The 2025 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2025 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

WASHINGTON–With Congress in its lame duck session to close out the remainder of 2024 and with Republicans taking control over both chambers of Congress in the just completed election cycle, no major tax legislation is expected, although there is potential for minor legislation before the year ends.

The IRS reminded individual retirement arrangement (IRA) owners aged 70½ and older that they can make tax-free charitable donations of up to $105,000 in 2024 through qualified charitable distributions (QCDs), up from $100,000 in past years. 

The IRS reminded individual retirement arrangement (IRA) owners aged 70½ and older that they can make tax-free charitable donations of up to $105,000 in 2024 through qualified charitable distributions (QCDs), up from $100,000 in past years. For those aged 73 or older, QCDs also count toward the year's required minimum distribution (RMD). Following are the steps for reporting and documenting QCDs for 2024:

• IRA trustees issue Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in early 2025 documenting IRA distributions.
• Record the full amount of any IRA distribution on Line 4a of Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors.
• Enter "0" on Line 4b if the entire amount qualifies as a QCD, marking it accordingly.
• Obtain a written acknowledgment from the charity, confirming the contribution date, amount, and that no goods or services were received.

Additionally, to ensure QCDs for 2024 are processed by year-end, IRA owners should contact their trustee soon. Each eligible IRA owner can exclude up to $105,000 in QCDs from taxable income. Married couples, if both meet qualifications and have separate IRAs, can donate up to $210,000 combined. QCDs did not require itemizing deductions. New this year, the QCD limit was subject to annual adjustments based on inflation. For 2025, the limit rises to $108,000.

Further, for more details, see Publication 526, Charitable Contributions, and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

IR-2024-289

The Treasury Department and IRS have issued final regulations allowing certain unincorporated organizations owned by applicable entities to elect to be excluded from subchapter K, as well as proposed regulations that would provide administrative requirements for organizations taking advantage of the final rules.

The Treasury Department and IRS have issued final regulations allowing certain unincorporated organizations owned by applicable entities to elect to be excluded from subchapter K, as well as proposed regulations that would provide administrative requirements for organizations taking advantage of the final rules.

Background

Code Sec. 6417, applicable to tax years beginning after 2022, was added by the Inflation Reduction Act of 2022 (IRA), P.L. 117-169, to allow “applicable entities” to elect to treat certain tax credits as payments against income tax. “Applicable entities” include tax-exempt organizations, the District of Columbia, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives. Code Sec. 6417 also contains rules specific to partnerships and directs the Treasury Secretary to issue regulations on making the election (“elective payment election”).

Reg. §1.6417-2(a)(1), issued under T.D. 9988 in March 2024, provides that partnerships are not applicable entities for Code Sec. 6417 purposes. The 2024 regulations permit a taxpayer that is not an applicable entity to make an election to be treated as an applicable entity, but only with respect to certain credits. The only credits for which a partnership could make an elective payment election were those under Code Secs. 45Q, 45V, and 45X.

However, Reg. §1.6417-2(a)(1) of the March 2024 final regulations also provides that if an applicable entity co-owns Reg. §1.6417-1(e) “applicable credit property” through an organization that has made Code Sec. 761(a) election to be excluded from application of the rules of subchapter K, then the applicable entity’s undivided ownership share of the applicable credit property is treated as (i) separate applicable credit property that is (ii) owned by the applicable entity. The applicable entity in that case may make an elective payment election for the applicable credit related to that property.

At the same time as they issued final regulations under T.D. 9988, the Treasury and IRS published proposed regulations (REG-101552-24, the “March 2024 proposed regulations”) under Code Sec. 761(a) permitting unincorporated organizations that meet certain requirements to make modifications (called “exceptions”) to the then-existing requirements for a Code Sec. 761(a) election in light of Code Sec. 6417.

Code Sec. 761(a) authorizes the Treasury Secretary to issue regulations permitting an unincorporated organization to exclude itself from application of subchapter K if all the organization’s members so elect. The organization must be “availed of”: (1) for investment purposes rather than for the active conduct of a business; (2) for the joint production, extraction, or use of property but not for the sale of services or property; or (3) by dealers in securities, for a short period, to underwrite, sell, or distribute a particular issue of securities. In any of these three cases, the members’ income must be adequately determinable without computation of partnership taxable income. The IRS believes that most unincorporated organizations seeking exclusion from subchapter K so that their members can make Code Sec. 6417 elections are likely to be availed of for one of the three purposes listed in Code Sec. 761(a).

