Category: Tax

2024 New Years’ Resolutions for Retirement Plans

Over the past few years, numerous pieces of legislation affecting retirement plans have been signed into law, including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Bipartisan American Miners Act, and the SECURE 2.0 Act (the “Acts”). While some of the changes, including both mandatory and optional provisions under the Acts previously became effective, other provisions under the SECURE Act and SECURE 2.0 Act had a delayed effective date. As we enter into 2024, many of the remaining mandatory and optional provisions established under these Acts are now going into effect. As a refresher, we have compiled a brief list of some of the important changes that will affect retirement
plans in 2024:

Long-Term Part-Time (“LTPT”) Employee Rule –
We resolve to permit more part-time employees to defer to our plans.

Beginning January 1, 2024, 401(k) plans are required to allow eligible employees who have at least 500 hours of service over 3 consecutive, 12-month periods beginning on or after January 1, 2021 to participate for purposes of making elective deferrals only, even where the 401(k) plan provides for a longer service requirement for deferral eligibility. See our prior SECURE Act and SECURE 2.0 Act newsletters, linked below, for more details on the LTPT employee rule; however, note that the IRS recently published proposed regulations on the LTPT employee rule, which are not addressed in these newsletters.

Effective January 1, 2025, the SECURE 2.0 Act changed the rule to require only 2 consecutive 12-month periods of service with at least 500 hours of service, and to apply the LTPT employee rule to 403(b) plans.

RMD Age and Roth Accounts –
We resolve to permit our elders to stay in our plans longer (again).

The age at which required minimum distributions (“RMDs”) must commence was increased again by SECURE 2.0, this time to age 73 for individuals who turn age 72 on or after January 1, 2023. Additionally, pre-death RMDs are no longer required for Roth accounts in retirement plans, generally effective for taxable years after December 31, 2023.

New Emergency Withdrawals –
We resolve to permit more access to retirement plan savings.

Beginning January 1, 2024, plan sponsors may add a number of new optional features addressing emergency situations, including:

  • Emergency Expense Distributions – Plans may permit participants to receive one emergency distribution of up to $1,000 per calendar year to cover unforeseeable or immediate financial needs relating to personal or family emergency expenses.
  • Distributions for Victims of Domestic Violence – Plans may permit a participant who is a domestic abuse victim to take a distribution up to the lesser of $10,000 (indexed) or 50% of the participants vested account balance during the 1-year period beginning on the date on which the individual is a victim of domestic abuse by a spouse or domestic partner.
  • Emergency Savings Accounts – Plan sponsors may offer an emergency savings account linked to their defined contribution retirement plan. Participants who are not highly compensated employees may contribute (on a post-tax, Roth basis) a maximum of $2,500 (indexed), or such lower amount that may be set by the plan sponsor. The account must allow for withdrawal by the participant at least once per calendar month, and the first 4 distributions per year from the account cannot be subject to fees or charges.

Mandatory Distribution Threshold –
We resolve to increase our automatic IRA rollover threshold.

The limit on involuntary distributions (i.e., the automatic IRA rollover limit) is increased from $5,000 to $7,000 for distributions occurring on or after January 1, 2024. However, this increase is optional – therefore, the limit under a plan will stay at $5,000 unless the plan administrator takes action to increase it to $7,000.

Roth Employer Contributions –
We resolve to treat employer contributions more like Roth.

Plans may permit employees to designate employer matching contributions or nonelective contributions as Roth contributions if such contributions are 100% vested when made.

Matching Contributions on Student Loan Payments –
We resolve to treat student loan payments like employee deferrals.

Plan sponsors may treat certain “qualified student loan payments” as elective deferrals for purposes of matching contributions.

2024 Resolutions Saved for Another Year

Roth Catch-Up Contribution Requirement is Pushed Back.

SECURE 2.0 required that all catch-up contributions made to a retirement plan by employees paid more than $145,000 (indexed) in FICA wages in the prior year be made on a Roth basis. The original effective date of this requirement was generally January 1, 2024 – however, in September, the IRS provided for a 2-year administrative transition period, which essentially moved the effective date for this requirement from January 1, 2024 to January 1, 2026. This extension provides plan sponsors with additional time to prepare for this new requirement.

Amendment Deadline to Reflect the Acts

IRS Notice 2024-02, released in the last week of December 2023, further extended the amendment deadline for changes made by the Acts. In general, the deadline to adopt an amendment to a qualified plan for required and discretionary changes made by the Acts is now December 31, 2026.

For more in-depth analysis of the new provisions briefly described above, please refer to our prior newsletters linked below:

The Secure Act Becomes Law!

SECURE 2.0 Passes

IRS Relief for Roth Roth Catch-up Requirement

© 2007-2023 Hill Ward Henderson, All Rights Reserved
For more news on Retirement Planning in 2024, visit the NLR Financial Institutions & Banking section.

