Friday December 8, 2023
2024 EV Credits for Auto Purchases
On October 6, 2023, the Internal Revenue Service (IRS) announced it will permit automobile dealers who sell electric vehicles (EVs) to immediately provide the purchaser with a federal tax credit, as of January 1, 2024. The effect of the credit transfer from the taxpayer to the dealer will be a reduction in the cost of the vehicle.
The IRS allows a credit for a new EVs of up to $7,500 per vehicle. The credit for qualified vehicles is $3,750 for the vehicle if certain mineral requirements are met, and $3,750 for a qualified battery. The law permits the Secretary of the Treasury to enable the taxpayer to transfer the credit to a registered automobile dealer.
There are specific requirements that the dealer must meet in order to reduce the EV price by the credit amount. The dealer must disclose the suggested retail price by the manufacturer, the value of the credit and the fact that the price is reduced by the credit amount.
The dealer must be certain that the credit does not reduce any other benefits or incentives. If the taxpayer is below the required income amounts, the credit will not be included in his or her taxable income.
Taxpayers may qualify for the new EV credit as a couple filing a joint tax return with income under $300,000 or a single taxpayer with income under $150,000. The IRS is permitted to make advanced payments to qualified dealers for the credit amounts.
A dealer is defined as an individual who is qualified by a state agency to engage in the sale of automotive vehicles. The dealer should ensure that the taxpayer is qualified for the credit. If the taxpayer has income over $300,000 (couple filing a joint tax return) or $150,000 (single taxpayer), the tax credit will be recovered when the taxpayer files his or her tax return.
There is a credit for the lesser of $4,000 or 30% of the sale price for the first sale of a used vehicle that has a model year at least two years old. This used vehicle must have a sale price of $25,000 or less. A qualified buyer for the used EV credit may have income up to $150,000 filing jointly or $75,000 for a single taxpayer.
Editor’s Note: There are several vehicles that qualify for the full $7,500 credit in 2024. Some models include but are not limited to the 2024 Ford F-150 Lightning, Lincoln Aviator, Chevrolet Silverado, Blazer and Equinox, Chrysler Pacifica, Tesla Model 3 and Model Y and Cadillac Lyriq. There are also vehicles in which the battery will qualify for a reduced credit of $3,750. These include some models (not all) of Ford Mustang Mach-E, Jeep Grand Cherokee and Wrangler, Lincoln Corsair and Rivian R1S and R1T.
2021 Tax Gap Increases to $688 Billion
In IR-2023-187, the Internal Revenue Service (IRS) reported that the tax gap has steadily increased during the past five years. For 2021, the tax gap is estimated to be $688 billion.
IRS Commissioner Daniel Werfel stated, "This increase in the tax gap underscores the importance of increased IRS compliance efforts on key areas. With the help of Inflation Reduction Act funding, we are adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships and corporations. These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes and working to combat the tax gap.”
The gross tax gap includes the tax issues of nonfiling, underreporting and underpayment. The late payments for 2021 returns and IRS enforcement efforts are estimated to generate an additional $63 billion in taxes collected. The projected net tax gap of $625 billion.
America continues to have a reasonably high compliance level. Approximately 85% of taxpayers made the correct payments voluntarily and on time.
However, there are three major components to the gross tax gap. Those who did not file did not pay $77 billion in the 2021 tax year. Taxpayers who filed but understated their income failed to pay $542 billion. Finally, taxpayers who reported their income but did not pay their tax on time caused a loss of $68 billion.
The IRS emphasizes that the total tax collected in 2022 was $4.9 trillion. Tax compliance is consistently higher when there is third-party reporting of income. This reporting is done by employers, banks, financial institutions and other entities. Tax compliance also increases when wages are subject to withholding.
The tax gap of $688 billion may be divided into a shortfall in individual income taxes, corporate income taxes, employment taxes and estate tax.
The individual income tax had a nonfiling shortfall of $67 billion, the underreporting amount was $396 billion and the underpayment amount was $57 billion, for a total of $520 billion.
Corporations underreported their tax by $40 billion and there was a $5 billion underpayment, for a total shortfall of $45 billion. The corporate underreporting was approximately equally divided between large and small corporations.
