The Internal Revenue Service today announced the release of draft Form 6765, Credit for Increasing Research ActivitiesPDF, also known as the Research Credit.

The IRS received helpful comments from various external stakeholders that have informed several revisions the IRS is making to reduce taxpayer burden. The feedback and changes will alleviate taxpayer burden, provide taxpayers with a consistent and predefined format and improve the information received for tax administration.

The changes include:

Optional reporting of Section G

Section G, which was labeled “Section F” in the version of the form that IRS shared last fall, requests the Business Component Detail. The instructions will provide that Section G will be optional for:

• Qualified Small Business (QSB) taxpayers, defined under section 41(h)(1) & (2) who check the box to claim a reduced payroll tax credit; or
• Taxpayers with total qualified research expenditures (QREs) equal to or less than $1.5 million, determined at the control group level, and equal to or less than $50 million of gross receipts, as determined under section 448(c)(3) (without regard to subparagraph (A) thereof), claiming a research credit on an original filed return.

Reduced scope of Business Component Detail and other revisions

In response to feedback from stakeholders, the IRS reduced the number of business components that must be reported on Section G. Taxpayers should report 80% of total QREs in descending order by the amount of total QREs per business component, but no more than 50 business components (with special instructions for taxpayers using the ASC 730 directive who can report ASC 730 QREs as a single line item on Section G).

The amount of information that must be provided with respect to the reduced number of business components on Section G has also been reduced. For example, the IRS eliminated whether a business component is new/improved, a sale/license/lease and the narrative requirement (for original returns) that describes the information sought to be discovered. The selections for the type of business component are reduced, and the definitions for officers, controlled group reporting and business component descriptive names will be clarified in the instructions.

The revised Section G will be optional for all filers for tax year 2024 (processing year 2025). This will allow taxpayers time to transition to the Section G format. Section G will be effective for tax year 2025 (processing year 2026), subject to the guidelines noted above.

On Sept. 15, 2023, the IRS released a preview of proposed changes to Form 6765 and solicited comments from interested parties. The preview included a new Business Component Detail section for reporting quantitative and qualitative information for each business component, new questions seeking various information and reordering some of the existing questions on the form. The solicitation requested feedback on whether the new Business Component Detail section should be optional for certain taxpayers.

Please see Form 6765PDF. Instructions will be released at a later date.

Source: IRS-2024-171, June 21, 2024

The Department of the Treasury and the Internal Revenue Service issued final regulations today on the prevailing wage and apprenticeship (PWA) requirements related to increased credit or deduction amounts for certain clean energy incentives, enacted as a part of the Inflation Reduction Act (IRA).

The IRA provides increased credit or deduction amounts for taxpayers who satisfy certain PWA requirements regarding the construction, alteration or repair of certain clean energy facilities or properties, projects or equipment. By satisfying the PWA requirements, taxpayers can generally increase the base amount of the credit or deduction by five times.

“The increased credit or deduction for taxpayers meeting prevailing wage and apprenticeship requirements creates opportunities for both workers and employers,” IRS Commissioner Danny Werfel said. “The IRS is committed to ensuring that taxpayers claiming the clean energy credits comply with all of the applicable prevailing wage and apprenticeship requirements. The additional resources the IRS has received are making a difference for our efforts to ramp up taxpayer service and enforcement, and we will continue to build on these improvements.”

To qualify for the PWA increased credit or deduction amounts, taxpayers generally need to:

• Ensure that laborers and mechanics employed in the construction, alteration or repair of the facility or property, project or equipment are paid wages at rates not less than applicable prevailing wage rates.
• Meet certain requirements related to employing qualified apprentices from registered apprenticeship programs.
• Meet specific recordkeeping and reporting requirements.

The PWA requirements apply to all contractors and subcontractors of the taxpayer who employ laborers and mechanics in construction, alteration or repair work. However, taxpayers claiming the increased credit or deduction are solely responsible for ensuring that the PWA requirements are satisfied.

Ensuring that taxpayers claiming the PWA increased credit or deduction amounts have met the requirements – along with enforcing the requirements for other clean energy tax credits – is a top priority for the IRS. In the months ahead, the IRS will dedicate significant resources to promoting and enforcing compliance with the final clean energy rules.

The IRS is committed to working with taxpayers, their advisors and other stakeholders to ensure compliance, including conducting appropriate education and outreach. The IRA funding will support efforts for effective tax administration of these novel and cross-cutting provisions.