Out with the Old? Not So Fast! A Quick Review of 2023 Highlights

2023 has brought many updates and changes to the legal landscape. Our blog posts have covered many of them, but you may not remember (or care to remember) them. Before moving on to 2024, let’s take a moment to review our top five blog posts from the year and the key takeaways from each.

VAX REQUIREMENT SACKED IN TN: MEDICARE PROVIDERS LOSE EXEMPTION FROM COVID-19 LAWS

Our most read blog of 2023 covered the federal COVID-19 vaccination requirement that applied to certain healthcare employers, which was lifted effective August 4, 2023. (Yes, in 2023 we were still talking about COVID-19). However, keep in mind that state laws may still apply. For example, Tennessee law generally prohibits employers from requiring employee vaccination, with an exception for entities subject to valid and enforceable Medicare or Medicaid requirements to the contrary (such as the federal vaccine requirement). However, now that the federal vaccine requirement is gone, there is no exception for these Medicare or Medicaid providers, and they are likely fully subject to Tennessee’s prohibition.

INTERPRETATION OF AN INTERPRETER REQUEST? 11TH CIRCUIT WEIGHS IN ON ACCOMMODATION OF DEAF EMPLOYEE

In this blog post, we covered a recent Eleventh Circuit case in which the court addressed ADA reasonable accommodation requests . The employee requested an accommodation, and the employer did not grant it—but the employee continued to work. Did the employee have a “failure to accommodate” claim? The Eleventh Circuit said yes, potentially. The court clarified that an employee still must suffer some harm—here, he needed to show that the failure to accommodate adversely impacted his hiring, firing, compensation, training, or other terms, conditions, and privileges of his employment. So, when you are considering an employee’s accommodation request, think about whether not granting it (or not providing any accommodation) could negatively impact the employee’s compensation, safety, training, or other aspects of the job. Always remember to engage in the interactive process with the employee to see if you can land on an agreeable accommodation.

POSTER ROLLERCOASTER: DOL CHANGES FLSA NOTICE REQUIRED AT WORKPLACES

If your business is subject to the FLSA (and almost everyone is), you probably know that you must provide an FLSA poster in your workplace. In this blog post, we reported that there is an updated FLSA “Employee Rights” poster that includes a “PUMP AT WORK” section, required under the Provide Urgent Material Protections (PUMP) for Nursing Mothers Act (more information on the PUMP Act here).

HOLIDAY ROAD! DOL WEIGHS IN ON TRACKING FMLA TIME AGAINST HOLIDAYS

In this now-timely blog post from June 2023, we discussed new guidance on tracking FMLA time during holidays. The DOL released Opinion Letter FMLA2023-2-A: Whether Holidays Count Against an Employee’s FMLA Leave Entitlement and Determination of the Amount of Leave. When employees take FMLA leave intermittently (e.g., an hour at a time, a reduced work schedule, etc.), their 12-week FMLA leave entitlement is reduced in proportion to the employee’s actual workweek. For example, if an employee who works 40 hours per week takes 8 hours of FMLA leave in a week, the employee has used one-fifth of a week of FMLA leave. However, if the same employee takes off 8 hours during a week that includes a holiday (and is therefore a 32-hour week), has the employee used one-fourth of a week of FMLA leave? Not surprisingly, the DOL said no. The one day off is still only one-fifth of a regular week. So, the employee has still only used one-fifth of a week of FMLA leave. Review the blog post for options to instead track leave by the hour, which could make things easier.

OT ON THE QT? BAMA’S TAX EXEMPTION FOR OVERTIME

Alabama interestingly passed a law, effective January 1, 2024, that exempts employees’ overtime pay from the 5% Alabama income tax. In this blog post, we discussed the new exemption. It is an effort to incentivize hourly employees to work overtime, especially in light of recent staffing shortages and shift coverage issues. The bill currently places no cap on how much overtime pay is eligible for the exemption, but it allows the Legislature to extend and/or revise the exemption during the Spring 2025 regular session. If you have employees in Alabama, be sure to contact your payroll department or vendor to ensure compliance with this exemption.

As always, consult your legal counsel with any questions about these topics or other legal issues. See you in 2024!

© 2023 Bradley Arant Boult Cummings LLP
For more news on 2023 Legal Landscape Updates, visit the NLR Labor & Employment section.

The Limits of Deference to Agency Interpretations Under Maine Law

Earlier this month, the Maine Law Court issued its decision in Cassidy Holdings, LLC v. Aroostook County Commissioners, holding that, in a municipality without a board of assessment review, a taxpayer whose nonresidential property is valued at $1 million or more has the option to appeal an assessment either to the county commissioners or to the State Board of Property Tax Review. The decision has been described by my excellent colleagues, Jon Block and Olga Goldberg.  For purposes of this blog, it is noteworthy that that Cassidy Holdings took up an issue of broad application: the extent of deference owed to changing agency interpretations of a state law.

