For 2024, the Social Security wage cap will be $168,600, and social security and Supplemental Security Income (SSI) benefits will increase by 3.2 percent. These changes reflect cost-of-living adjustments to account for inflation.

The IRS announced tax relief for individuals and businesses affected by terrorist attacks in the State of Israel. The IRS would continue to monitor events and may provide additional relief.

The IRS announced tax relief for individuals and businesses affected by terrorist attacks in the State of Israel. The IRS would continue to monitor events and may provide additional relief.

Filing and Payment Deadlines Extended

The IRS extended certain deadlines that occurred or would occur during the period from October 7, 2023, through October 7, 2024. As a result, affected individuals and businesses would have until October 7, 2024, to file returns and pay any taxes that were originally due during this period. This extension includes filing for most returns, including:

• individuals who had a valid extension to file their 2022 return due to run out on October 16, 2023. However, because tax payments related to these 2022 returns were due on April 18, 2023, those payments were not eligible for this relief. So, these individuals filing on extension have more time to file, but not to pay;
• calendar-year corporations whose 2022 extensions run out on October 16, 2023. Similarly, these corporations have more time to file, but not to pay;
• 2023 individual and business returns and payments normally due on March 15 and April 15, 2024. These individuals and businesses have both more time to file and more time to pay;
• quarterly estimated income tax payments normally due on January 16, April 15, June 17 and September 16, 2024;
• quarterly payroll and excise tax returns normally due on October 31, 2023, and January 31, April 30 and July 31, 2024;
• calendar-year tax-exempt organizations whose extensions run out on November 15, 2023; and
• retirement plan contributions and rollovers.

The penalty for failure to make payroll and excise tax deposits due on or after October 7, 2023 and before November 6, 2023, would be abated. But the deposits must be made by November 6, 2023.

Notice 2023-71

IR-2023-188

The Internal Revenue Service could release as soon as today the process that businesses can use to withdraw employee retention credit claims.

The Internal Revenue Service could release as soon as today the process that businesses can use to withdraw employee retention credit claims.

The move comes in the wake of the agency announcing that it is halting the processing of new ERC claims until at least the beginning of 2024 and scrutinizing existing claims due to the prevalence of suspected fraudulent claims following a spike in claims in 2023 coupled with the saturation marketing by so-called ERC mills. Thus far, the IRS closer examination of claims has led to thousands already being submitted for auditing.

As part of the heightened scrutiny of claims, the IRS said it would create a process by which businesses would have the ability to withdraw claims before they are processed if they do a more thorough review and determine the claim is not actually a valid claim for the credit that was created as part of the CARES Act to help businesses that may have lost income retain employees during the COVID-19 pandemic.

"I learned this morning that there is going to be an announcement tomorrow [October 19, 2023] on the withdrawal process initiative that the Service is going to be initiating," Linda Azmon, special counsel at the IRS’s Tax Exempt and Government Entities Division, said October 18, 2023, during a session of the American Bar Association’s Virtual 2023 Fall Tax Meeting.

Azmon said that "taxpayers who have not received their claims for refund will be entitled to participate in this process," adding that there is "going to be specific procedures that taxpayers can follow to request their withdrawal of their claims for refund."

She did not provide any specific information on what the process entails, but noted that requesting a withdrawal "means that a taxpayer is requesting that the amended return not be processed at all. And it’s going to be required that the complete return be withdrawn." This is limited to taxpayers who have not had their claim processed, have not received their check or who have the check but have not yet cashed it.

One of the reasons a taxpayer may want to withdraw a claim is "taxpayers have been advised that the only way the Service can recapture claims for refund is through the erroneous refund procedures," she said. "That usually means the service asks for the funds back and if they don’t receive it, the Service asks [the] Department of Justice to bring suit within two years of the payment."

But Azmon points out that taxpayers being told this are being given information that is not entirely correct, as the agency has issued final regulations that allow the IRS to treat an erroneous refund as an underpayment of tax subject to the regular assessment and administrative collections procedures.

"This is a way for the service to recover funds that a taxpayer should have received in an efficient way without the cost of litigation," she said. "And it still provides the administrative processing rights for taxpayers to dispute their claims" without the cost of litigation.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service detailed how it is proceeding with a pilot program that will allow taxpayers to file their taxes directly on the IRS website as an option along with doing an electronic file or working through a tax professional or other third-party tax preparer.

