitting a new Form W-4, Employee’s Withholding Allowance Certificate to their employer, not the IRS.