In Cassidy Holdings, the county commissioners cited a Tax Bulletin issued by Maine Revenue Services as support for their statutory interpretation argument.  The interpretive guidance provided by the Maine Revenue Services, however, had changed over time.  Initially, the agency had taken the position that appeals could go either to the county commissioners or the state board; later, without explanation, the agency changed its guidance to state that appeals should be taken to the state board.  This change raised the question whether the agency’s statutory interpretation should be granted judicial deference.

The Law Court did not have to resolve this issue, because it reached its conclusion based on the plain and unambiguous meaning of the statutory language.  Nevertheless, the Court found this issue to be of sufficient importance to address in a lengthy footnote.  While acknowledging that an “agency is free to change its mind in its interpretation of a statute,” Justice Connors, writing for the Court, made clear that Maine courts should not give deference to an agency interpretation when the agency has taken a new position without reasoned explanation.  For deference to be owed,

the agency must acknowledge that it is making a change, explain why, and give due consideration to the serious reliance interests on the old policy.

The Court cited numerous federal authorities in support of its conclusion that an agency must explain its change in position.

This footnote is notable on several levels.  First, although this issue had been addressed by federal courts, the Law Court had not previously opined on this particular limitation to Chevron-style judicial deference to agency interpretations of state law.  This limitation promises to have application in a wide variety of cases.  Second, the Law Court’s articulation of this limitation on Chevron­-style deference is a reminder of the unusual standing of that doctrine under Maine law.  As previously discussed on this blog, the Law Court has never addressed how the federal Chevron doctrine of judicial deference to agency interpretations of state law relates to Maine’s strict separation of powers doctrine.  That issue promises to come into stark relief early next year, when the Supreme Court will consider a pair of cases challenging the Chevron doctrine.  Given the Law Court’s recent emphasis on the primacy doctrine, together with any potential changes to the Chevron doctrine at the federal level, the Court may well confront additional issues relating to the application of Chevron deference in the near future.

©2023 Pierce Atwood LLP. All rights reserved.
For more news on Maine property taxes, visit the NLR Real Estate section.

2024 Estate Planning Outlook: Transfer Tax Changes are on the Horizon

The Tax Cuts and Jobs Act of 2017 (TCJA) significantly increased the lifetime estate and gift tax exemption from $5.6 million to $11.18 million for individuals, with adjustments for inflation starting in 2018. For 2023, the lifetime estate and gift tax exemption is $12.92 million (or $25.84 million for married couples). For 2024, the lifetime estate and gift tax exemption will be $13.61 million (or $27.22 million for married couples). This relatively high exemption level has offered substantial relief to many taxpayers in recent years.

However, absent Congressional action, the lifetime estate and gift tax exemption is scheduled to sunset after 2025 to its pre-2018 amount (adjusted for inflation). If this sunset does in fact occur, we anticipate that the lifetime estate and gift tax exemption will revert to around $7 million ($14 million for couples) for 2026, effectively reducing the exemption by about one-half. This substantial reduction in the lifetime estate and gift tax exemption will cause many more people to be potentially subject to federal estate tax at death.

The potential substantial reduction in the lifetime estate and gift tax exemption could have several significant impacts on estate planning:

  1. Increased Number of Estates Subject to Estate Tax. A much higher number of individuals could be subject to estate tax at death due to the new lower estate tax exemption threshold. Proper planning is crucial to minimize this impact.
  2. Increased Estate Tax Liability. Individuals with estates valued in excess of the new lower estate tax exemption threshold could be subject to higher estate taxes at death. Proper planning is crucial to minimize this impact.
  3. Gifting Strategies. If the lifetime gift tax exemption is reduced, then individuals will have a diminished ability to make significant gifts during their lifetime and greater care will need to be given to maximizing the tax benefits of the lower exemption.
  4. Reviewing Existing Plans. Individuals who designed their estate plans based on the current lifetime estate and gift tax exemption should consider revisiting their plans to ensure those plans remain aligned with their goals and objectives.

The big question in the estate planning world today is whether, when, and to what extent Congress will enact changes to gift, estate, and income tax laws. With many challenges facing the current Biden Administration and a heavily divided Congress, it is not certain that major tax legislation even will be considered in 2024. Nevertheless, the tax proposals endorsed by the Biden Administration provide signals for actions clients should consider during the current year.

