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2023 in Review and an Outlook on the Horizon for Tax-Exempt Entities

By:
Magdalena M. Czerniawski, CPA, MBA
Published Date:
Apr 1, 2024

As we enter a new year—an election year at that—many business tax incentives, including those affecting tax-exempt organizations, face potential elimination after 2025. As of this writing, Congress has introduced legislation to extend some of these incentives. Meanwhile, the popular Employee Retention Tax Credit (ERC) came under IRS fire in 2023 after a significant uptick in fraudulent claims by unscrupulous ERC “mills.” The following summarizes updates to the ERC along with other significant changes presented recently at the FAE’s Exempt Organization Conference.

ERC in the Crosshairs

The ERC is a fully refundable tax credit intended to encourage employers affected by economic disruption resulting from the recent pandemic. It is available to any nonprofit organization (other than governmental entities) whose operations were completely or partially shut down in 2020 and through the third quarter of 2021 due to a governmental order during quarters for which ERC was in effect.

However, a surge of questionable ERC claims made news in 2023 resulting from so-called ERC mills, or illegitimate, third-party ERC promoters who aggressively encourage businesses to file fraudulent and excessive claims. After issuing a series of warnings, the IRS took several actions to address the mounting problem.

Although business owners can still claim the tax credit in ERC in 2024 to benefit from increased cash flow, the deadline for filing claims for 2020 is April 15, 2025, and the deadline for 2021 claims is April 15, 2025. However, in January 2024, congressional leaders agreed on a bipartisan bill to terminate the ERC program early by accelerating these deadlines to Jan. 31, 2024. The bill has passed and under the new bill, ERC claims are prohibited after January 31, 2024, however, it could be revised to include a new deadline.

The IRS has taken action to crack down on ERC-related fraud as follows:

  1. March: ERC scams made the annual IRS Dirty Dozen list.

  2. July: After working with the DOJ to address rampant ERC fraud through its Criminal Investigation Division, the IRS initiated 252 investigations involving $2.8 billion of potential fraudulent claims.

  3. September: IRS announced an immediate moratorium on processing new claims to address increased fraud concerns, at least until the end of 2023. At the time, it had received more than 600,000 claims, all of which were submitted 90 days before the moratorium. Claims submitted before the moratorium continue to be processed, albeit at a slower pace due to more detailed compliance reviews.

  4. October: IRS announced the withdrawal process for Employee Retention Credit claims, which allows employers to rescind inaccurate claims if they have fallen prey to a scam or no longer believe their claims are legitimate. Withdrawn claims will be treated as if they were never filed, and the IRS will not impose penalties or interest. Employers must complete Form 15434  to apply.

    However, if an organization willfully filed a fraudulent ERC claim, it will not be exempt from criminal investigation and prosecution. The IRS will send a notification confirming whether the request was accepted or rejected. Keep in mind that tax returns and financial statements might need to be corrected to reflect the withdrawal.

  5. December: IRS launches Voluntary Disclosure Program to Repay Questionable ERC Credits to allow certain employers who received questionable ERC to repay them at a discounted rate. To qualify for this program, the employer must provide the IRS with the names, addresses and telephone numbers of any advisors or tax preparers who advised or assisted them with their claim and details about the services provided. Employers who already received the tax credits can repay money from erroneous claims at an 80% discounted rate. Note: The deadline for applications is March 22, 2024. Further qualifications and program details are in Announcement 2024.3.

The IRS has issued an ERC eligibility checklist to independently verify claims and recommends that organizations only work with trusted tax professionals rather than tax promoters. For more information, see updated  IRS ERC FAQs and tips on avoiding unscrupulous tax preparers.

Revised Form 8490 — Request for Misc Determination

In 2023, IRS greatly expanded Form 8940 and at the same time discontinued accepting certain other requests that now this form is used for. Form 8940 is filed to request determination from the IRS that is different from the original request for exemption by filing Forms 1023, 1024A or 1024. The 8940 Form must be filed for the following types of requests:

  • Advance approval of certain private foundation set-asides (Schedule A)
  • Advance approval of private foundation voter registration activities (Schedule B)
  • Advance approval of scholarship procedures described in Section 4945(g) for private foundations (Schedule C)
  • Exceptions from Form 990 filing requirements (Schedule D)
  • Advance determination that a potential grant or contribution is an unusual grant, excluded from certain public support calculations (Schedule E)
  • Change in or initial determination of Type of a Section 509(a)(3) supporting organization (Schedule F)
  • Reclassification of foundation status (Schedule G)
  • Termination of private foundation status under Section 507(b)(1)(B) (Schedule I)
  • Termination of private foundation status under IRC Section 507(B)(1)(B) (Schedule J)
  • Voluntary Termination of Section 501 (c)(3) recognition by a government
  • Canadian registered charities (Schedule K)

Please note: Form 8940 must be electronically filed effective April 2, 2023, since the grace period for paper filing expired. Taxpayers must include all required documentation that supports the request the organization is requesting about. Be sure to include the appropriate user fee where required and pay it via www.pay.gov.

