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The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The program is designed to help businesses with questionable claims to self-correct and repay the credits they received after filing erroneous ERC claims, many of which were driven by aggressive marketing from unscrupulous promoters.

The first ERC Voluntary Disclosure Program was announced in late December 2023, and ended on March 22, 2024 (Announcement 2024-3, I.R.B. 2024-2, 364). Over 2,600 taxpayers applied to the first program to resolve their improper ERC claims and avoid civil penalties and unnecessary litigation.

The second ERC Voluntary Disclosure Program will allow businesses to correct improper payments at a 15-percent discount, and avoid future audits, penalties and interest.

Procedures for Second Voluntary Disclosure Program

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and submit it through the IRS Document Upload Tool. Employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims, and are expected to repay their full ERC claimed, minus the 15-percent reduction allowed through the Voluntary Disclosure Program.

Eligible employers must apply by 11:59 pm local time on November 22, 2024.

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The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

For the Residential Clean Energy Credit, 1,246,440 returns were filed, with a total credit value of $6.3 billion and an average of $5,084 per return. Specific investments include:

Rooftop solar: 752,300 returns, up to 30 percent of the cost;
Batteries: 48,840 returns, up to 30 percent of the cost.

For the Energy Efficient Home Improvement Credit, 2,338,430 returns were filed, with a total credit value of $2.1 billion and an average of $882 per return. Specific improvements include:

Home insulation: 669,440 returns, up to 30 percent of the cost;
Windows and skylights: 694,450 returns, up to 30 percent of the cost or $600;
Central air conditioners: 488,050 returns, up to 30 percent of the cost or $600;
Doors: 400,070 returns, up to 30 percent of the cost, $250 per door or $500 total;
Heat pumps: 267,780 returns, up to 30 percent of the cost or $2,000;
Heat pump water heaters: 104,180 returns, up to 30 percent of the cost or $2,000.

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Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

"The Inflation Reduction Act funding is making a difference for taxpayers, and we will build on these improvements in the months ahead," Werfel said during a July 24, 2024, press teleconference, adding that "for this progress to continue, we must maintain a reliable, consistent annual appropriations for the agency as well as keeping the Inflation Reduction Act funding intact."

During the call, Werfel highlighted a number of improvements to IRS operations that have come about due to the IRA funding, including expansion of online account features (such as providing more digital forms, making it easier to make online payments, and making access in general easier); providing more access to taxpayers wanting face-to-face assistance (including a 37 percent increase in interactions at taxpayer assistance centers); IT modernization; and the collection of more than $1 billion in taxes due form high wealth individuals.

Werfel did highlight an area where he would like to see some improvements, including the number of taxpayers who have activated their online account.

While he did not have a number of how many taxpayers have activated their accounts so far, he said that “"we are nowhere near where we have the opportunity to be,"” adding that as functionality improves and expands, that will bring more taxpayers in to use their online accounts and other digital services.

He also noted that online accounts will be a deterrent for scams, and it will provide taxpayers with the information they need to not be fooled by scammers.

“We see the online account as a real way to test these scams and schemes because taxpayers will have a single source of truth about whether they actually owe a debt, whether the IRS is trying to reach them, and also information we can push out to taxpayers more regularly if they sign up and opt in for it on the latest scams and schemes,” Werfel said.

By Gregory Twachtman, Washington News Editor

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The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The newly identified issues include essential businesses claiming ERC despite being fully operational, unsupported government order suspensions, misreporting wages paid to family members, using wages already forgiven under the Paycheck Protection Program, and large employers incorrectly claiming wages for employees who provided services. The IRS plans to deny tens of thousands of claims that show clear signs of being erroneous and scrutinize hundreds of thousands more that may be incorrect. In addition, the IRS announced upcoming compliance measures and details about reopening the Voluntary Disclosure Program, aimed at addressing high-risk ERC claims and processing low-risk payments to help small businesses with legitimate claims.

IRS Commissioner Danny Werfel emphasized the agency’s commitment to pursuing improper claims and increasing payments to businesses with legitimate claims. Promoters lured many businesses into mistakenly claiming the ERC, leading to the IRS digitizing and analyzing approximately 1 million ERC claims, representing over $86 billion. The IRS urges businesses to act promptly to resolve incorrect claims, avoiding future issues such as audits, repayment, penalties, and interest. Taxpayers should recheck their claims with the help of trusted tax professionals, considering options such as the ERC Withdrawal Program or amending their returns to correct overclaimed amounts.

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The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

CASST will focus on three primary objectives: enhancing public outreach and education to alert taxpayers to emerging threats, developing new methods to identify fraudulent returns at the point of filing, and improving the infrastructure to protect taxpayers and the integrity of the tax system. This initiative builds on the successful framework of the Security Summit, which was launched in 2015 to combat tax-related identity theft. While the Security Summit made significant progress in reducing identity theft, CASST aims to address a broader range of scams, reflecting the evolving tactics of fraudsters.

