Taxpayers who own retirement accounts can often take steps to maximize the amount of money they are able to save and ensure that they will have sufficient financial resources later in life. However, the rules regarding retirement account contributions have changed in recent years, and this has led to some confusion about the types of contributions that may be made and the taxes that may apply. To give taxpayers, employers, and retirement plan administrators more time to adjust to these changes, the IRS is providing a longer transition period before changes in the law will be implemented.

The SECURE 2.0 Act and Catch-Up Contributions for Higher Income Earners

The SECURE 2.0 Act, which was passed in 2022, made some changes to how taxes apply to retirement accounts. One provision of the act addressed catch-up contributions to 401(k) plans and other retirement accounts. These contributions may be made by people over the age of 50 beyond the annual deferral limit. In 2023, the employee deferral limit is $22,500, which is the total amount that can be withheld from a person’s income each year and saved in a 401(k) account. People who are at least 50 years old can contribute an additional $7,500, which is known as a catch-up contribution.

Under the SECURE 2.0 Act, certain limitations were placed on catch-up contributions for high income earners. Specifically, for taxpayers who earn at least $145,000 per year from a single employer, catch-up contributions must be made on a Roth basis. That is, contributions must be made after income taxes have been applied. Prior to this change, these taxpayers could elect to make contributions before taxes were withheld.

There are a variety of tax penalties that may apply when U.S. taxpayers fail to meet their legal requirements for filing tax returns, paying taxes, or reporting information to the IRS. Foreign tax compliance can be an especially tricky issue, since taxpayers who own foreign assets or receive income or gifts from foreign sources may not be aware of their reporting requirements. In some cases, failure to file the proper forms may result in international information return (IIR) penalties.

There is a common conception that IIR penalties are mostly limited to wealthy taxpayers who earn high incomes or own extensive assets. However, this is not the case, and according to the National Taxpayer Advocate, lower- and middle-income individuals and small-to-midsize businesses are more likely to be affected by these types of penalties. 

Low-income individuals, businesses with moderate resources, and immigrants who are unaware of their tax reporting requirements may be subject to large penalties if they fail to file the proper information returns. Unfortunately, these penalties may sometimes be assessed after taxpayers discover their errors and make a good-faith effort to comply with their reporting requirements. Taxpayers who are seeking to address issues related to foreign tax compliance should consider working with an attorney who can advise them of the proactive measures that may be taken to minimize penalties or receive penalty abatement.

There are multiple types of financial assets that U.S. taxpayers may own, and certain requirements must be met when reporting assets and income to the Internal Revenue Service (IRS). Many taxpayers may need to address issues related to retirement accounts or pensions, but when these assets are held in foreign accounts or retirement plans, they will also need to ensure they follow the correct procedures for reporting foreign accounts and assets.

Some of the most common foreign retirement accounts held by U.S. taxpayers include Canadian registered retirement savings plans (RRSPs). The IRS has provided guidance on what forms need to be submitted to report RRSP ownership. Taxpayers may want to consider working with an attorney to address these requirements and determine their options for disclosing RRSPs that had not previously been reported.

Forms Used to Report Canadian RRSPs

Until 2012, taxpayers with RRSPs were required to file Form 8891 each year, and in some cases, they were required to pay taxes on the income that accrued in these plans. However, Form 8891 has been discontinued. Currently, RRSPs must be reported using the following forms:

For most taxpayers, a visit, call, or letter from the IRS can be very concerning. If a taxpayer has failed to pay taxes as required, has not reported information correctly when filing tax returns and other forms, or has otherwise failed to comply with tax laws, they can face significant penalties. When a person is contacted by the IRS, this could be a sign that they will face a tax audit, and they may need to address a variety of complex financial issues as they determine how to address issues related to tax compliance. However, the IRS recently announced a policy change that may limit certain forms of contact between IRS agents and taxpayers. Namely, the IRS will no longer make unannounced visits to taxpayers in most situations.

IRS Policy Addresses Safety Concerns and Other Issues

In the past, IRS agents would occasionally visit homes or businesses without contacting taxpayers in advance. During these visits, they would address concerns about unpaid taxes or failure to file tax returns. However, in recent years, IRS agents have faced safety concerns when making these unannounced visits. Law enforcement officials have also noted the increased prevalence of tax scams in which people pose as IRS agents. Because of these concerns, the IRS has put an end to nearly all unannounced visits, effective immediately.

Instead of making unannounced visits, the IRS will contact taxpayers ahead of time and schedule meetings. An appointment letter (Letter 725-B) will be sent, and a taxpayer can then schedule a one-on-one meeting with an IRS official at a designated time and place. This can ensure that taxpayers will be prepared to address specific issues, and they can compile the necessary documentation and take steps to resolve any concerns about unpaid taxes, unfiled tax forms, or compliance with tax laws.

In California, property taxes can be a significant concern for commercial real estate owners. Depending on the assessed value of a property, these taxes can be very high, and the requirement to pay these taxes may cause financial difficulties for property owners. Due to current trends in California real estate, the value of many properties has plummeted, and some property owners may struggle to meet their obligations. However, this may present an opportunity to reassess the value of a property through changes in ownership. By understanding when the transfer of ownership of a property may affect property taxes, commercial real estate owners may be able to take steps to reduce their tax burden.

Proposition 13 and Property Tax Assessments

Property tax assessments in California are governed by Proposition 13, a law that was passed in 1978. This law set the maximum property tax rate at 1%, and it also limited the amount by which the assessed value of a property can increase from year to year. A property will have a “base year value” that is assessed based on when the property was originally purchased, when construction was last completed, or when the property changed ownership. The assessed value of a property can only increase by 2% per year, regardless of the property’s actual fair market value. 

California law also allows for temporary adjustments to a property’s assessed value to be made if the value of the property has decreased below its base year value. This may allow for reduced property taxes based on the property’s current fair market value. However, if a property increases in value at a later date to the point where it meets or exceeds the base year value, property taxes will be assessed based on the original base year value.