Kids are expensive. Whether someone just brought a bundle of joy home from the hospital, adopted a teen from foster care, or is raising their grandchild. There are several tax breaks that can help.

Here are some tax tips for new parents

• Get the child a Social Security or Individual Tax Identification number
  To claim parental tax breaks, the taxpayer must have their child or dependent’s Social Security number, Adoption Tax Identification Number or Individual Tax Identification number. Confirming a child’s birth is the only way the IRS can verify that the parent is eligible for the credits and deductions they claim on their tax return.
• Check withholding
  A new family member might make taxpayers eligible for new credits and deductions, which can greatly change their tax liability. They can use the IRS Withholding Estimator to check their withholding. Taxpayers should provide their employer with an updated Form W-4, Employee’s Withholding Certificate, if they want to change how much tax is withheld from their paycheck.

Check eligibility for these tax credits and deductions

• Child Tax Credit
  Taxpayers who claim at least one child as their dependent on their tax return may be eligible for the Child Tax Credit. For help figuring out if a child qualifies for this credit, taxpayers can check Does My Child/Dependent Qualify for the Child Tax Credit or the Credit for Other Dependents?
• Child and Dependent Care Credit
  If taxpayers paid someone to take care of their children or another member of their household while they work, they may qualify for the Child and Dependent Care Credit regardless of their income. Taxpayers who pay for daycare expenses may be eligible to claim up to 35% of their daycare expenses with certain limits.
• Adoption Tax Credit
  This credit lets families who are in the adoption process during the tax-year claim eligible adoption expenses for each eligible child. Taxpayers can apply the credit to international, domestic, private and public foster care adoptions.
• Earned Income Tax Credit
  The Earned Income Tax Credit helps low- to moderate-income families get a tax break. If they qualify, taxpayers can use the credit to reduce the taxes they owe – and maybe increase their tax refund.
• Credit for Other Dependents
  Taxpayers with dependents who don’t qualify for the Child Tax Credit may be able to claim the Credit for Other Dependents. Taxpayers can use the Does My Child/Dependent Qualify for the Child Tax Credit or the Credit for Other Dependents tool on IRS.gov to help determine if they are eligible to claim the credit. They can claim this credit in addition to the Child and Dependent Care Credit and the Earned Income Credit.

Source: IRS Tax Tip 2023-89, July 10, 2023

WASHINGTON ― The Internal Revenue Service warned taxpayers today to be on the lookout for a new scam mailing that tries to mislead people into believing they are owed a refund.

The new scheme involves a mailing coming in a cardboard envelope from a delivery service. The enclosed letter includes the IRS masthead and wording that the notice is “in relation to your unclaimed refund.”

Like many scams, the letter includes contact information and a phone number that do not belong to the IRS. But it also seeks a variety of sensitive personal information from taxpayers – including detailed pictures of driver’s licenses – that can be used to by identity thieves to try obtaining a tax refund and other sensitive financial information.

“This is just the latest in the long string of attempts by identity thieves posing as the IRS in hopes of tricking people into providing valuable personal information to steal identities and money, including tax refunds,” said IRS Commissioner Danny Werfel. “These scams can come in through email, text or even in special mailings. People should be careful to watch out for red flags that clearly mark these as IRS scams.”

The Security Summit – a coalition between the IRS, state tax administrators and the nation’s tax industry – continue to warn people to protect their personal information to protect against tax-related identity theft as well as scams like this.

In this new scam, there are many warning signs that can be seen in many similar schemes via email or by text. An unusual feature of this scam is that it tries tricking people to email or phone very detailed personal information in hopes of stealing valuable information.

The letter tells the recipients they need to provide “Filing Information” for their refund. This includes some awkwardly worded requests like this:

“A Clear Phone of Your Driver’s License That Clearly Displays All Four (4) Angles, Taken in a Place with Good Lighting.”

The letter proceeds for more sensitive information including cellphone number, bank routing information, Social Security number and bank account type, followed by a poorly worded warning:

“You’ll Need to Get This to Get Your Refunds After Filing. These Must Be Given to a Filing Agent Who Will Help You Submit Your Unclaimed Property Claim. Once You Send All The Information Please Try to Be Checking Your Email for Response From The Agents Thanks”

This letter contains a variety of warning signs, including odd punctuation and a mixture of fonts as well as inaccuracies.