Reg. §1.761-2(a)(3) before amendment by T.D. 10012 required that participants in the joint production, extraction, or use of property (i) own that property as co-owners in a form granting exclusive ownership rights, (ii) reserve the right separately to take in kind or dispose of their shares of any such property, and (iii) not jointly sell services or the property (subject to exceptions). The March 2024 proposed regulations would have modified some of these Reg. §1.761-2(a)(3) requirements.

The regulations under T.D. 10012 finalize some of the March 2024 proposed regulations. Concurrently with the publication of these final regulations, the Treasury and IRS are issuing proposed regulations (REG-116017-24) that would make additional amendments to Reg. §1.761-2.

The Final Regulations

The final regulations issued under T.D. 10012 revise the definition in the March 2024 proposed regulations of “applicable unincorporated organization” to include organizations existing exclusively to own and operate “applicable credit property” as defined in Reg. §1.6417-1(e). The IRS cautions, however, that this definition should not be read to imply that any particular arrangement permits a Code Sec. 761(a) election.

The final regulations also add examples to Reg. §1.761-2(a)(5), not found in the March 2024 proposed regulations, to illustrate (1) a rule that the determination of the members’ shares of property produced, extracted, or used be based on their ownership interests as if they co-owned the underlying properties, and (2) details of a rule regarding “agent delegation agreements.”

In addition, the final regulations clarify that renewable energy certificates (RECs) produced through the generation of clean energy are included in “renewable energy credits or similar credits,” with the result that each member of an unincorporated organization must reserve the right separately to take in or dispose of that member’s proportionate share of any RECs generated.

The Treasury and IRS also clarify in T.D. 10012 that “partnership flip structures,” in which allocations of income, gains, losses, deductions, or credits change at some after the partnership is formed, violate existing statutory requirements for electing out of subchapter K and, thus, are by existing definition not eligible to make a Code Sec. 761(a) election.

The Proposed Regulations

The preamble to the March 2024 proposed regulations noted that the Treasury and IRS were considering rules to prevent abuse of the Reg. §1.761-2(a)(4)(iii) modifications. For instance, a rule mentioned in the preamble would have prevented the deemed-election rule in prior Reg. §1.761-2(b)(2)(ii) from applying to any unincorporated organization that relies on a modification in then-proposed Reg. §1.761-2(a)(4)(iii). The final regulations under T.D. 10012 do not contain any rules on deemed elections, but the Treasury and the IRS believe that more guidance is needed under Code Sec. 761(a) to implement Code Sec. 6417. Therefore, proposed rules (REG-116017-24, the “November 2024 proposed regulations”) are published concurrently with the final regulations to address the validity of Code Sec. 761(a) elections by applicable unincorporated organizations with elections that would not be valid without application of revised Reg. §1.761-2(a)(4)(iii).

Specifically, Proposed Reg. §1.761-2(a)(4)(iv)(A) would provide that a specified applicable unincorporated organization’s Code Sec. 761(a) election terminates as a result of the acquisition or disposition of an interest in a specified applicable unincorporated organization, other than as the result of a transfer between a disregarded entity (as defined in Reg. §1.6417-1(f)) and its owner.

Such an acquisition or disposition would not, however, terminate an applicable unincorporated organization’s Code Sec. 761(a) election if the organization (a) met the requirements for making a new Code Sec. 761(a) election and (b) in fact made such an election no later than the time in Reg. §1.6031(a)-1(e) (including extensions) for filing a partnership return with respect to the period of time that would have been the organization’s tax year if, after the tax year for which the organization first made the election, the organization continued to have tax years and those tax years were determined by reference to the tax year in which the organization made the election (“hypothetical partnership tax year”).

Such an election would protect the organization’s Code Sec. 761(a) election against all terminating acquisitions and dispositions in a hypothetical year only if it contained, in addition to the information required by Reg. §1.761-2(b), information about every terminating transaction that occurred in the hypothetical partnership tax year. If a new election was not timely made, the Code Sec. 761(a) election would terminate on the first day of the tax year beginning after the hypothetical partnership taxable year in which one or more terminating transactions occurred. Proposed Reg. §1.761-2(a)(5)(iv) would add an example to illustrate this new rule.

These provisions would not apply to an organization that is no longer eligible to elect to be excluded from subchapter K. Such an organization’s Code Sec. 761(a) election automatically terminates, and the organization must begin complying with the requirements of subchapter K.

