2023 Tax Filing Season Opens on January 23
Acting IRS Commissioner Doug O'Donnell stated, "This filing season is the first to benefit the IRS and our nation's tax system from multi-year funding in the Inflation Reduction Act. With these new additional resources, taxpayers and tax professionals will see improvements in many areas of the agency this year. We have trained thousands of new employees to answer phones and help people. While much work remains after several difficult years, we expect people to experience improvements this tax season."
The IRS has been updating its computers and other systems to prepare for the 2023 tax season. O'Donnell emphasized the systems will be ready to receive returns on January 23. Taxes must be filed and paid by Tuesday, April 18, 2023. If the individual desires to extend, the extended tax-filing date will be Monday, October 16, 2023.
The IRS recommends multiple specific steps for taxpayers to have a smooth filing experience.
1. Gather Your Information — All 2022 tax records should be gathered. This may include your Social Security numbers, Individual Taxpayer Identification Numbers, Adoption Taxpayer Identification Numbers or an Identity Protection Personal Identification Number. Additional forms may include IRS Forms 1099 from banks or other financial institutions that pay interest, unemployment compensation, dividends, pension or retirement plan distributions. If an individual is not self-employed, IRS Forms W-2 from any employers will be required. The IRS reminds individuals that nearly all income is taxable, including unemployment income, interest, digital asset sales, gig economy or other income.
2. Ask Questions on IRS.gov — The IRS emphasizes that it expects to provide better service, but many individuals will find answers to their questions on IRS.gov. O'Donnell noted, "Our phone volumes remain at very high levels. For faster access to information, we urge people to start with IRS.gov. From there, taxpayers can quickly access the variety of free resources available to help taxpayers anytime, day or night."
3. File Electronically — Taxpayers will have more accurate returns by filing electronically and selecting direct deposit. The direct deposit is normally through a bank account, prepaid debit card or mobile app.
4. IRS Free File — Several commercial tax-preparation software companies will be ready to launch the Free File program on January 23. Taxpayers with $73,000 or less in 2022 income qualify to use free commercial software on IRS.gov. All taxpayers can use the IRS Free File Fillable forms.
5. Prompt Refunds — The IRS has a goal to transfer refunds within 21 days if the taxpayer files electronically and chooses direct deposit. Taxpayers can check their refund status using "Where's My Refund?" on IRS.gov. Tax refunds may be delayed until mid-February for individuals who claim the Earned Income Tax Credit or the Additional Child Tax Credit. Congress requires the IRS to delay tax refunds for these returns until there is additional review.
6. IRS Online Account — Taxpayers are encouraged to create an IRS Online Account. It allows access to personal tax information, payments and adjusted gross income from prior tax years. The Interactive Tax Assistant (ITA) on IRS.gov also may answer many of your questions. If you have life event changes or are potentially eligible for credits, the ITA could be very helpful.
NTA Collins Predicts Better IRS Service in 2023
On January 11, National Taxpayer Advocate (NTA) Erin M. Collins released her 2022 annual report to Congress. In her report, Collins indicated that both taxpayers and tax professionals "experienced more misery in 2022."
The Internal Revenue Service (IRS) problems in 2022 included delays in processing returns and issuing refunds, extended periods of time before taxpayer correspondence was processed and problems returning calls on the toll-free phone lines. These delays included many unopened pieces of mail and paper returns. Only 13% of the 173 million callers to the IRS were successful in contacting an IRS employee. Collins noted, "Tax professionals are key to a successful tax administration. The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and creating a loss of trust in the system."
Collins notes, however, there are expected enhancements in 2023. She stated, "We have begun to see the light at the end of the tunnel. I am just not sure how much further we have to travel before we see sunlight."
There are several reasons for optimism. The IRS has processed most of the delayed paper tax returns. The additional funding provided by the Inflation Reduction Act has enabled the IRS and Treasury to hire 5,000 new staff for the agency and Taxpayer Assistance Centers.
Collins warned that there will be a period required for training. She noted, "Staff increases come with growing pains. As new employees are added, they must be trained. For most jobs, the IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors."
The 5,000 additional customer service representatives will hopefully improve service. Treasury Deputy Secretary Wally Adeyemo stated, "Better service for the American people is critically important so families and small businesses can receive refunds on time, access credits, and get the information they need to file an accurate return." Treasury Secretary Janet Yellen indicated that the new customer service representatives will hopefully reduce the phone wait time from 30 minutes in 2022 to less than 15 minutes this year. Secretary Yellen has set a goal for the IRS to answer at least 85% of taxpayer phone calls in 2023.