The IRS released substantial new guidance regarding the new clean vehicle credit and the used clean vehicle credit. The guidance updates procedures for manufacturer, dealer and seller registrations and written reports; and provides detailed rules for a taxpayer’s election to transfer a credit to the dealer after 2023. The guidance includes:

The IRS released substantial new guidance regarding the new clean vehicle credit and the used clean vehicle credit. The guidance updates procedures for manufacturer, dealer and seller registrations and written reports; and provides detailed rules for a taxpayer’s election to transfer a credit to the dealer after 2023. The guidance includes:

• -- Rev. Proc. 2023-33, which is scheduled to be published on October 23, 2023, in I.R.B. 2023-43;
• -- NPRM REG-113064-23, which is scheduled to published in the Federal Register on October 10, 2023; and
• -- IRS Fact Sheet FS-2023-22, which updates the IRS Frequently Asked Questions (FAQs) for the clean vehicle credits.

The proposed regs are generally proposed to apply to tax years beginning after they are published in the Federal Register. However, the proposed regs for transferring credits to dealers are proposed to apply beginning on January 1, 2024, which is when the transfer election becomes available. Proposed regs for treating the omission of a correct vehicle identification number (VIN) as a mathematical or clerical error would also apply to the Code Sec. 45W clean commercial vehicle credit. They are proposed to apply to tax years beginning after December 31, 2023.

Comments are requested. Rev. Proc. 2022-42 is superseded in part.

Proposed Regs for the Clean Vehicle Credits

For purposes of the new clean vehicle credit, the used clean vehicle credit, and the commercial clean vehicle credit, the proposed regs would treat a taxpayer as having omitted the required correct vehicle identification number (VIN) for the vehicle if the VIN is missing from the taxpayer’s return or the number reported on the return is an invalid VIN. An invalid VIN is a number that does not match any existing VIN reported by a qualified manufacturer. A taxpayer would also be treated as omitting the VIN if the provided VIN is not for a qualified vehicle for the year the credit is claimed.

With respect to the new clean vehicle credit and the used clean vehicle credit, the proposed regs would clarify that taxpayer must file an income tax return for the year the clean vehicle is placed in service, including a Form 8936, Clean Vehicle Credits. The taxpayer is treated as having omitted the vehicle’s correct VIN if the VIN on the taxpayer’s return does not match the VIN in the seller’s report. In addition, a dealer under the proposed regs would not include persons licensed solely by a U.S. territory. To facilitate direct-to-consumer sales, a dealer generally could make sales outside the jurisdiction where it is licensed; however, it could not make sales at sites outside its own jurisdiction.

New Rules for Used Clean Vehicle Credit

The proposed regs would clarify that a vehicle’s eligibility for the used vehicle credit is not affected by a title that indicates it has been damaged or an otherwise a branded title. In addition, the used vehicle credit could not be divided among multiple owners of a single vehicle. With respect to the MAGI limit for eligible taxpayers, if the taxpayer's filing status for the tax year differs from the taxpayer's filing status in the preceding tax year, the taxpayer would satisfy the limit if MAGI does not exceed the threshold amount in either year based on the applicable filing status for that tax year. These last two rules are consistent with earlier proposed regs for the new clean vehicle credit.

The proposed regs would provide a first transfer rule, under which a qualified sale must be the first transfer of the previously-owned clean vehicle since August 16, 2022, as shown by the vehicle history of such vehicle, after the sale to the original owner. The rule would ignore transfers between dealers. The taxpayer generally could rely on the dealer’s representation of the vehicle history; however, taxpayers would also be encouraged to independently examine the vehicle history to confirm whether the first transfer rule is satisfied.

Under the proposed regs, a used vehicle’s sale price would include delivery charges, as well as fees and charges imposed by the dealer. The sale price it would not include separately-stated taxes and fees required by law, separate financing, extended warranties, insurance or maintenance service charges.

Cancellation of Sale, Return of Clean Vehicle, and Resale of Clean Vehicle

The proposed regs would clarify that a taxpayer cannot claim a clean vehicle credit if the sale is canceled before the taxpayer places th vehicle in service (that is, before the taxpayer takes delivery). The credits also would not be available if the taxpayer returns the vehicle within 30 days after placing it in service. A returned new clean vehicle would no longer qualify as a new clean vehicle. However, a returned used clean vehicle could continue to qualify for the credit if the vehicle history does not reflect the sale and return. A vehicle’s return would nullify any election the taxpayer made to transfer the credit for the vehicle.