The proposed regulations would also clarify that the deemed election rule in Reg. §1.761-2(b)(2)(ii) does not apply to specified applicable unincorporated organizations. The purpose of this rule, according to the IRS, is to prevent an unincorporated organization from benefiting from the modifications in revised Reg. §1.761-2(a)(4)(iii) without providing written information to the IRS about its members, and to prevent a specified applicable unincorporated organization terminating as the result of a terminating transaction from having its election restored without making a new election in writing.

In addition, the proposed regulations would require an applicable unincorporated organization making a Code Sec. 761(a) election to submit all information listed in the instructions to Form 1065, U.S. Return of Partnership Income, for making a Code Sec. 761(a) election. The IRS explains that this requirement is intended to ensure that the organization provides all the information necessary for the IRS to properly administer Code Sec. 6417 with respect to applicable unincorporated organizations making Code Sec. 761(a) elections.

The proposed regulations would also clarify the procedure for obtaining permission to revoke a Code Sec. 761(a) election. An application for permission to revoke would need to be made in a letter ruling request meeting the requirements of Rev. Proc. 2024-1 or successor guidance. The IRS indicates that taxpayers may continue to submit applications for permission to revoke an election by requesting a private letter ruling and can rely on Rev. Proc. 2024-1 or successor guidance before the proposed regulations are finalized.

Applicability Dates

The final regulations under T.D. apply to tax years ending on or after March 11, 2024 (i.e., the date on which the March 2024 proposed regulations were published). The IRS states that an applicable unincorporated organization that made a Code Sec. 761(a) election meeting the requirements of the final regulations for an earlier tax year will be treated as if it had made a valid Code Sec. 761(a) election.

The proposed regulations (REG-116017-24) would apply to tax years ending on or after the date on which they are published as final.

T.D. 10012

NPRM REG-116017-24

IR-2024-292

National Taxpayer Advocate Erin Collins is criticizing the Internal Revenue Service for proposing changed to how it contacts third parties in an effort to assess or collect a tax on a taxpayer.

Current rules call for the IRS to provide a 45-day notice when it intends to contact a third party with three exceptions, including when the taxpayer authorizes the contact; the IRS determines that notice would jeopardize tax collection or involve reprisal; or if the contact involves criminal investigations.

The agency is proposing to shorten the length of proposing to shorten the statutory 45-day notice to 10 days when the when there is a year or less remaining on the statute of limitations for collection or certain other circumstances exist.

"The IRS’s proposed regulations … erode an important taxpayer protection and could punish taxpayers for IRS delays," Collins wrote in a November 7, 2024, blog post. The agency generally has three years to assess additional tax and ten years to collect unpaid tax. By shortening the timeframe, it could cause personal embarrassment, damage a business’s reputation, or otherwise put unreasonable pressure on a taxpayer to extend the statute of limitations to avoid embarrassment.

"Furthermore, the ten-day timeframe is so short, it is possible that some taxpayers may not receive the notice with enough time to reply," Collins wrote. "As a result, those taxpayers may incur the embarrassment and reputational damage caused by having their sensitive tax information shared with a third party on an expedited basis without adequate time to respond."

"The statute of limitations is an important component of the right to finality because it sets forth clear and certain boundaries for the IRS to act to assess or collect taxes," she wrote, adding that the agency "should reconsider these proposed regulations and Congress should consider enacting additional taxpayer protections for third-party contacts."

By Gregory Twachtman, Washington News Editor

The IRS has amended Reg. §30.6335-1 to modernize the rules regarding the sale of a taxpayer’s property that the IRS seizes by levy. The amendments allow the IRS to maximize sale proceeds for both the benefit of the taxpayer whose property the IRS has seized and the public fisc, and affects all sales of property the IRS seizes by levy. The final regulation, as amended, adopts the text of the proposed amendments (REG-127391-16, Oct. 15, 2023) with only minor, nonsubstantive changes.

The IRS has amended Reg. §30.6335-1 to modernize the rules regarding the sale of a taxpayer’s property that the IRS seizes by levy. The amendments allow the IRS to maximize sale proceeds for both the benefit of the taxpayer whose property the IRS has seized and the public fisc, and affects all sales of property the IRS seizes by levy. The final regulation, as amended, adopts the text of the proposed amendments (REG-127391-16, Oct. 15, 2023) with only minor, nonsubstantive changes.

Code Sec. 6335 governs how the IRS sells seized property and requires the Secretary of the Treasury or her delegate, as soon as practicable after a seizure, to give written notice of the seizure to the owner of the property that was seized. The amended regulation updates the prescribed manner and conditions of sales of seized property to match modern practices. Further, the regulation as updated will benefit taxpayers by making the sales process both more efficient and more likely to produce higher sales prices.

