In a special series, the Internal Revenue Service (IRS) and its Security Partners have published several articles to assist tax preparers in helping their clients avoid identity theft.

IRS Commissioner Danny Werfel stated, "We continue to see instances where tax professionals have had their systems compromised, and they did not realize it for weeks or months. Identity thieves are creative, and they can find ways of quietly penetrating systems. There are important warning signs tax pros should watch out for that can help alert them more quickly to a security issue and speed is critical to protect clients and their businesses from a security incident."

These tax security tips are explained at Nationwide Tax Forums held in Orlando, Baltimore, Dallas and San Diego. These forums are rapidly filling up and the IRS expects to have a sold-out attendance at each one.

There are several warning signs that individuals and tax preparers should watch for to protect themselves from identity thieves.

1. Unexpected IRS Online Account - If you received notice that a taxpayer has created an IRS Online Account without his or her consent or that the IRS has disabled an existing taxpayer online account, there is a problem.
2. Surprise Tax Transcript - It is possible to request a tax transcript through your IRS account. However, a fraudster may have initiated that request for a tax transcript.
3. Incorrect IRS Balance Due - If the IRS sends a notice that states an incorrect balance due for a taxpayer, there is probably an incorrect return filed by a fraudster.
4. Unexpected Client Calls - The tax preparer may receive client calls that claim to respond to a request. However, the initial request to the client may have come from a fraudster and not the tax preparer.
5. Unexpected Refund - A taxpayer may receive a refund without filing a tax return.
6. Slow Computer Response - The fraudster may have uploaded malware that reduces the responsiveness of your computer. Because information is being sent by the computer to identity thieves, the computer network may slow down. In addition, a computer cursor may move on its own or data may be changed without actions by the tax preparer. Finally, the tax professional could be locked out of his or her computer network.
7. Duplicate Social Security Number - If the fraudster files a return using the taxpayer's Social Security Number, a later return filed by the tax preparer may be rejected.
8. Extra IRS Filing Receipts - A tax preparer may receive more acknowledgments from the IRS than returns filed.

Tax preparers should immediately notify the IRS Stakeholder Liaison if there is an attack. There also is a Federation of Tax Administrators with appropriate contacts for state tax agencies. It is important to be proactive to reduce any potential losses for clients.

Final Secure Act Regulations Retain Ten Year RMD Payments

On July 18, 2024, the Internal Revenue Service (IRS) issued both final and proposed regulations on the Secure Act. The final rules clarify many required minimum distribution (RMD) specifics for IRA owners and IRA beneficiaries.

Prior to 2020, most designated beneficiaries were able to stretch distributions over their life expectancy. After the Secure Act, the majority of beneficiaries were subject to distributions over a term of 10 years.

The final regulations uphold most requirements of the proposed regulations. Beneficiaries who receive distributions after an IRA owner has reached the required beginning date (RBD) must continue to follow the IRS "at least as rapidly" rule. As a result, there still is a requirement for annual distributions, starting in 2025.

The final regulations provided detailed definitions for required beginning date, the new eligible designated beneficiary status, the requirements if the IRA owner dies prior to the RBD or the actions if an owner passes away after the RBD.