The coalition has received widespread support, with over 60 private sector groups, including leading software and financial companies, joining the effort. Key national tax professional organizations are also participating, all committed to strengthening the security of the tax system.

Among the measures CASST will implement are enhanced validation processes for tax preparers, including improvements to the Electronic Filing Identification Number (EFIN) and Preparer Tax Identification Number (PTIN) systems. The coalition will also target the issue of ghost preparers, who prepare tax returns for a fee without proper disclosure, leading to inflated refunds and significant revenue losses.

In addition to these technical improvements, CASST will address specific scams, such as fraudulent claims for tax credits like the Fuel Tax Credit. By the 2025 filing season, CASST aims to have new protections in place, bolstering defenses across both public and private sectors to make it more difficult for scammers to exploit the tax system. This coordinated effort seeks to protect taxpayers and ensure the integrity of the nation’s tax system.

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The Internal Revenue Service will be processing about 50,000 "low-risk" Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

The Internal Revenue Service will be processing about 50,000 "low-risk"Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

"The IRS projects payments will begin in September with additional payments going out in subsequent weeks," the agency said in an August 8, 2024, statement."The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall."

The agency also announced that it is shifting the moratorium period on processing new claims. Originally, the agency was not processing claims that were filed after September 14, 2023. It is now going to process claims filed between September 14, 2023, and January 31, 2024.

"Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum," the IRS said. "This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny any refund claim."

The agency also said it has sent out "28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect," preventing up to $5 billion in improper payments. It also has "thousands of audits underway, and 460 criminal cases have been initiated" with potentially fraudulent claims worth nearly $7 billion. Thirty-seven investigations have resulted in federal charges, with 17 resulting in convictions.

Businesses that receive a denial letter will have the ability to appeal the decision.

The agency also offered some other updates on the ERC program, including:

The claim withdrawal process for unprocessed ERC has led to more than 7,300 withdrawing $677 million in claims;
The voluntary disclosure program received more than 2,600 applications from ERC recipients that disclosed $1.09 billion in credits; and
The IRS Office of Promoter Investigations has received "hundreds" of referrals about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC.

"The IRS is committed to continuing out work to resolve this program as Congress contemplates further action, both for the good of legitimate businesses and tax administration," IRS Commissioner Daniel Werfel said in the statement.

By Gregory Twachtman, Washington News Editor

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The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS’s push for digital transformation has seen significant advancements, allowing taxpayers to conduct nearly all interactions with the agency online. This initiative aims to reduce the reliance on paper submissions, expedite tax processing, and improve overall efficiency. In 2024 alone, the IRS introduced extended hours at Taxpayer Assistance Centers across the country, particularly benefiting rural and underserved communities. The agency also reported a notable increase in face-to-face interactions, with a 37 percent rise in contacts during the 2024 filing season.

In parallel with these service improvements, the IRS has ramped up efforts to disrupt complex tax evasion schemes. Leveraging advanced data science and technology, the agency has focused on high-income individuals and entities employing sophisticated financial maneuvers to avoid taxes. Among the IRS’s new measures is a moratorium on processing Employee Retention Credit claims to prevent fraud, alongside initiatives targeting abusive use of partnerships and improper corporate practices.

The IRS also highlighted its progress in eliminating paper filings through the introduction of the Document Upload Tool, which allows taxpayers to submit documents electronically. This tool, along with upgraded scanning and mail-sorting equipment, is expected to significantly reduce the volume of paper correspondence, potentially replacing millions of paper documents each year. These technological upgrades are part of the IRS’s broader goal to create a fully digital workflow, thereby speeding up refunds and improving service accuracy.

Additionally, the IRS has launched new programs to ensure taxpayers are informed about and can claim eligible credits and deductions. This includes outreach efforts related to the Child Tax Credit and the Earned Income Tax Credit, aiming to bridge the gap for eligible taxpayers who may not have claimed these benefits. These initiatives underline the IRS's dedication to a more equitable tax system, ensuring that all taxpayers have access to the credits and services they are entitled to while maintaining robust compliance standards.

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Employees can elect to make voluntary contributions from their salary to certain retirement plans. The type of plan may depend on your employer. Many employers maintain cash or deferred arrangements -- 401(k) plans -- as part of their defined contribution retirement plan. State and local governments can maintain "457" eligible deferred compensation plans. Nonprofit organizations can provide a 403(b) tax-sheltered annuity. And, of course, taxpayers can contribute to an individual retirement account (IRA).

These plans all maintain separate accounts for their participants. All of these plans are subject to annual limits on voluntary employee contributions, which apply per participant, not per plan. The normal limit for both 2009 and 2010 is $16,500 or the employee's compensation, if less. Employer limits may reduce the $16,500 amount.

Contributions to a 401(k), 403(b) or 457 plans must be made by the end of the calendar year to apply against that year's limit. Generally, employees can change the amount or rate of salary reduction contributions by making an election at any time during the year.

