The Internal Revenue Service (IRS) Security Summit partners reminded taxpayers they can be protected against tax-related identity theft with an IRS Identity Protection PIN. These PINs are a strong defense against identity thieves. You can obtain an IP PIN through your IRS Online Account.

IRS Commissioner Danny Werfel stated, "To protect against continuing and evolving threats from identity thieves, these two special tools provide an extra layer of security for taxpayers and tax professionals. The IRS and the Security Summit urge people to sign up for both IP PINs and the Online Account to help protect their valuable information as well as avoid tax problems down the road."

The IP PIN is also supported by the Electronic Tax Administration Advisory Committee (ETAAC). ETAAC's annual report states, "The IP PIN method provides strong protection against stolen identity tax refund fraud and effectively locks out many fraudsters from e-filing using that taxpayer's social security number."

There are currently only about 500,000 taxpayers with an IP PIN. However, the Federal Trade Commission notes that there are more than 1.1 million reports of identity theft each year.

Taxpayers should be careful to protect their IP PIN. They should share that IP PIN only with a trusted tax preparer. Tax professionals should not store a client's IP PIN on their computer system. If the computer of the tax preparer is compromised by an identity thief, that individual could gain access to the client's IP PIN.

The IRS emphasizes that it will not call or text a taxpayer or a tax professional to request an IP PIN. If a taxpayer or tax professional receives such a call or text, it is coming from a fraudster.

Understanding the basics of the IP PIN is helpful for both taxpayers and tax preparers. The IP PIN is a six-digit number. If there has been proven identity theft, the IRS will assign an IP PIN to a taxpayer to ensure that future tax filings are coming from the correct individual.

If you file an electronic tax return, your software will prompt you to type the IP PIN next to the signature line. An IP PIN is valid for one year and taxpayers will receive a new IP PIN the next year. The taxpayer must verify his or her identity to obtain the IP PIN. It is issued only to the taxpayer and not to the tax professional.

Taxpayers may initiate the process through the "Get an IP PIN" webpage on IRS.gov. The preferred method is to validate your identity online or on the phone with an IRS employee. Individuals with an income of less than $79,000 or married couples with income of $158,000 or less may also file IRS Form 15227, Application for an Identity Protection Personal Identification Number. The IRS will call to validate your identity and then issue an IP PIN.

Small Businesses Anxiously Waiting for ERC Payments

On July 26, the Internal Revenue Service (IRS) published a release that indicates it will be making an announcement on the Employee Retention Credit (ERC) program. The announcement is expected to discuss a resumption of "processing of low-risk payments to help small business with legitimate claims."

The IRS has suspended the processing of ERC claims due to widespread fraud. Unfortunately, many small businesses and nonprofits with legitimate claims are facing cash shortfalls because of the delay.

IRS Commissioner Danny Werfel stated, "The IRS continues working aggressively to pursue improper claims as well as increase payments going out to businesses with legitimate claims on these complex credits. As we prepare for the next major announcement, we want businesses to be aware of common errors our compliance teams are seeing, many of which reflect bad advice coming from promoters."

The IRS notes aggressive promoters have caused many small businesses to file mistaken claims. The IRS is now analyzing approximately 1 million ERC claims that are requesting over $86 billion in payments.

The IRS indicates it will start to process lower-risk claims. The ERC rules are quite detailed, and it is important for taxpayers "to work with a trusted tax professional who understands the complex ERC rules."

In IR-2024-198, the IRS also explained five red flags for ERC claims. The red flags will cause delay or denial of the ERC claim by a small business.

1. Essential Businesses with No Decline in Gross Receipts — Many essential businesses did not have a full or partial suspension under a qualifying government order. However, promoters filed claims even though they did not qualify.
2. Suspended Activity Not Documented — If a business did have a full or partial suspension of operations, it must provide documentation confirming the suspension if requested. Many applicants did not sufficiently respond to a request for documentation.
3. Family Members' Wages — The wages paid to business owners and family members are generally not qualified for an ERC payment. These disqualified wages were paid to a spouse, child, sibling, parent, nephew, niece or spouse of a prohibited person.
4. Paycheck Protection Program (PPP) Loan — Many small businesses received Paycheck Protection Program loans which were later forgiven. Wages that were reported as payroll costs which also received PPP loan forgiveness are not qualified for the ERC.
5. Large Employers — There were special rules for employers with over 100 full-time employees claiming the ERC for the 2020 tax period and for employers with over 500 full-time employees claiming the ERC for the 2021 tax period.

