From the Bradford Tax Institute:
Yesterday, we reported that the Fifth Circuit Court of Appeals immediately reinstated FinCEN BOI filing requirements.
But there’s good news—later yesterday, the Treasury Department extended key deadlines to allow more time for compliance.
Here’s what you need to know:
New January 13, 2025 Deadline
Additional Extensions
Regular Deadlines Resume
Entities created with a state secretary of state filing on or after January 1, 2025, have 30 days to file once their registration is effective.
Why Compliance Matters
Failure to file can result in severe penalties, including:
Background
The CTA is mainly an anti-money laundering law. In it, Congress states that bad actors seek to conceal their ownership of corporations, LLCs, or similar entities in the United States to facilitate money laundering, financing of terrorism, tax fraud, and other illegal acts. And according to Congress, federal legislation providing for the collection of beneficial ownership information is needed to protect national interests and better enable efforts to counter those illegal acts.
Who has to file a BOI report?
Every corporation, LLC, or other entity created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe is required to file a BOI report unless it qualifies for an exemption. Those entities created in the United States and not exempt, and therefore required to file a BOI report, are called “domestic reporting companies”. (Certain entities created in foreign countries and registered to do business in the United States are also required to file a BOI report and are called “foreign reporting companies.”)
Who is exempt from filing a BOI report?
There are 23 categories of entities that are exempt. Most exemptions are for entities that are already subject to substantial federal or state regulation. Exempt entities include, for example, publicly traded companies and other entities that file reports with the SEC, banks, credit unions, money services businesses, securities brokers and dealers, tax-exempt entities, insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, and accounting firms.
There is also an exemption for what’s called a “large operating company”. A “large operating company” is an entity that (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office within the United States, and (3) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.
For more information, questions, or assistance with this complicated matter please contact M.R. Gaebel at 315-493-1862.
America’s income tax rates are staying the same for the current tax season and next year’s. But the tax brackets—the buckets of income that are charged at progressively higher rates—have undergone major inflation adjustments because of the highest price increases in decades.
The IRS has released tax brackets for the 2023 tax year that have upper limits 7% higher than the brackets for 2022 returns. If your income isn’t keeping up with inflation, the increases in the brackets make it less likely you’ll pay higher tax rates.
You can use the tax brackets to determine how much you can expect to pay in taxes each year. The 2023 tax year—meaning the return you’ll file in 2024—will have the same seven federal income tax brackets as the 2022-2023 season: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your filing status and taxable income, including wages, will determine the bracket you’re in.
Contact Us to discuss your individual situation.
For the business owner and tax practitioner, the most important part of the Inflation Reduction Act of 2022 was not the tax credit for flashy new electric cars.
It was something much more basic: a long-term budget commitment to help the struggling, failing IRS. The Inflation Reduction Act invests an additional $80 billion in the IRS over the next 10 years. This is the biggest budget increase the IRS has ever received. To put this in perspective, it is almost six times the IRS’s annual $13.8 billion budget.
Some politicians have raised the specter of 87,000 new gun-toting revenue agents scouring the land, looking for tax evaders. This is patently ridiculous.
But the new funding will impact all taxpayers. The average taxpayer should benefit because the IRS will be able to upgrade its operations and improve its woeful levels of service.
On the other hand, the well-above-average taxpayer should look out: the bulked-up IRS will be gunning for you.
How Will the IRS Use the Additional Money?
The new IRS funding will be appropriated as follows:
The appropriated funds will remain available until September 30, 2031.
This is a mandatory appropriation. This means that Congress can’t reduce the appropriation without passing a new
law to do so.
There are no limits on how much the IRS can spend in any given year. The Biden administration plans to have the
IRS phase in the new spending by implementing no more than $1.5 billion the first year and gradually building up to
$15 billion by year 10.? The IRS is going to issue a detailed spending plan within six months.
Note that $35 billion of the new money is not for enforcement. Among other things, the IRS plans to use these
funds to update its antiquated IT systems (some of which date back to the 1960s), improve phone service, and
speed up the processing of paper tax returns.
Taxpayers should see improvements in IRS services relatively soon. Over the next six months the IRS plans to hire
5,000 additional phone representatives, fully staff every IRS Tax Assistance Center, and improve the processing of
paper returns by implementing scanning technology.
How Much Will the IRS Grow?