Under the proposed regs, a taxpayer acquires a clean vehicle for resale if the resale occurs withing 30 days after the taxpayer places the vehicle in service. The resold vehicle would not qualify for either credit. If the taxpayer elected to transfer the credit, the election remains valid after the resale; thus, the credit is recaptured from the taxpayer, not from the dealer.

Taxpayers returning or reselling a clean vehicle more than 30 days after the date the taxpayer placed it in service would generally remain eligible for the applicable clean vehicle credit for purchasing the vehicle. Any election to transfer the taxpayer’s credit to the dealer also remains in effect. The returned or resold vehicle would not remain eligible for either credit. However, the IRS could disallow the credit if, based on the facts and circumstances, it determines that the taxpayer purchased the vehicle with the intent to resell or return it

Taxpayer's Election to Transfer Clean Vehicle Credit to Dealer

A taxpayer that elects to transfer a credit to a registered dealer must transfer the entire amount of the allowable credit. Each taxpayer may transfer a total of two credits per year (either two new clean vehicle credits, or one new clean vehicle credit and one used clean vehicle credit). This is the case even if married taxpayers file a joint return. A transfer election is irrevocable.

Under the proposed regs, the amount of a clean vehicle credit an electing taxpayer could transfer could exceed the electing taxpayer’s regular tax liability; and the amount of a transferred credit would not be subject to recapture merely because it exceeds the taxpayer’s tax liability. The dealer’s payment for the transferred credit, whether in cash or as a partial payment or down payment for the vehicle, is not includible in the electing taxpayer’s gross income. To ensure that the credit properly reduces the taxpayer’s basis in the vehicle, the electing taxpayer is treated as repaying the payment to the dealer as part of the purchase price of the vehicle.

Both the electing taxpayer and the dealer must make detailed disclosures and attestations. Some of these disclosures must be made to the other party, and some must be made through the IRS Energy Credits Online Portal. All must be made no later than the time of the sale. A taxpayer cannot transfer any portion of the new clean vehicle credit that is treated as part of the general business credit.

A seller or a registered dealer must retain records of transferred credits for at least three years after the taxpayer makes the credit transfer election or a seller files its report for the sale.

Manufacturer, Dealer and Seller Registration and Report Requirements

Clean vehicle manufacturers, sellers and dealers must register through an IRS Energy Credits Online Portal that should be available on the IRS website later this month. A representative of the manufacturer, seller or dealer will have to create or sign into an account on irs.gov. Registration help is available at www.irs.gov/registerhelp. Manufacturers, sellers and dealers may check IRS.gov/cleanvehicles for updates.

Taxpayers and sellers may rely on information and certifications by a qualified manufacturer providing that a vehicle is eligible for the new clean vehicle credit or the used clean vehicle credit. However, this reliance is limited to information regarding the vehicle’s eligibility for the applicable credit.

Rev. Proc. 2023-33 details the required registration information for sellers and dealers. The IRS will confirm the information or notify the seller or dealer that it has been unable to do so. If the IRS accepts a dealer registration, it will issue a unique dealer identification number. If the IRS rejects the registration, the dealer may request administrative review.

s for a qualified manufacturer’s written agreement with and a dealer’s written reports to the IRS before January 1, 2024, manufacturers and sellers may still use the procedures described in Rev. Proc. 2022-42. However, as of January 1, 2024, qualified manufacturers must have entered into written agreements with the IRS via the IRS Energy Credits Online Portal, even if they previously registered and filed written agreements under Rev. Proc. 2022-42. Also as of January 1, 2024, qualified manufacturers and sellers must use the Portal to file their required reports to the IRS.

A seller must file its report within three calendar days of the sale, and provide a copy to the taxpayer within another three days. If the information in the report does not match information in IRS records, the IRS may reject the report and notify the seller. The seller must notify the buyer within three calendar days. If the IRS rejects a seller report, a dealer will not be eligible for advance credit payments. A seller must also use the Portal to update or rescind information for a scrivener’s error or the cancellation of a sale as promptly as possible (the seller must also file a new report noting the return of a vehicle). The seller must notify the buyer within three calendar days and provide a copy of the updated or rescinded report.