The final regulation provides that the sale will be held at the time and place stated in the notice of sale. Further, the place of an in-person sale must be within the county in which the property is seized. For online sales, Reg. §301.6335-1(d)(1) provides that the place of sale will generally be within the county in which the property is seized. so that a special order is not needed. Additionally, Reg. §301.6335-1(d)(5) provides that the IRS will choose the method of grouping property selling that will likely produce that highest overall sale amount and is most feasible.

The final regulation, as amended, removes the previous requirement that (on a sale of more than $200) the bidder make an initial payment of $200 or 20 percent of the purchase price, whichever is greater. Instead, it provides that the public notice of sale, or the instructions referenced in the notice, will specify the amount of the initial payment that must be made when full payment is not required upon acceptance of the bid. Additionally, Reg. §301.6335-1 updates details regarding permissible methods of sale and personnel involved in sale.

T.D. 10011

The Financial Crimes Enforcement Network (FinCEN) has announced that certain victims of Hurricane Milton, Hurricane Helene, Hurricane Debby, Hurricane Beryl, and Hurricane Francine will receive an additional six months to submit beneficial ownership information (BOI) reports, including updates and corrections to prior reports.

The Financial Crimes Enforcement Network (FinCEN) has announced that certain victims of Hurricane Milton, Hurricane Helene, Hurricane Debby, Hurricane Beryl, and Hurricane Francine will receive an additional six months to submit beneficial ownership information (BOI) reports, including updates and corrections to prior reports.

The relief extends the BOI filing deadlines for reporting companies that (1) have an original reporting deadline beginning one day before the date the specified disaster began and ending 90 days after that date, and (2) are located in an area that is designated both by the Federal Emergency Management Agency as qualifying for individual or public assistance and by the IRS as eligible for tax filing relief.

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Beryl; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC7)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Debby; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC8)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Francine; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC9)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Helene; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC10)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Milton; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC11)

National Taxpayer Advocate Erin Collins offered her support for recent changes the Internal Revenue Service made to inheritance filing and foreign gifts filing penalties.

National Taxpayer Advocate Erin Collins offered her support for recent changes the Internal Revenue Service made to inheritance filing and foreign gifts filing penalties.

In an October 24, 2024, blog post, Collins noted that the IRS has "ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3250, Part IV, which deal with reporting foreign gifts and bequests."

She continued: "By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code Sec. 6677 penalty."

Collins said this change will "reduce unwarranted assessments and relieve burden on taxpayers" by giving them an opportunity to explain the circumstances for a late file to be considered before the agency takes any punitive action.

She noted this has been a change the Taxpayer Advocate Service has recommended for years and the agency finally made the change. The change is an important one as Collins suggests it will encourage more taxpayers to file corrected returns voluntarily if they can fix a discovered error or mistake voluntarily without being penalized.

"Our tax system should reward taxpayers’ efforts to do the right thing," she wrote. "We all benefit when taxpayers willingly come into the system by filing or correcting their returns."

Collins also noted that there are "numerous examples of taxpayers who received a once-in-a-lifetime tax-free gift or inheritance and were unaware of their reporting requirement. Upon learning of the filing requirement, these taxpayers did the right thing and filed a late information return only to be greeted with substantial penalties, which were automatically assessed by the IRS upon the late filing of the form 3520," which could have penalized taxpayers up to 25 percent of their gift or inheritance despite having no tax obligation related to the gift or inheritance.

She wrote that the abatement rate of these penalties was 67 percent between 2018 and 2021, with an abatement rate of 78 percent of the $179 million in penalties assessed.

"The significant abetment rate illustrates how often these penalties were erroneously assessed," she wrote. "The automatic assessment of the penalties causes undue hardship, burdens taxpayers, and creates unnecessary work for the IRS. Stopping this practice will benefit everyone."

By Gregory Twachtman, Washington News Editor

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

The plan includes many provisions that would make good on the President’s campaign promises. The proposal would provide universal preschool to three and four year-olds, two free years of community college, and free tuition for certain universities specializing in serving underrepresented students. The plan would also invest in teacher and child care education, provide free or lower cost child care to lower income families, expand paid leave programs, and improve the quality of student lunch programs. It would also establish automatic adjustments to unemployment insurance, depending upon economic conditions.