As part of this effort, the IRS also released Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact SheetPDF updated Publication 5855, IRA Prevailing Wage & Registered Apprenticeship OverviewPDF and the Prevailing wage and apprenticeship frequently asked questions.

Publication 5855 provides a summary of the PWA requirements. The frequently asked questions provide more details about the PWA requirements and information for how to alert the IRS of suspected tax violations related to the PWA requirements. The IRS takes referrals of alleged tax violations seriously and may use the information received about potential violations in connection with any applicable audit.

The PWA provisions include a significant penalty framework for failures to meet the PWA requirements. The penalty structure is intended to create incentives for real-time compliance with the PWA requirements.

Given the potential increased credit or deduction amounts available under the PWA provisions and the significant penalties at stake, taxpayers should consider establishing frameworks to support timely compliance with the PWA requirements, including the associated reporting and recordkeeping requirements. To minimize the potential for mistakes and significant penalties, taxpayers who know they intend to claim an increased credit or deduction amount through satisfaction of the PWA requirements should proactively take steps to position their project for compliance with the PWA requirements.

These steps could include, but would not necessarily be limited to:

• Regularly reviewing payroll records.
• Ensuring all contracts require that contractors and their subcontractors adhere to PWA requirements.
• Regularly reviewing the classifications of laborers and mechanics, prevailing wage rates, and percentage of labor hours to be performed by qualified apprentices.
• Posting information about prevailing wage rates in a prominent and accessible location or otherwise providing written notice of prevailing wage rates to laborers and mechanics during construction, alteration, and repair work.
• Establishing procedures for individuals to report suspected failures to comply with the PWA requirements without fear of retaliation or adverse action.
• Investigating reports of suspected failures to comply with the PWA requirements.
• Contacting the Department of Labor’s Office of Apprenticeship or the relevant state apprenticeship agency for assistance in locating registered apprenticeship programs.

The U.S. Department of Labor (DOL) determines the applicable prevailing wage rates for each classification of laborers and mechanics in a prescribed geographic area for a particular type of construction. For more information about prevailing wage rates please visit the Department of Labor’s website.

To support the IRS’s efforts in ensuring taxpayer compliance with the PWA requirements, DOL and the IRS are working on a Memorandum of Understanding (MOU) to be signed by the end of the year. Harnessing DOL’s extensive prevailing wage and registered apprenticeship expertise, the MOU will facilitate joint and cooperative education and public outreach and development of training content for IRS examination personnel. The MOU will also facilitate DOL’s review and comment as part of the development of PWA tax forms. Finally, the MOU will formalize a process for DOL to share with the IRS any credible tips or information that DOL receives as to potential noncompliance with the PWA requirements.

More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.

Source: IRS-2024-168, June 18, 2024

The Department of the Treasury and Internal Revenue Service issued Revenue Procedure 2024-26PDF today for the submission of information by qualified manufacturers of new clean vehicles and dealers and sellers of new clean vehicles and previously-owned clean vehicles.

Today’s guidance provides additional procedures for qualified manufacturers to submit attestations, certifications and documentation demonstrating the qualified manufacturer’s compliance with certain requirements regarding new clean vehicles placed in service after Dec. 31, 2024.

The guidance updates procedures for qualified manufacturers to submit information regarding new clean vehicles for upfront review by the IRS, with analytical assistance from the Department of Energy, to ensure the vehicles satisfy relevant requirements for the calendar year and are eligible for the new clean vehicle credit.

Finally, this revenue procedure provides rules regarding seller report updates and rescissions and provides clarification for qualified manufacturers for the transition rule for impracticable-to-trace battery materials.

More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.

Source: IRS-2024-158, June 7, 2024

The Internal Revenue Service announced today reaching another key milestone in the agency’s transformation work with the Document Upload Tool accepting its one millionth taxpayer submission.

Use of the Document Upload Tool, sometimes referred to as DUT, continues to grow. During the first six months of this fiscal year, more than 265,000 taxpayers used the tool, and the number continues to grow each month.

Initially launched in 2021 in a limited format and greatly expanded in 2023 with funding from the Inflation Reduction Act (IRA), the tool offers taxpayers and tax professionals the option to respond digitally to eligible IRS notices by securely uploading required documents online through IRS.gov. For anyone with a smart phone or computer, this means that replying to IRS notices is now often as easy as scanning required documents and uploading them to the tax agency.