For example, the letter says the deadline for filing tax refunds is Oct. 17; the deadline for people on extension for their 2022 tax returns is actually Oct.16, and those owed refunds from last year have time beyond that. And the IRS handles tax refunds, not “unclaimed property.”

Important reminders about scams

The IRS and Security Summit partners regularly warn people about common scams, including the annual IRS Dirty Dozen list.

Taxpayers and tax professionals should be alert to fake communications posing as legitimate organizations in the tax and financial community, including the IRS and states. These messages can arrive in the form of an unsolicited text or email to lure unsuspecting victims to provide valuable personal and financial information that can lead to identity theft, including phishing and smishing.

The IRS never initiates contact with taxpayers by email, text or social media regarding a bill or tax refund.

As a reminder: Never click on any unsolicited communication claiming to be the IRS as it may surreptitiously load malware. It may also be a way for malicious hackers to load ransomware that keeps the legitimate user from accessing their system and files.

Individuals should never respond to tax-related phishing or smishing or click on the URL link. Instead, the scams should be reported by sending the email or a copy of the text/SMS as an attachment to phishing@irs.gov. The report should include the caller ID (email or phone number), date, time and time zone, and the number that received the message.

Taxpayers can also report scams to the Treasury Inspector General for Tax Administration or the Internet Crime Complaint Center. The Report Phishing and Online Scams page at IRS.gov provides complete details. The Federal Communications Commission’s Smartphone Security Checker is a useful tool against mobile security threats.

The IRS also warns taxpayers to be wary of messages that appear to be from friends or family but that are possibly stolen or compromised email or text accounts from someone they know. This remains a popular way to target individuals and tax preparers for a variety of scams. Individuals should verify the identity of the sender by using another communication method; for instance, calling a number they independently know to be accurate, not the number provided in the email or text.

Source: IRS-2023-123, July 3, 2023

National Taxpayer Advocate Erin M. Collins today released her statutorily mandated midyear report to Congress. The report says the tax-return filing season generally ran smoothly this year, urges the Internal Revenue Service to prioritize a broad array of technology upgrades and sets forth key objectives of the Office of the Taxpayer Advocate for the upcoming fiscal year.

The filing season

The report analyzes the IRS’s effectiveness in processing original returns, amended returns, taxpayer correspondence and answering taxpayer telephone calls.

“What a difference a year makes!” Collins wrote in her preface to the report. Reflecting on the challenges taxpayers experienced in recent filing seasons due to the COVID-19 pandemic, she said, “In submitting this report, I’m finally able to deliver some good news: The taxpayer experience vastly improved during the 2023 filing season. The IRS caught up in processing paper-filed original Forms 1040 and various business returns; refunds were generally issued quickly; and taxpayers calling the IRS were much more likely to get through – and with substantially shorter wait times. Overall, the difference between the 2022 filing season and the 2023 filing season was like night and day.”

Despite these improvements, the report says the IRS is still behind in processing amended tax returns and taxpayer correspondence. Typically, employees in the IRS’s Accounts Management function perform two roles – they answer telephone calls, and they process taxpayer correspondence, amended returns and other cases. The report says the IRS was much more effective in answering taxpayer calls this year, “but [that] could only be accomplished by prioritizing the phones over other IRS operations, and it resulted in greater delays in the processing of paper correspondence.”

Processing of original tax returns. Figure 1 shows that the IRS reduced its backlog of unprocessed paper-filed original tax returns from 13.3 million at the end of the 2022 filing season to 2.6 million at the end of the 2023 filing season. That represents a reduction of 80% and marks a return to pre-pandemic levels.

Figure 1: Status of Unprocessed Paper-Filed Original Tax Returns Comparing Weeks Ending April 22, 2022, and April 22, 2023

As of June 3, however, the inventory of unprocessed paper-filed original returns had grown to 4.1 million, consisting of about half individual returns and half business returns.

Processing of amended tax returns. In contrast to the 80% reduction in the backlog of paper-filed original tax returns, Figure 2 shows that the inventory of amended returns was 3.6 million in April 2022 and 3.4 million in April 2023, a reduction of only six percent between the two periods.