Personal Tax Breaks Extended

The proposal would also extend tax benefits already signed into law under the American Rescue Plan Act. This includes:

• extending enhanced premium tax credits and making premium reductions permanent;
• extending the enhanced child tax credit through 2025 (currently a fully refundable $3,000 per child ($3,600 for a child under age six) for 2021 only);
• permanently extending the enhancements of the child and dependent care tax credit, which increase the amount of the credit as well as the incomes at which the credit is phased out;
• permanently extending the increased earned income tax credit for taxpayers without children.

Tax Changes, TCJA Rollback

On the campaign trail, President Biden promised to increase taxes on both corporations and higher-income individuals. While the provisions of the American Jobs Plan are largely funded through a proposed increase in the corporate tax rate from 21% to 28%, the provisions of his American Families Plan are funded by the promised increases to individual taxes.

The proposal would increase the top tax rate on individuals to 39.6 percent from the current rate of 37 percent. This would return the tax rate on the highest bracket of income to where it was before the Tax Cuts and Jobs Act took effect in 2018.

The proposal would also increase the tax rate on capital gains and dividends for households making over $1 million, to match the 39.6 percent rate on income. For 2021, capital gains and certain qualified dividends are taxed at 20 percent for joint filers with taxable income of $496,000 or more.

The plan proposes to eliminate the tax-free step-up in basis on inherited property where the gain would be in excess of $1 million (up to $2.5 million in the case of a couple using existing real estate exemptions. The plan also eliminates the carried interest loophole that allows hedge fund partners to pay tax on income at capital gains rates. The plan would also limit a provision allowing for tax deferral on property exchanges, permanently extend the limitation on excess business losses, and ensure that higher income taxpayers cannot avoid the 3.8 percent Medicare tax.

The plan also provides increased funding for the IRS to improve enforcement, specifically to ensure that higher income taxpayers are unable to avoid proper payment of taxes. While the White House estimates that this will produce an additional $700 billion in revenue over 10 years, many believe this to be a vast overestimate.

Notably absent from the plan is an increase to the cap on the deduction of state and local taxes. The Tax Cuts and Jobs Act set a $10,000 limit for the deduction, but many lawmakers, particularly those representing higher tax states like New York and California, have been pressing to increase the limit or completely eliminate it

Next Steps?

It is uncertain when Congress may take up the process of proposing legislation carrying out the American Families Plan. President Biden has indicated his willingness to negotiate on any proposals he makes. However, the chilly reception to his American Jobs Plan does not indicate a smooth process to get a vote on a legislative package for the infrastructure proposal, let alone passage with razor-thin majorities in both chambers of Congress. With many lawmakers indicated that they want to work on infrastructure before moving on to other proposals, the process from proposal to law could stretch out for months.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

The IRS had initially determined that businesses whose PPP loans were forgiven or expected to be forgiven could not deduct business expenses paid for by the loan. However, the Consolidated Appropriations Act of 2021 ( P.L. 116-260), enacted on December 27, 2020, subsequently permitted taxpayers to deduct these expenses.

Safe Harbor Eligibility

To be eligible for the safe harbor, the taxpayer must have received an original PPP covered loan and filed a federal income tax return or information return for the 2020 tax year on or before December 27, 2020. The taxpayer must have paid or incurred original eligible expenses during the taxpayer’s 2020 tax year that the taxpayer did not deduct because:

• the expenses resulted in forgiveness of the original PPP covered loan; or
• the taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in forgiveness.

Electing the Safe Harbor

A taxpayer elects the safe harbor by attaching a statement to a timely, including extensions, federal income tax return or information return for the taxpayer’s first tax year following the 2020 tax year in which the original eligible expenses were paid or incurred. The statement must include:

• the taxpayer’s name, address, and social security number or taxpayer identification number;
• a statement that the taxpayer is applying the safe harbor provided by section 3.01 of Revenue Procedure 2021-20;
• the amount and date of disbursement of the taxpayer’s original PPP loan; and
• a list, including descriptions and amounts, of the original eligible expenses.

Certain Expenses and Loans Not Covered

The safe harbor applies only to original eligible expenses, and not to additional expenses that were added by the Consolidated Appropriations Act. The safe applies only to original PPP loans. It does not apply to PPP second draw loans.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit. Under the procedures:

• individuals who are not required to file returns for 2020 can use a simplified federal income tax return filing procedure; and
• individuals with zero adjusted gross income (AGI) for 2020 can file electronic returns by entering "$1" in several fields.

Simplified Return Procedures

Individuals may file simplified 2020 returns electronically or on paper if they have not filed and are not required to file 2020 returns. The simplified procedures apply to Forms 1040, 1040-SR and 1040-NR.