Executive Summary

  • The time to gift is 2024 — change is potentially on the horizon.
  • The timing and extent of potential changes to gift and estate tax laws are unclear.
  • Some potential changes could include reducing the exemption, increasing the estate tax rate, increasing the capital gains tax rate, and eliminating the basis adjustment.
  • Consider “locking in” the 2024 exemption amount by gifting to irrevocable trusts and continuing to take advantage of planning opportunities to shift appreciation out of your estate with techniques such as GRATs and intra-family loans.

Potential Legislative Tax Changes[1]

Potential Transfer Tax Changes – Lowered Transfer Tax Exemptions & Increased Transfer Tax Rate

The Biden Administration has proposed lowering the current lifetime estate and gift tax exemption amount to around $3.5 million per individual and increasing the estate tax rate from 40% to 45% on amounts exceeding the exemption. Instead, we may see Congress simply let the exemption sunset back to around $7 million (adjusted for inflation), which was the exemption amount before the substantial increase enacted under the TCJA.

For what it’s worth, the exemption has never been lowered. Despite this, the doubling of the exemption under the TCJA was a dramatic departure from past policies. Thus, reducing the exemption to $7 million (adjusted for inflation) may seem like an easier path, particularly since Congress is so heavily divided. In other words, Congress may opt to treat the last seven years as a fluke and return to “normal.”

Potential Income Tax Changes – Repeal Basis Adjustment & Capital Gains Taxed as Ordinary Income

The Biden Administration also signaled that it might seek repeal of the basis step-up at death and tax capital gains as ordinary income. Although the basis step-up is an income tax planning concept, it is also an important consideration in transfer tax planning. Under current law, gifts of low basis assets can be detrimental because the donee receives the donor’s basis. Taxpayers often decide to retain certain low basis assets, rather than sell them or gift them, to obtain the basis step-up at death. The family members or trusts receiving those assets then can sell those assets with little or no capital gains tax.

The Biden Administration has proposed to eliminate this basis adjustment. An alternative proposal involves treating the transfer of appreciated property at death or by gift as a taxable event causing the gain to be recognized, but many commentators think this is unlikely.

The Biden Administration proposal to tax long-term capital gains and qualified dividends as ordinary income on all income over $1 million would further exacerbate the impact of a repeal of the basis step-up.

Planning Ahead

2024 is an opportune time to make the most of your estate and gift tax exemption.

“Locking In” the Estate and Gift Tax Exemption

Many ultra-high net worth individuals have used most, if not all, of their exemption. Under current tax laws, in 2024, individuals may gift up to $13.61 million during their lives ($27.22 million for married couples). If the exemption decreases from $13.61 million to $3.5 million and the estate tax rate is raised from 40% to 45% percent, the cost of inaction is more than $4.5 million (if an individual makes a gift of $13.61 million while the exemption is $3.5 million and gifts beyond the exemption are taxed at a rate of 45%, the resulting gift tax amounts to roughly $4.5 million; $9 million for married couples). If individuals and married couples have not used their exemption(s) and can afford to, they should give serious consideration to completing gifts equal to their remaining exemption(s) in 2024, ideally to a generation-skipping trust for the benefit of their descendants, particularly since these exemptions are scheduled to sunset in 2025.

Depending on your and your family’s goals, circumstances, remaining exemption, and cash flow needs, gifting up to $27.22 million, or even $13.61 million, to a trust for your beneficiaries may not be feasible. A long-accepted way to address this concern is to create a trust that benefits both the Grantor’s spouse and descendants. This type of trust is commonly referred to as a Spousal Lifetime Access Trust (SLAT). A SLAT is a simple and effective way to address the possible need of the senior generation to access the property transferred. It provides direct access for the beneficiary spouse and indirect access for a Grantor spouse. Grantor Trust provisions, such as ones allowing the Grantor of the trust to swap assets or take loans from the trust without full and adequate consideration, offer tax flexibility, and access to funds by loan.

SLATs have become so popular that couples have created trusts for each other. This is not without risk and should only be done with different trust provisions and with creation of the trusts separated in time. Finally, it is important to remember that potential estate tax savings should never be the sole determinate of your financial planning decisions. Individuals who have stretched themselves thin to make significant gifts sometimes have profound “gifter’s remorse.” Thus, make gifts if you can, but, more importantly, make them if you’re comfortable doing so.

Freezing the Size of the Estate

Perhaps you and your spouse have already utilized your exemptions and are seeking ways to further reduce the tax burden on your estate, or you are not ready to commit large transfers of your property. In either situation, an excellent alternative is to freeze the growth of your estate with strategies like Grantor Retained Annuity Trusts (GRATs) and installment sales with trusts or family loans. GRATs and installment sales have thrived in the past low interest rate environment because assets have often grown in value at a rate above the rate of the annuity, in the case of GRATs, or the interest rate on a promissory note. However, in today’s current higher rate environment, the tax benefits of these planning opportunities may be more restrictive as the appreciation hurdle for a GRAT is now substantially higher than before, and the interest rate on an installment sale is also substantially higher. However, these strategies will still essentially “freeze” the size of one’s estate and transfer potentially significant appreciation, which would have otherwise remained in the client’s estate, out of his or her estate.