Advance Credit Payments to Dealers

When a buyer elects to transfer a clean vehicle credit to a dealer, the advance credit program allows the dealer to receive payment of the credit before the dealer files its tax return. The proposed regs would clarify that the advance payments are not included in the dealer’s income and they may exceed the dealer’s tax liability. The dealer cannot deduct the payment made to the electing taxpayer. The advance payment is included in the amount realized by the dealer on the sale of the clean vehicle. If the dealer is a partnership or an S corporation, the advance payment is not treated as exempt income.

To receive advance credit payments, the registered dealer must be an eligible entity under the proposed regs. An eligible entity is a registered dealer that submits additional registration information and is in dealer tax compliance. The IRS will conduct dealer tax compliance checks before disbursing an advance credit payment, and also on a continuing and regular basis.

Dealer tax compliance means that, for all tax periods during the most recent five tax years, the dealer has filed all of its required federal information and tax returns, including for federal income and employment tax; and paid all federal tax, penalties, and interest due at the time of sale (or is current on its obligations under any installment agreement with the IRS). The dealer must also retain information related to the vehicle sale or credit transfer for at least three years. A dealer that does not satisfy this test may still be a registered dealer, but it cannot be an eligible entity until the tax compliance issue is resolved.

The dealer that receives the transferred credit must provide the qualified vehicle’s VIN, the seller report, and the required taxpayer disclosure information through the IRS Energy Credits Online Portal. The IRS will disburse advance payments of the credits only through electronic payments; it will not issue any paper checks.

The IRS may suspend a registered dealer’s eligibility to participate in the advance payment program for sever reasons, including the provision of inaccurate information regarding eligible for the credit; failure to satisfy dealer tax compliance requirements; and failure to properly use the IRS Energy Credits Online Portal. The IRS will notify the dealer of its suspension, and give the dealer an opportunity correct the errors. If a suspended dealer does not correct the errors withing one year, the IRS will revoke its registration.

The IRS may also revoke a dealer’s registration to receive transferred credits and its eligibility for the advance payment program for failure to comply with the registration or tax compliance requirements, for losing its dealer license, for providing inaccurate information, for failing to retain required records for three years, or if it is suspended three times in the preceding year. The IRS will notify the dealer within 30 days of its decision to revoke eligibility for the advance payment program, and the dealer may request administrative review of the decision. The dealer may re-register after one year, but will be permanently barred after three revocations.

The proposed regs would provide that a dealer could not administratively appeal the IRS’s decisions relating to the suspension or revocation of a dealer’s registration unless the IRS and the IRS Independent Office of Appeals agree that such review is available and the IRS provides the time and manner for the review.

Comments Requested

The IRS requests comments on the proposed regs. Comments and requests for a public hearing must be received by December 11, 2023. They may be mailed to the IRS, or submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-113064-23).

Effect on Other Documents

Rev. Proc. 2023-33 supersedes in part Rev. Proc. 2022-42, I.R.B. 2022-52 , 565.

Proposed Regulations, NPRM REG-113064-23

Rev. Proc. 2023-33

FS-2023-22

IR-2023-186

The IRS has released the 2023-2024 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

The IRS has released the 2023-2024 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS), and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2023-2024 special per diem rates are:

• $309 for travel to any high-cost locality, and
• $214 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

The IRS provided guidance on the new energy efficient home credit, as amended by the Inflation Reduction Act of 2022 (P.L. 117-169). The guidance largely reiterates the statutory requirements for the credit, but it provides some new details regarding definitions, certifications and substantiation.

The IRS provided guidance on the new energy efficient home credit, as amended by the Inflation Reduction Act of 2022 (P.L. 117-169). The guidance largely reiterates the statutory requirements for the credit, but it provides some new details regarding definitions, certifications and substantiation.

Definitions

For purposes of the requirement that a home must be acquired from an eligible contractor, a home leased from the contractor for use as a residence is considered acquired from the contractor. However, a home the contractor retains for use as a residence is not acquired from the contractor. A manufactured home may be acquired directly from the contractor, or indirectly from an intermediary that acquired it from the contractor and then sold or leased it to a buyer for use as a residence, or to intervening intermediaries that eventually sold it to a buyer for use as a residence.

For a constructed home, the eligible contractor is the person that built and owned the home and had a basis in it during its construction. For a manufactured home, the eligible contractor is the person that produced the home and owned and had a basis in it during its production.

