Washington News

On May 1, 2024, the Internal Revenue Service (IRS) reminded taxpayers that soon it will be prime season for natural disasters. The National Wildfire Awareness Month is May and National Hurricane Preparedness Week starts May 5, 2024.

All individuals should use this time before the natural disaster season to protect your important tax and financial information. While major disasters normally occur during the summer months, the Federal Emergency Management Agency (FEMA) has already issued 25 Federal disaster declarations for winter storms, flooding, tornadoes, wildfires and landslides in 2024.

There are several helpful tips to protect your personal financial and tax information. Additional information is also available on IRS.gov or FEMA.gov.

1. Protect Important Documents — Your original documents may include tax returns, Social Security cards, marriage certificates, birth certificates and deeds to real property. These should be secured in a waterproof and fireproof container in a safe location. You also may want to make copies of important documents and protect them in a safe deposit box or send them to a trusted person in a different secure location.
2. Record of Valuables — With the ease of taking pictures or videos with the camera on your cell phone, you should have a record of your high-value items. These photos or videos will be important if you lose the items in a natural disaster. Your insurance company may be willing to pay a substantial value if you have a good record. Some insurance policies require items with high values to be specifically named in the policy prior to an incident. The IRS also offers Publication 584, Casualty, Disaster, and Theft Loss Workbook, which can be very helpful to you if you have a loss due to a natural disaster.
3. Rebuild Your Records — After any disaster, you may have a challenge in reconstructing or rebuilding your records. These records could be essential for receiving a federal grant or an insurance company payment. If you can accurately estimate your loss through records, the insurance adjuster will be able to justify the payments. The IRS has a Reconstructing Records webpage on IRS.gov that may be helpful.
4. Employer Fiduciary Bond — If you are an employer, you may have a problem with a payroll service provider. Your payroll service provider is obligated to make timely federal tax payments. There should be a fiduciary bond that protects you as an employer if your payroll service provider is in a natural disaster and defaults.
5. IRS Tax Relief — If FEMA declares a federal disaster zone, the IRS frequently postpones tax filing and payment deadlines for individuals and businesses located in that geographic area. If you are within the disaster area, you will not need to contact the IRS. The IRS automatically identifies taxpayers with a business or personal address in the covered disaster area. If you reside outside the covered disaster area but have been impacted by the disaster, you may call 866-562-5227 to determine whether you qualify for relief.

Editor's Note: The summer months are a prime time for hurricanes, tornadoes and wildfires. This IRS guide is helpful to make sure you are prepared for a disaster. Many natural disasters occur without warning, so your preparations now may be essential for receiving a prompt government grant or insurance payment.

Top Small Business Scams

During National Small Business Week, the Internal Revenue Service (IRS) encouraged all business owners to safeguard their data. It is important to protect financial, personal and employee information so that cybercriminals cannot victimize you or your employees.

The risk of cybercriminal harm was highlighted recently when a large medical services company CEO announced it paid a ransom of $22 million to hackers and up to 100 million Americans may have suffered a breach of their medical data records. While most small businesses are less likely to be targeted, the fraudsters still may attempt to obtain your client information. The stolen information can be used to file a phony business tax return, empty your business bank account or create a stolen identity.

Spearfishing scams are specifically targeting small businesses. Identity thieves believe that small businesses are easier targets than large entities.

IRS Commissioner Danny Werfel noted, "Each year, the IRS sees thousands of attempts trying to attack small business owners and other taxpayers. Those who are victimized by these schemes can see serious financial consequences. Cybercriminals are relentless, and anyone can be a target. The best way business owners and individuals can protect themselves is to stay well informed on the latest scams, continuously protect their computers and smart phones and install data security at home and in the business to protect sensitive information."

The fraudster may attempt to obtain your customers’ credit card or payment information. The credit cards will be used for fraudulent charges. While the bank or financial services company’s fraud department aggressively tries to protect customers, this can damage your business reputation.

If the fraudster can obtain data records of your employees, this information may be used for identity theft and fraud. Hackers may attempt to obtain the financial information necessary to file fraudulent tax returns.

A frequent tactic is the "New Client" scam. The fraudster emails a business owner and claims to be a potential client. After a series of emails, the fraudster sends an email with an attachment that loads malware on the business owner's computer.

There are several red flags to watch out for to avoid email scams. Quite often, the emails are written using unusual word choices or poor grammar. They may have suspicious requests for information. Finally, because you trust your regular customers, they will frequently mimic current customer emails. This strategy has tricked many business owners into clicking on links and downloading malware.

