by Taxing Subjects | Jan 28, 2025 | Tax Tips and News
The IRS will begin accepting individual returns on Monday, Jan. 27, 2025
More and more taxpayers are leaning towards the convenience and speed of electronic filing (e-file) leading to many of us wanting to know exactly when e-filing starts. The IRS will begin accepting individual returns on Monday, January 27, 2025. Direct File will be available to a limited number of states on January 27th.
When Does E-Filing Start for the IRS?
The exact date can vary slightly every year due to various tax updates and new laws. This year, individual returns will be accepted on Monday, January 27, 2025. For business, e-file opened on January 15th at 6:00 am. Direct File will be available to eligible taxpayers in 25 states to file their taxes directly with the IRS which includes 12 states that were part of the IRS pilot last year. Please visit the IRS website to find out more about specific states that are eligible.
Early Preparations: What Can You Do Before E-Filing Opens?
There are several things you can do to prepare for tax season before e-file officially opens:
- Gather Your Client’s Tax Documents: Collect all the necessary paperwork you’ll need to help your clients file including:
- W-2s
- 1099s
- Interest statements
- Receipts for deductions (e.g., medical, educational, charitable donations)
- Check for Tax Law Changes: It’s a good idea to review any tax law updates especially since a new administration has been elected—which could impact your filing. The IRS often releases updates regarding new credits, deductions, or changes to filing requirements. Staying informed can help you avoid surprises. We will update our systems and do our best to keep you informed via Taxing Subjects, the Drake Software blog.
- Try to stay ahead: Begin preparing your clients’ returns before the e-filing system opens so you are ready to hit the submit button once the IRS officially opens its filing system.
Can you e-file prior year returns?
You can usually e-file the current tax year and the two prior years, except during IRS closing periods. When tax yar 2024 e-filing opens, you can file for 2024, 2023, and 2022. However, if an extension is needed, it can generally only apply to the current tax year.
While waiting for e-filing to open, take the time to gather all the necessary documents, review potential changes in tax laws, and get familiar with your tax preparation software or professional service. By getting an early start, you’ll be ready to file as soon as the IRS begins accepting returns.
Understanding the timeline for e-filing helps you meet your tax filing obligations without stress and can help take advantage of the many benefits that come with submitting your return electronically. So, get ready and prepare to file!
Stay updated. Subscribe to Taxing Subjects and get the latest updates on e-filing and other important tax updates.
– Article provided by Taxing Subjects.
by Taxing Subjects | Sep 6, 2024 | Tax Tips and News
As part of the Dirty Dozen tax scams and fraud awareness effort, the Internal Revenue Service (IRS) encourages people to report individuals who promote improper and abusive tax schemes, as well as tax return preparers who deliberately prepare improper returns.
In this second installment of our overview of the 2024 Dirty Dozen, we look at the stern warnings issued by the IRS regarding scammers who promote schemes designed to evade taxes, scams targeting the wealthy, and dubious social media advice.
Tax Evasion Pitched as “Tax Strategies”
Thinly veiled tax evasion schemes come in various forms and can pose significant threats to taxpayers, sometimes even involving international elements—for example, concealing money and digital assets in foreign accounts or using foreign captive insurance and foreign individual retirement accounts.
“Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” says IRS Commissioner Danny Werfel. “[Scammers] continue to peddle elaborate schemes to reduce taxes and make a handsome profit. Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.”
Some prominent examples include exploitative agreements related to syndicated conservation easements, micro-captive insurance arrangements, foreign individual retirement arrangements, and “hidden” digital assets.
Syndicated Conservation Easements
A conservation easement is a restriction on the use of real property. Generally, taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets the requirements of Internal Revenue Code section 170.
In abusive arrangements, scammers syndicate conservation easement transactions, offering investors the opportunity to claim charitable contribution deductions and corresponding tax savings that far exceed the amount invested. These arrangements generate high fees for scammers and attempt to exploit the tax system with grossly inflated tax deductions.
Micro-Captive Insurance Arrangements
A micro-captive, also known as a small captive, is an insurance company whose owners elect to be taxed on the captive’s investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance, such as implausible risks, failure to match genuine business needs, and unnecessary duplication of the taxpayer’s commercial coverages. The premiums paid under these arrangements are often excessive, reflecting non-arm’s length pricing. The IRS has made enforcement against abusive micro-captive transactions a high priority, prevailing in related Tax Court and appellate court cases since 2017.
