This is a published version of our weekly Forbes Tax Breaks newsletter. You can sign-up to get Tax Breaks in your inbox here.
What’s in a name? The Social Security Administration (SSA) has released its list of the most popular names for babies born in the United States in 2023, and once again, Liam and Olivia top the list. (Spoiler alert: Kelly did not make the top 100 again, coming in at #773.) (☆)
The agency said it issued Social Security numbers for 3,580,350 new babies last year.
Why get a Social Security number for a baby who is unlikely to punch a time clock any time soon? Your child must have a Social Security number for you to claim your child as a dependent on your income tax return. If you can’t claim your child as a dependent, you can’t claim certain tax breaks, including the earned income tax credit (EITC), the child tax credit, and the additional child tax credit. Additionally, without a Social Security number for your child, you can’t file as head of household (HOH) or qualifying widow(er) with a dependent child.
Your child may also need a number if you plan to open a bank account (including a 529 savings plan) for them, buy savings bonds for their benefit, get medical coverage or insurance for them, or apply for government services on their behalf. In fact, Social Security numbers are widely used today for various purposes, although only about 40 official uses are approved by Congress.
Of course, as Social Security numbers allowed agencies like the IRS to streamline processes, they also created a market for thieves. Today, scammers and crooks use Social Security numbers—those they stole or bought on the dark web—for many reasons, including tax fraud.
Recently, the IRS issued a warning to taxpayers about a series of tax scams and inaccurate social media advice that led thousands of taxpayers to file inflated refund claims. (☆) The most recent alert focuses on scams targeting the Fuel Tax Credit, the Sick and Family Leave Credit, and household employment taxes. If the IRS flags any of these claims, the agency will freeze your refund—your entire refund amount is frozen on returns with these bad claims. That means you will not receive any portion of your refund, even if you claimed legitimate credits. The IRS will also send you a letter asking you to verify your identity, including your Social Security number, and to confirm that you qualify for the credits (you may need to submit documentation to prove your claim is legitimate). If you claimed those credits—but weren’t entitled to do so—you may need to file an amended return. (☆)
Of course, it’s not just Social Security numbers that thieves want—the IRS is implementing new security measures for tax professionals, including holds for Centralized Authorization File (CAF) numbers. A CAF number is a unique nine-digit identification number assigned to tax professionals and others who file third-party authorizations. The IRS assigns you a CAF the first time you file a third-party authorization with the IRS, and you use that number for your entire career—even if you switch firms.
Fraudsters have been using schemes, including unsolicited scam emails, to convince tax professionals to turn over their CAF number for purposes of using the data to commit identity theft, refund fraud, and other crimes. As a result, the IRS has a new process for dealing with suspected compromised CAF numbers. (☆) If your CAF number is flagged as potentially compromised, it will be placed into a suspended status pending further review (the IRS will send a letter to the CAF owner to confirm whether the number has been compromised). If the CAF number has been compromised, the number will be coded as such and can’t be used in the future. The move, and related security steps, are an effort to make taxpayer data more secure.
Of course, those who want to steal data are going to find a way. As I previously reported, taxpayers began receiving notices about an unauthorized disclosure of tax return information by an IRS contractor. (☆) The contractor, Charles Edward Littlejohn, pleaded guilty to unauthorized disclosure of tax return and return information—a violation of section 7213(a)(1) of the tax code, the most serious offense for leaking tax information. In January of 2024, Littlejohn was sentenced to five years in prison for disclosing thousands of tax returns—including Donald Trump’s tax returns—without authorization. (☆)
Now, the IRS has offered an update. (☆) Notably, the agency answered one of the questions that taxpayers had about the timing of the notice: Why now? The IRS says, “In deference to these criminal proceedings, it was only after Mr. Littlejohn was sentenced, in February 2024, that the IRS was able to access information regarding all affected taxpayers. The data set that the IRS received at that point is voluminous and complex, and the IRS has been working with TIGTA to process and analyze this data, including to more fully understand what information, pertaining to what taxpayers, was unlawfully disclosed by Mr. Littlejohn.”
The IRS has not, they claim, seen any indication that any information was disclosed beyond what was shared with two news organizations or that the news organizations disclosed the information to anyone else beyond what was publicly reported. Notably, the IRS says there is no indication so far that taxpayer information was used in any way for identity theft or any related type of fraud (Littlejohn confirmed in court documents that his motivations were related to his sense of fairness and not for financial gain). The investigation is ongoing.
