The Internal Revenue Service (IRS) continues to work on the direct-file software project. The IRS has tentatively promised to deliver a tax software program for the 2024 tax filing season.

IRS surveys indicated that taxpayers were interested in using a direct-file software program, but that they would strongly prefer that it also enable them to file their state tax return. On July 26, IRS Commissioner Danny Werfel wrote a letter to all state tax administrators and requested input on methods to integrate the IRS direct-file software with state tax systems. He acknowledged that there may not be sufficient time to include the state tax returns in the 2024 IRS software.

The IRS plans to include state tax returns in future software. However, the IRS is currently exploring options to "include limited State income tax filing information sharing to help facilitate State tax return filing for the taxpayer." It now seems likely that the state tax returns will be deferred to a future release date.

In other news, the IRS announced it is expanding the Tax Pro Account capabilities of IRS.gov. The enhancements are designed to enable CPAs and other tax preparers to view taxpayer information online. Tax Pro Account users will need to authorize their tax preparer to have access to their information.

IRS Commissioner Danny Werfel stated, "Tax professionals provide a vital service to taxpayers and the nation, and the IRS is committed to making improvements to help them serve their clients. As part of our transformation efforts, we will be working to add new technology and expand our relationship with the tax professional community. The ongoing improvements to the Tax Pro Account are just part of a larger effort."

The Tax Pro Account is a digital self-service portal for both taxpayers and tax professionals. A common use of the account is for the taxpayer to authorize representation, by accepting Power of Attorney (POA) and Tax Information Authorization (TIA) requests from the tax professional. The new system allows the taxpayer to approve the request of the tax professional and for the authorization to be effective immediately.

IRS Warns About Art Donation Tax Scams

In IR-2023-185, the Internal Revenue Service (IRS) warned taxpayers to be aware of promoters who encourage tax scams that involve inflated appraisals for gifts of art.

These promoters approach high-income taxpayers and ask them to purchase art. After waiting for one year for the art to acquire long-term status, the art is transferred to a qualified charity to display the art. The related-use deduction is permitted for the appreciated value of the art.

IRS Commissioner Daniel Werfel noted, "Creativity in art is a beautiful thing, but aggressive creativity in art donation deductions can paint a bad picture for people pulled into the schemes. This is another example where people should be careful when it comes to aggressive marketing and promotions. There are legitimate ways to claim an art donation, but taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals. Beauty is not always in the eye of the beholder when it comes to tax deductions of art."

The IRS is auditing abusive art donations and will pursue civil penalties, taxes and interest. Because high-income filers with large charitable deductions are highlighted by the IRS artificial intelligence programs, they are more likely to face audits.

There are multiple red flags that should alert taxpayers as to an art deduction scheme. A promoter may offer art at a "discounted" price. Promoters frequently promise to provide storage, shipping, and an appraisal. After waiting for one year, the high-income taxpayer donates the art to a qualified exempt charity. The promoter also may have a relationship with a specific charity that promises to provide a related-use deduction.

The IRS currently is conducting multiple investigations of abusive art donations. It warns taxpayers to be cautious. An art appraisal must be done by a qualified individual and consider the rarity, age, quality, condition and stature of the artist in valuing the art.

An art deduction requires the donor to note the name and address of the charity, the date and location of the contribution and a detailed description of donated art. There are specific requirements based upon the claimed value of the art deduction.

1. Contemporaneous Written Acknowledgment — If the art is valued at $250 or more, the nonprofit must provide a statement that documents the gift date and note that "No goods or services were provided for the gifted property; the nonprofit has exclusive legal control over the gift."
2. IRS Form 8283, Section A — If the art is valued at over $500 but less than or equal to $5,000, the taxpayer must complete IRS Form 8283, Noncash Charitable Contribution, Section A and attach it to the tax return.
3. IRS Form 8283, Section B — If the art is valued at more than $5,000, then Form 8283, Noncash Charitable Contribution, Section B must be completed with the signatures of the representative of the nonprofit and the qualified appraiser. The donor must retain the qualified written appraisal.
4. Copy of the Qualified Appraisal — If the artwork is valued at $20,000 or more, the taxpayer must include a copy of the qualified appraisal with the return. The taxpayer also includes a high-resolution photo or digital image of the artwork.

Many gifts of art for charitable deduction purposes and transfers of art to family members are valued by the Commissioner's Art Advisory Panel. There are up to 25 renowned art experts on this panel. They serve without compensation and value over 100 art items each year.

Because some art items are valued for charitable deduction purposes and some are valued to determine the appropriate gift values for estate and gift tax purposes, the Art Advisory Panel generally provides objective answers. The Art Advisory Panel reduces the value on many items given for charitable purposes and increases the value of a substantial number of the items gifted to family.

The IRS continues to warn taxpayers about promoters who attempt to use inflated appraisals to produce substantial deductions and tax savings.

Congress Concerned About ERC Fraud and Delays

On October 3, 2023, House Ways and Means Committee Chair, Jason Smith (R-MO), and Oversight Subcommittee, Chair David Schweikert (R-AZ), sent a letter to IRS Commissioner Daniel Werfel. Representatives Smith and Schweikert were concerned that the Internal Revenue Service (IRS) faces two major challenges —an unacceptable level of Employee Retention Credit (ERC) fraud, and the IRS delay of ERC payments to legitimate businesses who are filing proper claims.

Smith and Schweikert stated, "While we want to work with you to consider action to support these proposals, we have yet to see any legislative proposal from the IRS for Congress to consider."

Smith and Schweikert note they understand the IRS is working diligently to resolve a backlog of ERC claims. However, the efforts to prevent fraud are blocking distributions to "hard-working, eligible businesses." This is particularly the case because the IRS has announced a moratorium on processing claims due to the backlog of claims and the concern about ERC mills submitting fraudulent ERC claims.

Smith and Schweikert added, "the ERC 'mills' have capitalized on the confusion and complexity of the program and are aggressively soliciting employers via phone calls, text messages, and a proliferation of television and radio advertisements." The promoters often ask for a fee upfront or percentage of the ERC credit and promise lucrative refunds. With the proliferation of ERC fraud, the IRS has placed the problem on its "Dirty Dozen" list of tax scams.

The IRS was faulted by Smith and Schweikert for issuing complicated and confusing guidance. Part of the problem that the IRS has in processing claims is that it does not provide clear guidance on how taxpayers may qualify for ERC payments.

There are approximately 500,000 IRS Forms 941-X that have not been processed. In May, the IRS released $152 billion in ERC refunds. There is an estimated $120 billion in further payments in the backlog. The total cost for the ERC is likely to be six times the original Congressional Budget Office estimate of $55 billion.

Smith and Schweikert asked a few questions, one of which was, "What steps will the IRS take to ensure legitimate ERTC claims filed before the moratorium beginning September 14, 2023 are processed in a reasonable amount of time?"

Editor's Note: Both the IRS and Congress claim the primary cause of the problem lies with the other party. Congress passed two bills that modify requirements for the ERC and that has caused confusion. The IRS has also had staff limitations and has been inundated by the sheer volume of ERC claims. The number of claims far exceeds the Congressional Budget Office (CBO) projected amounts when the bills were passed.

Applicable Federal Rate of 5.4% for October -- Rev. Rul. 2023-18; 2023-40 IRB 1 (15 September 2023)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2023. The AFR under Sec. 7520 for the month of October is 5.4%. The rates for September of 5.0% or August of 5.0% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% 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."