“The Document Upload Tool is a key part of our ambitious initiative to transform the IRS into a virtually paperless agency, and we continue to see increased use of this by taxpayers,” said IRS Commissioner Danny Werfel. “This tool saves time for taxpayers and helps IRS employees process responses faster and more efficiently. A growing number of taxpayers are using their smart phones or computers to scan and upload their responses to IRS correspondence, rather than the more time-consuming option of writing a letter or mailing in documents.”

The Document Upload Tool has shown steady growth over time as well. Since 2022, average monthly use of the DUT has more than doubled every year, from around 16,000 in 2022, to around 37,000 in 2023 and finally almost 84,000 so far in 2024. The document submissions cover a wide range of tax issues, including responding to IRS Notice CP2000, where the agency notifies taxpayers of potentially underreported income.

The IRS receives about 76 million paper tax returns and forms, as well as 125 million pieces of correspondence, notice responses and non-tax forms each year. In the past, the agency’s limited capability to accept these forms digitally or to digitize paper has added time-consuming steps that has created challenges for taxpayers, tax professionals and IRS employees. For decades, the only option available was to have taxpayers or their representatives mail or fax these documents to the tax agency.

The IRS estimates that more than 94% of individual taxpayers will have the option of no longer having to send mail to the IRS, potentially replacing up to 125 million paper documents per year, easing the paperwork burden for both them and the IRS.

The IRS team of leaders that oversaw last year’s sweeping DUT expansion is now a finalist for the 2024 Samuel J. Heyman Service to America Medals. Known as the Sammies, the Samuel J. Heyman Service to America Medals are considered to be the “Oscars” of public service.

To learn more about the Document Upload Tool, visit IRS.gov/dut.

Source: IRS-2024-155, June 5, 2024

New York City’s tax revenue generated by tourists has surpassed pre-pandemic levels as a jump in US visitors helped offset a drop in international and business travel.

Last year 62.2 million people visited the Big Apple, state Comptroller Thomas DiNapoli said in a report released Thursday. While that’s down from 66.6 million in 2019, those tourists are expected to generate a record $4.9 billion in sales and other tourism-related tax revenue in the current fiscal year, a 16% jump from 2020 driven in part by rising prices for hotel rooms and other services.

The COVID-19 outbreak that began in early 2020 paralyzed the biggest U.S. city, killing thousands of residents, devastating the office and retail market, and spurring many to flee to the suburbs and other states. The city has been making a slow but steady economic recovery, with visitors returning to Broadway shows, museums and other destinations.

Tourism officials had hoped to surpass pre-pandemic levels this year, but a slower-than-expected return of international travelers forced them to push back the forecast to 2025, when the city is expecting to host 68 million visitors, DiNapoli said.

“The industry’s full recovery won’t be complete until we see a full return of international and business travelers,” DiNapoli said. “Our city and state leaders need to focus on keeping New York a desirable and safe destination for individuals and families from around the world.”

International visitors make up about 20% of the city’s annual visitors. In 2020, with travel restrictions affecting many countries, their numbers plunged 82.2% to 2.4 million, led by a drop in tourists from China, where the virus originated. That has since rebounded to 11.6 million last year but is still down 14.1% from before the pandemic.

Domestic travelers, on the other hand, have led the rebound. The 50.6 million U.S. visitors last year were 7% higher than in 2022.

Business travel, both domestic and international, has recovered more slowly than leisure, the report found. It fell to 400,000 in 2021 from 3.4 million in 2019, but has since risen to about 2.3 million.

In addition, the New York City tourism industry overall is still down 10.4%, or about 30,000 jobs, from before the pandemic, DiNapoli said.

Even with the slow recovery, New York remains the top U.S. tourist destination, with 33 million overnight visitors in 2023, ahead of Las Vegas (26 million) and Los Angeles (21 million).

Source: Mark Schoifet

The Internal Revenue Service issued a consumer alert today following ongoing concerns about a series of tax scams and inaccurate social media advice that led thousands of taxpayers to file inflated refund claims during the past tax season.

The IRS warned taxpayers not to fall for these scams centered around the Fuel Tax Credit, the Sick and Family Leave Credit and household employment taxes. The IRS has seen thousands of dubious claims come in where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims.

The IRS continues to urge taxpayers to avoid these scams as myths continue to persist that these are ways to obtain a huge refund. Many of these scams were highlighted during this spring’s annual Dirty Dozen series, including the Fuel Tax Credit scam, bad social media advice and “ghost preparers.”

