Recent IRS warnings and announcements regarding the Employee Retention Tax Credit (ERTC) have raised some businesses’ concerns about the validity of their claims for this valuable, but complex, pandemic-related credit — and the potential consequences of an invalid claim. In response, the IRS has rolled out a new process that certain employers can use to withdraw their claims.

Fraudsters jump on the ERTC

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can file claims until April 15, 2025 (on amended returns), and receive credits worth up to $26,000 per retained employee.

With such potentially large payouts, fraudulent promoters and marketers were quick to rush in with offers to help businesses file claims in exchange for fees in the thousands of dollars or for a percentage of any refunds received. The requirements for the credit are strict, though, and the IRS has found that many of these claims fall short of meeting them.

Invalid claims put taxpayers at risk of liability for credit repayment, penalties and interest, in addition to the promoter’s fees. And promoters may leave out key details, which could lead to what the IRS describes as a “domino effect of tax problems” for unsuspecting employers.

The IRS responds

The wave of fraudulent claims has produced escalating action from the IRS. In July 2023, the agency announced that it was shifting its ERTC review focus to compliance concerns, with intensified audits and criminal investigations of both promoters and businesses filing suspect claims. Two months later, it imposed a moratorium on the processing of new ERTC claims.

The moratorium, prompted by “a flood of ineligible claims,” will last until at least the end of 2023. The processing of legitimate claims filed before September 14 will continue during the moratorium period but at a much slower pace. The IRS has extended the standard processing goal of 90 days to 180 days and potentially far longer for claims flagged for further review or audit.

According to the IRS, though, the moratorium isn’t deterring the scammers. It reports they’ve already revised their pitches, pushing employers that submit ERTC claims to take out costly upfront loans in anticipation of delayed refunds.

Now, the IRS has unveiled a new withdrawal option for eligible employers that filed claims but haven’t yet received, cashed or deposited refunds. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties or interest. (The IRS also is developing assistance for employers that were misled into claiming the ERTC and have already received payment.)

The withdrawal option is available if you:

• Claimed the credit on an adjusted employment return (for example, Form 941-X),
• Filed the adjusted return solely to claim the credit, and
• Requested to withdraw your entire ERTC claim.

The exact steps vary depending on your circumstances, including whether you filed your claim yourself or through a payroll provider, have been notified that you’re under audit, or have received a refund check that you haven’t cashed or deposited. Regardless of the applicable procedure, your withdrawal isn’t effective until you receive an acceptance letter from the IRS.

Taxpayers that aren’t eligible for the withdrawal process can reduce or eliminate their ERTC claim by filing an amended return. But you may need to amend your income tax return even if your claim is withdrawn.

Seek help

Throughout its warnings about potential ERTC pitfalls, the IRS has continued to urge taxpayers to consult “trusted tax professionals.” If you’re having second thoughts about your ERTC claim, we can help you review your claim and, if appropriate, properly withdraw it.

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If your investments have fluctuated wildly this year, you may have already recognized some significant gains and losses. But nothing is decided tax-wise until year end when the final results of your trades will reveal your 2023 tax situation. Here’s what you need to know to avoid tax surprises.

Tax-favored retirement accounts and taxable accounts

If you’ve had wild swings in the value of investments held in a tax-favored 401(k), traditional IRA, Roth IRA or self-employed SEP account, there’s no current tax impact. While these changes affect your account value, they have no tax consequences until you finally start taking withdrawals. At that point, the size of your balance(s) will affect your tax bills. If you have investments in a Roth IRA, qualified withdrawals taken after age 59½ can be federal-income-tax-free.

With taxable accounts, your cumulative gains and losses from executed trades during the year are what matter. Unrealized gains and losses don’t affect your tax bill.

Overall loss for 2023

If your losses for the year exceed your gains, you have a net capital loss. To determine and apply the loss:

1. Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
   • If your short-term losses exceed your short- and long-term gains, you have a net short-term capital loss for the year.
   • If your long-term losses exceed the total of your long- and short-term gains, you have a net long-term capital loss for the year.
2. Claim your allowable net capital loss deduction of up $3,000 ($1,500 if you use married filing separate status).
3. Carry over any remaining net short-term or long-term capital loss after Step 2 to next year where it can be used to offset capital gains in 2024 and beyond.