1099 Updates

Organizations that receive payments via credit, debit or gift card from customers or clients will receive a new Form 1099-K from their payment processor or payment settlement entity, no matter how many payments they received or how much they were for. Payments include goods you sell, services provided and property you rent. All Form 1099-K forms should have arrived by Jan. 31 if you received payments for any of the following:

  • All payment cards transactions
  • In settlement of third-party payment network transactions above the minimum reporting thresholds as follows:

    • Returns for calendar years prior to 2023

      • Gross payments that exceed $20,000, and
      • More than 200 such transactions

The IRS plans a threshold of $5,000 for tax year 2024.

NFTs and Form 1099-DA

Nonfungible Tokens

The IRS issued Notice 2023-27 regarding the treatment of certain nonfungible tokens (NFT) as collectibles. An NFT is a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset. Ownership of an NFT may provide the holder a right with respect to a digital file that typically is separate from the NFT, such as digital images, digital music, digital trading cards or a digital sports moment. When an organization receives an NFT, it must issue an acknowledgement letter for a non-cash gift with a description but not the value of the asset received. A sale of an NFT is treated as a capital gain and should be reported as such on the tax return.

Form 1099-DA (digital assets) and 1099-S

Last August, the IRS issued proposed regulation to report the sales or exchange of digital assets that take place after Jan. 1, 2025. This will require brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset-hosted wallet providers to report the gross process on a newly developed Form 1099-DA and to provide payee statement to customers. In certain cases, brokers would also be required to include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, on these information returns and statements

Form 1099-S, Proceeds from Real Estate Transactions, will also report disposition of digital assets paid as consideration by real estate purchaser to acquire real estate in transactions that close on or after Jan. 1, 2025. The form will require the fair market value of digital assets paid to sellers.

1099 E-filing Requirement

Effective for tax year 2023, an organization that files 10 or more information returns must e-file Forms 1099 through the Information Return Intake System (IRIS) Taxpayer Portal using a transmitter control code (TCC). Be aware that it could take up to 45 days to process the TCC application. Filing due dates are Jan. 31 for the recipient and March 21 to the IRS. Form 8809 can be used to apply for a 30-day extension to submit Form 1099s and W-2s if your organization meets certain criteria. Be aware that noncompliance penalties are $310 per form.

New York State Attorney General Update and Reminders

Remember, Form Char500 must be filed electronically, and some questions have been updated especially around private foundations and Schedule B attachment requirements. Organizations must create an online account and fill out a checklist before they can file. PDF copies of Form 990 and audited financial statements can be attached. Electronic signatures are required, and payments may be made via credit card or e-check. The following links will be useful:

Charities registration | New York State Attorney General (ny.gov)

Charities annual filing (CHAR500) | New York State Attorney General (ny.gov)

In addition, it’s important to note a few details. First, the organization must go through a series of questions based on which it will be able to file under different registration categories, such as Article 7A, or EPTL, or both. Then, if the organization hired professional fundraiser or received government grants, those must be listed individually on the form. Unfortunately, the system doesn’t allow any type of import, so one must be careful to enter the information correctly. Lastly, the required attachments are important.  The filing will not be accepted without financial statement or copy of Form 990, excluding Schedule B.   

Magdalena M. Czerniawski, CPA, MBA, is the managing director at CBIZ Marks Paneth.

 

About CBIZ Marks Paneth

CBIZ, Inc. (NYSE: CBZ) is a national business consulting, tax and financial services provider that helps individuals, tax-exempt organizations and a wide range of publicly traded and privately held companies manage their financial, benefits and insurance needs. CBIZ works in close association with MHM (Mayer Hoffman McCann P.C.), a national, independent CPA firm that provides audit, review and attest services to middle-market and growth-oriented businesses. Together, CBIZ and MHM provide accounting, tax, financial advisory, risk, valuation, and advisory services across a diverse range of industry sectors, including commercial businesses, manufacturing, real estate, not-for-profits, high net worth, government, and private equity. CBIZ and MHM are members of Kreston Global, a worldwide network of independent accounting firms. In 2022, CBIZ Marks Paneth, a top not-for-profit provider in the New York Market, joined CBIZ.

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.