The IRS has also announced that it would increase its audit rates of large partnerships—those with over $10 million in assets—nearly ten-fold as compared to its historical large partnership audit rates. That continues an initiative announced in 2021 to identify and initiate audits of some of the largest and most complicated partnership tax returns. Later, the agency used artificial intelligence to expand the LPC program to include additional partnerships. In September 2023, the IRS announced that it had established a designated pass-through group within its Large Business and International (LB&I) division that, when finalized and ready, would help the IRS continue its focus on large partnerships. The IRS has already hinted at some of what it is looking at in these reviews, including partnership balance mismatches, distributions in excess of outside basis, and limited partners who skip out on self-employment taxes.
Skipping out on value-added tax (VAT) in the EU just got a little harder. The European Commission has recently released the revised proposals for VAT reform, which requires electronic invoicing as the default system for issuing invoices in the EU from 2030 onwards. The electronic invoice will have to adhere to a structured format and comply with the European e-invoicing standard—so no PDFs. Hybrid invoices, such as the German ZUGFeRD, combining structured and unstructured formats, will be covered if they include all requisite data in a structured format. It’s also getting closer to real-time reporting, shortening the deadline for reporting certain kinds of transactions to just ten days. The EC has been creeping towards these standards for a while now with the goals of fighting fraud and increasing compliance. So far, there’s nothing on this scope planned in the U.S., although the Business Payments Coalition (BPC) and the Federal Reserve have introduced an electronic delivery network to allow businesses to securely share electronic supply chain documents.
I’ll be paying a little VAT of my own this weekend. I’m currently in London at a global legal conference—and yes, I have already managed to squeeze in a transfer pricing conversation (or two). But the big conference discussion today focused on cybercrimes and privacy laws—it’s increasingly a concern all over the world. I’ll share some takeaways next week—but first, I’m going to socialize a bit at a James Bond-themed reception where I am not making any promises that I won’t bring up U.K. tax credits used to make recent Bond films. (This may be why folks avoid tax lawyers at cocktail parties.)
Cheers!
(One quick note: Last week, I reported that Shohei Ohtani’s former interpreter Ippei Mizuhara had pleaded guilty to tax and fraud charges related to gambling, based on a plea agreement and related court documents. Shortly after those filings, the matter was transferred out of—and back to—the original docket, and Mizuhara pleaded not guilty. That was said to be a procedural maneuver and he is expected to plead guilty at a future hearing. The article has been updated. (☆))
Kelly Phillips Erb (Senior Writer, Tax)
Articles marked with (☆) are premium content and require you to log-in with your Forbes membership credentials. Not a subscriber yet? Click here to sign up.
Filing Statistics
Most U.S. taxpayers file as individuals according to IRS data from the 2021 tax year, the last year for which complete data is available.
Not surprisingly, only a tiny percentage of taxpayers file married filing separately (MFS)—that’s typically the least advantageous way to file though your mileage may vary. There’s been a slight uptick in filing MFS for some couples because it made economic sense, including reducing student loan repayments and, for the 2021 tax year (the year this data reflects), increasing certain pandemic relief benefits.
Questions
Marriage can be complicated—even more the case when it comes to non-traditional marriages. A reader wants to know:
I wanted to ask what are the supporting things to show the IRS that you qualify for common law marriage to claim your girlfriend’s children that you have been taking care of for ten years?
The IRS relies on federal income tax laws, but those laws don’t actually define marriage. Marriage—especially as it relates to common law marriage—is state law specific. If a couple is married (or considered married) under state law as of December 31, you are treated as married for the whole year for federal income tax purposes.
In the U.S., marriage is typically evidenced by a marriage certificate. That’s the piece of paper you get from the local or county officials offering proof of marriage.
A common law marriage is one by oral contract, and isn’t memorialized by a piece of paper. In a common law marriage, you hold yourself out as married. But here’s the tricky bit: not all states recognize common law marriage. It’s only fully legal in a handful of states (Colorado, Iowa, Kansas, Montana, Oklahoma, Rhode Island, and Texas) and the District of Columbia. Some states, including Utah, recognize common law marriage in certain circumstances, while others, like Pennsylvania, may recognize those that were entered into before common law marriages were abolished (in Pennsylvania, that happened in 2005).