The employment tax gap was $9 billion for nonfiling, $105 billion for underreporting and $4 billion for underpayment, for a total of $118 billion. The underreporting included the failure to pay self-employment tax of $68 billion, uncollected FICA tax of $36 billion and uncollected FUTA of $1 billion.
The estate tax shortfall was $2 billion for non-filers and $2 billion for underpayment. The total estate tax shortfall was $4 billion.
The tax gap has grown substantially over the past decade. The tax gap was $438 billion from 2011 to 2013, $496 billion from 2014 to 2016, $540 billion from 2017 to 2019, $601 billion in 2020 and $688 billion in 2021.
Editor's Note: With the substantial reported tax gap, the IRS has announced a new program to audit 1,600 millionaires with tax debts of $250,000 or more. These include individuals involved in hedge funds, large law firms and partnerships. In a testimony before Congress, former IRS Commissioner, Charles Rettig, stated the tax gap could be as much as $1 trillion if all cryptocurrency non-payments were included.
Tax Code Too Complex for Direct eFile
In an article by the Tax Foundation, there were multiple concerns expressed about the IRS plan to create a Direct eFile pilot program for the 2024 tax-filing season. In the view of the Tax Foundation, and in reference to the direct file program, the current U.S. tax code is too complicated for it to work.
The IRS estimates a typical taxpayer spends 13 hours each year completing his or her return. The average cost is $250 per taxpayer, for a total of $339 billion in annual compliance costs. Several Members of Congress have suggested that the IRS should allow prefilled tax returns similar to those available in many other countries.
There are two basic systems for prefilled returns. There is an exact withholding system (EWS) or a tax agency reconciliation system (TARS). With the exact withholding system, the government obtains information from the employer and attempts to withhold the amount of tax that is due over the course of the year. With TARS, the government must receive information from the employer, the taxpayer's bank, the taxpayer's financial institution and other entities in order to prepare the return for the taxpayer. With both methods, the taxpayer reviews the return for accuracy and then pays the applicable tax or receives a refund.
The IRS estimates the annual cost to operate Direct eFile would be $64 million to $249 million each year. The majority of this cost would be for customer support. The Tax Foundation noted the IRS "currently struggles to do well" in this area.
The IRS Electronic Tax Administration Advisory Committee (ETAAC) suggests "the IRS and Congress evaluate making improvements in the communication, marketing, and accessibility of existing free tax filing programs before investing in the development and implementation of an IRS Direct eFile platform." The ETAAC observes that 104 million taxpayers were eligible for the Free File program, but only 3 million used the system in 2017.
The Tax Foundation explains multiple reasons why individuals may be reluctant to use prefilled tax returns. Because the IRS may have limited taxpayer data, many individuals may have tax overpayments. In addition, providing the IRS with massive information from banks, financial service companies and other entities may increase the taxpayer’s privacy risk. Finally, it would be very difficult to prepare a correct Direct eFile return due to the complexity of the current tax code.
The IRS has previously created the "IRS Substitute for Return" program and an experiment conducted by an Enrolled Agent attempted to compare the results of an IRS return with typical taxpayer data in a professional-prepared return. The experiment results indicated the tax preparer would have a better result for the taxpayer. The problem is that there are multiple deductions and credits passed by Congress in the areas of education, healthcare, housing, childcare, energy and many other areas. The sheer complexity of these deductions and credits makes it difficult for the IRS to assess the correct amount.
The Tax Foundation recognizes that there are over 30 countries across the world that have prefilled tax returns. It notes that in Estonia there is a flat 20% individual income tax. Because there is a very simplified system, the taxpayer receives a prefilled return and can review it in three minutes. If the U.S. tax code were simplified, it may be possible to have a Direct eFile system similar to that of Estonia.
The Tax Foundation concludes, "It is hard to imagine the IRS Direct eFile Program operating seamlessly with the complexity of the current U.S. tax system."
Applicable Federal Rate of 5.4% for October -- Rev. Rul. 2023-18; 2023-40 IRB 1 (15 September 2023)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2023. The AFR under Sec. 7520 for the month of October is 5.4%. The rates for September of 5.0% or August 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 13, 2023
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