Overall gain for 2023

If your gains for the year exceed your losses, you have a net capital gain. To figure out the gain:

• Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
  • If your short-term gains exceed the total of your short- and long-term losses, you have a net short-term capital gain for the year.
  • If your long-term gains exceed the total of your long- and short-term losses, you have a net long-term capital gain for the year.

Net short-term and long-term gain

A net short-term capital gain is taxed at your regular federal income tax rate, which can be up to 37%. You may also owe the 3.8% net investment income tax (NIIT) (see below) and state income tax, too.

A net long-term capital gain (LTCG) is taxed at the lower federal capital gain tax rates of 0%, 15%, and 20%. Most individuals pay 15%. High-income folks will owe the maximum 20% rate on the lesser of: 1) net LTCG or 2) the excess of taxable income, including any net LTCG, over the applicable threshold. For 2023, the thresholds are $553,850 for married joint-filers, $492,300 for singles and $523,050 for heads of households. You may also owe the NIIT and state income tax, too.

Watch out for the NIIT

The 3.8% NIIT hits the lesser of your net investment income, including capital gains, or the amount by which your modified adjusted gross income exceeds the applicable threshold. The thresholds are:

• $250,000 for married joint-filers,
• $200,000 for singles and heads of households, and
• $125,000 for married individuals filing separate.

Year end is still months away

As explained earlier, your tax results for 2023 are up in the air until all the gains and losses from trades executed during the year are tallied up. If you have questions or want more information, consult with us.

© 2023

Most not-for-profits regard their volunteers as invaluable assets. After all, if it weren’t for your volunteers’ dedication and commitment, your organization might have stalled out a long time ago. It certainly wouldn’t have accomplished as many successes!

However, like your paid staffers, volunteers represent some liability risk. For example, an allegation of volunteer negligence or intentional misconduct could motivate litigation against your nonprofit. A volunteer who’s injured while volunteering could sue your organization. And in certain situations, you could be held liable even if a volunteer acted outside the scope of prescribed duties or accepted procedures. Act now to reduce the possibility that a volunteer could threaten your nonprofit’s future.

Adopt certain policies

Operating without unpaid help is probably out of the question. But you can use volunteers with greater confidence by adopting these four best practices:

1. Establish a formal volunteer recruitment process. Although the process doesn’t have to be as structured as the one you follow when hiring staffers, document procedures that can be followed consistently. For instance, develop volunteer job descriptions for open positions that outline the nature of the work to be performed, any required skills or experience, and any possible risks the job presents.

2. Screen prospects based on your mission, programs and likely activities. Some positions will pose few risks and your screening process can be relatively basic: Ask candidates to fill out an application and submit to an interview, and then check their work and character references. Positions that carry greater risks — such as work involving children, the elderly and other vulnerable populations, or that provide direct access to cash donations — require a more rigorous process.

3. Provide training, supervision and, if necessary, discipline. Once volunteers are on board, provide an orientation session to explain your nonprofit’s mission, policies and rules of conduct. After volunteers have begun working for you, actively supervise them. This means that staff members should remain in close physical proximity to volunteers or that volunteers can easily contact staff in the event of a problem. If a volunteer acts in a manner that puts your nonprofit at risk, terminate the volunteer relationship.

4. Maintain adequate insurance coverage. In addition to general liability coverage, your nonprofit may want to consider purchasing supplemental policies that address specific types of exposure such as medical malpractice or sexual misconduct.

Get advice

When establishing volunteer policies, be sure to ask an attorney to review them before you put them in place. Contact us to discuss insurance coverage and other risk mitigation strategies.

© 2023

In December 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act. Among other things, the sweeping new law made some significant changes to so-called catch-up contributions, with implications for both employers and employees.

