Tax Alerts

The IRS issued final and proposed rules governing required minimum distributions (RMDs) under Code Sec. 401(a)(9). The regulations reflect changes made by the SECURE Act (P.L. 116-94) and SECURE 2.0 Act (P.L. 117-328) that apply to qualified plans and IRAs. The final regulations apply for distribution calendar years beginning on or after January 1, 2025. The IRS simultaneously proposed further changes to reflect certain provisions of the SECURE 2.0 Act.

The IRS issued final and proposed rules governing required minimum distributions (RMDs) under Code Sec. 401(a)(9). The regulations reflect changes made by the SECURE Act (P.L. 116-94) and SECURE 2.0 Act (P.L. 117-328) that apply to qualified plans and IRAs. The final regulations apply for distribution calendar years beginning on or after January 1, 2025. The IRS simultaneously proposed further changes to reflect certain provisions of the SECURE 2.0 Act.

Final Regulations

The final regulations reflect the SECURE Act’s increase in the applicable age for beginning RMDs and the limitation on lifetime distributions to beneficiaries under defined contribution plans. With respect to lifetime distributions under Code Sec. 401(a)(9)(H), the final regulations provide that the 10-year rule applies to designated beneficiaries that die on or after the January 1, 2020, statutory effective date. The regulations provide additional details on the definition of eligible designated beneficiaries.

The IRS retained the controversial rule in the proposed regulations that requires continued annual distributions to a designated beneficiary under the 10-year rule. Thus, when an employee or IRA owner dies on or after their required beginning date and their beneficiary follows the 10-year distribution rule, the beneficiary must continue to take annual distributions until the end of the 10-year period, when full distribution is required. This rule also applies after the death of an eligible designated beneficiary taking life expectancy payments and a minor child beneficiary’s attainment of the age of majority. However, the IRS noted that transition relief applies through 2024.

The final regulations also provide rules for treating trusts as beneficiary, in particular, rules for see-through trusts and trusts with multiple beneficiaries. The final regulations include a special rule that prevents a surviving spouse from using the 10-year rule to delay the commencement of benefits beyond the decedent’s required beginning date.

Proposed Regulations

The IRS reserved some provisions of the final regulations that reflect changes made under the SECURE 2.0 Act. For example, the statute is unclear as to whether the applicable age for employees born in 1959 is 73 or 75. The proposed regulations would provide that 73 is the applicable age for beginning RMDs.

In addition, the IRS is seeking comments on the following:

• Rules of operation for aggregating the purchase of an annuity contract with a portion of the employee’s individual account.
• Whether distributions from a designated Roth account should be disregarded for purposes of satisfying RMD rules, so that it might be rolled over to a Roth IRA.
• Whether a RMD must be made in a year in which a corrective distribution for a previous year is made.
• How to make a spousal election to be treated as the employee for purposes of calculating the RMD.
• How divorce affects the purchase of qualifying longevity annuity contract (QLAC).

Effective Dates

The final regulations apply for distribution calendar years beginning on or after January 1, 2025. For earlier distribution calendar years, taxpayers must apply prior regulations plus a reasonable good faith interpretations of statutory amendments made by the SECURE Act and (for 2023 and 2024 distribution calendar years) the SECURE 2.0 Act.

The proposed regulations would have the same applicability dates as the corresponding provisions in the final regulations.

Department of the Treasury Secretary Janet Yellen said there are no plans to extend the Beneficial Ownership Information reporting deadline.

Department of the Treasury Secretary Janet Yellen said there are no plans to extend the Beneficial Ownership Information reporting deadline.

"I don't think it's going to be necessary to extend the timeframe," she testified during a July 9, 2024, House Financial Services Committee hearing, highlighting ongoing outreach and what the agency considers a good amount of reporting so far.

During the hearing, a number of committee members noted that there are still a lot of small business owners who do not know that they have this BOI reporting requirement from the Financial Crimes Enforcement Network and could be facing significant financial penalties that might create a financial hardship if they miss the deadline to report BOI by the end of the year.

However, Secretary Yellen does not expect this to be an issue, relying on specific wording of the reporting regulations that will help small business owners who may not be aware they have to file that could protect from the $250,000 fine associated with not filing a BOI report.