Uncertainty Doesn’t Preclude Planning

It is absolutely within the power of Congress to enact retroactive tax legislation if it is rationally related to a legislative purpose, but on a practical level, Congress usually avoids that option. It is almost always unpopular and adds only nominal additional revenue for budgeting purposes. Biden Administration officials already have stated they are not interested in seeking retroactive tax changes. Given the low probability, the threat of retroactive tax law changes should not prevent clients from implementing new estate planning strategies. For those who remain worried, a number of strategies can be structured in a manner that limits potential gift tax liability in the unlikely event legislative changes are enacted retroactively. In 2024, clients should consider reviewing their existing plan to determine whether they can employ certain strategies to maximize use of their exemption and achieve their planning objectives. If the lifetime estate and gift tax exemption is reduced, clients will lose the ability to give away that excess amount (and all subsequent appreciation on that amount).

[1] The following list of potential legislative changes is not all-inclusive. Instead, it focuses on the transfer tax and income tax proposals that would have the most significant impact on the practice of wealth transfer.

© 2023 ArentFox Schiff LLP
For more news on 2024 Transfer Tax Changes, visit the NLR Tax section.

California Governor Signs a Handful of Tax-Related Bills into Law

This fall, California Governor Gavin Newsom signed several tax-related bills into law on a diverse array of topics ranging from the use tax to the gun tax.

Use tax: On October 7, 2023, Governor Newsom signed a bill into law changing the threshold for a California business to register to pay use tax. Prior to enactment of the new law, a qualified purchaser that had more than $100,000 in annual gross receipts was required to register with the California Department of Tax and Fee Administration (“CDTFA”) to pay use tax on purchases from out-of-state sellers. Under the new law, a qualified purchaser must make more than $10,000 in purchases per year from an out-of-state seller on which use tax has not been paid and remitted by the remote seller in order to be required to register with CDTFA. The bill’s sponsor described the purpose of the bill as to update the “outdated and burdensome” old system which was in effect before the Supreme Court decision in South Dakota v. Wayfair, Inc. generally allowed states to collect use tax from out-of-state sellers. As California adopted a law post-Wayfair that requires out-of-state sellers that sell more than $500,000 in property in California to register to collect and remit use tax, the legislature determined that the old use tax registration requirements should be updated and streamlined.

Gun tax: While the change to the use tax registration did not garner much attention from the press, one bill that did was one signed by Governor Newsom on September 26, 2023, that doubled the taxes on sales of guns and ammunition in California. While federal law already taxes gun and ammunition sales at either 10 or 11 percent depending on the type of gun, the new law adds an additional 11 percent California tax on top of that, making California the only state to impose its own tax on guns and ammunition. The Governor’s office described the legislation as a “first-in-the-nation effort to generate $160 million annually on the sale of bullets to improve school safety and fund a gun violence intervention program.”

Settlement authority of the CDTFA: On October 8, 2023, Governor Newsom signed into law a bill that makes changes to certain tax administration provisions, including a provision giving the CDTFA sole authority to approve settlement agreements reducing a taxpayer’s liability for tax or penalties by up to $11,500, with periodic adjustments to be made to that threshold for inflation. Prior to the enactment of the new law, settlements involving a reduction of tax or penalties of up to $5,000 required joint approval from the executive director of CDTFA and the chief counsel’s office.

Extension of disaster relief deduction: On September 30, 2023, Governor Newsom signed a bill extending the State’s disaster relief loss deduction through December 31, 2028, for both individual and corporate taxpayers. The disaster relief loss deduction allows a taxpayer to declare a loss related to a California disaster declared by the President of the United States or the Governor of California. Prior to the enactment of the new law, the disaster relief loss deduction was scheduled to sunset on December 31, 2023.

© 2023 Blank Rome LLP
For more news on California Tax Bills, visit the NLR Tax section.

IRS Process for Withdrawing Employee Retention Credit Claims

On October 19, 2023, the IRS announced a process which is intended to allow employers who were pressured or misled by marketers or promoters into filing ineligible claims for the Employee Retention Credit (ERC), but who have not yet received a refund, to withdraw their claim. This process permits employers whose ERC claims are still being processed to withdraw their refund claims and avoid the potential that the IRS would deny the claim after the credit is received, thus avoiding the need to repay any refunded amounts, and avoiding potential interest and penalties.

When properly claimed, the ERC is a refundable tax credit designed for employers that were fully shut down or partially suspended due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods.