With the new catch-up provisions scheduled to kick in after 2023, many retirement plan sponsors have been struggling to institute the necessary processes and procedures to comply. In recognition of taxpayer concerns, the IRS recently provided some relief in Notice 2023-62. In addition to extending the deadline, the new guidance corrects a technical error in SECURE 2.0 that had left taxpayers and their advisors confused about the continued availability of catch-up contributions for employees.

The new requirements

Tax law allows taxpayers age 50 or older to make catch-up contributions to their 401(k) plans and similar retirement accounts. The permissible amount is adjusted annually for inflation. For 2023, you can contribute an additional $7,500 over the current $22,500 annual 401(k) contribution limit. The contributions are allowed regardless of a taxpayer’s income level.

Under the existing rules, all eligible taxpayers can choose whether to make their contributions on a pre-tax basis or a Roth after-tax basis (assuming the employer allows the Roth option). Section 603 of SECURE 2.0, however, mandates that any catch-up contributions made by higher-income participants in 401(k), 403(b) or 457(b) retirement plans must be designated as after-tax Roth contributions.

Higher-income participants are those whose prior-year Social Security wages exceeded $145,000 (the threshold will be adjusted for inflation going forward). In addition, a plan that allows higher-income participants to make such catch-up contributions also must allow other participants age 50 or older to make their catch-up contributions on an after-tax Roth basis. The law provides that these requirements are effective for tax years beginning after December 31, 2023.

The imminent effective date had plan sponsors and payroll providers worried, due to multiple administrative hurdles. For example, sponsors must develop processes to identify higher-income plan participants — they generally haven’t had the need to calculate employees’ Social Security wages previously — and provide that information to their plan administrators. Sponsors also must institute procedures to restrict catch-up contributions to Roth contributions and communicate the changes to their employees.

The challenges are even greater for employers that don’t already have Roth contribution features in their traditional retirement plans. They have to choose between amending their plans to allow such contributions, which can take months to process and implement, or eliminating the ability to make catch-up contributions for all employees.

The IRS guidance

In Notice 2023-62, the IRS acknowledges the concerns related to the original effective date for the new requirements. In response, it has created an “administrative transition period,” extending the effective date to January 1, 2026. In other words, employers can allow catch-up contributions that aren’t designated as Roth contributions after December 31, 2023, and until January 1, 2026, without violating SECURE 2.0. And plans without Roth features may allow catch-up contributions during this period.

The guidance also addresses a drafting error in SECURE 2.0 that led to some questions about whether the law eliminated the ability of taxpayers to make catch-up contributions after 2023. The IRS made clear that plan participants age 50 or older can continue to make catch-up contributions in 2024 and beyond.

After-tax vs. pre-tax

Unlike pre-tax contributions, after-tax contributions don’t reduce your current-year taxable income, but they grow tax-free. This is a significant advantage if you expect to be subject to a higher income tax rate in retirement than you are at the time of your contributions.

You generally can withdraw “qualified distributions” without paying tax as long as you’ve held the account for at least five years. Qualified distributions are those made:

• On account of disability,
• On or after death, or
• After you reach age 59½.

You may be able to reap other savings from after-tax contributions, as well. For example, lower taxable income in retirement can reduce the amount you must pay for Medicare premiums and the tax rate on your Social Security benefits.

But you could have reasons to reduce your current taxable income with pre-tax contributions. For example, doing so could increase the amount of your Child Tax Credit, which phases out at certain income thresholds, as well as the amount of financial aid your children can obtain for higher education.

Note: Roth 401(k) contributions are currently subject to annual required minimum distributions (RMDs), like traditional 401(k)s. Beginning in 2024, though, designated Roth 401(k) contributions won’t be subject to RMDs until the death of the owner.

Potential future guidance

The IRS also used Notice 2023-62 to preview some additional guidance regarding Section 603 that’s “under consideration.” After taking into account any comments received, the IRS stated it is considering releasing future guidance concerning multi-employer plans and other out-of-the-ordinary situations.

Don’t delay

The IRS’s extension of the effective date for the Section 603 requirements is good news for employers and employees alike. As noted, though, the requisite changes to achieve compliance will take some time and effort to put into place. Plan sponsors would be wise to start sooner rather than later.

© 2023