IRS Urges “Extreme Caution” About Claiming Tax Credits
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Even though everyone has a determined number of what they owe the Internal Revenue Service (IRS) every year in taxes, that’s not always the amount that they end up paying. There are also standard deductions and other considerations that can bring that number down. But if you misapply deductions, you could wind up liable for paying back the agency what it’s owed, getting fined, or both. And as we reach the end of the year, the IRS is urging “extreme caution” about claiming certain tax credits. Read on to see what you might want to leave out of your next filing.
RELATED: IRS Announces Major Tax Filing Changes for Next Year—Are You Affected?
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In addition to deductions, tax credits can be a way to lower your tax bill when it comes time to pay. Those who are eligible can work with a list of standard options that include things like environmentally friendly purchases, having children, and investing in retirement or education, among others, according to the IRS.
However, the list of what’s available can change over time as legislation gets passed and policies change. The Employee Retention Credit (ERC) is one such example. It was created on Mar. 27, 2020 to help employers and small businesses keep employees on their payroll during the COVID-19 pandemic.
While not available to individuals, the ERC allowed businesses that were shut down during the pandemic or saw a “decline in gross receipts” to claim a credit equal to 50 percent up to $10,000 paid out in wages, per the IRS.
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People bending the truth to lower their tax bill is nothing new, and getting caught running afoul of the rules can be a costly mistake. Now, the IRS has announced that it is taking a harder look at filings that claimed the ERC and sending out more than 20,000 disallowance letters to taxpayers, according to a Dec. 6 press release from the agency.
The agency explains that it determined a large number of taxpayers didn’t qualify for the credit after a lengthy review earlier this year. Those not in compliance included operations that didn’t exist or had no employees during the eligible time frame. The IRS says that the problem may have been made worse by companies that targeted small businesses and pushed them to make ERC claims on their filings, then charging them for their services.
“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” IRS Commissioner Danny Werfel said in the agency’s statement. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”
The agency used the opportunity to remind taxpayers they could file to withdraw any ERC claims they may have made in error. This will allow those who have yet to receive a refund to avoid paying any penalties , interest, or future repayment.
RELATED: The No. 1 Reason You Could Get Audited by the IRS, Experts Warn .
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Some businesses can also claim a fuel tax credit on their filing to reduce what they owe . The program helps to encourage the use of renewably sourced fuel , including biodiesel and renewable diesel, according to the IRS.
Fuel tax credits are relatively limited in their scope and are rarely available to individuals . They’re primarily intended for off-highway business use, farming and agriculture, bus transportation, and certain fuels used for planes, according to TurboTax.
The claim is also enticing because it works dollar-to-dollar. This means that a business claiming it spent $1,000 on renewable fuels would be able to take $1,000 off of its tax bill, per TurboTax.
RELATED: 6 Tax Return Secrets From Accountants .
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Like the ERC, fuel tax credits have been the target of the IRS due to overuse. In a press release on Mar. 23, the agency listed it as one of its “Dirty Dozen” tax scams as it saw an increase in bogus claims using Form 4136.
“People should watch out for erroneous fuel tax credit claims and the scammers that promote them,” Werfel said in the release. “These scammers will often charge a hefty fee for these bogus claims, and participants also face the possibility of identity theft. This is another example that people should always remember: Be wary if a tax deal sounds too good to be true.”
The agency warns that it’s taken steps to beef up compliance efforts surrounding the claims, adding that it is now able to stop a “significant number of fuel tax credit refund claims” by using theft filters. They add that some taxpayers could face fines for knowingly making false claims.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you’re spending, saving, or investing, always consult your financial advisor directly.
- Source: Credits and Deductions
- Source: COVID-19-Related Employee Retention Credits: Overview
- Source: IRS expands work on aggressive Employee Retention Credit claims; 20,000 disallowance letters being mailed, more action and voluntary disclosure program coming
- Source: Withdraw an Employee Retention Credit (ERC) claim
- Source: Fuel Tax Credits
- Source: Dirty Dozen: Watch out for third-party promoters of false fuel tax credit claims
IRS Announces Major Tax Filing Changes for Next Year—Are You Affected?
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The fact that we have to pay our taxes every year is one thing that famously never changes. And while there are plenty of different tools to help you file , it’s more often significant changes in your own life that can alter the process. But now, the Internal Revenue Service (IRS) has announced a set of major changes for next year. Read on to see if you’re affected by the latest updates and what it could mean when it comes time to file.
RELATED: IRS Warns That Claiming These Credits Can Get You Audited and Fined .
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Typically, any change in the tax rate is a development that tends to grab plenty of headlines no matter which way it’s heading. But while those numbers will remain the same the next time you file , the IRS has released an updated set of tax brackets for the 2023 tax year.
The adjustments affect where the boundaries are set for each income level, with progressively increasing rates as amounts increase. This year’s changes take into account inflation, with upper limits that are 7 percent higher than brackets in 2022, Forbes reports. And while deductions and other elements must still be factored in, these brackets can help estimate roughly how much you’ll pay when it comes time to file.
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So, how much will each group now pay? The lowest tax bracket begins at 10 percent for individuals with $11,000 or less in taxable income—or $22,000 for married couples filing jointly. It then ranges from 12 percent for individuals making between $11,001 and $44,725, 22 percent for those with $44,726 to $95,375 in taxable income, and 24 percent for individuals earning between $95,376 to $182,100.
The new rate for individual income between $182,101 and $231,250 is 32 percent, while people earning between $231,251 and $578,125 fall into a 35 percent rate. It tops out with those who take in $578,126 or more in 2023 paying 37 percent. The complete list of updated brackets and rates—including those for married couples filing jointly or separately—can be found on the agency’s website.
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But it’s not just your income bracket that could be changing for this year. In a press release on Oct. 17, the IRS also announced that it would begin rolling out its free tax filing program known as Direct File during the 2024 filing season for certain taxpayers.
The service aims to provide an affordable alternative to tax preparation services many people use to file annually. It’s estimated that Americans spend an estimated $11 billion each year nationwide for professional assistance, CBS News reports.
However, not everyone filing will be able to use the service right away. The agency specifies that eligibility will be limited to “taxpayers with relatively simple returns,” targeting those with specific income, credits, and deductions, according to the press release.
RELATED: 6 Tax Return Secrets From Accountants .
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Besides individual limitations, where you live could also keep you from using Direct File next year. The IRS said the free program will be available to eligible residents in Arizona, California, Massachusetts, and New York, where state governments have worked to incorporate their own taxes into the new system. Those who live in one of the nine states that do not collect state income tax—Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—could also qualify.
Despite its limited initial reach, officials hope the early rollout will reach at least several hundred thousand taxpayers , CNN reports. The initial phase will also help work out any issues and see if the program could be expanded to a broader pool of potential filers.
“The plan is to roll it out in increments that get larger and larger, consistent with how products like this are rolled out in the private sector,” IRS Commissioner Daniel Werfel told reporters during a call, per CBS News. “We want to make sure it is an easy-to-understand pilot.”