The IRS budget fell by 18.5 percent over the past decade, leading to a 20 percent decline in the agency’s
workforce. As of 2021, the IRS had only 78,661 employees. By comparison, it had 90,290 employees in 2012 and
116,673 in 1992. Staff losses have been most significant for revenue officers, who collect taxes (a 50 percent
decline to 8,200), and revenue agents, who audit complex returns (a 35 percent decline).
Today, the IRS has fewer auditors than at any time since World War II.°
The IRS will be adding new employees, but not anywhere close to the 87,000 number bandied about in the media.
Much of the new hiring will just offset attrition. The IRS has an aged workforce and expects a whopping 35,000
employees to retire in the next six years, along with another 17,000 who’ll leave before retirement. That’s 52,000
employees who’ll need to be replaced.
Thus, the IRS needs to hire 8,600 new employees per year just to stay even over the next six years. If all goes
well, at the end of 10 years the IRS may grow by 20,000 to 30,000 employees, but it will still be smaller than it was
in 1992. But the number of revenue agents could increase to 17,000 by 2031—over twice as many as today.
Will Audits Increase?
In a word: yes. Treasury Secretary Yellen has promised that IRS audit rates will remain at “historical levels” for
taxpayers earning less than $400,000 per year.° “Historical levels” is an ambiguous term. Does it encompass the
audit levels of the past decade or so?
In 2010, audit rates were at 1 percent compared with the current historic lows of about 0.25 percent. Thus, audits
for those earning less than $400,000 could increase fourfold, albeit from a very low level.
In any event, audit rates will definitely rise for taxpayers earning more than $400,000 per year. This may take some
time. The investment in the IRS is expected to raise some $124 billion over the next 10 years.
Planning for the Restored IRS of the Future
If you earn $400,000 or more, your chances of being audited over the next five or 10 years will likely go up,
perhaps substantially.
You should keep complete and accurate records and file timely and complete tax returns. (Of course, this is
something you should do anyway.)
Here are a few special areas of concern.
Cryptocurrency
The first page of the draft Form 1040 for 2022 asks the following revised cryptocurrency question: “At any time
during 2022, did you (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise
dispose of a digital asset (or a financial interest in a digital asset)?”
When the IRS places a question about an asset on the first page of Form 1040, you know it’s a high-priority item.
You can expect increased IRS audits dealing with cryptocurrency transactions.
If you’re one of the millions of Americans who engage in such transactions, it’s important to keep good records and
report any income you earn. For detailed guidance, see IRS Focuses on Cryptocurrency: Are You Ready?
S Corporation Compensation
If you’re an S corporation shareholder-employee, you’re likely saving on employment taxes by characterizing part
of your compensation as a corporate cash distribution rather than employee wages or bonus. The smaller your
salary, the more Social Security and Medicare tax you save.
You’re supposed to pay yourself a reasonable employee salary. If the IRS concludes part of your distribution is
really a disguised salary payment, it can recharacterize it as salary and retroactively impose employment taxes,
penalties, and interest.
For over 20 years, the IRS has been officially concerned with S corporations paying their shareholder-employees
unreasonably low salaries. In the past, it threatened to increase audits of S corporations. But, doubtless due to
budget constraints, it never really happened. In 2018, the audit rates for S corporations were a minuscule 0.65
percent.
This time it could be different. If the beefed-up IRS starts looking for low-hanging audit fruit to pick, S corporation
salaries would be a likely choice.
You should have your S corporation pay you an arguably reasonable salary and benefits, and document how you
arrived at the amount. For guidance, see Avoid Trouble: Don’t Let the IRS Set Your S Corporation Salary.
Syndicated Conservation Easements
One hot-button item for the IRS right now is syndicated conservation easements. Even in its currently reduced
state, the IRS has been fighting them tooth and nail. They are listed as one of the IRS’s dirty dozen tax scams for
2022.
These are real estate partnerships that acquire land and donate the development rights to a qualified organization.
The investors in the partnerships then obtain a charitable deduction for the value of the easement. The promoters
of some of these deals have used wildly inflated appraisals to increase their tax benefits.
Some investors have claimed charitable deductions four times the amount of their investment. The IRS says that it
examines 100 percent of these deals and plans to continue doing so for the foreseeable future.
Note that there are other ways to benefit from a conservation easement. For example, you could donate, to a
qualified organization, development rights to a parcel of land that you own. For guidance, see Use a Conservation
Easement Donation to Create a $63,000 199A Deduction.