Schemes with International Elements
Scammers may also promote tax avoidance through contributing to foreign individual retirement arrangements, which allow contributions in a form other than cash and do not limit the amount of contributions by reference to employment or self-employment activities. By improperly asserting this as a “pension fund” for U.S. tax treaty purposes, the taxpayer claims an exemption from U.S. income tax on gains and earnings in, and distributions from, the foreign individual retirement arrangement.
The Foreign Account Tax Compliance Act (FATCA) plays a critical role in combating tax evasion by U.S. persons holding accounts and other financial assets offshore. It requires most U.S. taxpayers with financial assets outside the United States to report these assets to the IRS, and certain foreign financial institutions must report directly to the IRS about financial accounts held by U.S. taxpayers. Reporting requirements carry penalties for failure to file.
Despite these measures, scammers continue to lure U.S. persons into placing their assets in offshore accounts and structures, falsely claiming they are out of reach of the IRS. These assertions are untrue, as the IRS can identify and track anonymous transactions of foreign financial accounts.
“Untraceable” Digital Assets
Digital assets are digital representations of value recorded on a cryptographically secured, distributed ledger or similar technology. Common examples include convertible virtual currency, cryptocurrency, stablecoins, and non-fungible tokens (NFTs).
Scammers often falsely claim that digital assets are untraceable and undiscoverable by the IRS. In reality, the IRS can track anonymous transactions of digital assets globally. For federal tax purposes, digital assets are treated as property, and general tax principles applicable to property transactions apply to transactions using digital assets.
Aggressive Tax Strategies Targeting the Wealthy
The IRS has also issued a warning to high-income individuals about three specific tax traps designed by scammers and shady tax practitioners. Wealthy taxpayers are particularly susceptible to schemes that promise to reduce their tax burden but can lead to severe legal consequences.
High-income individuals often become targets for various aggressive tax strategies and schemes. These strategies can range from inflated art donation deductions to aggressive charitable remainder annuity trusts and complex shelters designed to delay the payment of gains on property.
Improper Art Donation Deductions
Some scammers exploit art donations by promising inflated values. These scammers encourage taxpayers to purchase art at a “discounted” price, which may include additional services like storage, shipping, appraisal, and donation arrangements. The scammers claim that the art is worth significantly more than the purchase price, encouraging taxpayers to donate the art after a year and claim a tax deduction for an inflated fair market value.
The IRS has a team of professionally trained appraisers who assist in valuing personal property and works of art to ensure compliance with tax laws. Commissioner Werfel warned, “Creativity in art is a beautiful thing, but aggressive creativity in art donation deductions can paint a bad picture for people pulled into these schemes. Taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals.”
Charitable Remainder Annuity Trust (CRAT)
A Charitable Remainder Annuity Trust (CRAT) is an irrevocable trust allowing individuals to donate assets to charity while drawing annual income for life or a specific period. However, some scammers misuse CRATs to eliminate capital gains improperly.
In these schemes, appreciated property is transferred to a CRAT, and the transfer is wrongly claimed to provide a step-up in basis to fair market value. The CRAT sells the property without recognizing gain and uses the proceeds to purchase a single premium immediate annuity (SPIA). The beneficiary then reports only a small portion of the annuity as income, misapplying the rules to exclude the remaining payment as a return of investment. Taxpayers should be wary of such schemes, as they misapply the laws relating to CRATs.
Monetized Installment Sales
Monetized installment sales are another aggressive tax strategy used by scammers to defer gain recognition on the sale of appreciated property. In these transactions, an intermediary purchases the property in exchange for an installment note, which typically includes interest-only payments with the principal due at the end of the term.
The seller receives most of the proceeds but improperly delays gain recognition until the final installment payment, often scheduled many years later. This strategy can lead to significant legal trouble as it abuses the tax system.
The IRS urges wealthy individuals to remain cautious and seek advice from independent tax or legal professionals. By avoiding scammers and understanding the rules, taxpayers can protect themselves from schemes that distort tax laws and result in severe penalties.
Bad Tax Advice on Social Media
The IRS has also warned taxpayers about the dangers of bad tax information circulating on social media. Platforms like TikTok are rife with inaccurate or misleading tax advice, which can lead to serious consequences, including identity theft and tax problems.