The individual should write "Rev. Proc. 2021-24" at the top of a paper return. The procedure includes detailed instructions for providing identification, income and direct deposit information.

Zero AGI

Many filing systems for electronic returns will not accept returns that report zero AGI. To file an electronic return, in addition to all other information required to be entered on Form 1040, Form 1040-SR, or Form 1040-NR, an individual with no AGI should report:

• $1 as taxable interest on line 2b of the form;
• $1 as total income on line 9 of the form; and
• $1 as AGI on line 11 of the form.

Filers of Form 1040-NR with no AGI should also report $1 as itemized deductions on lines 7 and 8 of Schedule A (Form 1040-NR) and line 12 of Form 1040-NR.

Returns Must Be Accurate

Simplified returns and zero-AGI electronic returns are federal income tax returns for all purposes. Thus, the individual must properly sign the return under penalties of perjury. The returns must also provide accurate information. However, the IRS will not challenge the accuracy of income items reported by taxpayers using these special procedures.

Individuals Who Filed 2020 Returns

Individuals who have already filed their 2020 returns do not have to do anything further to:

• receive advance child credit payments for an eligible child shown on that return;
• receive a third-round Economic Impact Payment (EIP) for the 2021 recovery rebate credit that is attributable to a dependent shown on that return; or
• claim a previously claimed 2020 recovery rebate credit and additional 2020 recovery rebate credit for themselves and for each eligible qualifying child.

Similarly, an individual who filed a federal income tax return for 2019, including by entering information in the "Non-Filers: Enter Information Here" tool on the IRS website, also do not need to file any additional forms of contact the IRS in order to receive advance child credit payments for a qualifying child shown on that return. An individual who did not receive EIPs for the full amount of the 2020 Recovery Rebate Credits may claim them by filing a 2020 federal income tax return.

U.S. Territory Residents

The simplified return and zero-AGI procedures do not apply to residents of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, or the U.S. Virgin Islands.

• Residents of Puerto Rico may be eligible to claim the child tax credit from the IRS under procedures to be announced at a later date, but they are not eligible to receive advance child tax credit payments.
• Residents of other U.S. territories should contact their local territory tax agency for additional information about the child tax credit and advance child tax credit payments, third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

ARP tax credits are available to eligible employers that pay sick and family for leave from April 1, 2021, through September 30, 2021. Under the Act, eligible employers include any business, including tax-exempt organizations with fewer than 500 employees who are not able to work or telework due to reasons related to COVID-19, including needing to recover from any injury, disability, illness or condition related to the vaccinations.

The IRS has informed taxpayers that the paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, and the employer is entitled to payment of the full amount of credits if it exceeds the employer’s share of the Medicare tax. The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons, for up to two weeks at 100 percent of the employee’s regular rate of pay. Further, the tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, at 2/3rds of the employee’s regular rate of pay. Importantly, the amount of these tax credits increases according to allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages.

Eligible employers are recommended to report their total paid sick and family leave wages, health plan expenses and collectively bargained contributions, including their share of social security and Medicare taxes on the paid leave wages for each quarter on their federal employment tax return. Form 941, Employer’s Quarterly Federal Tax Return, can be used to report income tax and social security and Medicare taxes withheld from employee wages.

Further, in anticipation of claiming the credits on the Form 941, eligible employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax withheld, the employees’ share of social security, Medicare taxes and their share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If, however, an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages, the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will then have to account for the amounts received as an advance when they file Form 941, Employer's Quarterly Federal Tax Return, for the relevant quarter. Finally, self-employed individuals may claim comparable tax credits on their individual Form 1040, U.S. Individual Income Tax Return.

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. 

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. For individual taxpayers, the notice postpones to May 17, 2021, certain deadlines that would normally fall on April 15, 2021, such as the time for making IRA contributions and for filing federal income tax refund claims. The notice also extends the time for return preparers to participate in the Annual Filing Season Program for the 2021 calendar year.

The IRS has released this notice as a follow-up to a previous announcement on March 17 that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021. This notice provides details on the additional tax deadlines which have been postponed until May 17.

Federal Tax Returns and Tax Payments
For an affected taxpayer, the due date for filing federal income tax returns in the Form 1040 series having an original due date of April 15, 2021, and for making federal income tax payments in connection with one of these forms, is automatically postponed to May 17, 2021. Affected taxpayers do not have to file any form, including Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to obtain this relief.