The move to permit the withdrawal of claims comes after the IRS placed abusive ERC promotions on its Dirty Dozen, an annual list aimed at helping raise awareness to protect honest taxpayers from aggressive promoters and con artists. After placing abusive ERC promotions on the Dirty Dozen, on September 14, 2023, the Commissioner of the IRS ordered that processing of any new ERC claims be stopped until December 31, 2023. However, the IRS stated that it would continue to process and pay out previously filed eligible ERC claims, as well as audit ERC claims and pursue criminal investigations of promoters and businesses filing dubious claims.

Who Can Withdraw an ERC Claim
To be eligible to withdraw an ERC claim, an employer must meet all of the following criteria:

  1. The ERC must have been claimed using an adjusted employment return, i.e. Forms 941-X, 943-X, 944-X, or CT-1X
  2. The ERC must be the only adjustment claimed on the return
  3. The employer must withdraw the entire amount of the ERC claim (this refers to each calendar quarter, rather than all calendar quarters, for which an ERC claim was made)
  4. The ERC claim cannot have been paid by the IRS or, if it has been paid, the employer has not yet cashed or deposited the refund check

How to Withdraw an ERC Claim

The notice provides a step-by-step menu for withdrawing a claim.  If the employer filed adjusted returns to claim ERCs for more than one calendar quarter and wishes to withdraw all ERC claims, it must follow the steps below for each calendar quarter for which it is requesting a withdrawal.  The IRS also has a dedicated page with sample form, which can be found here.

Employers that have not received a refund and have not been notified their claim is under audit may request a withdrawal by following these steps:

  1. Make a copy of the adjusted return with the claim you wish to withdraw
  2. In the left margin of the first page, write “Withdrawn”
  3. In the right margin of the first page:
    • Have an authorized person sign and date it
    • Write their name and title next to their signature
  4. Fax the signed copy of your return using your computer or mobile device to the IRS’s ERC claim withdrawal fax line at 855-738-7609.  The employer should keep a copy with its tax records.  The notice even provides a template for a simple claim withdrawal request.

Employers that have not received a refund and have been notified of an audit can still withdraw ERC claims using the above procedure, but must check with their examiner about how to fax or mail the withdrawal request directly to the examiner or, if an examiner has not yet been assigned, should respond to the audit notice with the withdrawal request, using the instructions in the notice for responding.

Special instructions are also included in the notice for employers that have received a refund check but have not cashed or deposited it.

Once a withdrawal is submitted, the employer should expect to receive a letter from the IRS about whether their withdrawal request was accepted or rejected.  A withdrawal is not effective until accepted by the IRS.  If the IRS accepts the withdrawal, the employer may need to amend its income tax return (if it previously amended that return to reflect ERCs that had been claimed).

ERC Refunds Already Received

Employers that are not able use the above withdrawal process may still be able to file another adjusted return if they need to:

  • Reduce the amount of their ERC claim
  • Make other changes to their adjusted return

However, it should be noted that the IRS is also working on separate guidance for ineligible employers that were misled into making ERC claims and have already received the payment.

Continued Risk for Fraudulent Claims

Withdrawn ERC claims will be treated as if they were never filed and the IRS will not impose penalties or interest.  However, ineligible employers should note that withdrawing an ERC claim will not remove the possibility that they or their advisor could be subject to potential criminal investigation or prosecution for filing a fraudulent ERC claim.

Copyright ©2023 Nelson Mullins Riley & Scarborough LLP
For more news on Employee Retention Claims, visit the NLR Labor & Employment section.

Taxpayer Makes Offer, But IRS Refused

James E. Caan, the movie actor most famous for playing Sonny Corleone in The Godfather, got into IRS trouble regarding the attempted tax-free rollover of his IRA.

Caan had two IRA accounts at UBS, a multinational investment bank and financial services company. One account held cash, mutual funds and exchange-traded funds (ETF) and the other account held a partnership interest in a hedge fund called P&A Multi-Sector Fund, L.P.

Because the hedge fund was a non-publicly traded investment, UBS required Caan to provide UBS with the year-end fair market value to prepare IRS Form 5498. Caan never provided the fair market value as of December 31, 2014. UBS issued a number of notices and warnings to Caan and finally on November 25, 2015, UBS resigned as custodian of the P&A Interest. UBS issued Caan a 2015 Form 1099-R reporting a distribution of $1,910,903, which was the value of the P&A Interest, used as of December 31, 2013. Caan’s 2015 tax return reported the distribution as nontaxable.