The United States includes only the states and the District of Columbia.

Certifications

A dwelling unit that is certified under the applicable Energy Star program is considered to meet the program requirements for purposes of the credit. Similarly, a dwelling unit that is certified under the Zero Energy Ready Home (ZERH) program is deemed to meet the requirements for the credit for a ZERH. The ZERH program in effect for purposes of the credit is the one in effect as of the date identified on the Department of Energy’s ZERH webpage at https://www.energy.gov/eere/buildings/doe-zero-energy-ready-home-zerh-program-requirements.

The eligible contractor must obtain the appropriate Energy Star or ZERH certification before claiming the credit. The contractor should keep the certification with its tax records, but does not have to file it with the return that claims the credit.

Rules for homes acquired before 2023, under which eligible certifiers could certify a home and contractors could use approved software to calculate a new home’s energy consumption, do not apply to a home acquired after 2022.

Substantiation

To substantiate the credit, the contractor must retain in its tax records, at a minimum, the home's Energy Star or ZERH certification, including its date; and records sufficient to establish:

1. the address of the qualified home and its location in the United States;
2. the taxpayer’s status as an eligible contractor;
3. the acquisition of the home from the taxpayer for use as a residence, including the name of the person who acquired it; and
4. if applicable, proof that the prevailing wage requirements were met.

However, for a manufactured home the contractor sells to a dealer, a safe harbor allows the contractor to rely on a statement by the dealer to establish the date the home was acquired, its location in the United States, and its acquisition for use as a residence. The statement must:

1. Specify the date of the retail sale of the manufactured home, state that the dealer delivered it to the purchaser at an address in the United States, and provide that the dealer has no knowledge of any information suggesting that the purchaser will use the manufactured home other than as a residence;
2. Provide the name, address and telephone number of the dealer and any intervening intermediaries; and
3. Declare, under penalties of perjury, that the dealer statement and any accompanying documents are true, correct and complete.

Effect on Other Documents

Notice 2008-35, 2008-1 CB 647, and Notice 2008-36, 2008-1 CB 650, are obsoleted for qualified homes acquired after December 31, 2022.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be raised for slaughter, held for sporting purposes or be poultry.

Second, the taxpayer must have held the converted livestock for:

• draft,
• dairy, or
• breeeding purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

• ends on August 31 in or after the last year of the four-year replacement period, and
• does not include any weekly period of drought.

What Areas are Suffering from Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

http://droughtmonitor.unl.edu/Maps/MapArchive.aspx

However, the IRS also provided a list of areas where the year ending on August 31, 2023, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

With the Internal Revenue Service announcing more details on how it will be targeting America’s wealthiest taxpayers, Kostelanetz’s Megan Brackney offered up some advice on preparing for increased compliance activity.

With the Internal Revenue Service announcing more details on how it will be targeting America’s wealthiest taxpayers, Kostelanetz’s Megan Brackney offered up some advice on preparing for increased compliance activity.

The first step, especially for those that fall within the agency’s announced parameters for who is being targeted, is to review recent tax filings. The agency announced in September it would be targeting large partnerships.

"I would say to look back over the last three years because that’s the typical statute of limitations period for the IRS to audit and assess, maybe look back even a little bit longer," Brackney, partner at the law firm, said in an interview.

In particular, she recommended a focus on major financial transactions.

"Look at significant transactions and make sure that you have all the substantiation because a lot of times, the issue isn’t so much a legal question or anything to complex," she continued. "It’s just whether or not you know [for example if] the partnership sold an asset, do they actually have records that substantiate their basis?"

Brackney expects that after the agency completes its work on the largest partnerships, it will continue this kind of compliance work on those high earning partnerships that may be outside of the original targeted thresholds.

Other things to start thinking about if you are a large partnership is how you plan to respond to an audit if you end up targeted for enforcement action by the IRS, especially if you have significant transactions that might draw extra scrutiny. Some questions to ponder are whether you have the in-house expertise to handle an audit or if you plan on going to an outside source.

"Nobody is going to do those things until they are actually audited, but its good to start thinking about it and planning it," she said. "And if you do have a really significant transaction, maybe go ahead and have someone take a look at it already to make sure it is properly documented."

She also suggested that if a partnership finds an error as they look back on their own to go ahead and correct it with the IRS before the agency "is poking around and looking at it."

