The IRS has been slowly moving forward with a direct e-file system. Several members of Congress have promoted the concept. The Inflation Reduction Act included funding to allow for the IRS to conduct a study on building an e-file system.

To explore the interest in a federal e-file system, the IRS has conducted two taxpayer surveys. There is significant taxpayer support for a direct e-file system, particularly among younger taxpayers. The survey responses emphasized that privacy is a major concern and taxpayers prefer to combine filing a federal return with their state tax return.

The IRS estimates that a direct e-file system would cost between $64 million to $249 million each year. The majority of the costs would be for customer support. The IRS also faces major challenges due to the complexity of the U.S. tax code. A direct e-file system must be updated regularly for tax law changes and to ensure that taxpayer information is secure.

The IRS points to many other nations that offer a direct file system including the United Kingdom, Australia, Japan, Spain and France. One step in taxpayer convenience is a prepopulated filing system. Australia, Belgium, Denmark, Spain, Sweden, France, Finland and Norway all offer these systems.

Many nations, including Australia, New Zealand and the United Kingdom, offer extensive online services. The IRS recently has moved forward with enhanced systems. U.S. taxpayers now have a " Your Online Account " page. The IRS also launched new chat bots that provide taxpayer support.

Editor's Note: Several members of Congress who support direct e-file have observed that commercial tax software companies are not protecting taxpayer information. One of the primary reasons for creating a federal system is that many of the commercial companies have been using Google analytics. Some of the tax software websites included a Google Pixel that collected income, refund amounts, filing status and scholarship information from taxpayers who used those websites. The taxpayers did not consent to the use by Google of that information for marketing purposes. While Google claims that it has safeguards to protect personal identity, artificial intelligence capabilities now allow identification of individuals through their data. The advocates for an IRS direct file system emphasize a federal system that would protect the information of taxpayers.

Two Year Delay on Roth Catch-Up Contributions

In Notice 2023-62; 2023-37 IRB 1, the Internal Revenue Service (IRS) provided guidance that allows the Secure 2.0 Act provisions on Roth catch-up contributions to be delayed for two years.

Section 414(v)(1) provides that a retirement plan can permit an individual aged 50 or over to make additional elective deferrals (catch-up contributions). The Secure 2.0 Act amended Section 414(v)(7)(A), and stated that in 2024 and subsequent years, individuals who are 50 or over with incomes over $145,000 must use the Roth plan for catch-up contributions.

In 2023, individuals are allowed to contribute $22,500 to a 401(k) with up to $7,500 as a catch-up contribution. The Secure 2.0 Act requires taxpayers with incomes over $145,000 to make an after-tax Roth contribution for the $7,500 catch-up amount.

However, Notice 2023-62 states there will be an "administrative transition period with respect to the requirement under Section 414(v)(7)(A) of the Code that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions." This effectively creates a two-year delay in the Roth requirement for higher-income taxpayers.

Matt Petersen is the Executive Director of the National Association of Government Defined Contribution Administrators. In an August 25 release, Petersen noted, "Leadership at both agencies engaged openly with us on the issue, and we felt our concerns were heard every step of the way. Today's guidance is an excellent example of the results of an open, fair, and considerate process."

There also was a drafting error in the Secure 2.0 Act that unintentionally banned catch-up contributions in 2024 and later years. The IRS indicated that guidance will be forthcoming to emphasize that catch-up contributions will be permitted in the years following 2023.

DAF Giving Increases to $23 Billion

Donor advised funds (DAFs) have grown rapidly during the past decade. During the past year, there have been approximately 3.5 million DAF grants with a total distribution of approximately $23 billion.

Initially, DAFs were sponsored by community foundations and religious organizations. Subsequently, large financial firms created foundations and their customers were permitted to make transfers of stock and cash from their accounts into the charitable foundations. Several of the largest DAF grantor organizations are the foundations affiliated with large financial services companies.

1. Fidelity Charitable — The largest DAF custodian holds approximately 186,000 DAF accounts. The Fidelity Charitable organization reported $11.2 billion in grants made in 2022. This amount is an increase of 9% over grants in the prior year.

2. Schwab Charitable — The Schwab Charitable organization distributed approximately 1 million grants with a total value of $5 billion during its fiscal year 2022. The grants benefited over 120,000 charities. Schwab Charitable’s President reported that this is a "record-breaking amount" for distributions.

3. National Philanthropic Trust — The third largest DAF sponsor reported grants of $4.6 billion in fiscal 2023. This was a decline in value from the prior year, but the number of grants increased. National Philanthropic Trust noted the prior year distribution was a record level of grants and it perhaps reflected the intention of donors to support nonprofits during the COVID-19 pandemic.

4. Vanguard Charitable —Vanguard Charitable reported an 11% grant increase to $2.1 billion dollars. The average grant value of $10,972 represented a 17% increase.

Major donors to nonprofits are increasingly making grants from a DAF. These DAF grants also reflect a number of specific giving trends. Because major donors frequently make DAF grants, most nonprofits now include a campaign for DAF grants in their annual marketing plans.

1. Unrestricted Gifts — Many donors are recommending unrestricted gifts. Approximately one-half of Vanguard Charitable’s DAF grants were unrestricted during the past calendar or fiscal year. The unrestricted grants are understandably very popular with the nonprofits because they may be used in the area of greatest need.

2. Recurring Grants — A large number of donors are recommending recurring grants. Schwab Charitable reported a 20% increase in the recurring grants category. Vanguard Charitable noted that the $114 million in recurring grants was up 11% over the prior year.

3. Emergency Grants — In response to both natural and man-made disasters, donors have been quite generous. There are many grants to various relief organizations following a hurricane, fire, flood or other natural disaster. There have also been many good-hearted donors who supported nonprofits providing aid to refugees from the Ukraine war.

4. Principal Grants — Many DAF donors give both income and principal from their fund. The DAFs have frequently distributed a high percentage of the contributions received. Fidelity charitable reports that 75% of DAF principal balances are granted within five years of the initial contribution.

Editor's Note: The DAF data was published on August 30, 2023 by NonProfitPRO Editor-in-Chief Amanda Cole. Cole's article indicates DAFs are gaining popularity. In 2021, assets held by DAFs totaled nearly $235 million. The total value of DAFs is projected to grow well beyond that amount in 2023. While DAFs were initially limited to community foundations and religious foundations, they now are quite popular with charitable foundations of financial service companies. However, many midsized and larger nonprofits have created their own DAFs. Gifts to these organizations normally result in grants to different sections of the organization or to affiliates.

Applicable Federal Rate of 5.0% for September — Rev. Rul. 2023-16; 2023-37 IRB 1 (15 August 2023)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2023. The AFR under Sec. 7520 for the month of September is 5.0%. The rates for August of 5.0% or July of 4.6% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% 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."