There are several important strategies to reduce your risk. These are best practices published by the Federal Trade Commission (FTC).

1. Update Software — You should be aware that older versions of software are much more likely to have security issues. You may benefit by updating your apps, web browsers and computer operating systems. Most software can be set up to update automatically.
2. Secure Files — You should back up your important files on an external hard drive or in the cloud. You can make digital copies of paper files and back them up in a secure manner.
3. Device Passwords — All of your laptops, tablets, computers and smartphones should have a password in order to log in to the device. You should not leave the device unattended in public places, as doing so may increase the risk of theft or unauthorized access to personal information stored on it.
4. Encryption — If your devices have sensitive personal data, you should have an encryption method on your laptop or desktop computer.
5. Multi-Factor Authentication — You may take the additional security step to create multi-factor authentication. The most common authentication is a six-digit code sent to your smartphone to log on to your accounts.

If you have a business wireless router, make sure you do not use the default name and password. You should create WPA2 or WPA3 encryption and ensure it is turned on.

Training your business staff is an important protection measure. All staff members should use passwords of 12 or more characters. A good password includes numbers, symbols and both capital and lowercase letters. Do not share your passwords in any unsecure system, such as a smartphone or regular email. Your staff should be trained in data security risks. If some employees do not follow best practices, you may need to restrict their network access to certain areas.

If your business is the victim of identity theft, you should file IRS Form 14039-B, Business Identity Theft Affidavit. Be on the lookout for red flags that indicate you may have been hacked. These include a notice your electronically filed return has been rejected because there previously was a return for your business, a notice there is a tax return pending you have not filed or there are IRS Forms W-2 filed you do not recognize.

Any spearphishing or other scams can be reported to [email protected]. If you wish to mail your information, you should complete IRS Form 14242 - Report Suspected Abusive Tax Promotions or Preparers and mail that form and other supporting information to Internal Revenue Service Lead Development Center, Stop MS5040, 24000 Avila Road, Laguna Niguel, California 92677-3405.

Direct File Used By 140,000 Taxpayers

On April 26, 2024, the Internal Revenue Service announced the Direct File pilot program was closed. Over 140,000 taxpayers chose to file using the new service.

Direct File was initially launched in mid-March for a limited number of qualifying individuals. It was subsequently opened up to the general public in April. During the final weeks of the tax season, there were over 5,000 Direct File returns per day.

Most taxpayers were from California (33,328), Texas (29,099), Florida (20,840), New York (14,144) and Washington (13,954). Direct File taxpayers received $90 million in tax refunds and reported $35 million in tax due.

There was widespread interest in the Direct File option. Millions of people visited the Direct File website to learn about the system. Over 3.3 million taxpayers checked their eligibility and 140,803 submitted returns that the IRS accepted. The IRS indicated the usage "far exceeded” the expected number of taxpayers.

IRS Commissioner Danny Werfel stated, "From the very beginning of the Direct File pilot, we wanted to test new ways to give taxpayers an easy, accurate and free way to file their taxes online directly with the IRS. We saw a strong response from the pilot, and Direct File’s users generally found it fast and easy to use."

The Direct File pilot goal was to provide a capable product from the start that would improve the tax filing experience.

A General Services Administration Touchpoints survey of 11,000 Direct File users discovered that 90% of the respondents ranked Direct File as "Excellent" or "Above Average."

Commissioner Werfel continued, "Direct File provided important lessons for us. A team of experts from across government worked together — alongside private sector partners with critical expertise — to build and test Direct File. This team designed and built Direct File from the beginning with taxpayers’ help, and we worked with taxpayers to refine the system throughout the pilot."

The IRS reports that the Direct File program cost just under $25 million. However, the IRS worked with the U.S. Digital Service (USDS) to develop the software. The USDS cost was not included in the IRS estimates.

The IRS plan was to start small and build a very solid system. The pilot was quite limited because it allowed only IRS W-2 wage income, the Earned Income Tax Credit, the Child Tax Credit, the Credit for Other Dependents, the standard deduction and deductions for educator expenses or student loan interest. Direct File was available in 12 states.

Editor's Note: The IRS is conducting a review of the Direct File system. Based on the review of the system, the IRS will announce future plans. The IRS considers Direct File a success. However, it is still a long way away from full federal tax return capability and the state tax return capabilities of commercial software.

Applicable Federal Rate of 5.4% for May; 2024-19 IRB 1 (16 April 2024)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2024. The AFR under Sec. 7520 for the month of May is 5.4%. The rates for April of 5.2% or March 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 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.”