Training Concerns

And while the IRS is moving forward with its plans to audit high earning partnerships, Brackney expressed some concerns relative to agent training.

She recalled a few years ago when the IRS announced global high net worth audits program that ended up collecting very little.

"Most of those audits resulted in no change letters," Brackney said, "which is wild because you audit a normal middle-class taxpayer with a Schedule C business, you are going to have a change [and] not because anybody is trying to cheat. There is going to be something that they can’t substantiate."

She said it was hard to understand how most of the global high net worth audits had no changes, and expressed some concerns that this could happen again, but is hopeful that with the agency’s supplemental funding from the Inflation Reduction Act will come proper training to handle the complexities of reviewing these tax returns.

"I support the IRS being fully funded," she said. "It’s good for tax administration and it makes a fairer society because it’s not like people are just getting away with stuff because the IRS doesn’t have the resources."

By Gregory Twachtman, Washington News Editor

The IRS has cautioned taxpayers to be vigilant about promotions involving exaggerated art donation deductions that may target high-income individuals and has also provided valuable tips to help people steer clear of falling into such schemes. Taxpayers can legitimately claim art donations, but dishonest promoters may employ direct solicitation to make unrealistically promising offers. In a bid to boost compliance and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area.

The IRS has cautioned taxpayers to be vigilant about promotions involving exaggerated art donation deductions that may target high-income individuals and has also provided valuable tips to help people steer clear of falling into such schemes. Taxpayers can legitimately claim art donations, but dishonest promoters may employ direct solicitation to make unrealistically promising offers. In a bid to boost compliance and protect taxpayers from scams, the IRS has active promoter investigations and taxpayer audits underway in this area.

Also, the IRS has employed various compliance tools, including tax return audits and civil penalty investigations, to combat abusive art donations. Taxpayers, especially high-income individuals, are advised to watch out for aggressive promotions. Additionally, following Inflation Reduction Act funding the IRS has intensified the efforts to ensure accurate tax payments from high-income and high-wealth individuals.

The Service has advised taxpayers to watch-out for the following red flags:

• Be wary of purchasing multiple works by the same artist with little market value beyond what promoters claim.
• Watch for specific appraisers arranged by promoters, as their appraisals often lack crucial details.
• Taxpayers are responsible for accurate tax reporting, and engaging in tax avoidance schemes can lead to penalties, interest, fines, and even imprisonment.
• Charities should also be cautious not to inadvertently support these schemes.

In order to to properly claim a charitable contribution deduction for an art donation, a taxpayer must keep records to prove:

• Name and address of the charitable organization that received the art.
• Date and location of the contribution.
• Detailed description of the donated art.

Also, The IRS has a team of trained appraisers in Art Appraisal Services who provide assistance and advice to the IRS and taxpayers on valuation questions in connection with personal property and works of art.

Finally, the taxpayers can report tax-related illegal activities relating to charitable contributions of art using:

• Form 14242, Report Suspected Abusive Tax Promotions or Preparers, to report a suspected abusive tax avoidance scheme and tax return preparers who promote such schemes.
• They should also report fraud to the Treasury Inspector General for Tax Administration at 800-366-4484.

If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

• The amount of the expense;
• The amount of use (i.e. the number of miles driven for business purposes);
• The date of the expenditure or use; and
• The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

Under the so-called "kiddie tax," a minor under the age of 19 (or a student under the age of 24) who has certain unearned income exceeding a threshold amount will have the excess taxed at his or her parents' highest marginal tax rate. The "kiddie tax" is intended to prevent parents from sheltering income through their children.

A child with earned income (wages and other compensation) in excess of the filing threshold is a separate taxpayer who is generally taxed as a single taxpayer. If a child in one of the following categories has unearned income (i.e., investment income) in excess of the "threshold amount" ($950 in 2009) that unearned income is taxed at the parent's marginal tax rate, as if the parent received that additional income.

• A child under the age of 19;
• A child up to age 18 who provides less than half of his or her support with earned income; or
• A19 to 23 year-old student who provides less than half of his or her support with earned income.

If the child's unearned income is less than an inflation-adjusted ceiling amount ($9,500 in 2009), the parent may be able to include the income on the parent's return rather than file a separate return for the child (and which the tax based on the parent's marginal rate bracket is computed on Form 8615).

Any distribution to a child who is a beneficiary of a qualified disability trust is treated as the child's earned income for the tax year the distribution was received.