For taxpayers who did fall for these traps, they need to follow steps to verify their eligibility for the claim. Some taxpayers could also face steep financial penalties, potential follow-up audits or criminal action for improper claims. The IRS encourages people to review the guidelines, talk to a trusted tax preparer and, in some cases, file an amended return to remove claims for which they’re ineligible to avoid potential penalties.

“Scam artists and social media posts have perpetuated a number of false and misleading claims that have tricked well-meaning taxpayers into believing they’re entitled to big, windfall tax refunds,” said IRS Commissioner Danny Werfel. “These bad claims have been caught during our fraud review process. Taxpayers who filed these claims should realize they’ve been tricked, and they face an extensive review process and a long potential wait if they’re owed a refund for other things.”

Problem claims involve Fuel Tax Credit, Sick and Family Leave Credit, household employment taxes

The IRS has identified three common themes that continue to pop up among these bad refund claims. They involve legitimate tax provisions, but they are limited to very specialized situations. The vast majority of the related claims coming in do not qualify:

Fuel Tax Credit: This specialized credit is designed for off-highway business and farming use. Taxpayers need a business purpose and a qualifying business activity such as running a farm or purchasing aviation gasoline to be eligible for the credit. Most taxpayers don’t qualify for this credit.

Credits for Sick Leave and Family Leave: This specialized credit is available for self-employed individuals for 2020 and 2021 during the pandemic; the credit is not available for 2023 tax returns. The IRS is seeing repeated instances where taxpayers are incorrectly using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to incorrectly claim a credit based on income earned as an employee and not as a self-employed individual.

Household employment taxes: Taxpayers “invent” fictional household employees and then file Schedule H (Form 1040), Household Employment Taxes, to claim a refund based on false sick and family medical leave wages they never paid.

“These improper claims have been fueled by social media and people sharing bad advice,” Werfel said. “Scam artists constantly prey on people’s hopes and try to use the complexity of the tax system to convince people there are secret ways to get a big refund. These three credits illustrate that it’s important to carefully review the tax return for accuracy before filing and rely on the advice of a trusted tax professional, not some fly-by-night preparer or a questionable source they hear on social media.”

Potentially fraudulent refunds frozen; improper claims could face follow-up compliance action

Given the questionable nature of many of these claims, the IRS has frozen the refunds for these taxpayers. Taxpayers have to follow several specific steps to resolve these issues.

Taxpayers whose refunds have been frozen will generally receive one of several letters from the IRS asking for additional information.

Initially, taxpayers may have received a letter asking them to verify their identity. In these situations, if they filed the return in question, they should review whether their tax return is accurate. For example, did they actually qualify for one of the three credits listed above? Or if they used a tax preparer, check to see if the preparer actually signed the tax return. When tax preparers don’t sign a tax return, it is a red flag that the taxpayer is being misled.

Taxpayers who improperly claimed these credits do not need to visit a Taxpayer Assistance Center (TAC) to verify their identity. However, they may need to amend their tax return to remove the improperly claimed credit.

Taxpayers should use the IRS.gov tool Should I file an amended return? to determine if they should amend their return. If they submit an amended return, they do not need to visit a TAC.

A number of taxpayers who initially received correspondence asking about their identity may be receiving an additional letter seeking additional documentation to show they actually qualify for the credits they claimed. Taxpayers who verified their identity in-person may receive these letters. Taxpayers who haven’t verified their identity yet and receive one of these letters asking for additional documentation should follow the advice on the most recent letter.

These letters – IRS Notice 3176c – apply to potentially frivolous tax returns, which includes incorrect claims for Fuel Tax Credits, Sick and Family Leave Credits and household employment taxes.

Legitimate taxpayers qualifying for these credits can submit documentation showing they actually qualify for the credit. But people who don’t qualify for these credits risk facing a penalty of up to $5,000 per return for filing a frivolous claim. Taxpayers submitting inaccurate claims also face the risk of an audit. Those who knowingly filed a false tax return also face potential criminal prosecution.

To avoid penalties and potential follow-up action by the IRS, taxpayers who incorrectly filed for these claims need to promptly submit an accurate tax return without the claims. Taxpayers can visit the IRS.gov tool Should I file an amended return? to determine if they should amend their return. If they submit an amended return, they do not need to visit an IRS Taxpayer Assistance Center. Taxpayers in this situation can also visit a trusted tax professional for advice.

The IRS noted that the entire refund amount is frozen on returns with these bad claims. Taxpayers will not receive any portion of their refund, even if they also claimed legitimate credits.

Source: IRS-2024-139, May 14, 2024