By now, both the Internal Revenue Service and the media have made many taxpayers aware that they might receive smaller refunds this year than they have become accustomed to. There are a number of reasons for this, according to Stephen Mankowski, tax chair at the National Conference of CPA Practitioners.
"The Child Tax Credit has been reduced back down to $2,000 per child, resulting in higher total tax," he said. "Moreover, new withholding Form W-4 results in taxpayers withholding less than in prior years. The form was revised in 2019 — while the old form can still be used, taxpayers are gradually shifting to the new form."
The new form does away with "allowances," which is meant to reduce the form's complexity and increase its transparency, according to the IRS. The value of an allowance was tied to the amount of the personal exemption, which can no longer be claimed on the Form 1040.
Besides the reduction of the CTC from $3,000 to $2,000, Mankowski cited a number of tax law issues for preparers to bear in mind this tax season:
- The gift tax annual exclusion for 2023 increases to $17,000;
- Mortgage insurance (on Schedule A) is no longer deductible;
- The $300/$600 deduction for charitable contributions is now only permitted on Schedule A;
- Preparers should expect more IRS guidance on virtual currency gains and activity;
- The new Form 1099-k threshold of $600, which was delayed for a year, is now in effect. For transactions in 2023, there is a $600 threshold and no transaction limit. Furthermore, there is no aggregation of transactions (this typically applies to ticket sales); and,
- Proposed regulations for inherited IRAs include a 50% penalty for failure to withdraw, with a 10-year time to liquidate; and this also applies to Roth IRAs.
Besides those specific legislative changes, Mankowski shared some broader issues from the IRS for the rest of the run up to April 18.
No. More. Paper. Checks!
There is an agencywide priority within the U.S. Treasury to reduce the number of paper checks that are issued, with more than 11 million tax returns requiring paper checks.
"Some are simply requested by taxpayers," Mankowski pointed out. "The goal is for 99% of payments to be made electronically by 2030. Often, the taxpayer pays fees in order to cash their checks if they do not have a standard bank account. Electronic deposit is not only faster, but also safer for initially filed returns — paper checks are more likely to be manipulated or compromised."
He noted that there are currently an astonishing 10 million Treasury checks that have not been cashed, a large portion of which are for under $50.
"The IRS is asking preparers to help promote direct deposit of refunds and to ask taxpayers to have their banking information available," he added. "Beginning in 2023, taxpayers are now able to request direct deposit on electronically filed amended returns for tax years 2021 and 2022."
Inflation Reduction Act
The IRS is working on a report requested by Treasury Secretary Janet Yellen, which is already over 100 pages, according to Mankowski.
"It incorporates much of the materials from the Taxpayer First Act," he said. "In addition, the IRS recently began an initiative, and has been holding meetings to gain input from practitioners and diverse groups for the implementation of the act and product development."
EITC awareness
The IRS estimates that four of five eligible taxpayers claim and receive the Earned Income Tax Credit.
"They stress that the EITC, combined with the Child Tax Credit and the Credit for Other Dependents, is a financial boost for working people and local economies," said Mankowski. "The Center on Budget and Policy Priorities estimates that in 2018 the Child Tax Credit and EITC together lifted more children — 5.5 million — above the poverty line than any other economic support program. The American Rescue Plan Act, by making a significant set of changes to the Child Tax Credit, will lift another 4.1 million children above the poverty line, cutting the number of children in poverty by more than 40%."
While 31 million tax returns with EITC requests resulted in $54 billion in refunds, 20% of those eligible for the credit don't claim it, according to the service.
"During the filing season, take a few minutes to see if someone would be eligible this year, or going back to 2020, including those without filing requirements," Mankowski urged. "The earned income limit for Married Filing Jointly taxpayers with three children is nearly $60,000," he said. "Those families would get nearly $7 thousand of EITC."
A new RPO director
Kimberly Rogers is the new director of the Return Preparer Office. She has been with the IRS since 1988, beginning as a clerk in Chicago. In 2010, she joined the team now known as the RPO.