In June 2015, Caan’s investment advisor Michael Margiotta resigned from UBS and began working for Merrill Lynch. In October 2015, Margiotta got all UBS IRA assets to transfer to a Merrill Lynch IRA, except for the P&A Interest. The P&A Interest was ineligible to transfer through the Automated Customer Account Transfer Service. In December 2016, Mr. Margiotta directed the P&A Fund to liquidate the P&A Interest and the cash was transferred to Caan’s Merrill Lynch IRA in three separate wires between January 23 and June 21, 2017.

In April 2018, the IRS issued a Notice of Deficiency for the 2015 tax year asserting that distribution of the P&A Interest was taxable. On July 27, 2018, Caan requested a private letter ruling asking the IRS to waive the requirement that a rollover of an IRA distribution be made within 60 days. In September 2018, the IRS declined to issue the ruling.

Caan died July 6, 2022. In the Estate of Caan v. Commissioner, 161 T.C. No. 6 (October 18, 2023), the Tax Court ruled that Caan was not eligible for a tax-free IRA rollover of the P&A Interest for three reasons. First, to be a nontaxable rollover the taxpayer may not change the character of any noncash distributed property, but here, the P&A Interest was changed to cash before being rolled-over. Second, the contribution of the cash occurred long after the 60-day deadline. Third, only one rollover contribution is allowed in any one-year period, but Caan had three contributions. The Court also determined the 2015 fair market value of the P&A Interest.

Finally, the Tax Court determined that it has jurisdiction to review the IRS denial of the 60-day waiver request and that the applicable standard of review is an abuse of discretion. The Court ruled there was no abuse of discretion because Caan changed the character of the rollover property and even if the IRS waived the 60-day requirement, the rollover would still not be tax-free.

The case highlights some of the potential dangers in holding non-traditional, non-publicly traded assets in an IRA.

© 2023 Chuhak & Tecson P.C.
For more news on IRA rollovers, visit the NLR Tax section.

Inadvertent Errors and Tax Hedge Identification

Businesses often manage their price risks by hedging those risks with financial derivative contracts. Because businesses generate ordinary income and loss on their normal business activities, they want to be sure their hedging activities also generate ordinary tax treatment. If these hedging activities were to generate capital gains and losses, they would be basically worthless for many businesses. As a result, business taxpayers want to be able to net their hedging gains and losses against gains and losses on their normal business activities. (See my article, “Hedging: Favorable Tax Treatment Requires Careful Compliance.”)

Tax Hedge Identification Requirements

 In order to receive favorable tax treatment, a hedge (Hedge) must be clearly identified “before the close of the day on which it is acquired, originated, or entered into.”[1] The item (or items) being hedged (Hedged Item) must also be identified on a “substantially contemporaneous”[2] basis, but not more than 35 days after the taxpayer enters into the Hedge. And, the tax hedge accounting method must “clearly reflect income.”

In order to comply with these requirements, taxpayers can either establish an aggregate hedge program where they enter their Hedges into a designated hedge account, or they can attach a notation to a Hedge identifying the specific transaction as a “Hedge.” Either way, taxpayers must unambiguously and timely identify their Hedges and Hedged Items. Simply identifying a hedge for financial accounting purposes is not good enough because the hedge identification must clearly state that the identification is for tax purposes.

 The Best Laid Plans

So what happens if a taxpayer fails to unambiguously and timely identify the Hedge and the Hedged Item? Mistakes and errors happen. Tax identification can slip through the cracks. Sometimes the employee responsible for proper identification leaves the company and that responsibility is not promptly assigned to someone else. There are many reasons why tax identifications are made late, are incomplete, or are missed entirely. To discourage incomplete or omitted identification, the Code imposes so-called whipsaw rules that treat the gains on misidentified hedge transactions as ordinary and losses as capital.[3] This is a seriously adverse tax result. In limited circumstances, however, a taxpayer can escape the consequence if the failure to provide a proper identification was due to an “inadvertent error.”[4]

Inadvertent Error

Treas. Reg. §1.1221-2(g)(2)(ii) provides that a taxpayer can treat gains and losses on hedges that it has failed to identify if the failure was due to an “inadvertent error.” Unfortunately, neither the Code nor the Treasury regulations define inadvertent error. All we’ve got to go on in this regard is one private letter ruling and two Chief Counsel Advice Memoranda. These documents are not the type of guidance that taxpayers can rely on or cite as precedent. Nevertheless, they are instructive, however, because they give us a look into what the IRS views as inadvertent error.

In LTR 200051035 the IRS stated, “In the absence of a specific definition in the regulations, the term ‘inadvertent error’ should be given its ordinary meaning. . . . The ordinary meaning of the term ‘inadvertence’ is ‘an accidental oversight; a result of carelessness.’”[5] This view seems sensible and entirely appropriate.