This relief includes the filing of all schedules, returns, and other forms that are filed as attachments to the Form 1040 series, or are required to be filed by the due date of the Form 1040 series, including, for example, Schedule H, Household Employment Taxes, and Schedule SE, Self-Employment Tax, as well as:

• Form 965-A (Individual Report of Net 965 Tax Liability);
• Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts);
• Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts);
• Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations);
• Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund);
• Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs));
• Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships);
• Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments); and
• Form 8938 (Statement of Specified Foreign Financial Assets).

Additionally, elections that are made or required to be made on a timely filed Form 1040 series (or attachment to such form) will be timely made if filed on such form or attachment, as appropriate, on or before May 17, 2021.

Claims for Refund
Individuals with a period of limitations to file a claim for credit or refund of federal income tax expiring on or after April 15, 2021, and before May 17, 2021, have until May 17, 2021, to file those claims for credit or refund. This postponement is limited to claims for credit or refund properly filed on the Form 1040 series or on a Form 1040-X. As a result of this postponement, the period beginning on April 15, 2021, and ending on May 17, 2021, will be disregarded in determining whether the filing of those claims is timely.

IRA and HSA Contributions
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

For affected taxpayers that must file forms in the Form 5498 series, the due date for filing and furnishing the Form 5498 series is postponed to June 30, 2021. The period beginning on the original due date of those forms and ending on June 30, 2021, will be disregarded in the calculation of any penalty for failure to file those forms.

Estimated Tax Payments, Other Items Not Extended
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.

For calendar quarters beginning after 2020, an employer is generally eligible for the credit if it was carrying on a trade or business during the calendar quarter for which the credit is determined, and either (1) had operations that were fully or partially suspended during the calendar quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19, or (2) experienced a decline in gross receipts for the calendar quarter when compared to the same quarter in 2019.

The guidance explains changes made to the employee retention credit for the first two calendar quarters of 2021, including:

• the increase in the maximum credit amount,
• the expansion of the types of employers that may be eligible to claim the credit,
• modifications to the gross receipts test,
• revisions to the definition of qualified wages, and
• new restrictions on the ability of eligible employers to request an advance payment of the credit.

The guidance does not address the employee retention credit provided by Code Sec. 3134, enacted by the American Rescue Plan Act of 2021 ( P.L. 117-2), for wages paid after June 30, 2021, and before January 1, 2022. The IRS will address Code Sec. 3134 in future guidance.

Highlights of some of the items addressed in the guidance are summarized below.

Eligible Employers
While the employee retention credit is not available to most governmental employers, it is available to tax-exempt organizations described in Code Sec. 501(c)(1), and to any governmental entity that is a college or university or whose principal purpose is providing medical or hospital care. For this purpose, a college or university means an educational organization as defined in Code Sec. 170(b)(1)(A)(ii) and Reg. §1.170A-9(c)(1). An entity that has the principal purpose or function of providing medical or hospital care means an entity that has the principal purpose or function of providing medical or hospital care within the meaning of Code Sec. 170(b)(1)(A)(iii) and Reg. §1.170A-9(d)(1).

Decline in Gross Receipts
One way an employer can be eligible for the credit is if it experienced a decline in gross receipts. Whether an employer is an eligible employer based on a decline in gross receipts is determined separately for each calendar quarter, and is based on an 80 percent threshold compared to the same calendar quarter in 2019.

If an employer did not exist as of the beginning of the first calendar quarter of 2019, the employer generally determines whether the decline in gross receipts test is met in the first calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the first calendar quarter of 2020. If an employer did not exist as of the beginning of the second calendar quarter of 2019, the employer generally determines whether the test is met in the second calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the second calendar quarter of 2020. An employer may also elect to use an alternative quarter to calculate gross receipts.

Eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter an eligible employer elects to use in measuring the decline.

Qualified Wages
Whether wage payments by an eligible employer will be considered qualified wages depend, in part, on the average number of full-time employees an eligible employer employed during 2019. For the first and second calendar quarters of 2021, large eligible employers are those whose average number of full-time employees during 2019 was greater than 500. For these employers, qualified wages are wages paid to an employee for time that the employee is not working for the reasons the credit is allowed.

Small eligible employers are those whose average number of full-time employees during 2019 was 500 or less. For these employers, qualified wages are the wages paid an employee whether the employee is working or not working for the reasons the credit is allowed.

An employer may not claim a credit under Code Secs. 41, 45A, 45P, 45S, 51, or 1396 with qualified wages for which it claims the employee retention credit, but it may be able to take a credit under these provisions for wages for which it did not claim an employee retention credit if the particular credit’s requirements are met.