1. Distributions to IRA Owners - The principal rule continues to be that distributions of the RMD will commence no later than April 1 of the year after the owner reaches the RBD. For individuals born on or after January 1, 1951, the RBD is age 73. Individuals born after January 1, 1960, will have an RBD age of 75. Distributions for most IRA owners will be under the Uniform Lifetime Table. This is a table that assumes a second recipient 10 years younger than the IRA owner. The exception to the Uniform Lifetime Table rule is a spouse that is more than 10 years younger than the IRA owner. In that case, the RMD is calculated based on the ages of both spouses. There is another exception to the age 73 RBD rule for individuals who are less than 5% owners and are still employed. They are permitted to defer the RMD until retirement. For example, some university professors have remained in their teaching positions to very senior ages and qualified to defer RMDs until they retire.
2. Eligible Designated Beneficiary (EDB) - The Secure Act created a new category that permits individuals to use the pre-2020 "payouts over life expectancy" option. Under the EDB rules, there are five exceptions. These include a surviving spouse, a minor child, disabled or chronically ill individual or a beneficiary that is less than 10 years younger than the IRA owner. The surviving spouse in nearly all cases will roll over the plan and take distributions under his or her own RBD and the Uniform Lifetime Table. A child under age 21 may take distributions based on his or her life expectancy until reaching majority. After the child reaches age 21, the transition is made to the 10-year rule, with a final distribution at age 31. A person who is disabled under Section 72(m)(7) or is chronically ill under Section 7702B(c)(2) qualifies to use the life expectancy method. The life expectancy method is a fraction with a numerator of one and a denominator representing the life expectancy in the initial year. The denominator is reduced by one for each annual calculation until the final year, one divided by one, when the full IRA is distributed. Finally, a beneficiary less than 10 years younger is also permitted to use the life expectancy method.
3. IRA Owner Dies before RBD - If the IRA owner passes away before age 73 (under current law), then the rules for a traditional IRA or Roth IRA are applicable. A traditional IRA, 401(k) or 403(b) must be distributed at the end of 10 years, but there is no RMD each year. However, to avoid maximizing the tax payment in year 10, many individuals will choose to make distributions over several years. With a Roth IRA, distributions are not required until year 10. Generally, Roth IRA beneficiaries will take a distribution in December of the tenth year. If there is no designated beneficiary, a retirement plan is distributed to the estate and the full plan must be distributed by the end of the fifth year.
4. IRA Owner Death after RBD - If the IRA owner has reached the RBD and started distributions, the general "at least as rapidly" rule will apply. Under final regulations, there are two categories. A designated beneficiary is required to take RMDs in 2025 and subsequent years. The final distribution must be by the end of the 10th year. An EDB will commence distributions and use the life expectancy method. A Roth designated beneficiary is treated as though the IRA owner passed away prior to the RBD and may take distributions at the end of the 10th year.

The final regulations also include extensive discussions on provisions for conduit or accumulation trusts. The trusts are generally created with separate shares, so there will be a different RMD for a designated beneficiary or an eligible designated beneficiary. The trusts for designated beneficiaries will generally be distributed in 10 years. If there is an accumulation trust for designated beneficiaries, there could be a severe tax burden on the trust in the tenth year. However, after payment of taxes, that accumulation trust may then function as a normal trust for the selected duration.

Distributions of IRA amounts to charity will normally be made by September 30 of the year after the date of death.

Proposed Regulations for Retirement Plans

While the IRS published a 260-page final regulation on retirement plans, it also chose to distribute a 36-page proposed regulation to cover additional issues. The proposed regulations clarify several issues that remained after publishing the final regulations.

1. Employees Born in 1959 - The regulations under the Secure 2.0 Act created uncertainty for individuals born in 1959. They will still have an RBD age of 73. The change to the age 75 RBD will occur for individuals born on or after January 1, 1960.
2. Annuity Contracts - An IRA owner may invest part of his or her account in an annuity contract. However, the account value may be aggregated with the annuity contract and other investments to determine the RMD. The annuity contract distribution may qualify for the RMD.
3. Roth Account Distributions - It is possible that some retirement account owners may have in part a Roth account and in part a traditional account. If this is the case, the amounts in the Roth portion of the account are not included in the RMD calculation.
4. Section 4974 Excise Tax - There is a potential 25% excise tax under Section 4974. If there is a corrective RMD payment made by the end of the following calendar year, the excise tax is reduced to 10%. This section also includes a potential automatic waiver of the Section 4974 excise tax.
5. Spousal Election under Section 327 - If the employee passes away before the RBD, a spouse may elect to be treated as the deceased employee. He or she may defer payouts until the date the employee would have reached the RBD.
6. Divorce with a QLAC - Some IRA owners have purchased a qualifying longevity annuity contract (QLAC). If there is a subsequent divorce, the court order may be substituted for a qualified domestic relations order (QDRO).

Editor's Note: The general principles for retirement plan distributions are reasonably straightforward. However, the specific exceptions and qualifications are quite technical. In the notes above, for simplicity purposes the reference has been to IRA owners, but the author recognizes that many of the same rules apply to 401(k), 403(b), 457 and other qualified retirement plans.

Applicable Federal Rate of 5.2% for August: Rev. Rul. 2024-15; 2024-32 IRB 1 (16 July 2024)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2024. The AFR under Sec. 7520 for the month of August is 5.2%. The rates for July of 5.4% or June of 5.6% 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 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."