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Thursday July 25, 2024

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Washington Hotline

IRS Plans Direct File in 13 States

The Internal Revenue Service (IRS) has been developing a Direct File system for 2024. The IRS announced this week that it will be available in nine states without a state income tax. There will also be a limited pilot program for taxpayers in four states with state taxes. The nine states are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. The four states with the limited pilot program are Arizona, California, Massachusetts and New York.

New York and Arizona announced that they have partnered with the nonprofit Code for America to develop state tax returns. Code for America's website explains that taxpayers in those states will be able to export the data from the IRS directly to a state tax return.

New York Governor Kathy Hochul stated, "I am incredibly proud that New York will be one of the first states in the nation to take this bold step, and I look forward to continued collaboration with our partners at the IRS and Code for America to ensure that New Yorkers can make the most of this new tool when it launches."

The initial Direct File program will be limited in its application. The scope is still being finalized and is subject to change. Current plans provide that eligible taxpayers may use it only if they have W-2 wage income, Social Security or Railroad Retirement income, unemployment compensation and or interest income up to $1,500. The pilot software is expected to be able to handle the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and the Credit for Other Dependents (COD). The taxpayer will be required to take the standard deduction but may also have student loan interest or educator expense deductions.

IRS Commissioner, Daniel Werfel, promised the pilot program will be available for mobile devices and will be offered in English and Spanish. There will be a dedicated group of IRS customer service representatives to answer questions about the online program. The pilot program for Direct File will be a test for potential expansion in the future. Werfel noted, "It will be interesting to see if we have a huge number of taxpayers trying to get into the pilot that were not able to get into the pilot, because it was limited. And that will tell us about the demand for the pilot."

Some members of Congress are supportive of the program. Senate Finance Committee Chair Ron Wyden (D-OR) indicated he is hopeful there will be a day when all Americans can directly file their tax returns. A collective statement was also made by a group of legislators led by Senate Finance Committee member, Elizabeth Warren (D-MA), calling the 2024 pilot, "an important first step towards creating a free, easy way for millions of Americans to file their taxes online."

Editor's Note: Members of both the House and Senate have been encouraging the IRS to develop a Direct File program. It is helpful that the Code for America nonprofit will start to develop state tax returns. The concept of Direct File has been opposed by tax preparation companies who are concerned that they might lose paying customers. Advocates for Direct File point out that many other countries offer this simplified filing option.

Final Regulations on Type I and III Supporting Organizations

In T.D. 9981, the Internal Revenue Service (IRS) published final regulations that define the requirements for Type I and Type III supporting organizations (SO).

Supporting organizations are described in Section 509(a)(3) and must satisfy an organizational test, operational test, relationship test and disqualified person control test. The supporting organizations are classified into one of three categories. A Type I SO is controlled by one or more supported organizations. A Type II SO is supervised or controlled in connection with one or more supported organizations. Typically, there is a commonality of the trustees or directors for the Type II SO. A Type III SO is operated "in connection with one or more supported organizations." The supported organization may not be controlled directly or indirectly by any disqualified persons.

The Pension Protection Act of 2006 and the final regulations created several specific definitions. There are distribution requirements for Type III supporting organizations that are not "functionally integrated." There are also defined requirements for functionally integrated supporting organizations.
  1. Control by Donors — A supported organization may not be directly controlled by a disqualified person, his or her family or a 35%-controlled entity. A supported organization is not qualified to receive distributions if it is directly controlled by a donor. The definition of control is generally that the donor holds 50% or more of the voting power of the organization's governing body. All facts and circumstances may be included in the control test.
  2. Relationship Test — A Type III SO must fulfill the relationship test. The intention is that the organization is responsive to the needs or demands of the supported organization. The supporting organization must provide the supported organization with a written notice describing the type and amount of support, a copy of SO's latest IRS Form 990, a copy of the SO's governing documents and a description of the distributions. The final regulations permit the SO to summarize activities so long as there is sufficient financial detail.
  3. Responsiveness Test for Functionally Integrated SO — The functionally integrated Type III supporting organization must be "responsive to the needs or demands of a supported organization." This is fulfilled through the relationship and the significant voice requirements. The supported organization must have a significant voice in the grants, the manner of making grants and the selection of grant recipients. The supporting organization may use various methods to demonstrate that it meets the responsiveness test.
  4. Integral Part Test — A functionally integrated Type III SO must satisfy an integral part test through significant involvement in the operations of a supported organization. The activities of the SO must "directly further the exempt purposes of one or more supported organizations." It is sufficient if substantially all of the activities support the organization. The officers of the parent-supported organization may appoint a majority of the officers or trustees of the supporting organization.
  5. Governmental Supported Organizations — A Type III SO may make grants to a governmental supported organization (GSO). The Type III SO must meet the requirement to "directly further the exempt purposes" of the GSO standard. There may be multiple GSOs if they are in the same geographic region or work closely together. The GSO must provide a letter to the SO describing the supported service or program.
  6. Integral Part Test for Non-Functionally Integrated SO — A non-functionally integrated (NFI) Type III is subject to a distribution requirement. The distributable amount may include reasonable and necessary administrative expenses related to exempt purpose, but not those incurred in the production of investment income. Fundraising expenses may be included only if they are used to raise funds directly for the supported organization. Fundraising expenses for the supporting organization are generally not included.

Filing Delay to October 7, 2024 For U.S. Taxpayers in Israel

In IR-2023-188, the Internal Revenue Service (IRS) announced tax relief for individuals who were affected by the October 7 attack in the State of Israel. The IRS determined that a number of individuals would be unable to meet tax-filing or tax-payment obligations. As a result, the IRS has granted limited relief.

Most tax-filing and payment deadlines from the period of October 7, 2023, through October 7, 2024, will be postponed. Therefore, individuals will have until October 7, 2024, to file. Some payments that are due during that period will also be deferred to October 7, 2024.

Individuals with an extension on their 2022 tax returns were required to file before October 16, 2023. The payments were due on April 18, 2023, and are not eligible for relief, but the extended filing date is delayed until October 7, 2024.

Some calendar year corporations also had a similar extension to Oct. 16, 2023. They may delay their filing, but not their tax payments.

There are individuals and businesses with payments due on March 15 and April 15, 2024. These taxpayers may delay both their filing and tax payments. Quarterly income tax payments due during the postponement period are also delayed.

The delay in filing or payments applies to any individual required to file a U.S. tax return who resides in Israel, the West Bank or Gaza ("covered area"). It also applies if the tax preparer or CPA for the business or individual is located in the covered area. In addition, anyone who was a victim during the attack or a relief worker in the covered area may qualify for the delayed filing and payments.

Applicable Federal Rate of 5.6% for November -- Rev. Rul. 2023-20; 2023-45 IRB 1 (15 October 2023)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2023. The AFR under Sec. 7520 for the month of November is 5.6%. The rates for October of 5.4% or September of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."

Published October 20, 2023
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