Washington News

The Internal Revenue Service (IRS) reminds taxpayers that the 2025 filing season is rapidly approaching. The IRS is attempting to provide improved taxpayer services. One of the primary ways for taxpayers to benefit is to sign up for an IRS Online Account.

There is an IRS Get Ready page on IRS.gov. It has many practical tips and resources for taxpayers.

1. IRS Online Account — You may create an Online Account and enjoy multiple benefits. With the Online Account, you can review your most recent tax return and adjusted gross income. You can obtain an Identity Protection PIN or sign a power of attorney for your tax preparer. The Online Account allows you to select your language preference and to receive up to 200 various IRS electronic notices. You can review and cancel payments and set up a payment plan.
2. Identity Protection Personal Identification Number (IP PIN) — An IP PIN is a six–digit number that protects you from having your identity stolen and prevents the filing of a federal tax return. This increases your personal and financial information safety. A new feature is that the IRS will accept a return with an already claimed dependent if you have a valid IP PIN. This will allow the IRS to accelerate the issuance of your tax refund.
3. Quarterly Estimated Payments — Some taxpayers have non-wage income and must make estimated payments. There is a Tax Withholding Estimator on IRS.gov that may help you calculate the amount of your estimated payment. The last quarterly estimated payment for 2024 is due on January 15, 2025.
4. 1099-K Reporting — If you received over $5,000 in payments for goods or services through an online marketplace, you can anticipate receiving IRS Form 1099-K in January 2025. While income from part-time work, side jobs or sale of goods and services is taxable, taxpayers who exceed the $5,000 limit may receive Form 1099-K. The IRS reminds taxpayers that they are taxable on all income even if they did not receive this form.
5. Digital Asset Taxes — Many taxpayers own or trade Bitcoin or other digital assets. The income from virtual currencies, cryptocurrencies, stablecoins or non–fungible tokens (NFTs) must be reported. Taxpayers should keep records about the purchase, sale or exchange of digital assets. The 2024 federal tax return will ask taxpayers to answer “Yes” or “No” whether they have received a payment for services, sold, exchanged or otherwise disposed of a digital asset. If the taxpayer checks the "Yes" box, he or she must report all income related to the digital transaction.

The IRS often takes less than 21 days after it receives your tax return to issue a refund. An exception exists for returns that claim the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC). Returns claiming the EITC or ACTC are blocked from refunds until the middle of February.

You should gather your tax information and have a good record-keeping system. Your records generally are collected by the end of January. They could include Forms W-2, Forms 1099, Form 1099-K from third-party payment vendors, Form 1099-NEC for nonemployee compensation, Form 1099-MISC for miscellaneous income and Form 1099-INT for interest income.

Filing electronically and selecting direct deposit is both fast and safe. An estimated 70% of taxpayers will be qualified to use the complementary filing system that is called IRS Free File. All taxpayers can use the IRS Free File Fillable Forms. The IRS has added another 12 states where taxpayers with fairly simple tax returns can use the Direct File program. Older adults and military members also may benefit from the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs.

GAO Report on Direct File

The United States Government Accountability Office (GAO) was tasked to complete a thorough analysis of the 2024 Direct File program.

In 2024, the IRS implemented a government provided software program called Direct File. Direct File was a friendly system with interview-style questions, which was limited to basic tax returns. Over 140,000 taxpayers were able to use Direct File. Users reported Direct File was easier than their previous tax filing experience.

The GAO report indicated that 85% of the direct filers were single and 24% had income under the poverty guidelines. Over 98% reported they had wage income. The median taxpayer age was 33 years old, and the average adjusted gross income (AGI) of filers was $44,000. Only 8% of Direct Filers had dependents.

The GAO study was commissioned to identify lessons learned from Direct File and make the program more efficient. The IRS reported it has recently created a Direct File Office to manage improvements.

An additional 12 states will make Direct File available in 2025. The IRS initially created Direct File for states with no state income tax. However, many of the new states have a state solution for an online income tax return.

The GAO report indicated the IRS is behind schedule in training customer service representatives for the upcoming tax filing period. There is also a significant challenge for the IRS in developing state income tax solutions.

Many foreign revenue agencies offer a direct filing program. However, they increase the participation rate through prepopulating tax returns with wage and other income. The IRS is studying the use of prepopulation of taxpayer information but is still in the early planning stages for that effort.

Editor's Note: Direct File will expand substantially this year. It remains a significant project to offer a tax program solution for more complex tax returns and to provide all state tax returns. The new Congress also has expressed concern about the Direct File program and there may be reductions in funding available for the Direct File program.

Confusion on Conservation Easement Regulations

The Land Trust Alliance (LTA) recently sent a letter to IRS Commissioner Danny Werfel raising concerns about the final regulations on syndicated conservation easements (89 FR 81341). LTA noted that the final regulations published on October 8, 2024, were a step forward, but expressed concerns that the regulations could impact "legitimate donors and donees."

LTA was a strong supporter of the Charitable Conservation Easement Program Integrity Act. The final regulations are designed to implement the provisions of that act. A major provision within the act is a limit to the charitable deduction of 2.5 times the basis for syndicated conservation partnership easements.

The land trust community has had great success in working with landowners to preserve land through conservation easements. The federal charitable conservation easement deduction has been "incredibly successful in fostering private land conservation."

While the final regulations are excellent for opposing abusive tax shelters, but may have an unexpected impact on donors. LTA notes, "We are concerned that certain provisions of the final regulations unduly burden well-intentioned, legitimate donors and donees, including our member land trusts."

LTA requested clarification from the IRA regarding the following:

1. Nonprofits as Material Advisors — There is no general exemption for donees who could be classified as a material advisor. Many land trusts often sign IRS Form 8283 and send donors a contemporaneous written acknowledgment (CWA) for their gift. These actions do not create material advisor status for the nonprofit. However, there are frequent actions that may exceed the $10,000 threshold amount that may characterize the gift as a listed transaction. For instance, the land trust often spends funds to create the basic baseline documentation for the donor. There is substantial staff time expended to draft, negotiate and record a conservation easement and the reimbursement for these efforts could cause the land trust to exceed the $10,000 threshold. It would be helpful through sub-regulatory guidance if the IRS would clarify that preparing baseline documentation falls within the safe harbor provision of "acting solely in its capacity as a qualified organization."
2. Inherited and Gifted Basis — The final regulations use the term "investment" in multiple provisions. However, it does not clarify whether this term applies to family partnerships that have held land for a long period of time. Many family partnerships include land that was gifted by a parent to children as beneficiaries and the cost basis of the parent carries through. For example, LTA offers a hypothetical of a father who owned property for 30 years and transferred it to the family partnership. If there were a conservation easement placed on that property, the charitable deduction is likely more than 2.5 times the basis. While this may not specifically be included as a listed transaction, the family partnership documentation could come within the definition of "promotional materials.” Therefore, advisors may be uncertain whether or not the conservation easement constitutes a listed transaction. LTA requests that the IRS issue sub-regulatory guidance that creates a clear exception for inherited or gifted property with low basis.

Finally, LTA emphasizes that these two changes would minimize the requirement of the IRS to deal with "false positives” under the regulations.

Applicable Federal Rate of 5.2% for January: Rev. Rul. 2025-1; 2025-3 IRB 1 (16 December 2024)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2025. The AFR under Sec. 7520 for the month of January is 5.2%. The rates for December of 5.0% or November of 4.4% 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”