Washington News

On January 12, 2024, the Internal Revenue Service (IRS) announced that the IRS Free File service is now available. This is the 22nd year that the Free File program is available. There are still two weeks until the IRS starts to process individual tax returns on January 29, and millions of Americans qualify to start their filing process.

IRS Commissioner Danny Werfel stated, "The IRS continues its partnership with Free File Inc. to give taxpayers an opportunity to file their taxes electronically for free. Taxpayers will always have choices for how they file their taxes. They can file using tax software, a trusted tax professional, Free File or free tax preparation services through IRS partners. Through the years, Free File has helped millions of taxpayers, and it remains an important option for people to consider using to quickly and easily file their taxes."

The Free File program is available through a partnership involving the IRS and tax software providers. The eight tax software providers will enable taxpayers with a 2023 Adjusted Gross Income (AGI) of $79,000 or less to use the service. One of the eight tax programs is also available in Spanish.

Individuals who use the Free File software will have their returns filed on January 29. If a taxpayer has an AGI over $79,000, after January 29, he or she may use the IRS Free File Fillable Forms. This is an electronic version of IRS Form 1040 and related tax materials.

Some of the Free File providers will have limited eligibility rules and may not allow returns for incomes up to $79,000. However, active-duty military taxpayers with AGI up to $79,000 may use any of the eight providers.

Free File is an excellent way to receive all your tax benefits. These benefits may include the Earned Income Tax Credit (EITC), the Child Tax Credit or other various credits. The 2023 EITC is available for taxpayers with earned income under $63,398.

If you are interested in Free File, you should go to IRS.gov/Freefile. Use the "Explore Free Guided Tax Software" button to review the trusted partners and select your desired program. You will follow links to the tax provider’s website to complete your return. The tax software providers also support mobile phone access to complete a return on a smartphone or tablet.

Editor's Note: The IRS Direct File program is now in testing. The Direct File initial rollout will be for states without a state income tax. There will also be income limits and a simplified return. If the rollout is successful, there is a possibility the IRS Direct File will eventually replace the Free File program.

Bipartisan Tax Bill Expedited

House Ways and Means Committee Chair Jason Smith (R-MO) and Senate Finance Committee Chair Ron Wyden (D-OR) recently announced agreement on a bipartisan tax bill. The bill is designed to increase child tax credits to help families and includes multiple provisions that benefit businesses.

Chairman Smith stated, "American families will benefit from this bipartisan agreement that provides greater tax relief, strengthens Main Street businesses, boosts our competitiveness with China and creates jobs. We even provide disaster relief and cut red tape for small businesses, while ending a COVID-era program that is costing taxpayers billions in fraud."

Chairman Wyden noted, "Fifteen million kids from low-income families will be better off as a result of this plan, and given today's miserable political climate, it is a big deal to have this opportunity to pass pro-family policy that helps so many kids get ahead. At a time when so many people in Oregon and all across America are getting clobbered by rising rents and home prices, the improvements this plan makes to the Low-Income Housing Tax Credit will build more than 200,000 new affordable housing units."

The Tax Relief for American Families and Workers Act of 2024 includes sections on the child tax credit, research and development expensing, small business expensing, low-income housing and the Employee Retention Tax Credit Program.

1. Enhanced Child Tax Credit –– The child tax credit will be increased for 2023, 2024 and 2025. There will be an enhancement that is beneficial for families who are seeking to benefit from the larger credit. An example individual with two qualifying children and $9,000 of earned income qualifies for a $975 tax credit under the current law. However, under the new proposal, there would be a tax credit amount of $1,950. The maximum amount for the additional child tax credit will be $1,800 in 2023, $1,900 in 2024 and $2,000 in 2025 (adjusted for inflation).

2. Research & Development Expensing –– The research and development credit and expensing will generally enable businesses to deduct up to 100% of the value of qualified property placed in service between September 27, 2017, and January 1, 2023. The 100% deduction allowance will be phased down by 20% per calendar year for many types of assets. Some property will also qualify for 100% bonus depreciation during years 2023, 2024 and 2025.

3. Small Business Expensing –– The expensing for small businesses under Section 179 will not be limited to $1 million of qualifying property. The new proposal increases the expensing limit to $1.29 million. The $1.29 million amount will be adjusted for inflation in year 2025 and later years.

4. Low-Income Housing Credit –– The act will increase the low-income housing credit. There will be increased state allocations and provisions to facilitate tax-exempt bond financing.

5. Employee Retention Tax Credit Program –– ERC filing will be concluded with claims submitted by January 31, 2024. The change in the eligible filing date from 2025 to January 31, 2024, will save an estimated $70 billion. The savings in the termination of the ERC program will largely pay for the expanded child tax credit and business credits and deductions.

Editor’s Note: The bill was passed on a vote of 40-3 by the House Ways and Means Committee on January 19. The hope of the House and Senate tax-writers is to pass a completed bill by January 29, 2024. With solid bipartisan agreement, this tax bill is likely to pass.

IRS Taxes $25 Million Excess IRA Contribution

In Clair R. Couturier Jr. v. Commissioner; No. 19714-16; T.C. Memo. 2024-6, the taxpayer had transferred $26 million to an individual retirement account (IRA). The IRS determined that $25,132,892, was an excess contribution subject to a Sec. 4973 excise tax of $8,476,705. There were also additions to tax and accuracy-related penalties.

The taxpayer was a corporate executive with 4,586 shares in an employee stock option plan (ESOP). He also had nonqualified plans, including a Compensation Continuation Agreement, an Incentive Stock Option plan and a Value Enhancement Incentive plan. As part of a corporate reorganization, taxpayer was offered a $26 million buyout. He claimed in filing his return that the full buyout amount was paid in exchange for the ESOP stock and therefore a qualified IRA contribution. However, the IRS determined that over $25 million was transferred in exchange for the nonqualified compensation plans and was an excess contribution to the IRA.

Taxpayer claimed the payment on the excess IRA contribution was a "penalty" and not a tax. Because the IRS allegedly did not have supervisory approval for the "penalty," it was not applicable.

The Tax Court noted that Sec. 4973 is captioned "Tax on excess contributions to certain tax-favored accounts and annuities." The text of Section 4973(a) refers to a tax four times and the word "penalty" does not appear in any of the seven subsections of Section 4973. The plain text indicates this is a "tax." It is also in Subtitle D of the Code which is captioned "Miscellaneous Excise Taxes."

Congress clearly stated this is a tax and not a penalty. The penalties require supervisory approval under Section 6751(b). The intent of Congress is to ensure that penalties are asserted only in appropriate circumstances. However, this is clearly not a penalty, but is a tax.

The taxpayer requested the Tax Court conduct a "functional analysis" of the Code. The Tax Court indicated that a "functional analysis" is not appropriate or required. The taxpayer also observed that the 6% exaction is a punitive tax. However, there are multiple other sections with higher taxes such as Sec. 4945 with 20% tax on taxable expenditures by a private foundation or Sec. 4975 with a 15% tax on a prohibited transaction. Therefore, the $8.5 million tax is applicable.

Applicable Federal Rate of 4.8% for February -- Rev. Rul. 2024-3; 2024-6 IRB 1 (16 January 2024)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2024. The AFR under Sec. 7520 for the month of February is 4.8%. The rates for January of 5.2% or December of 5.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”