On August 27, the Internal Revenue Service (IRS) reminded taxpayers to use this end-of-summer opportunity to review their withholdings or tax payments. The IRS recognizes that most taxpayers receive a refund during the filing season. However, some taxpayers unexpectedly end up owing taxes. The individuals who owe taxes are frequently gig economy workers, individuals with a "side hustle" or anyone who earns income but does not pay withholding.

The IRS suggests that taxpayers go to IRS.gov and use the Tax Withholding Estimator to calculate what amounts should be paid during the year. The IRS also offered the following tips:

1. Tax Refunds — The federal tax system is designed to encourage payments as income is received. If you earn wages, your taxes will be withheld from your paycheck by an employer. If you are a gig economy worker or have untaxed income, you should also make quarterly estimated tax payments to avoid a penalty when you file. Two thirds of taxpayers receive a refund each year. The average refund last year was approximately $2,900.
2. Unexpected Tax Bills — Unfortunately, some taxpayers have an unexpected tax bill and must pay a substantial tax penalty. Many taxpayers pay several hundred dollars as a penalty amount. This happens more frequently for self–employed individuals, gig economy workers or those with more than one job.
3. Tax Withholding Estimator — The handy tax estimator tool on IRS.gov will help you calculate the amount of tax you are likely to pay. You will need pay stubs for all your jobs and other information for side jobs, self-employment income, investment income and a copy of your 2023 tax year return. With the Tax Withholding Estimator, you can determine the federal income tax due, see how a change in your take-home pay would affect withholding and select the best withholding amount. If you need to adjust your withholding, you will need to contact your employer and update your IRS Form W-4 with the new amount.

Finally, the IRS reminds taxpayers to check their withholding if there are five circumstances that apply. These changes are if the taxpayer has a new job or other employment that produces income, has received a substantial bonus or an increase in income, gets married, has a child or adopts a child or purchases a home. With any of these changes, a taxpayer should update their tax withholding.

Education Assistance For Employees

In IR-2024-227 the Internal Revenue Service (IRS) reminded employers that there is an additional component for educational assistance programs that is scheduled to expire on December 31, 2025.

Many employers offer educational assistance programs. The programs usually pay for books, equipment, supplies, fees, tuition and other qualified educational expenses. The Consolidated Appropriations Act of 2020 expanded Section 127 to allow an additional benefit for employees. The employer is permitted to repay up to $5,250 each year toward an employee's student loans. Any amount over that limit would be taxable income.

According to an educational survey, the average federal student loan debt in America is $37,717. This is a substantial obligation and may require payments for many years by younger workers. According to a 2022 employee benefits survey, Generation X employees with student debt indicated that a student loan repayment assistance program would be important in encouraging them to remain with an employer. Millennials had a similar opinion that a student loan payment program would be a great employment benefit.

Not all student loans are qualified. To be eligible for the assistance, federal law requires that the loan was for the employee, a spouse or a dependent and must be paid within a reasonable time. The loan must be for the education of a student who was enrolled at least half-time in a degree-seeking program.

There are three specific requirements for an employer to consider with a student loan repayment program.

1. Annual Allowance for Repayments — Employers will need to determine the amount. While the maximum is $5,250, many employers have an annual cap that is below this amount. Some employers make a monthly payment, while many employers set a specific amount per year. For example, Google will match student loan payments up to $2,500 per year per employee.
2. Who Is Eligible for Loan Repayments? — The employer must determine who is eligible. Many employers will offer the benefit only to full-time employees or employees that have a specific level of experience with the company.
3. IRS Guidelines and Requirements — The employer will want to ensure that the loan repayment program is qualified. To be qualified, it may not favor highly compensated employees or provide more than 5% of annual benefits to individuals who own greater than 5% of the company. It also cannot offer a cash alternative or a different taxable benefit in place of the assistance and must give reasonable notice to all eligible employees.

Editor’s Note: While the student loan payment benefit is scheduled to terminate at the end of 2025, many of these types of benefits may be extended by future legislation. With the number of tax provisions scheduled to terminate at the end of 2025, it is very likely that there will be major tax legislation next year.

Week Eight of "Protect Your Client; Protect Yourself”

On August 27, 2024, the Internal Revenue Service (IRS) and the Security Summit concluded a summer awareness campaign. In the final installment of the "Protect Your Clients; Protect Yourself" series, the IRS strongly encouraged tax professionals to use best practices to protect client information.

IRS Commissioner Danny Werfel stated, "Tax professionals remain a tempting target for identity thieves and cybercriminals. They face countless attacks from those hoping to harvest valuable personal and financial information that can be used to file an authentic-looking tax return and slip through the tax system’s defenses. By taking some basic steps, tax professionals at firms both large and small can protect their clients and protect themselves from these relentless security threats."

The IRS acknowledges that the scam artists have steadily become more sophisticated. There are organized groups who have diligently studied the psychology of tax professionals and the most effective methods for gaining entry to their computer systems. The organized scammers have been successful with thousands of victims and tax professionals must be aware of the skill and expertise of these fraudsters.

1. Remain on the Lookout — Many of the strategies are now familiar to tax professionals. The fake "new client" scheme continues to be quite effective. After a series of texts or emails to build a relationship, the fraudster sends an email with a link to a site that claims to provide the tax professional with important client information. However, the site will instead collect information on the tax professional or may load malware onto the tax professional’s computer. Phishing and other email scams also continue to be quite effective. The phishing emails deceive the tax professional and allow access to client passwords, bank account numbers, credit card numbers or Social Security numbers.
2. Scam Warning Signs — Tax professionals must know the obvious signs of data theft. If clients report that they have an IRS online account that was created without their consent or receive a tax transcript that was not ordered, a fraudster is likely involved. Some fraudsters who gain access to Social Security numbers will file the client tax return as soon as possible. Then, a return filed later by the tax professional will be rejected. Other technical problems to be aware of include slowdowns on computer networks, unexpected cursor movements or numbers that change without any keystrokes by the tax professional.
3. Security Tools — All tax professionals are reminded that they are required to have a Written Information Security Plan (WISP). The Summit Tax Professionals Working Group released an updated WISP template this summer. The general requirements are multi-factor authentication or an equivalent security method to ensure only your staff has access to client data. There are new Federal Trade Commission rules that require multi-factor authentication when a staff member is accessing your computer system. The multi-factor authentication is usually a six-digit number sequence sent to your cellphone.

Tax professionals are reminded to make certain that their staff are following the Security Six: anti-software, firewalls, backup software or services, encrypted drives, multi-factor authentication and virtual private networks. If your clients obtain an IRS Identity Protection PIN, they should be cautioned to share that only with their tax preparer. Tax professionals should be careful not to store any client IP PINs on their computer systems. The IRS reminds tax professionals that it will not call, email or text taxpayers or tax professionals to request an IP PIN. If you receive this request, it is from a fraudster.

Any security breaches should be reported to the IRS Stakeholder Liaison. With immediate reporting, the IRS is frequently able to block fraudulent returns filed with your client names. The IRS will also assist the tax professional in the recovery procedure.

The tax professional should also contact the appropriate state tax agency if fraud is suspected. In addition, it is important to understand the FTC data breach response requirements. A helpful document is IRS Publication 5293, Data Security Resource Guide for Tax Professionals.

Applicable Federal Rate of 4.8% for September: Rev. Rul. 2024-17; 2024-36 IRB 1 (15 August 2024)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2024. The AFR under Sec. 7520 for the month of September is 4.8%. The rates for August of 5.2% or July of 5.4% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% 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.”