The previous IRS red flags include multiple issues such as: businesses that claimed too many quarters, the government shutdown orders were not qualified or not in effect during the applicable period, the business reported more employees than were on the payroll, the supply chain interruption exception did not apply to the businesses or the ERC applications requested a claim for the incorrect tax period.

Finally, some businesses were not even in existence or did not pay wages during the applicable period. The business owners may have filed only because a promoter said they "have nothing to lose." The IRS emphasizes that these incorrect ERC payouts "risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns or represent them in an audit."

If business owners recognize their ERC claim is not qualified, they should consider the ERC Withdrawal Program. If they have received a payment, they may want to amend their tax returns.

Direct File Debate Continues

The IRS created a Direct File pilot program during the 2024 filing season. Approximately 140,000 taxpayers claimed $90 million in refunds and saved an estimated $5.6 million in filing costs. The IRS has announced it is planning to expand the Direct File program for the 2025 filing season.

The IRS has invited additional states to participate in the expanded program. New Jersey, Pennsylvania and New Mexico recently announced they will join the Direct File program.

New Jersey Governor, Phil Murphy, noted his state is pleased to join the program. He stated, "By cutting costly, for-profit tax filing software out of the equation with the free Direct File tool, we are saving individuals and families in our state time and money." Murphy indicates that more than 1.3 million residents of New Jersey could use the tool in 2025.

Pennsylvania also plans to join Direct File in 2025. Governor Josh Shapiro stated, "Pennsylvanians will be able to save money by filing both their state and federal taxes at no cost on an easy-to-use platform."

Pennsylvania Representative, Brendan Boyle, continued, "So I am proud to say IRS Direct File will save people time and money. It is just one example of how the IRS is utilizing the funding Congress provided to improve the service it provides to taxpayers."

An estimated 1.5 million Pennsylvania taxpayers will be qualified to use Direct File in the 2025 filing season.

New Mexico also plans to join the Direct File program. Governor Michelle Lujan Grisham noted, "This collaboration with the IRS will simplify the tax filing process for New Mexicans. The Direct File program empowers taxpayers with a free, reliable, and efficient way to manage their federal and state tax filings."

The Direct File program claims a high degree of satisfaction. 90% of the Direct File users ranked their experience as "Excellent" or "Above Average."

However, several GOP Senators expressed concern about the shortcomings of the Direct File program in a July 31 letter to Commissioner Danny Werfel. The 19 Senators note, "We write with serious concerns regarding your agency's recent unilateral and unauthorized action to create a permanent Internal Revenue Service (IRS) Direct File tax preparation program. Despite numerous problems and objections from members of Congress, the IRS announced the launch of its permanent Direct File program on May 30, 2024."

The letter expresses multiple concerns. The Direct File program is limited to very basic returns. It excludes categories of taxpayers such as those who "own their own businesses, collect income from property and investment, or work as independent contractors, such as ride-share drivers and delivery workers."

In addition, the Direct File program is not compatible with most state tax returns. A letter from 21 state financial officers to the IRS indicated this will create "challenges for taxpayers and state treasurers and the costs of Direct File far outweigh any potential benefits it may confer to taxpayers."

There is controversy regarding the cost estimates of the program. The IRS claims that Direct File will cost $249 million each year. Alternatively, the existing Free File program involves no cost to taxpayers.

Editor's Note: The IRS is moving forward with Direct File. The observations by the 19 Senators may lead to greater efforts to correct perceived deficiencies and problems.

Applicable Federal Rate of 5.2% for August: Rev. Rul. 2024-15; 2024-32 IRB 1 (16 July 2024)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2024. The AFR under Sec. 7520 for the month of August is 5.2%. The rates for July of 5.4% or June of 5.6% 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."