Figure 2: Status of Unprocessed Amended Tax Returns Comparing Weeks Ending April 22, 2022, and April 22, 2023

For individual amended returns (Forms 1040-X), the IRS’s processing time was about seven months as of the end of the 2023 filing season. On the business side, a large portion of the delay in processing amended returns is attributable to Employee Retention Credit (ERC) claims. The ERC is a refundable tax credit that Congress authorized to encourage employers to retain employees during the COVID‑19 pandemic. Employers may receive up to $26,000 per employee if they meet certain conditions. Many ERC claims are legitimate, but the IRS has also received a large number of fraudulent claims and has placed promoter claims involving the ERC on its “Dirty Dozen” list of tax scams.

“The influx of fraudulent claims has put the IRS between a rock and a hard place,” Collins wrote. “If the IRS pays out claims quickly without taking the time to review them individually, it will be making some payments to individuals potentially engaged in fraud. If it takes the time to review claims individually, legitimate businesses who need the funds Congress authorized to help them stay afloat may not receive them in time.”

Processing of taxpayer correspondence and other Accounts Management (AM) cases. In addition to answering telephone calls and processing amended tax returns, AM employees process taxpayer responses to IRS notices and many types of taxpayer requests, such as applications for Employer Identification Numbers, a high percentage of Identity Theft Victim Assistance cases, and tax return preparer authorizations.

The IRS has not made notable progress in reducing its paper AM inventories over the past year. The inventory is just six percent lower than at the same time last year. In April, it was taking the IRS 130 days to process its adjustments cases. That represents a substantial improvement from the 214 days it was taking last year, but it is still well above the IRS’s standard processing time of 45 days. Figure 3 compares the AM inventory, excluding amended tax returns, at the close of the 2022 and 2023 filing seasons.

Figure 3: Status of Unprocessed Taxpayer Correspondence and AM Cases Comparing Weeks Ending April 22, 2022, and April 22, 2023

For victims of identity theft, the delays have been particularly long and frustrating. The average cycle time for Identity Theft Victim Assistance cases closed in April 2023 was 436 days – nearly 15 months. That is about three months longer than the 362-day cycle time for cases closed in April 2022.

Telephone service. The IRS made considerable progress in improving its telephone service this filing season. It answered more calls, answered a substantially higher percentage of calls and significantly reduced wait times, as shown in Figure 4.

Figure 4: IRS Enterprise Telephone Results Comparing Weeks Ending April 23, 2022, and April 22, 2023

The IRS reached the Treasury Department’s goal of an 85% “Level of Service” (LOS) on the AM telephone lines. However, IRS employees only answered 35% of all calls received. As the report details, the LOS measure does not account for the significant majority of taxpayer calls and is not the best measure of overall service levels. The report also points out that calls to certain telephone lines, including the collection lines and the installment agreement/balance due line, were answered at lower rates.

“Despite these areas of relative weakness,” the report says, “the big picture shows taxpayers had a much easier time reaching the IRS this filing season, reducing the need for repeat calls and lengthy wait times – a welcome relief for millions of taxpayers.”

Inflation Reduction Act funding and IRS strategic priorities

The report addresses the IRS’s Strategic Operating Plan to utilize funding the agency received under the Inflation Reduction Act (IRA). Of the roughly $79 billion in IRA funding the IRS received, only $3.2 billion was allocated for Taxpayer Services and only $4.8 billion was allocated for Business Systems Modernization (BSM) (The Fiscal Responsibility Act of 2023 and a related side agreement have reduced the IRA funding level to about $58 billion). The report says the Taxpayer Advocate Service (TAS) will continue to advocate for adequate funding for Taxpayer Services, BSM, and the operational overhead that supports those programs.

The report urges the IRS to prioritize information technology (IT) upgrades that will improve the taxpayer experience. It says that although the COVID-19 pandemic was an unexpected development, the refund delays and service challenges taxpayers experienced over the past three years would have been substantially less severe if the IRS had better technology. Highlighting the agency’s IT deficiencies, Collins wrote:

[T]o achieve and sustain transformational improvement over the longer term, the IRS must focus like a laser beam on IT. The IRS must give taxpayers robust online accounts that are comparable to accounts provided by banks and other financial institutions. It must make it possible for all taxpayers to e-file their tax returns. It must limit the number of rejected electronic tax returns. It must provide faster relief for victims of identity theft. It must make it possible for taxpayers to receive and submit responses to information requests electronically in all interactions with the agency. For taxpayers who prefer to submit returns or correspondence by mail, it must digitize all paper upon receipt. It must replace its 60 discrete case management systems that currently have limited ability to communicate with each other with an integrated, agency-wide system. And it must complete the modernization of its Individual Master File and Business Master File, which were originally deployed in the 1960s and are the repository for official taxpayer records. It must transform the way it performs its tax administration mission and become a responsive and trusted agency. Improved IT is imperative to achieving that goal.