"The fine is for a ‘willful’ violation," she said, although when pressed, she could not provide a clear definition of what constitutes a willful violation. Yellen added that "FinCEN is not going to prioritize going after small businesses."

She also noted that FinCEN is engaged in extensive and ongoing outreach to make sure small business owners are aware of and educated on the requirement to file a BOI report.

By Gregory Twachtman, Washington News Editor

Compliance initiatives using supplemental Inflation Reduction Act funding have resulted in the Internal Revenue Service collecting more than $1 billion from millionaires, the agency stated.

Compliance initiatives using supplemental Inflation Reduction Act funding have resulted in the Internal Revenue Service collecting more than $1 billion from millionaires, the agency stated.

In a July 11, 2024, statement, the IRS noted that the collection of these past-due taxes is the result of targeting 1,600 individuals with more than $1 million per year in income and a past due balance of more than $250,000 in recognized debt.

The IRS assigned 1,500 revenue officers to these cases. They were able to collect the more than $1 billion in past due payments from more than 1,200 individuals. The agency expects more money to be collected from this group in the months ahead as the compliance initiative in this area continues.

"Our increased work in this area means these past-due tax bills from high-end taxpayers are no longer being left on the table, like they were too often in the past," IRS Commissioner Daniel Werfel said in a statement.

Werfel added that the supplemental funding the agency received in the IRA "is reversing a decade-long decline in our compliance work, including increasing our compliance work involving the wealthiest individuals and groups with tax issues. The collection results achieved in less than a year reveal the magnitude of what can be achieved over the long run as our Inflation Reduction enforcement continues to ramp up in the months ahead."

The Treasury Department and IRS have issued regulations requiring brokers of digital assets to report certain sales and exchanges. The regulations address the reporting requirements enacted by the Infrastructure Investment and Jobs Act (P.L. 117-58 ). According to the IRS, the regulations should improve the deter noncompliance through sales and exchanges of digital assets.

The Treasury Department and IRS have issued regulations requiring brokers of digital assets to report certain sales and exchanges. The regulations address the reporting requirements enacted by the Infrastructure Investment and Jobs Act (P.L. 117-58). According to the IRS, the regulations should improve the deter noncompliance through sales and exchanges of digital assets. In addition, the reporting requirements will provide taxpayers with the information needed to accurately report their digital asset activity. The regulations are part of the larger effort to ensure tax compliance from high-income individuals.

In addition to the broker reporting rules, the regulations establish the requirements for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also create backup withholding rules.

Reporting Requirements

Under the final regulations brokers must report the gross proceeds for sales or exchanges of digital assets taking place on or after January 1, 2025, on a new Form 1099-DA. In addition, the regulations require brokers to furnish their customers with payee statements. Beginning in 2026, brokers will also be required to include gain or loss and basis information for certain sales on these information returns and statements.

Real Estate Reporting

Under the final regulations, real estate reporting persons treated as brokers with respect to reportable real estate transactions would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in transactions that close on or after January 1, 2026.

These real estate reporting persons would also be required to include the fair market value of digital assets paid to sellers of real estate in certain real estate transactions on Form 1099-S.

Brokers Impacted by the Regulations

These final regulations apply only to digital asset industry participants that take possession of the digital assets being sold by their customers, such as operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, certain PDAPs, and digital asset kiosks, as well as to certain real estate reporting persons that are already subject to the broker reporting rules. Brokers that do not take possession of the digital assets being sold or exchanged, often referred to as decentralized or non-custodial brokers, are not subject to the new reporting requirements. The IRS will provide rules for these brokers in separate regulations.

The definitions of a processor of digital asset payments (PDAP) and PDAP sales applies only to transactions in which PDAPs take possession of the digital asset payment. The requirement that a person must receive the digital assets in order to be a PDAP covers all transactions. Proposed new digital asset middleman rules that apply to non-custodial industry participants were not finalized. The IRS continue to study this area. However, the acceptance of digital assets in return for cash, stored-value cards, or different digital assets by a physical electronic terminal or kiosk is identified as a facilitative service.

