Here are some key changes to the tax code for 2023. Use this information to help understand your 2023 tax obligation and how it may change from last year's return.
If you receive a 1099-K, you are considered to be a business. The revenue on the 1099-K must be reported on your tax return, but you also can include any related business expenses to reduce the reportable income, so you may need to include a Schedule C with your 2023 Form 1040.
Tax Benefits of a Donor Advised Fund
A donor advised fund (DAF) uses a third party entity to manage the charitable contributions of individuals, families, and organizations. You deduct the contributions on your tax return in the year you provide the funds to the DAF, but you can then donate to qualified charities from the DAF over any number of years. Here are some benefits of using a DAF:
Bunch Deductions:
Figure what you normally donate to chari ties in a year, then multiply this number by two or more years. Make this entire contribution to the OAF in one year and plan on itemizing deductions in that year, then use the standard deduction in the other years.
Immediate Tax Deduction:
Funding your DAF in a year with higher income will have a bigger impact on your income taxes.
Donate Long-term Appreciated Assets:
By funding your DAF with long-term assets that have appreciated in value, you still get the tax benefit of not being taxed on the gain AND you receive the charitable deduction.
Your Fund will Continue to be Invested:
Any money that remains in the DAF will continue to be invested under your direction and can grow in value to help future donations! Remember that once donations are made to your DAF, the money cannot be retrieved. It must be used for qualified charities.
Hints To Audit Proof Your Tax Return:
Audit rates for individuals are at historic lows. Overall, the rate is down to a minuscule 0.9% for 2020. However, the Inflation Reduction Act, signed into law in 2022, gives the IRS more resources for auditing upper-income taxpayers. Knowing this, here are several tips to help make your tax return audit proof:
Assemble the required documentation before filing your return:
Not only does this avoid last-minute scrambling during an audit, contemporaneous records are often required by the IRS. For example, you must keep a detailed log for business-related driving in your vehicle and document monetary charitable contributions of $250 or more. Remember that it will be far easier to gather the records as they occur rather than scramble to collect the necessary documents after-the-fact.
Identify the focus points:
Don't wait for the IRS to send you a letter informing you that you've been chosen for an audit. Instead, conduct a self-audit of your tax return each year. Identify items that, if challenged, will require documentation. Consider obtaining transcripts from the IRS and compare them with your return to ensure they match. You might even wish to visit irs.gov and compare IRS statistics to your return to see if anything on your tax return might stick out.
When reviewing your projections for 2023, you may identify certain areas of your tax return that could raise a red flag with the IRS, such as high er-than-usual home office deductions or vacation home rental losses. For these deductions that the IRS may challenge, be sure to have proof to back up your claimed expenses. The key here is meeting the ordinary and necessary threshold for each expenditure.
If you've donated appreciated property to charity, you can generally deduct its current fair market value if you've owned the property longer than one year. But the IRS still requires independent appraisals by qualified professionals for property valued above $5,000.
Use a reputable appraiser for the type of property donated.
IRS Targets Foreign Accounts with Big Fines
Supreme Court ruling creates good AND bad news for taxpayers.
IRS is aggressively pursuing foreign reporting compliance, including the levying of fines and penalties even in situations where a taxpayer makes an inadvertent oversight.
In a recent case, the IRS assessed a $2.72 million penalty to Alexandru Bittner, a Romanian American immigrant and dual citizen who lived overseas. Bittner had no U.S. tax obligation but was unaware that even if not living in the U.S., he still needed to report all foreign accounts annually on a U.S. tax return.
But a recent U.S. Supreme Court ruling knocked this fine from $2.72 million to $50,000. Here's what happened.
Bittner was a dual citizen living abroad and was unaware of his U.S. reporting obligation because he had no U.S. income. When he realized he needed to file a report of foreign bank and financial accounts (FBAR) for tax years 2007 through 2011, Bittner reported only his largest foreign bank account to the IRS as part of his annual tax return filing. After hiring a new accountant in 2011, Bittner learned he should have reported ALL his foreign accounts to the IRS. He subsequently reported all the omitted accounts, 272 in total.
The law imposes a $10,000 fine for non-willful delinquency, which Bittner interpreted as $10,000 per report. Since there were 5 tax returns over 5 years with incomplete foreign account information, Bittner expected his fine to be $50,000.
The IRS, though, fined Bittner $10,000 PER ACCOUNT. The total was a staggering $2.72 million for an accidental oversight that was immediately fixed once discovered.
The U.S. Supreme Court ruled in favor of Bittner, stating that the law's intent was to assess a $10,000 fine per missing report.
Historically the IRS had regulatory procedures put in place that reduces the $10,000 fine to $500 for non-willful violations. But now a July 6, 2023, internal IRS memo instructs all field agents to delete the lower $500 fine and instead levy the $10,000 for all non-willful violations. The implication is that the IRS lost the case but sees the Supreme Court ruling as an opportunity to effectively penalize everyone to a higher degree for honest omissions.
File required reporting if you have foreign accounts! This is especially true for dual citizens that no longer live in the United States. It appears that the IRS will continue its aggressive enforcement not just for FBAR reporting, but for all foreign-related assets and income.
And despite this Supreme Court victory, most previous lower court rulings in FEAR-related matters have sided with the IRS.
So if you have any assets in a foreign country or have foreign bank accounts, be sure you are reporting these assets correctly and call immediately should you have any questions or concerns.