IRS Updates

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.

The IRS announced that it will use the additional funding it received through the Inflation Reduction Act of 2022 (IRA) to restore fairness in compliance by shifting its attention to high-income earners, large partnerships, large corporations and promoters of tax schemes who abuse U.S. tax law. The effort will utilize improved technology and AI to better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid the needless “no-change” audits that burden taxpayers.

As part of its efforts toward tax fairness, the IRS said it would not increase audit rates for taxpayers earning less than $400,000 a year and would add new fairness safeguards for those claiming the earned income tax credit (EITC). The EITC was intended to help taxpayers with modest incomes, but audit rates for those claiming the credit have remained high in recent years, while the rates dropped precipitously for high-income partnerships and taxpayers with complex tax situations. The agency will also work to help protect those claiming the EITC from being exploited by unscrupulous tax preparers.

The expansion of compliance efforts for individuals and partnerships with high income and wealth will include:

Prioritization of high-income cases

The IRS's High Wealth, High Balance Due Taxpayer Field Initiative will intensify its enforcement efforts for taxpayers with incomes of more than $1 million who have more than $250,000 in recognized tax debt. The IRS plans on contacting roughly 1,600 taxpayers who fall into this category and owe hundreds of millions in taxes. The initiative has already collected $38 million from more than 175 high-income earners, and the IRS plans to have dozens of revenue officers focusing on high-end cases in fiscal year 2024.

Utilize AI in large partnership compliance program

The IRS will be expanding the Large Partnership Compliance (LPC) program it launched in 2021 to examine additional partnerships selected with the help of AI. By the end of September, the IRS will be opening examinations of 75 of the country's largest partnerships across a cross-section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, law firms and other industries. On average, each of these partnerships has more than $10 billion in assets.

Increased focus on partnership discrepancies

Partnership returns showing discrepancies of millions of dollars between end-of-year balances and beginning balances for the following year are often an indicator of potential non-compliance. Those discrepancies have been increasing in recent years, with many taxpayers not attaching the required statements explaining them. Beginning in early October, the IRS will start mailing compliance letters to about 500 of these partnerships. The agency will use the responses it receives to decide whether the partnerships should be added to the audit stream

The IRS announced a two-year administrative transition period that delays the implementation of the Roth catch-up contribution requirement for high-income participants in retirement plans until 2026. The transition period is included in Notice 2023-62 and is designed to facilitate an orderly transition for compliance with the catch-up requirement for participants in 401(k)s and similar retirement plans that was included in the SECURE 2.0 Act of 2022. Additionally, the announcement clarified that plan participants who are 50 or older can continue making catch-up contributions after 2023, regardless of their income.

Under §603 of the SECURE 2.0 Act, certain catch-up contributions made to an employer retirement plan after Dec. 31, 2023, must be designated as after-tax Roth contributions. The new catch-up rule only applies to employees participating in an employer or governmental retirement plan with prior-year Social Security wages that exceeded $145,000.

The Inflation Reduction Act of 2022 required the IRS to provide Congress with a report on the feasibility of running a direct filing system. In the report, which the agency submitted on May 16, the IRS said many taxpayers are interested in a direct file system, and the agency is capable of executing it. Therefore, the IRS is taking the necessary steps to begin a direct file pilot program for the 2024 filing season so it can assess the customer support and technology necessary to fully implement direct file for all taxpayers.

The IRS will also use the pilot program to determine whether the agency could overcome the potential operational challenges. However, it did note that effectively implementing direct file would require a sustained budget investment and careful management of the program's operational complexity.

The report relied on information the IRS collected through its Taxpayer Experience Survey as well as an independently conducted survey of taxpayers. The IRS plans to supplement that information with user research and usability testing conducted using an internal prototype that will allow the agency to better understand the user's perspective.

IRS officials say the agency is resuming its collection efforts and is expected to issue CP14 notices, Notice of Tax Due and Demand for Payment, to roughly 8 million taxpayers by the end of May. The IRS temporarily stopped collections activities during the COVID-19 pandemic.

Eric Green, a tax attorney who regularly serves as an instructor for NATP webinars on collections issues, said he learned of the IRS's intention to resume issuing the balance due notices during a recent meeting with officials from the agency. “We have been waiting for the tidal wave of IRS rep work to start, and it seems things will be gearing up around Memorial Day,” he said.

Additionally, IRS officials noted the following:

• The IRS has caught up with its mail processing backlog, so there is no longer a concern that the agency is sending notices out to taxpayers who have responded or made payments that had not been opened.
• Taxpayers who owed balances and were due for enforcement action before the pause will probably receive a refresh notice to remind them of the balance due in the hopes that they or their representative will contact the IRS to work out an arrangement before action is taken on a levy.

Enforcement notices will be sent out in waves to avoid overwhelming the IRS's collection phone lines, Office of Appeals and Taxpayer Advocate when taxpayers receive their notices and try to contact the agency.