Collins expressed optimism that the IRS will be able to make major strides in the near future. “[W]ith adequate funding, leadership prioritization, and appropriate oversight from Congress, I believe the IRS will make considerable progress in the next three to five years in helping taxpayers comply with their tax obligations as painlessly as possible,” she wrote.

Taxpayer Advocate Service objectives for Fiscal Year 2024

As required by law, the report identifies TAS’s key objectives for the upcoming fiscal year. The report describes 17 systemic advocacy objectives, four case advocacy and other business objectives and five research objectives. In light of the challenges taxpayers have been facing over the last three years, Collins wrote that TAS will be placing heavy emphasis on working with the IRS to improve the processing of tax returns and taxpayer service generally. Among the objectives the report identifies are the following:

• Protect taxpayer rights as the IRS implements its Strategic Operating Plan. The IRS’s Strategic Operating Plan proposes compliance initiatives designed to quickly resolve taxpayer issues and improve tax compliance, particularly among high-income taxpayers, large businesses and pass-through entities. Depending on how tax compliance initiatives are structured and administered, they have the potential to undermine taxpayer rights. During FY 2024, TAS will monitor the implementation of compliance initiatives and advocate for the protection of taxpayer rights.
• Improve correspondence audit processes, taxpayer participation, and agreement and default rates. The IRS conducts most of its audits by correspondence. Taxpayers often have difficulty navigating the correspondence audit process, including difficulty understanding the notices, gathering and providing documentation to substantiate their return positions, responding within prescribed deadlines and having limited options to communicate with an IRS employee. Substantially all Earned Income Tax Credit audits are conducted by mail. During 2022, correspondence audits resulted in a 41.6% no-response rate, only a 20.8% agreement rate and a 20.4% default rate. During FY 2024, TAS plans to continue working on cross-functional teams with other IRS business units to improve the correspondence examination process.
• Implement systemic first-time penalty abatement but allow substitution of reasonable cause. Under existing procedures, the IRS will provide a first-time abatement (FTA) of penalties for failure to file, failure to pay and failure to deposit required tax if a taxpayer is otherwise compliant and has not used FTA within the prior three years. However, FTA is generally provided only if a taxpayer requests FTA or reasonable cause relief. In 2021, the IRS granted FTA to about 200,000 taxpayers requesting relief from these penalties, but there were about 4.3 million taxpayers eligible for relief from these penalties who did not receive it. The result was that a relatively small percentage of sophisticated taxpayers or taxpayers who paid for professional assistance received penalty abatements just for asking while the overwhelming majority of taxpayers who do not know the IRS is willing to abate these penalties did not. Relatedly, TAS believes taxpayers who qualify for “reasonable cause” penalty relief should receive it and not be forced to use their once-in-three-years FTA waiver. During FY 2024, TAS plans to continue working with the IRS to ensure that similarly situated taxpayers receive equitable treatment in the abatement of these penalties.

IRS responses to National Taxpayer Advocate administrative recommendations

The National Taxpayer Advocate is required by statute to submit a year-end report to Congress that, among other things, makes administrative recommendations to resolve taxpayer problems. Section 7803(c)(3) of the Internal Revenue Code authorizes the National Taxpayer Advocate to submit the administrative recommendations to the commissioner and requires the IRS to respond within three months.

The National Taxpayer Advocate made 46 administrative recommendations in her 2022 year-end report and then submitted them to the commissioner for response. The IRS has agreed to implement 38 (or 83%) of the recommendations in full or in part.

The IRS’s responses are published on the TAS website at TAS Administrative Recommendations.

The National Taxpayer Advocate is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The statute requires the reports to be submitted directly to the Committees without any prior review or comment from the Commissioner of Internal Revenue, the Secretary of the Treasury, the IRS Oversight Board, any other officer or employee of the Department of the Treasury or the Office of Management and Budget. The first report must identify the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The second report must include a discussion of the ten most serious problems encountered by taxpayers, identify the ten tax issues most frequently litigated in the courts and make administrative and legislative recommendations to resolve taxpayer problems.