Catch-up contributions

For most plans, the limit increases in the year that the employee will turn 50. The increased limit applies even if the employee terminates employment or dies before actually turning 50. The increased limits are known as "catch-up" contributions. Catch-up contributions are additional elective deferrals made by eligible participants above the normal applicable limit. However, a catch-up contribution does not mean that the employee can take an unused limit from an earlier year and catch-up; the catch-up contribution is based on the higher limits allowed to older individuals.

A plan does not have to allow catch-up contributions. There are statutory limits on catch-up contributions, adjusted for inflation each year. For 401(k), 403(b), and 457 plans, the maximum catch-up contribution for both 2009 and 2010 is $5,500. The employer cannot reduce the catch-up limit. Adding the catch-up limit produces a potential overall limit of $22,000 on voluntary contributions by a 50-year old employee. Excess contributions have to be included in income (if not withdrawn in time), plus they are subject to a 10 percent penalty.

IRAs

For an IRA, there is a separate regular limit of $5,000 for 2009, up to the amount of the individual's compensation, and a separate catch-up limit of $1,000 for an individual who turns 50 by the end of the year. An IRA contribution can be made by the due date of the year's tax return in the following year (not including extensions). So the deadline is April 15 of the following year. There also are penalties for an excess contribution to an IRA.

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The first-time homebuyer tax credit has proven to be one of the most popular tax incentives in recent years. Until recently, the credit was generally limited to "first-time homebuyers." Although the full ($8,000) is still limited to "first-time" homebuyers, "long-time" homeowners of the same principal residence may be eligible for a reduced credit of $6,500. This new provision can give a boost to younger homeowners looking to trade up, or simply move on from their current home, as well as seniors looking to downsize.

The new "new homebuyer" tax credit

The homebuyer tax credit would have expired on November 30, 2009 had Congress not extended the credit. The new credit is extended to homes purchased before (1) May 1, 2010, or (2) July 1, 2010 if the taxpayer enters into a written binding contract before May 1, 2010 to close on the home before July 1, 2010. The credit amount remains at a maximum of $8,000, or 10 percent of the home's purchase price (whichever is less). However, the new law places a cap on the home's purchase price, which cannot exceed $800,000 in order to claim the credit. In addition, a modified credit is available for "repeat" homebuyers, discussed below.

Comment. The "first-time homebuyer credit" is somewhat of a misnomer. Under the original - and now extended - credit, you did not (and still do not) technically have to be purchasing your very first home to qualify for and take the credit. A first-time homebuyer for purposes of the $8,000 credit is a taxpayer who an individual (and spouse, if married) who had no present ownership interest in a principal residence during the three-year period ending on the date the home is purchased. This means that you could have previously owned a home as long as you have not had any ownership interest in a personal residence for at least the three years prior to purchasing the home for which you are claiming the credit.

Congress raises income limits

The homebuyer tax credit is also now available to a greater segment of the home-buying population. The new law has increased the income limits that phase out the credit, allowing higher income individuals and families to qualify.Phase-out of the credit begins under the new law at $125,000 modified adjusted gross income (AGI) for single taxpayers (up from $75,000) and at $225,000 for married taxpayers filing joint returns (up from $150,000). The phaseout range itself is $20,000, thereby reducing the credit to zero for individual taxpayers with modified AGI of more than $145,000 ($245,000 for married joint filers). The credit is reduced proportionately for taxpayers with modified AGIs between these amounts.

"Long-time" homeowners qualify for reduced $6,500 credit

A reduced homebuyer tax credit may be claimed by existing homeowners who have owned and lived in their home for a long period of time. The reduced tax credit, of up to $6,500, may benefit long-time homeowners who are ready to move up or simply move on from their current home. The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.

To qualify for the reduced $6,500 credit, you must be a "long-time resident" as defined by the law. For purposes of the credit, a "long-time resident" is defined as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase of the new residence. Importantly, for married taxpayers, the law tests the homeownership history of both the spouses.

If you are an existing, repeat homebuyer who qualifies for the reduced credit, you do not have to purchase a home that is more expensive than your previous home to qualify for the tax credit. There is no requirement that the new principal residence be a "move up" property; it can be less expense than your former home. However it must be your new "principal residence" in order to claim the credit. Moreover, a repeat homebuyer does not need to sell or otherwise dispose of his or her current residence to qualify for the $6,500, either, as long as your new home becomes your principal residence.

Example. Bob and Edith are married and are both eligible to claim the reduced $6,500 credit for existing "long-time residents." Their modified AGI is $240,000, which results in being $15,000 over the beginning of the phaseout for married taxpayers filing jointly. They will be able to claim a partial reduced homebuyer credit in the amount of $1,650 (15,000/$20,000 = 0.75; 1.0-0.75 = 0.25. $6,500 x 0.25 = $1,625).

While the homebuyer credit can be very valuable, it is also very complex. In addition to the provisions we have described, there are special rules for repayment, new documentation requirements, a purchase price cap, and more. Please contact our office for more details about the first-time homebuyer credit.

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