Offshore Accounts
U.S. citizens and residents are taxable on their worldwide income and are required to report foreign bank accounts
to the U.S. Treasury. Concealing assets in offshore accounts is another item on the IRS’s list of dirty dozen tax
scams.
If you have more than $10,000 in one or more offshore accounts, you must file a Report of Foreign Bank and
Financial Account (FBAR) each year. Failure to do so can result in substantial penalties: $100,000 or 50 percent of
the total balance of the account per violation.
In recent years, the IRS has gone after both banks and bank account holders who hide assets in offshore accounts. In future years, we can expect the IRS to place even greater emphasis on identifying and tracking such offshore assets.
For guidance, see Does Your Foreign Bank Account Smell Like Offshore Tax Evasion to the IRS?
Business Partnerships
Partnerships and multi-member LLCs taxed as partnerships (which describes most of them) can expect increased
scrutiny from the IRS in the future.
Currently, partnerships are hardly ever audited. The partnership audit rate has been about 0.4 percent to 0.5
percent for many years.
The IRS’s latest five-year strategic plan calls for an increased focus on business partnerships that make up a
disproportionate share of unpaid taxes.
The IRS began this process in late 2021 when it launched the Large Partnership Compliance (LPC) program, using
data analytics to select 2019-tax-year large partnership returns for audit. You can expect the IRS to devote more
resources to this program in the future.
Takeaways
The Inflation Reduction Act gives the IRS an additional $80 billion to spend over the next 10 years. Some $35
billion will be used to upgrade IRS operations, and $45 billion is earmarked for enforcement.
The IRS may grow by 20,000 to 30,000 employees by 2032, and the number of revenue officers who collect unpaid
taxes could more than double.
The IRS promises that audits of taxpayers earning less than $400,000 per year will remain at historical levels. But
this could mean they increase by as much 400 percent over their current low levels.
Taxpayers who earn more than $400,000 will be in the IRS’s crosshairs in future years. Areas it is likely to focus on
include cryptocurrency, S corporation compensation, offshore accounts, syndicated conservation easements, and
business partnerships.
Pub, L. No. 117-169 (08/16/2022).
U.S. Department of the Treasury, “The American Families Plan Tax Compliance Agenda,” p. 16 (2021).
Ibid., p. 11.
IRS Commissioner Rettig written testimony before the House Ways and Means oversight subcommittee (Mar. 17, 2020), p. 3.
Remarks by Secretary of the Treasury Janet L. Yellen (Sept. 15, 2022).
IR-2022-125,
A new law that requires cash apps and online marketplaces, including Venmo and eBay, to send tax documents to millions of Americans is ensnaring a surprising demographic: the wealthy.
Under the rule, e-commerce and digital payment platforms that transfer money from a buyer of goods or services to a seller must issue the recipient a Form 1099-K if they receive $600 or more in a calendar year. The Internal Revenue Service will also get a copy of the form, which details who got paid and through which third-party service. Lawmakers severely shrank the previous reportable threshold — $20,000 earned through at least 200 transactions — last year as part of the $1.9 trillion stimulus bill known as the American Rescue Plan.
Common information returns include forms W-2, 1099 and 1098, among others.
With the supporting documents destroyed, the IRS will likely be missing many of the documents it requires to adequately screen for accuracy of returns, and may also end up lacking sufficient materials for tax audits. However, the IRS can request taxpayers provide relevant proof or copies of documents used to support their income tax returns, including copies of files the IRS may have destroyed..
“TIGTA previously reported that there were actions the IRS could take to reduce paper filings and/or convert paper tax returns into an electronic format. In addition, TIGTA reported that, while the electronic filing (e-filing) of business tax returns continued to increase, the e-filing rate still lags behind that of individual tax returns. Finally, repeated efforts to modernize paper tax return processing have been unsuccessful.
In other findings, TIGTA reported that has taken several steps to increase e-filing, but that the pandemic amplified the backlog of paper tax returns and records. This, TIGTA noted, suggests that the IRS needs to create an agency-wide “strategy to further increase e-filing.”
TIGTA made three overall recommendations as a result of its audit:
The report from the Treasury Inspector General for Tax Administration is at:
https://www.treasury.gov/tigta/auditreports/2022reports/202240036fr.pdf
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