With tax return backlog and millions of taxpayers waiting for refunds, the Internal Revenue Service (IRS) announced a plan to hire 5,000 new staff. This poses a challenge due to the stiff hiring competition and a tight job market.
IRS Commissioner Charles Rettig stated, "We expect to fill that 5,000 shortly. We are having quite a bit of success in our job fairs."
The IRS has conducted job fairs in many cities. IRS managers have been given permission to make immediate job offers to people who interview for positions. The on–the–spot job offers have been made to approximately 90% of interviewees. The IRS has made over 2,500 conditional job offers to date. These jobs generally pay from the low to mid $20,000s to the high $40,000s range. The IRS hopes to hire 5,000 individuals in 2022 and 5,000 additional staff in 2023.
Commissioner Rettig stated that the normal hiring process can take several months. However, with the job fairs and new on–the–spot job offers, a new staff member may be at the IRS within 30 to 45 days.
This flexibility is particularly important because the IRS has a pressing need to process returns. By late March, there still were 7.2 million unprocessed paper tax returns. Unfortunately, 2.7 million of the unprocessed returns had been received a year ago. In addition, there will be an avalanche of new returns by the April 18, 2022 filing date.
As of April 1, the IRS had processed 89 million tax returns and issued 63 million refunds. The refunds totaled more than $200 billion. The average refund is $3,263. This large refund is an important benefit for many individuals.
Some businesses with unprocessed tax returns have had problems with financing. These businesses are not able to obtain loans because they cannot provide tax return information to their bank.
New IRS staff will help process returns and provide phone support. The IRS is continuing to struggle this year with a shortfall in customer service staff to provide prompt phone answers to taxpayer questions.
IRS Commissioner Rettig concluded, "Our efforts are working. We are trending in the right direction. During the summer, you will start seeing the impact of this."
The new hires will not be trained in time to solve taxpayer problems by April 18, 2022. However, this is a positive step that should enable the IRS to provide better taxpayer support in the future. Some taxpayers who cannot receive IRS support by April 18 will need to file an extension until October 15, 2022.
Business League Medical and Retirement Program Produces UBTI
In PMTA 2022–004, an IRS program manager technical assistance note changed the basic provisions of a 2012 private letter ruling and classified the medical and retirement program of a business league as unrelated business taxable income (UBTI).
In PLR 201246039, the IRS issued a favorable ruling to a Section 501(c)(6) Business League that provided pension and health benefits to members. The PLR indicated that providing these benefits did not create private inurement and did not put at risk its exempt status. The ruling did not discuss UBTI.
The PMTA examined two issues. Do pension and health benefits for members further the business purpose of the organization and will offering these benefits create UBTI under Section 512? The PMTA concluded that pension and health benefits were not part of the business purpose and therefore the unrelated activity created UBTI.
Section 501(c)(6) grants exemption to business leagues for the purpose of improving business conditions of one or more lines of business. Section 511 taxes unrelated business taxable income from an unrelated trade or business that is regularly carried on. Reg. 1.501(c)(6)–1 states that a business league must be involved in activities that are "directed towards the improvement of business conditions in one or more lines of business."
In ABA Retirement Funds v. United States
, 759 F.3d 718 (7th Cir. 2014), aff'g 2013-1 U.S. Dist. LEXIS 60086 (N.D. Ill. 2013) the Seventh Circuit determined that the actions of ABA in offering retirement benefits to attorneys created UBTI. The Court stated, "ABA Retirement fails every necessary condition for business league status. Because the district court's opinion is thorough, we focus on just two of the reasons why ABA Retirement is not a business league: 1) its activities are not directed to the improvement of business conditions for the legal field generally; and 2) it engages in a business ordinarily conducted for profit."
Similar to ABA Retirement, the Business League does not engage in an activity that improves a line of business. Rather, it provides a service to specific members and their families.
UBTI is created when a trade or business regularly carries on actions as defined in Section 512(a)(1) that are not substantially related to its exempt purpose. Reg.1.513–1(d)(1).
Furthermore, the provision of retirement or medical benefits is a business ordinarily conducted for profit. Therefore, these are commercial services provided to the individual members and constitute an unrelated trade or business. Because the unrelated trade or business is regularly carried on, "these activities are generally subject to tax under IRC 511, because they constitute unrelated trade or business under IRC 512 and are not substantially related within the meaning of IRC 513."
Fiscal Year 2023 Proposed Tax Increases
The White House recently published the Fiscal Year 2023 proposed budget. The revenue proposals are designed to create a fund that will be "deficit neutral to be conservative for purposes of the budget holdings." In order to produce a deficit neutral result, there are multiple proposed tax increases.
- High–Income Minimum Tax — There is a new proposed 20% minimum tax on high–income individuals with net wealth over $100 million. The tax is projected to raise $360 billion over 10 years.
- Corporate Tax Rate — The top corporate income tax rate would be changed from 21% to 28%.
- High Earner Tax Rate — The top marginal income tax rate is increased from 37% to 39.6% and the brackets would be lowered. The top rate applies to $450,000 of income for married couples filing jointly, $425,000 for heads of household and $400,000 for single persons.
- High–Income Capital Gains — Individuals with earnings over $1 million would pay ordinary income tax rates on capital gains.
- Capital Gain Recognized at Death — The appreciated property of a decedent would cause recognition of gain in the final income tax return filed by the executor.
- Grantor Trusts — The estate and gift tax rules for grantor trusts would be modified to generally require inclusion in the estate at fair market value.
- Generation Skipping Exemption — The GSTT exemption would be generally limited to two generations.
- Carried Profits — The interests of active partners in partnerships or LLCs taxed as partnerships would be taxed as ordinary income rather than capital gain.
- Syndicated Conservation Easement Partnerships — The charitable deduction for a conservation easement would be limited to 2½ times the investment of the partner.
- Donor Advised Fund Distributions to Private Foundations — The required minimum payout from a private foundation would not be qualified if it were transferred to a donor advised fund rather than outright to a qualified charitable organization.
There is a huge difference between the revenue proposals by the White House and the actual tax legislation that will be drafted by the House Ways and Means Committee. The actual legislation frequently is much less comprehensive than the proposals. This is particularly true in an election year like 2022. It is extremely rare to pass substantial tax increases in election years. However, there are some proposals in the Fiscal Year 2023 budget that may eventually become law.
Applicable Federal Rate of 2.2% for April -- Rev. Rul. 2022-8; 2022-14 IRB 1 (16 Mar 2022)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2022. The AFR under Section 7520 for the month of April is 2.2%. The rates for March of 2.0% or February of 1.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.