Claiming the Credit
Eligible employers may continue to access the employee retention credit for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits in anticipation of the credit. However, advance payment of the employee retention credit is available only to small eligible employers, who can may elect to receive an advance payment of not more than 70 percent of the average quarterly wages paid in calendar year 2019.

For this purpose, average quarterly wages generally means the average of wages or compensation determined without regard to the social security wage base, paid in each calendar quarter in 2019. The guidance provides details for calculating average quarterly wages. Small eligible employers that come into existence in 2021 are ineligible to receive advance payment.

Effect on Other Documents
Notice 2021-20, I.R.B. 2021-11, 922, is amplified.

The IRS has extended the penalty relief provided in Notice 2020-22, I.R.B. 2020-17, 664, for failure to deposit employment taxes, to eligible employers that reduce their required deposits in anticipation of the following credits.

The IRS has extended the penalty relief provided in Notice 2020-22, I.R.B. 2020-17, 664, for failure to deposit employment taxes, to eligible employers that reduce their required deposits in anticipation of the following credits:

• the paid sick and family leave credits under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), as amended by the COVID-related Tax Relief Act of 2020 (Tax Relief Act) (Division N of P.L. 116-260), for qualified leave wages paid with respect to the period beginning January 1, 2021, and ending March 31, 2021;
• the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, added by the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), for qualified leave wages paid with respect to the period beginning April 1, 2021, and ending September 30, 2021;
• the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for qualified wages paid with respect to the period beginning January 1, 2021, and ending June 30, 2021;
• the employee retention credit under Code Sec. 3134, added by ARP, for qualified wages paid with respect to the period beginning July 1, 2021, and ending December 31, 2021; and
• the COBRA Continuation Coverage Premium Assistance credit under Code Sec. 6432, added by ARP, for continuation coverage premiums not paid by assistance eligible individuals under section 9501(a)(1) of the ARP, during the period beginning April 1, 2021, and ending September 30, 2021.

Background
Eligible employers claim the paid sick and family leave credits under the Families First Act, and the employee retention credit under the CARES Act, against the employer’s share of the Old Age, Survivors, and Disability Insurance (Social Security) portion of FICA tax under Code Sec. 3111(a). Employers that are eligible for the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, the employee retention credit under Code Sec. 3134, or the COBRA Continuation Coverage credit under Code Sec. 6432, can claim the credit(s) against the employer’s share of the Hospital Insurance (Medicare) portion of FICA tax under Code Sec. 3111(b). The credits are also available to eligible railroad employers for the attributable Railroad Retirement Tax Act (RRTA) taxes under Code Sec. 3221(a).

These refundable tax credits are reported on the employer’s employment tax return for reporting its FICA tax liability, which for most employers is the quarterly Form 941. Certain employers may claim an advance payment of the refundable credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Code Sec. 6656 imposes a penalty for failure to timely deposit required tax amounts, unless the failure is due to reasonable cause and not willful neglect. Failure to deposit employment taxes required under Code Sec. 6302 generally subjects an employer to the penalty. The various legislative acts and provisions implementing the refundable employment tax credits described above either instruct the IRS to waive the penalty or authorize guidance that provides penalty relief.

Paid Leave Credit Penalty Relief
An employer can reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the applicable paid sick or family leave credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer paid qualified leave wages, qualified health plan expenses, or qualified collectively bargained contributions, for the period beginning on April 1, 2021, and ending on September 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
• the amount of employment taxes that the employer does not timely deposit is less than or equal to its anticipated applicable paid leave credits claimed for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of the deposit reduction cannot be more than the total amount of the employer’s anticipated paid leave credits as of the time of the required deposit, minus any amount of those anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Employee Retention Credit Penalty Relief
After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of its applicable employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer paid qualified retention wages for the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
• the amount of employment taxes that the employer does not timely deposit— reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits claimed— is less than or equal to the amount of the employer’s anticipated applicable employee retention credits for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated employee retention credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

COBRA Credit Penalty Relief
After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits and the anticipated employee retention credit, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the employer’s COBRA continuation coverage credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer is a “person to whom premiums are payable,”
• the amount of employment taxes that the employer does not timely deposit— reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits and the employee retention credits claimed—is less than or equal to the amount of the employer’s anticipated credits under Code Sec. 6432 for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated COBRA continuation coverage credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Effect on Other Documents
Notice 2020-22, I.R.B. 2020-17, 664, is amplified.