Editor's Note: The 5,000 new representatives are a positive start. The IRS will have a great challenge, however, in reaching in reaching the 85% phone service goal set by Secretary Yellen.
NTA Collins Advocates Flexible Gift Documentation Rules
National Taxpayer Advocate (NTA) Erin Collins has suggested the IRS be more flexible in its requirements for documentation of charitable contributions. Her legislative recommendations released on January 11 recommended more latitude in allowing taxpayers to document their charitable gifts.
A relaxation of charitable contribution requirements was the major addition to previous legislative suggestions. Collins stated, "This requirement is inconsistent with Congressional policy to encourage charitable giving." She noted that strict documentation requirements were harmful to both taxpayers and tax-exempt organizations. She added that many donors are "trying to do the right thing but may not be aware of the exact legal requirements."
Collins suggests that there should be a requirement for written documentation, but the contemporaneous written acknowledgment (CWA) requirement for a charitable gift could be fulfilled by allowing it to be presented after a filing or due date for a tax return, rather than prior to filing the tax return. She would recommend allowing the IRS to have discretion to accept alternate proof after the taxpayer reports gifts.
Collins is suggesting flexibility in enforcing several specific rules currently in effect. Professional advisors must share these with their clients.
Recordkeeping and Substantiation for Cash Gifts
Gifts of $250 or more to a charity require a "contemporaneous written acknowledgement" from the charity. The receipt issued by the charity must state that no goods or services have been transferred in exchange for the gift. Reg. 1.170A-13. If the donor receives a "quid pro quo" (i.e. something in return) from the charity, the deduction value is reduced by the value of the "quid pro quo." For "quid pro quo" gifts over $75, the charity must make a good faith estimate of the value of the goods or services transferred to the donor and disclose the estimate. Reg. 1.170A-13(f). For gifts to a donor advised fund (DAF), there must be a contemporaneous written acknowledgment that the charity has "exclusive legal control" over the DAF assets. Sec. 170(f)(18)(B).
IRS Form 8283, Noncash Charitable Contribution
If a person makes a noncash charitable contribution greater than $500, Form 8283 must be filed with the tax return. The first section of Form 8283 includes Part A, a description of the property. If the property is publicly traded stock or if the stock is closely held business stock worth less than $10,000, only Part A is required. Reg. 1.170A-13(c). For carryforwards of noncash charitable contributions, the donor must include a completed Form 8283 and qualified appraisal, if required, to the tax return claiming the carryforward.
Qualified Appraisal Requirements
With several exceptions, gifts of property over $5,000 in value ($10,000 for closely held stock) will require a qualified appraisal or the charitable deduction may be denied. Reg. 1.170A-13(c). Qualified appraisal exceptions include stock traded on a public exchange, inventory and vehicles sold by the donee without significant intervening use or material improvement. Sec. 170(f)(11)(A)(ii). The appraisal must be made no earlier than 60 days prior to the gift and not later than the date the return is due (with extensions). The qualified appraisal requirement applies to individual taxpayers, partnerships and corporations. If gifts of art are valued at over $20,000 or if the noncash gift deduction exceeds $500,000, the appraisal must be appended to the return. Sec. 170(f)(11)(D). If the appraised property is a home in an historic district, the appraisal must include photos of the four sides of the home, a $500 fee and an agreement with a qualified conservation charity. The historic easement appraisal must be submitted with the tax return. The agreement must include under oath that the conservation charity is qualified to receive the easement and has the resources and commitment to enforce the agreement. Sec. 170(h)(4)(B)(ii). If a donor gives personal property "not in good used condition," valued over $500, an appraisal must also be appended to the tax return.
Editor's Note: The IRS has been quite strict with both the contemporaneous written acknowledgment required under Section 170(f)(8) and the appraisal and appraiser requirements for property gifts valued over $5,000. The detailed appraisal and appraiser requirements are unintentionally violated by many donors and advisors. It may be good for Congress to consider some greater flexibility in these areas. While some courts have permitted a "substantial compliance" standard to apply, the Tax Court has been strict in interpretation of the requirements.
Applicable Federal Rate of 4.6% for January -- Rev. Rul. 2023-1; 2023-2 IRB 1 (15 December 2022)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2023. The AFR under Section 7520 for the month of January is 4.6%. The rates for December of 5.2% or November of 4.8% 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.