The final regulations include a rule allowing taxpayers to use a standing order or instruction to make adequate identifications of digital assets. A broker may also take into account customer provided acquisition information for purposes of identifying which units are sold, disposed of, or transferred under the identification rules. A new rule accommodates the unlikely circumstance in which the broker does not have any transfer-in date information about the units in the broker’s custody.

Stablecoins and NFTs

Stablecoins pegged to a fiat currency are not excluded from the definition of "digital assets." The IRS will take into account any subsequent legislation regarding stablecoins. The final regs provide an alternative reporting method for certain stablecoin transactions. The final regs also provide an alternative reporting method for certain types of nonfungible tokens (NFTs). For PDAP transactions, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.

The IRS concluded that optional approaches to reporting dual classification assets generally are not appropriate, but special rules may apply to tokenized securities (which do not include stablecoins). Exceptions also apply to apply to dual classification assets that are cleared or settled on a limited-access regulated network, are section 1256 contracts, or are shares in money market funds. Additional special rules apply when a dual classification asset is a digital asset solely because its sale is cleared or settled on a limited-access regulated network.

Delay on Information Reporting for Certain Transactions

Under Notice 2024-57, until the IRS issues further guidance, brokers will not have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:

• Wrapping and unwrapping transactions,
• Liquidity provider transactions,
• Staking transactions,
• Transactions described by digital asset market participants as lending of digital assets,
• Transactions described by digital asset market participants as short sales of digital assets, and
• Notional principal contract transactions.

Transitional Relief

The IRS has provided general transitional relief in Notice 2024-56. Any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, will not be subject to reporting penalties and backup withholding, provided that the broker makes a good faith effort to comply with the reporting obligations. In addition, more limited relief is provided from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs. Finally, the Notice provides backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs.

The IRS released final regulations relating to the excise tax imposed on certain sales by manufacturers, producers, or importers of designated drugs. 

The IRS released final regulations relating to the excise tax imposed on certain sales by manufacturers, producers, or importers of designated drugs. Specifically, the final regulations set forth procedural provisions relating to how taxpayers must report liability for such tax. The final regulations also except such tax from semimonthly deposit requirements. The final regulations affect manufacturers, producers, or importers of designated drugs dispensed, furnished, or administered to individuals under the terms of Medicare during certain statutory periods. The proposed regulations (NPRM REG-115559-23) were published on October 2, 2023. After consideration of the public comments, the regulations finalized by the IRS adopt the proposed regulations with three non-substantive modifications. Specifically, the final regulations modify proposed §§40.0-1, 40.6011-1(d), and 40.6302(c)-1 by clarifying that the Code Sec. 5000D tax is imposed on “the sale of” designated drugs. The language, as modified, more closely tracks the language of Code Sec. 5000D(a).

Applicability Dates

The final regulations, which are effective on August 16, 2024, generally apply to calendar quarters beginning on or after October 1, 2023. For rules that apply before October 1, 2023, see 26 CFR part 40, revised as of April 1, 2024.

The IRS warned taxpayers about misleading claims regarding a fictitious "Self Employment Tax Credit." Promoters and social media posts are inaccurately suggesting self-employed individuals and gig workers can claim substantial payments for the COVID-19 pandemic period. These claims are not valid, and taxpayers were advised to consult trusted tax professionals before filing such claims.

The IRS warned taxpayers about misleading claims regarding a fictitious "Self Employment Tax Credit." Promoters and social media posts are inaccurately suggesting self-employed individuals and gig workers can claim substantial payments for the COVID-19 pandemic period. These claims are not valid, and taxpayers were advised to consult trusted tax professionals before filing such claims.

Promoters are falsely marketing a"Self Employment Tax Credit," similar to incorrect promotions about the Employee Retention Credit. The actual credit being misrepresented is the Credits for Sick Leave and Family Leave, which is highly specific and only applicable under certain conditions in 2020 and 2021. Taxpayers filing claims based on misleading information risk submitting incorrect returns, as these credits are not available for 2023 tax returns. The IRS is scrutinizing such claims, and inaccurate filings can lead to complications.