Source: IRS-2023-119, June 21, 2023

WASHINGTON — The Internal Revenue Service submitted a report today to CongressPDF evaluating a Direct File option for taxpayers and is taking steps to begin a pilot project for the 2024 filing season following a directive from the Treasury Department.

The report to Congress, required by the Inflation Reduction Act, evaluated the feasibility of providing taxpayers with the option of a free, voluntary, IRS-run electronic filing system, commonly referred to as “Direct File.”

The report finds that many taxpayers are interested in using a free IRS-provided tool to prepare and file taxes, and that the agency is technically capable of delivering a Direct File program. It also concludes that effective execution of a Direct File program would require sustained budget investment and careful management of the potential program’s operational complexity.

The report focuses on three areas: taxpayer opinions, cost and feasibility. The report also includes an analysis conducted by an independent third party, as required by the statute. The report also lays out the potential benefits and challenges associated with the IRS implementing a Direct File program.

“The IRS is committed to delivering significantly improved services by providing taxpayers with tools, information and assistance to make it easier to comply with their tax filing obligations. Direct File – used by numerous tax jurisdictions around the world – has long been discussed as an option for improving the customer experience for taxpayers in the U.S.,” said IRS Commissioner Danny Werfel. “The IRS review looked at the potential operational and administrative requirements of such a system. Ultimately, the results show there is taxpayer interest in an optional Direct file program and such a program is technically feasible. Any path forward should start with a limited pilot to assess operational factors described in this study.”

As directed by Treasury, the IRS will move to gather further information through the implementation of a scaled Direct File pilot in the 2024 filing season to further assess customer support and technology needs and the ability to overcome the potential operational challenges identified in the report. Additional details on the Direct File pilot will be available in coming months.

The IRS report relied on information from the agency’s Taxpayer Experience Survey (TES), which surveyed thousands of taxpayers on these topics. The IRS also reviewed and incorporated findings from an independently conducted survey by the MITRE Corporation.

The IRS supplemented data from these taxpayer surveys with user research and usability testing that was conducted using a basic internal prototype to better understand first-hand taxpayer perspectives.

Source: IRS-2023-103, May – 2023

WASHINGTON — The Internal Revenue Service today reminded thousands of tax-exempt organizations of their May 15, 2023, filing deadline.

The annual filing due date for certain returns filed by tax-exempt organizations is normally by the 15th day of the 5th month after the end of an organization’s accounting period. Those operating on a calendar-year (CY) basis must file a return by May 15, 2023. Returns due include:

• Form 990-series annual information returns (Forms 990, 990-EZ, 990-PF)
• Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ
• Form 990-T, Exempt Organization Business Income Tax Return (other than certain trusts)
• Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code

Mandatory electronic filing

Electronic filing provides fast acknowledgement that the IRS has received the return and reduces processing time, making compliance with reporting requirements easier. Note:

• Organizations filing a Form 990, 990-EZ, 990-PF or 990-T for CY2022 must file their returns electronically.
• Private foundations filing a Form 4720 for CY 2022 must file the form electronically.
• Charities and other tax-exempt organizations can file these forms electronically through an IRS Authorized e-File Provider.
• Organizations eligible to submit Form 990-N must do so electronically and can submit it through Form 990-N (e-Postcard)on IRS.gov.

Common errors

The IRS also reminds organizations to submit complete and accurate returns. If an organization’s return is incomplete or the wrong return for the organization, the return will be rejected. Common errors include missing or incomplete schedules.

Extension of time to file

Tax-exempt organizations that need additional time to file beyond the May 15 deadline can request a six-month automatic extension by filing Form 8868, Application for Extension of Time to File an Exempt Organization ReturnPDF. In situations where tax is due, extending the time for filing a return does not extend the time for paying tax. The IRS encourages organizations requesting an extension to electronically file Form 8868.

Pre-recorded workshops

To help exempt organizations comply with their filing requirements, IRS provides a series of pre-recorded online workshops. These workshops are designed to assist officers, board members and volunteers with the steps they need to take to maintain their tax-exempt status, including filing annual information returns.

Source: IRS-2023-90, April 20, 2023