Since the laws are so state-specific (and can vary by date and circumstances), the best way to find out whether you’re covered is to ask a family lawyer where you live for confirmation.
That said, if your state recognizes common law marriage and you have held yourself out as married, you are married under state law. In that case, the IRS also considers you married.
However, if you are not married under state law, all is not lost in your case. For tax purposes, dependents are either a qualifying child or a qualifying relative. Qualifying relatives can be unrelated, as long as they lived with you all year (and meet the other tests).
One more note: When it comes to taxes, mixed nationality couples face even more challenges—this is certainly the case when one spouse is a U.S. citizen and the other a non-U.S. citizen. That includes estate and gift tax issues that arise when one partner does not have U.S. citizenship—for example, when gifts are given to a U.S. citizen spouse, an unlimited marital deduction is permitted so that gifts are exempt from gift tax regardless of the amount. But if a U.S. citizen spouse gifts assets to their non-citizen spouse, gifting tax-free is subject to annual limits indexed for inflation. Gifts to a non-U.S. citizen spouse in 2024 can be tax-free only if the annual aggregate does not exceed $185,000.
(Fun fact: Despite popular belief, when a U.S. person marries a non-U.S. person, citizenship is not automatically conferred.)
—
Do you have a tax question or matter that you think we should cover in the next newsletter? We’d love to help if we can. Check out our guidelines and submit a question here.
A Deeper Dive
Billionaire tax rates are a big talking point as we tiptoe towards the election, with Berkeley economist Gabriel Zucman finding that the highest-income Americans pay only about 23% of their income in taxes. As a result, Zucman claims that “for the first time in the history of the United States, billionaires had a lower effective tax rate than working-class Americans.”It raises some interesting questions about who pays taxes. Most economists agree that the burden of corporate taxes does not fall on businesses. Corporations may remit taxes to the IRS, but the tax ultimately is paid by some mix of workers and owners of capital. Who should pay more—and who should pay less—is bound to be a lively discussion when Congress considers the fate of the TCJA next year.
Speaking of billionaires, since 1965, Warren Buffett’s Berkshire Hathaway has delivered a 19.8% compound annual return, compared to 10.2% for the S&P 500 Index, resulting in a value 140 times more than sticking with the large-cap index for 59 years. He is the world’s sixth richest person, with a net worth of $133 billion.
Berkshire Hathaway’s annual shareholder meeting last weekend was the first one for Buffett, 93, since vice chairman Charlie Munger passed away last November at the age of 99. At the meeting, Buffett’s comments about some of his largest positions revealed just how much he uses behavioral psychology to guide many of his positions. For example, Buffett said, “People have speculated on how I’ve decided to really put a lot of money into Apple.” He continued, “Maybe I’ve used this example before, but if you talk to most people, if they have an iPhone and they have a second car, the second car cost them $30,000 or $35,000, and they were told that they could never have the iPhone again, or they could never have the second car again, they will give up the second car. Now, people don’t think about their purchases that way, but I think about their behavior, and so we just decide without knowing.” (☆)
Buffett acknowledged that he did offload some shares of Apple, and pivoted to taxes, saying, “Almost everybody I know pays a lot of attention to not paying taxes, and I think they should, but we don’t mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we’re taking in Apple. That rate was 35% not that long ago, and it’s been 52% in the past when I’ve been operating. The federal government owns a part of the earnings of the business we make.”
He thinks that number could go up, but doesn’t mind, saying, “We always hope at Berkshire to pay substantial federal income taxes. We think it’s appropriate. If we send in a check like we did last year, we sent more than $5 billion to the U.S. federal government, and if 800 other companies had done the same thing, no other person in the United States would have had to pay a dime of federal taxes, whether income taxes, no Social Security taxes, no estate taxes. It doesn’t bother me in the least to write that check.”
Important Dates
📅 June 6-7, 2024. NYU School of Professional Studies Federal Real Estate and Partnerships Tax Conference. Mayflower Hotel, Washington, DC. Registration required.
📅 June 17, 2024. Second-quarter estimated payments are due for individuals for the 2024 tax year.