Example:  Greta is a 16-year-old whose father is alive. In 2009, she has $3,000 in unearned income, no earned income, and no itemized deductions. Her basic standard deduction is $950, which is applied against her unearned income, reducing it to $2,050. The next $950 of unearned income is taxed at Greta's individual tax rate. The remaining $1,100 of her unearned income is taxed at her parent's allocable tax rate. Assuming her father's tax rate bracket is 25 percent, her tax on the $1,100 is $275.

If you own a vacation home, you may be considering whether renting the property for some of the time could come with big tax breaks. More and more vacation homeowners are renting their property. But while renting your vacation home can help defray costs and provide certain tax benefits, it also may raise some complex tax issues.

Determining whether to use your vacation home as a rental property, maintain it for your own personal use, or both means different tax consequences. How often will you rent your home? How often will you and your family use it? How long will it sit empty? Depending on your situation, renting your vacation home may not be the most lucrative approach for you.

Generally, the tax benefits of renting your vacation home depend on how often you and your family use the home and how often you rent it. Essentially, there are three vacation home ownership situations for tax purposes. We will go over each, and their tax implications.

Tax-free rental income

If you rent your vacation home for fewer than 15 days during the year, the rental income you receive is tax-free; you don't even have to report it on your income tax return. You can also claim basic deductions for property taxes and mortgage interest just as you would with your primary residence.

You won't, however, be able to deduct any rental-related expenses (such as property management or maintenance fees). And, if your rental-related expenses exceed the income you receive from renting your vacation home for that brief time, you can't take a loss. Nevertheless, this is an incredibly lucrative tax break, especially if your vacation home is located in a popular destination spot or near a major event and you don't want, or need, to rent it out for a longer period. If you fit in this category of vacation homeowners and would like more information on this significant tax benefit, call our office.

Pure rental property

Do you plan on renting your vacation home for more than 14 days a year? If so, the tax rules can become complicated. If you and your family don't use the property for more than 14 days a year, or 10% of the total number of days it is rented (whichever is greater), your vacation home will qualify as rental property, not as a personal residence.

If you rent your vacation home for more than 14 days, you must report all rental income you receive. However, now you can deduct certain rental-related expenses, including depreciation, condominium association fees, property management fees, utilities, repairs, and portions of your homeowner's insurance. How much you can deduct will depend on how often you and your family use the property. But, as the owner of investment property, you can take a loss on the ultimate sale of your rental homes, which second-homeowners can't do.

Income and deductions generated by rental property are treated as passive in nature and subject to passive activity loss rules. As passive activity losses, rental property losses can't be used to offset income or gains from non-passive activities (such as wages, salaries, interest, dividends, and gains from the sale of stocks and bonds). They can only be used to offset income or gains from other passive type activities. Passive activity losses that you can't use one year, however, can be carried forward to future years.

However, an owner of rental property who "actively participates" in managing the rental activities of his or her vacation home, and has an adjusted gross income that doesn't exceed $100,000, can deduct up to $25,000 in rental losses against other non-passive income, such as wages, salaries, and dividends. It's not all that difficult to meet the "active participation" test if you try.

Personal use for more than 14 days

If you plan on using your vacation home a lot, as well as renting it often, your vacation home will be treated as a personal residence. Specifically, if you rent your home for more than 14 days a year, but you and your family also use the home for more than 14 days, or 10% of the rental days (whichever is greater), your vacation home will qualify as a personal residence, not a rental property, and complex tax issues arise.

All expenses must be apportioned between rental and personal use, based on the total number of days the home is used. For example, you must allocate interest and property taxes between rental and personal use so that a portion of your mortgage interest payments and property taxes will be reported as itemized deductions on Schedule A (the standard form for itemized deductions) and a portion as deductions against rental income on Schedule E (the form for rental income and expenses.) You will only be able to deduct your rental expense up to the total amount of rental income.  Excess losses can be carried forward to future years though.

Proper planning

With proper planning and professional advice, you can maximize tax benefits of your vacation home. Please call our office if you have, or are planning to buy, a vacation home and would like to discuss the tax consequences of renting your property.

The benefits of owning a vacation home can go beyond rest and relaxation. Understanding the special rules related to the tax treatment of vacation homes can not only help you with your tax planning, but may also help you plan your vacation.