Three years later, in CCA 200851082 the IRS Chief Counsel said that the “Taxpayer should bear the burden of proving inadvertence, and its satisfaction should be judged on all surrounding facts and objective indicia of whether the claimed oversight was truly accidental…. The size of the transaction, the treatment of the transaction as a hedge for financial accounting purposes, the sophistication of the taxpayer, its advisors, and counterparties, among other things, are all probative.”

Fair enough, but shortly thereafter, the IRS expressed its displeasure with taxpayers that should have known better and explained when taxpayers can rely on the inadvertent error excuse to receive tax hedge treatment. In CCA 201046015, the IRS Chief Counsel’s Office said that the failure to promptly address failed or improperly identified hedges would undercut a taxpayer’s inadvertent error claim; and that the inadvertent error exception is not intended to “eviscerate” the hedge identification requirements. The IRS went on to state, “Absent a change in the regulation, [it saw] no compelling policy justification to read the inadvertent error rule as an open-ended invitation for taxpayers to brush aside establishing hedge identification procedures.” A taxpayer’s claim of ignorance of the requirement for hedge identification is no excuse and is not grounds for claiming inadvertent error. In other words, inattention to the hedge identification requirements cannot be excused simply by asserting inadvertent error.

CONCLUSION

Notwithstanding the regulatory provision that provides an “inadvertent” error is an excuse for failing to timely identify hedges, it is now clear that the IRS is only willing to entertain an inadvertent error claim in very limited circumstances. Taxpayers have very little hope of being able to rely on this excuse to avoid the whipsaw rule if they do not properly identify their hedging transactions. This is just one more reason why taxpayers must treat the hedge identification requirement with care and seriousness. Failure to do so can have severe tax consequences.

[1] Code § 1221(a)(7).

[2] Treas. Reg. § 1.1221-2(f)(2).

[3] Code § 1221(b)(2)(B).

[4] Treas. Reg. § 1.1221-2(g)(2)(ii).

[5] Dec. 22, 2000.

© 2023 ASKramer Law
For more on Tax Hedge Errors, visit the NLR Tax section.

IRS Releases Annual Increases to Qualified Retirement Plan Limits for 2024

On November 1st, the IRS released a number of inflation adjustments for 2024, including to certain limits for qualified retirement plans. As expected, this year’s adjustments are more modest than last year’s significant increases. The table below provides an overview of the key adjustments for qualified retirement plans.

Qualified Defined Benefit Plans
2023 2024 Increase from 2023 to 2024
Annual Maximum Benefit $265,000 $275,000 $10,000
Qualified Defined Contribution Plans
2023 2024 Increase from 2023 to 2024
Aggregate Annual Contribution Limit $66,000 $69,000 $3,000
Annual Pre-Tax/Roth Contribution Limit $22,500 $23,000 $500
Catch-Up Contribution Limit for Individuals 50+ $7,500 $7,500 —
Other Adjustments for Qualified Plans
2023 2024 Increase from 2023 to 2024
Annual Participant Compensation Limit $330,000 $345,000 $15,000
Highly Compensated Employee Threshold $150,000 $155,000 $5,000
Key Employee Compensation Threshold for Top Heavy Testing $215,000 $220,000 $5,000
© 2023 Proskauer Rose LLP.
By Jesse T. Foley , Justin S Alex of Proskauer Rose LLP
For more articles on the IRS, visit the NLR Tax section.

IRS Offers Forgiveness for Erroneous Employee Retention Credit Claims

The Employee Retention Credit (“ERC”) is a popular COVID-19 tax break that was targeted by some unscrupulous and aggressive tax promoters. These promoters flooded the IRS with ERC claims for many taxpayers who did not qualify for the credit. Now, the IRS is showing mercy and allowing taxpayers to withdraw some ERC claims without penalty.

Many taxpayers were very excited about the ERC, which could refund qualified employers up to $5,000 or $7,000 per employee per quarter, depending on the year of the claim. But the requirements are complicated. Some tax promoters seized on this excitement, charged large contingent or up-front fees, and made promises of “risk-free” applications for the credit. Unfortunately, many employers ended up erroneously applying for credits and exposing themselves to penalties, interest, and criminal investigations—in addition to having to repay the credit. For example, the IRS reports repeated instances of taxpayers improperly citing supply chain issues as a basis for an ERC when a business with those issues rarely meets the eligibility criteria.

After months of increased focus, the IRS halted the processing of new ERC claims in September 2023. And now, the IRS has published a process for taxpayers to withdraw their claims without penalty. Some may even qualify for the withdrawal process if they have already received the refund check, as long as they haven’t deposited or cashed the check.

For those who have already received and cashed their refund checks, and believe they did not qualify, the IRS says it will soon provide more information to allow employers to repay their ERC refunds without additional penalties or criminal investigations.

© 2023 Miller, Canfield, Paddock and Stone PLC
For more articles on the IRS, visit the NLR Tax section.