Social media can often spread incorrect tax information, where users share wildly inaccurate advice. Some schemes involve urging people to misuse common tax documents like Form W-2 or more obscure ones like Form 8944, a technical e-file form not commonly used by taxpayers. Both scams encourage the submission of false information in hopes of obtaining a refund.
The IRS is aware of various filing season hashtags and social media topics leading to inaccurate and potentially fraudulent information.
Fraudulent Advice on Form W-2
One scheme encourages people to use tax software to manually fill out Form W-2, Wage and Tax Statement, and include false income information. Scam artists suggest making up large income and withholding figures, as well as the employer details. They instruct people to file the bogus tax return electronically in hopes of getting a substantial refund, sometimes as much as five figures.
According to the IRS, variations of this scheme involve misusing Form 7202 and Schedule H to claim credits and refunds based on false information.
Form 8944 Scheme
Another example involves Form 8944, Preparer e-file Hardship Waiver Request. False claims circulating on social media suggest that taxpayers can use this form to receive a refund from the IRS, even if they have a balance due. This information is incorrect. Form 8944 is intended for tax return preparers who request a waiver to file returns on paper instead of electronically.
Taxpayers who intentionally file forms with false information can face severe consequences, including civil and criminal penalties, such as criminal prosecution for filing a false tax return and a frivolous return penalty of $5,000.
Verifying Tax Information
The best place for taxpayers to learn how to properly use tax forms and follow legitimate social media channels related to taxes is IRS.gov. The website provides a repository of forms with detailed instructions and links to official IRS social media accounts.
Reporting Fraud
To report such activities, individuals can use the online Form 14242. The form can also be printed and completed to be sent by mail or fax to the IRS Lead Development Center in the Office of Promoter Investigations:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, CA 92677-3405
Fax: 877-477-9135
Alternatively, taxpayers and tax practitioners may send information to the IRS Whistleblower Office for a possible monetary award.
For more information, visit the IRS page on abusive tax schemes and preparers.
This article is for informational purposes only and not for legal or financial advice.
– Article provided by Taxing Subjects.
by Taxing Subjects | Mar 4, 2024 | Tax Tips and News
Many businesses, enticed by misleading information, have found themselves unwittingly in non-compliance with ERC regulations. The IRS has urged tax preparers to act soon to verify their compliance, emphasizing the need for proactive review and correction.
To help tax preparers who are victims of misinformation, the IRS established the ERC Voluntary Disclosure Program. This program offers an opportunity for businesses to rectify erroneous filings by repaying only 80% of the claimed amount. Additionally, for claims pending processing, prompt action is advised to initiate the withdrawal process if eligibility criteria are not met.
The March 22 deadline for the Voluntary Disclosure Program is swiftly approaching, however, so it is imperative that businesses reassess their claims.
Seven warning signs of ERC non-compliance
The genesis of these cautionary measures lies in the deceptive marketing tactics employed by certain entities, which oversimplified ERC eligibility requirements. The IRS has highlighted seven key warning signs indicative of potentially erroneous claims, drawing attention to common pitfalls.
- Excessive Quarters Claimed: Claiming ERC for all available quarters without meeting eligibility criteria.
- Misinterpretation of Government Orders: Erroneously claiming ERC based on government orders without proper qualification.
- False Reliance on OSHA Communications: Incorrectly citing Occupational Safety and Health Administration (OSHA) communications as grounds for ERC eligibility.
- Inaccurate Employee Count and Calculations: Overclaiming by including ineligible wages or miscalculating credit amounts.
- Unsubstantiated Supply Chain Disruptions: Erroneously attributing ERC eligibility to supply chain disruptions without meeting requisite conditions.
- Misrepresentation of Tax Period Coverage: Falsely claiming ERC for entire tax periods without meeting suspension criteria.
- Nonexistent or Ineligible Business: Claiming ERC for periods when no wages were paid or when the business did not exist.
Businesses must exercise caution and seek guidance from reputable tax professionals to navigate the complexities of ERC claims. It is essential to avoid promoters who fail to request detailed business records or exhibit a lack of understanding of eligibility criteria.
Tax preparers are responsible for staying informed and ensuring accurate ERC claims. The IRS provides valuable resources, including FAQs and an ERC Eligibility Checklist, to aid in understanding eligibility criteria. By leveraging these resources and fostering a proactive approach, tax preparers can protect themselves against ERC fraud and penalties for non-compliance.