IRS Commissioner Danny Werfel emphasized the danger of such misleading information, urging taxpayers to avoid outlandish claims from social media and marketers. Claims should be verified by consulting a reliable tax professional. The IRS highlighted that many self-employed individuals wrongly use Form 7202, leading to inappropriate claims. The IRS continues to see a pattern of incorrect claims fueled by social media, advising taxpayers to be vigilant and seek professional advice before filing.

The Internal Revenue Service needs to do more in underserved markets, according to a recent report from the Treasury Inspector General for Tax Administration.

The Internal Revenue Service needs to do more in underserved markets, according to a recent report from the Treasury Inspector General for Tax Administration.

"The IRS has made improvements to increase the accessibility and availability of customer service in underserved, underrepresented, and rural communities; however additional efforts are needed to improve the geographic outreach efforts in these communities," a June 25, 2024, report states.

One of the problems identified in the report is that while there are various models that the agency uses to identify these populations, "there is no clear definition for these populations. Without a clear definition of what constitutes these populations, the IRS is unable to measure its progress in increasing accessibility and availability to these segments of taxpayers."

The agency watchdog noted that not having a clear definition "presents a risk that the IRS will not meet the objectives of the SOP [Strategic Operating Plan] and as such, will not provide additional service where it is needed and to whom needs it."

TIGTA also reported that the IRS’s data for determining locations to set up Taxpayer Assistance Centers is out of date and causing the agency to not reach these underserved populations. The agency is currently using demographic data from 2016 to identify the availability of TACs but, as TIGTA reports, citing U.S. Census Bureau data, "approximately 8.2 million people moved to different states in 2022. Considering the IRS is using data over six years old, the information is most likely outdated and therefore, the IRS may be incorrectly identifying where underserved and underrepresented populations are located."

TIGTA also called for a more comprehensive communications strategy to reach these populations.

"[W]e identified that additional efforts are needed to market these efforts to increase taxpayer education and awareness as to these eligible services," including TACs, Volunteer Income Tax Assistance, Low-Income Taxpayer Clinics, and Taxpayer Counseling for the Elderly, the report stated.

For example, IRS management stated that some events in rural communities had low attendance, with IRS management noting that the agency "relies on the local contact personnel within each community to help spread the word about these types of events," TIGTA reported. "Intentional planning and focused marketing strategies could increase taxpayer participation."

TIGTA made a number of recommendations with it said the IRS agreed with.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service has room to improve its virtual currency tax compliance enforcement, according to the Treasury Inspector General for Tax Administration.

The Internal Revenue Service has room to improve its virtual currency tax compliance enforcement, according to the Treasury Inspector General for Tax Administration.

In a report dated July 10, 2024, the treasury watchdog noted that the IRS has established a partnership"between the criminal and civil functions to identify taxpayers who omit digital assets for their tax returns. However, [the partnership’s] primary purpose has been limited to the acquisition of tools and training, rather than pursuing taxpayers."

In addition, TIGTA reported that the current timeline for enforcement activities "will hinder efforts to regulate the digital asset industry and may result in lost revenue and taxpayer burden."

The Infrastructure and Jobs Act of 2021 requires brokers to file an information return for digital transactions in a calendar year. The IRS has created an information form to report information needed to calculate gains and losses of digital currency transactions, but those regulations are not effective until January 1, 2025, for gross proceeds reporting and January 1, 2026, for basis reporting.

Criminal enforcement has increased over time related to digital assets. Between fiscal year 2018 and fiscal year 2023, Criminal Investigations saw a 113 percent increase in cases with digital assets, TIGTA reported. In that time, digital asset seizure values have increased, with a highest amount of $7 billion in FY 2022. In that same window, cases recommended for prosecution has more than doubled.

Despite the increases, TIGTA notes that the "anonymity of virtual currency complicates the IRS’s enforcement efforts," adding that there are challenges because the agency "does not have a clear window into taxpayers’ virtual currency investments or transactions because their names are generally not directly attached."

Also, the IRS "does not consistently get reports from trading platforms on virtual currency transactions."

TIGTA asserted that more needs to be done noting that with the limited reporting requirements and the anonymity of virtual currency and the associated transactions "has emboldened taxpayers to move money offshore, purchase illegal goods and services, and carry out other nefarious activities. Users may feel there is the possibility of avoiding tax obligations."

By Gregory Twachtman, Washington News Editor.