Q3 2022 Tax Updates

This quarter saw major developments to tax law and administration (3rd quarter, 2022). While these developments don’t directly impact charitable giving, charitable trusts, or donor-advised funds, some changes may impact personal tax liabilities for 2022 and beyond. 

Here’s a summary of the most relevant changes:

  1. Inflation Reduction Act:

The Inflation Reduction Act is a large, omnibus bill with the following changes to the Internal Tax Code:

  • A corporate minimum tax
  • An excise tax on stock buybacks
  • Increased or revised energy tax credits

The part receiving the most attention and that’s most relevant to individual taxpayers is the additional $80 billion in funding over 10 years going toward the Internal Revenue Service. Half is earmarked for increased enforcement of tax law and the other half for increased efficiency and modernizing of IRS operations.

Enforcement of tax laws is focused on high-income, high-net-worth individuals. The IRS intends to hire and train experienced auditors to beef up its enforcement division, which has performed far less audits in the last decade as limited resources were needed elsewhere at the IRS. Numerous government officials have said that those who make under $400,000 per year will not be targeted for an audit.

The goals of this act are to:

  1. Close the tax gap between wealthy taxpayers and everyone else.
  2. Bring in additional tax revenue.
  3. Encourage compliance by taxpayers. 

The other half of the $80 billion IRS funding will go toward hiring and training staff to process tax returns and handle the administrative functions of the IRS. Over the last 10 years, the IRS’ budget has shrunk, which has been detrimental to its operations and customer service. To make matters worse, they use an antiquated and inefficient system that requires manual entry for many tax forms. The IRS must also prepare for a shift in their staff as a large portion of their workforce nears retirement age.

To date, there are 10 million unprocessed Form 1040 from the 2021 tax year, months of unopened correspondence, and call center hold times often span hours. This additional funding will allow the IRS to process its massive backlog, install modern technology such as document scanners to process paper returns more efficiently, and provide better customer service to taxpayers.

The effects of the Inflation Reduction Act won’t be immediate, but over several years the IRS will bring on the staff and resources needed to modernize itself and increase enforcement. 

Regardless of a taxpayer’s risk of an audit, we recommend that each taxpayer continue to do the following:

  • Retain tax documents indefinitely, but at least three years after filing a return.
  • Retain investment statements, 1099s, copies of tax returns, and any documents that support cost basis or a charitable deduction.
  • Send any paper tax return or correspondence to the IRS through certified mail or other method that provides tracking information. This will help prove timely filing of returns and responses to tax letters and notices.
  1. Student loan forgiveness:

The Biden Administration ordered forgiveness of federal student loan debt of $10,000 per borrower ($20,000 if borrower received a Pell grant).

Forgiveness of federal student loan debt is available for single taxpayers with an AGI less than $125,000 or married filing joint taxpayers with AGI less than $250,000 in either the 2020 or 2021 tax year. Taxpayers who have not filed Form 1040 in either 2020 or 2021 will have until September 30, 2022, to file missing returns to be eligible for relief.

Important to note:

The debt relief is not taxable income for federal tax purposes. State income tax laws on student loan debt relief might differ from federal tax law. As the next tax filing season approaches, consult with your home state tax agency’s website and with your CPA on any concerns about the debt relief’s effect on state tax returns.

  1. Penalty relief for certain taxpayers:

The IRS will provide relief from certain failures to file penalties related to 2019 and 2020 tax returns filed by September 30, 2022. This relief should help affected taxpayers and alleviate some of the workload currently delaying IRS operations.

Late filing penalties for income tax returns can be up to 25% of the tax owed on the return, and late filings of certain information returns, like 1099s and W-2s, are $250 per return.

Among the returns eligible for late filing penalty relief are:

  • Form 1040 (Individuals)
  • Form 1041 (Trusts)
  • Corporate and partnership tax returns (1120, 1120-S, 1065) 

Eligible returns are 2019 or 2020 and must be filed by September 30, 2022. 

Important to note:

Penalties currently under an IRS Offer in Compromise or otherwise settled in court are not eligible for relief. Penalties assessed against those years the taxpayer has paid will be refunded; unpaid penalties will be abated automatically.  

Form 5227, Split Information Trust Information Return that are required to be filed for charitable lead trusts, charitable remainder trusts, and pooled income funds, aren’t eligible for late filing penalty relief. Trustees with outstanding late filing penalties for 2019 or 2020 Form 5227 should either pay or apply for an abatement.

Additional guidance on penalty relief will be released by the IRS and posted to its website when available. The relief process is automatic, so the only thing taxpayers must do is ensure affected tax returns from 2019 and 2020 are filed by September 30, 2022. We recommend these returns are sent through certified mail to provide proof the taxpayer mailed the returns by the deadline.