Source: IR-2024-39
– Article provided by Taxing Subjects.
by Taxing Subjects | Feb 9, 2024 | Tax Tips and News
Tax season is in full swing, and with it comes a surge in scams targeting tax professionals. The Internal Revenue Service (IRS) and Security Summit partners have issued a warning about a new email scam that impersonates various software companies, aiming to steal Electronic Filing Identification Numbers (EFINs). These scams pose a serious threat to both tax professionals and their clients, potentially leading to identity theft and fraudulent tax filings.
What is the EFIN documentation scam?
This recently growing scam involves fraudulent emails masquerading as communications from tax software providers. The emails request EFIN documents from tax professionals under the guise of a required verification process to transmit tax returns.
Unsuspecting victims who fall for this scam risk exposing sensitive client data and their own identities to malicious actors.
What is the IRS doing to mitigate the threat?
In response, the IRS is taking proactive measures to educate and protect tax professionals. Special educational webinars begin on February 12th, aimed at providing crucial information and strategies to combat this scam.
IRS Commissioner Danny Werfel emphasized the importance of remaining vigilant during this busy period, urging tax professionals to prioritize security measures within their practices.
How active is the EFIN documentation scam?
The IRS has already received numerous reports of this scam targeting tax professionals. Signs of a potential scam email include requests for EFIN documents via fax, instructions to obtain EFIN documentation from the IRS e-Services site, and inconsistencies in the email wording. Tax professionals who receive such emails are advised not to respond or take any action outlined in the message.
One example of the fraudulent email includes instructions to fax EFIN documents to a specified number, along with warnings that failure to comply will result in an inability to transmit tax returns:
Dear [recipient_email_address],
Help us protect you.
Because many Electronic Filing Identification Numbers (EFINs) are stolen each year and used to file fraudulent tax returns, the IRS has asked software vendors, such as Software A, to verify who the EFIN owner is by getting a copy of the IRS issued EFIN document(s). Our records show that we do not have a document for one or more of the EFINs that you transmit with.
What this means for you: Until your EFIN is verified, you will be unable to transmit returns. Please provide a copy of your EFIN Account Summary from IRS e-Services, with a status of ‘Completed’, to Software B for verification.
To send us your EFIN Summary document:
- Fax to Software B at 631-995-5984
PLEASE NOTE THAT YOUR PREPARER TAX IDENTIFICATION NUMBER (PTIN) APPLICATION CANNOT BE USED AS DOCUMENTATION FOR YOUR EFIN.
If you do not have the above documentation you can get a copy of your IRS Application Summary from IRS e-Services by following the below steps or call the IRS e-Services helpline at 866-255-0654.
- Sign in to your IRS e-Services account
- Choose your organization from the list provided and click Submit
- Click the Application link to access your existing application
- Click the e-File Application link
- Select the existing application link that applies to your organization
- Click the Application Summary link for the area of the application you wish to enter
- Click the Print Summary link at the bottom of the summary presented on the screen
If you have any questions please contact the Compliance Department at xxx-xx-xxxx for assistance.
Thank you for your business. We look forward to serving you this coming season. Software B (edited)
What will the IRS webinars on the EFIN scam cover?
Tax professionals are encouraged to attend the upcoming webinars hosted by the IRS, where cybersecurity experts will provide valuable insights and guidance. These sessions will equip professionals with the knowledge needed to identify and prevent potential scams, ensuring the security of their clients’ data and their own identities.
What else can tax professionals do to avoid becoming victims?
In addition to attending webinars, tax professionals are advised to remain vigilant against other phishing scams targeting EFINs, PTINs, and e-Services credentials. The IRS stresses the importance of promptly reporting any suspicious activity to the appropriate authorities, including the Treasury Inspector General for Tax Administration (TIGTA) and local IRS Stakeholder Liaisons.
As tax-related identity theft scams continue to evolve and proliferate, tax professionals must stay informed and proactive in safeguarding sensitive information. By remaining vigilant and taking proactive measures, tax professionals can help protect themselves and their clients from falling victim to these fraudulent schemes.
For more information and resources on identity theft prevention, tax professionals can visit the IRS’s Identity Theft Central and refer to Publication 4557, Safeguarding Taxpayer Data. Stay informed, stay vigilant, and stay protected during this tax season and beyond.