📅 June 17, 2024. Due date for U.S. citizens or resident aliens residing overseas or in the military on duty outside the U.S., on April 15, 2024. If you can’t file by the deadline, you can request an extension. (☆)
📅 June 17, 2024. Due date for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts—or FBAR—for taxpayers residing outside of the U.S.
Noteworthy
Baker Tilly is acquiring the accounting and advisory firm Seiler LLP. The firm says the move represents its commitment to expanding its footprint in the San Francisco Bay Area and follows a recent strategic investment from Hellman & Friedman and Valeas Capital Partners.
The Warwick Legal Network recently held its spring conference in London, U.K., where topics included a discussion on the expansion of privacy laws and cybercrime activity around the globe. The network is a group of commercial law firms in 30 countries around the world.
U.S. Senators Todd Young (R-Ind.) and James Lankford (R-Okla.) introduced the Protecting Charitable Giving Act to address the unlawful disclosure of data identifying donors who contribute to nonprofit organizations. The pair says the legislation would help nonprofit organizations better protect the identities of their donors by reinforcing existing privacy protections and increasing the penalties for disclosure of sensitive taxpayer data.
Franklin University has announced a strategic partnership with Miles CPA Review. The program is specifically designed for U.S. undergraduates who require additional credits to fulfill the 150-credit requirement for CPA licensure. Franklin University’s Main Campus is located in downtown Columbus, Ohio.
AICPA & CIMA, together known as the Association of International Certified Professional Accountants, and accounting firm PwC, are jointly offering a new e-learning course, Introduction to the European Sustainability Reporting Standards. The NASBA-compliant training provides an overview of the mandatory EU sustainability reporting standards and their application.
The National Association of Tax Professionals (NATP) is hosting a free webinar for those interested in learning more about earning an Enrolled Agent (EA) or Annual Filing Season Program (AFSP) designation. Registration required.
—
If you have career or industry news, submit it for consideration here.
Trivia
Which country boasts the most billionaires?
A. China
B. Switzerland
C. United Arab Emirates
D. United States
Find the answer at the bottom of this newsletter.
Our Team
I hope you’ll get to know some of our staff and contributors. Since the Social Security Administration just released its top baby names for the year, I asked: Did you ever want to change your name as a kid? If so, to what?
Kelly Phillips Erb (Senior Writer, Tax): I always wanted something super fancy and long like Victoria or Elizabeth. I was envious of kids who could shorten their names for a cool nickname. Kell doesn’t have the same ring to it as, say, Jenny for Jennifer.
Emily Mason (Writer, Money Team): I definitely, definitely wanted to change my name. My mom said they were going to name me Elaine but my English grandma said it was a “tart” name. (I wish they had stuck with Elaine—then it could be Elle, too).
Brandon Kochkodin (Writer, Money Team): Nope.
Amber Gray-Fenner (Contributor, Tax): I ALWAYS wanted to change my name as a kid. We had to sing America the Beautiful after the pledge at least once a week and I was tired of kids pointing and saying “Amber waves of grain” or “Amber waves of gray.”
Andrew Leahey (Contributor, Tax): I never wanted to change my name but I did ardently resist allowing other folks to refer to me as “Andy.” I got in my head that, and I am quoting myself at about age eight here, “Andy is the kind of kid that skips everywhere and eats cheese.” I have no idea where I got that particular (and peculiar) stereotype from — but I have grown as a person and now know Andys are good people.
Matthew Roberts (Contributor, Tax): Didn’t really think about changing my name as a kid…
Virginia La Torre Jeker (Contributor, Tax): I always felt my name was just too long. I wanted to change it to my nickname at the time: Ginny.
Key Figures
That’s the amount of potentially improper Employee Retention Credits (ERC) and Sick and Family Leave Credits claimed by taxpayers as identified by the Treasury Inspector General for Tax Administration (TIGTA).
In the scheme, individuals obtained Employer Identification Numbers (EIN), a nine-digit identifier required for tax purposes, to file business tax returns that improperly claimed the credits. These tax returns frequently showed no signs that a business was active or operating.
Trivia Answer
The answer is (D) United States.
According to the most recent Forbes World’s Billionaire List, the U.S. has a record 813 billionaires—the most of any country. China came in second with 473 billionaires and India, which has 200 billionaires, ranks third.
Feedback
How did we do? We’d love your feedback. If you have a suggestion for making the newsletter better, let us know.
Read the full article here