The benefits of owning a vacation home can go beyond rest and relaxation. Understanding the special rules related to the tax treatment of vacation homes cannot only help you with your tax planning, but may also help you plan your vacation.

For tax purposes, vacation homes are treated as either rental properties or personal residences. How your vacation home is treated depends on many factors, such as how often you use the home yourself, how often you rent it out and how long it sits vacant. Here are some general guidelines related to the tax treatment of vacation homes.

Treated as Rental Property

Your home will fall under the tax rules for rental properties rather than for personal residences if you rent it out for more than 14 days a year, and if your personal use doesn't exceed (1) 14 days or (2) 10% of the rental days, whichever is greater.

Example - You rent your beach cottage for 240 days and vacation 23 days. Your home will be treated as a rental property. If you had vacationed for 1 more day (for a total of 24 days), though, your home would be back under the personal residence rules.

Income: Generally, rental income should be fully included in gross income. However, there is an exception. If the property qualifies as a residence and is rented for fewer than 15 days during the year, the rental income does not need to be included in your gross income.

Expenses: Interest, property taxes and operating expenses should all be allocated based on the total number of days the house was used. The taxes and interest allocated to personal use are not deductible as a direct offset against rental income. In the example above, the total number of days used is 263, so the split would be 23/263 for personal use and 240/263 for rental.

Any net loss generated will be subject to the passive activity loss rules. In general, passive losses are deductible only to the extent of passive income from other sources (such as rental properties that produce income) but if your modified adjusted gross income falls below a certain amount, you may write off up to $25,000 of passive-rental real estate losses if you "actively participate". "Active participation" can be achieved by simply making the day-to-day property management decisions. Unused passive losses may be carried over to future years

Planning Note: If your personal use does exceed the greater of (1) 14 days, or (2) 10% of rental days, the special vacation home rules apply. This means you drop back into the personal residence treatment, which allows you to deduct the interest and taxes and usually wipe out your rental income with deductible operating expenses. This is explained in greater detail below.

Treated as Personal Residence

If you use your vacation home for both rental and a significant amount of personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. Remember that personal use includes use by family members and others paying less than market rental rates. Days you spend working substantially full time repairing and maintaining your property are not counted as personal use days, even if family members use the property for recreational purposes on those days.

Rented 15 days or more. If you rent out your home more than 14 days a year and have personal use of more than (1) 14 days or (2) 10% of the rental days, whichever is greater, your home will be treated as a personal residence.

Income: You must include all of your rental receipts in your gross income. Again, however, if the property qualifies as a residence and is rented for fewer than 15 days, the rental income does not need to be included in your gross income.

Expenses:

Interest and Taxes: Mortgage interest and property taxes must be allocated between rental and personal use. Personal use for this allocation includes days the home was left vacant.

Example: You rent your mountain cabin for 4 months, have personal use for 3 months, and it sits empty for 5 months. The amount of interest and taxes allocated to rental use would be 33% (4 months/12 months) and since vacant time is considered personal use, you would allocate 67% (8 months/12 months) to personal use. The rental portion of interest and taxes would be included on Schedule E and the personal part would be claimed as itemized deductions on Schedule A.

Operating Expenses: Rental income should first be reduced by the interest and tax expenses allocated to the rental portion (33% in our example above). After that allocation is made, you can deduct a percentage of operating expenses (maintenance, utilities, association fees, insurance and depreciation) to the extent of any rental income remaining. When calculating the allocation percentage for operating expenses, vacancy days are not included. Any disallowed rental expenses are carried forward to future years.

Planning Note: It would be wise to try to balance rental and personal use so that rental income is "zeroed" out since, even though losses may be carried forward, they still risk going used. Mortgage interest should be fully deductible on Schedule A as a second residence. If more than two homes are owned, choose the vacation home with the biggest loan as the second residence. Property taxes are always deductible no matter how many homes are owned.

Rented fewer than 15 days. If you have the opportunity to rent your home out for a short period of time (< 15 days), you will not have to worry about the tax consequences. This rental period is "ignored" for tax purposes and the house would be treated purely like a personal residence with no tricky allocation methods required.

Income: You do not include any of the rental income in gross income.

Expenses: Interest and taxes are claimed on Schedule A. You can not write off any operating expenses (maintenance, utilities, etc...) attributable to the rental period.

Planning Note: Take advantage of this "tax-free" income if you get the chance. Short-term rentals during major events (such as the Olympics) can be a windfall.

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