Source: IR-2024-36
– Article provided by Taxing Subjects.
by Taxing Subjects | Jan 31, 2024 | Tax Tips and News
The Employee Retention Credit (ERC), initially introduced as part of the CARES Act in 2020 and extended through subsequent legislation, aims to provide financial relief to businesses impacted by the COVID-19 pandemic. However, claiming this credit requires adherence to specific criteria outlined by the IRS. In light of this, the IRS has issued a reminder urging businesses to review their qualifications for the ERC diligently.
What is the Voluntary Disclosure Program?
For those who may have erroneously claimed the credit without meeting the eligibility requirements, the IRS has provided a lifeline in the form of the Voluntary Disclosure Program. This program offers a pathway for businesses to rectify their claims before the impending March 22 deadline, thereby avoiding potential penalties and interest on incorrect filings.
The Voluntary Disclosure Program will be open until March 22, 2024, with provisions from the IRS that allow businesses to repay just 80% of the claim received—considering that ERC promoters frequently took around 20% of the payment. The program is a crucial opportunity for businesses to proactively address any discrepancies and ensure compliance with tax regulations.
What if my ERC claim is already pending?
Additionally, recognizing the complexity and uncertainty surrounding ERC eligibility, the IRS has introduced a special withdrawal program for employers with pending claims and concerns about their eligibility status. This program offers a means for affected employers to reassess their situation and withdraw their claims if necessary, mitigating the risk of penalties and repercussions down the line.
Will there be any special training on ERC qualification?
The Criminal Investigation (CI) division of the IRS is launching a nationwide initiative aimed at bolstering tax professionals’ understanding of the ERC. This initiative underscores
the IRS’s commitment to ensuring that tax professionals have the knowledge and resources necessary to navigate ERC claims effectively and accurately.
CI special agents will host a series of educational sessions tailored specifically to tax professionals at field offices throughout the United States. These sessions, scheduled for February 2024, will serve as comprehensive workshops covering various aspects of the ERC, including eligibility criteria, documentation requirements, and best practices for compliance and accurate reporting.
What sets these sessions apart is the targeted focus on tax professionals who have previously claimed ERCs for their clients on past tax returns. By tailoring the content to experienced professionals, the sessions aim to provide advanced insights and strategies that can enhance their ability to serve clients effectively.
Attendees can expect CI special agents to walk them through ERC eligibility criteria in detail, provide guidance on the documentation requirements necessary to substantiate ERC claims, and ensure that attendees are well-equipped to navigate the documentation process with confidence.
These educational sessions will also delve into best practices for compliance and accurate reporting, offering practical tips and strategies to mitigate the risk of errors or discrepancies in ERC filings. With CI special agents leading the discussions, attendees will benefit from firsthand insights and expertise derived from their extensive experience in tax enforcement.
The CI-lead workshops will take place in at least 23 U.S. states and the District of Columbia, ensuring widespread accessibility for tax professionals nationwide. Invitations to attend will be distributed via mail through the U.S. Postal Service, providing recipients with all the necessary details to participate in these invaluable educational sessions.
Is the IRS still processing new ERC claims?
On September 14th, the IRS announced a moratorium on processing new ERC claims, signaling a pivotal shift in approach aimed at safeguarding against potential fraud and ensuring the integrity of the credit.
During the four-month moratorium period, the IRS is doubling down on efforts to implement robust fraud protection measures. These measures are deemed necessary before the IRS can confidently resume processing new ERC claims. While a specific
resumption date has not yet been determined, the IRS remains steadfast in its commitment to fortifying the ERC program against abuse and exploitation.
It’s important to note that while new ERC claims are temporarily on hold, the IRS continues to process claims submitted before the moratorium went into effect. However, these claims are subject to enhanced scrutiny and are being processed at a significantly slower rate compared to previous procedures. This cautious approach underscores the IRS’s dedication to rooting out fraudulent claims and safeguarding businesses and organizations from potential financial harm.
Since the announcement of the moratorium in September, the IRS has grappled with processing over $1 billion in ERC claims. Enhanced compliance reviews are being conducted to meticulously scrutinize claims submitted before the moratorium, ensuring that only legitimate claims receive approval. This rigorous review process is crucial in combatting fraud and protecting taxpayers from the consequences of erroneous or fraudulent claims.
At Drake Software, we understand the challenges businesses face in navigating the intricate landscape of tax regulations. That’s why we’re committed to making sure our clients are equipped with the resources they need to make informed decisions and maximize their tax benefits while staying compliant.
Sources: IR-2024-21, IR-2023-193
– Article provided by Taxing Subjects.
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