Washington News

On January 10, 2025, the Internal Revenue Service (IRS) Free File program opened for tax filing. Through the Free File program, the IRS offers access to free tax software filing programs to millions of qualifying taxpayers.

IRS Commissioner Danny Werfel stated, "Taxpayers have multiple filing choices, including trusted tax professionals, tax software, Free File, Direct File or free preparation services through IRS partners. Over the years, Free File has helped millions of taxpayers, providing a fast and simple way to file their returns. This program continues to be a valuable resource for eligible individuals looking to file their taxes for free through this unique program."

This is the 23rd year for the IRS Free File program. Eight private companies participate in the Free File Inc. partnership. These eight software companies provide complimentary tax software for taxpayers with adjusted gross income (AGI) of $84,000 or less. One provider also offers a tax program in Spanish.

Any returns that are prepared after January 10 will be held and filed at the end of the month. Taxpayers with AGI over $84,000 have another free option available; on January 27, they may start using the Free File Fillable Forms from IRS.gov.

IRS Free File is a no-cost solution for taxpayers. Many Free File users will qualify for the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) or other benefits. The EITC is generally available to taxpayers with an income under $66,819. A taxpayer may use the EITC Assistant on IRS.gov which is available in English and seven other languages.

The EITC and other tax credits may be refundable. These refundable credits benefit taxpayers even if they have no tax obligation.

The IRS explains the simple steps to use the Free File program. Taxpayers should go to IRS.gov/freefile. Select the “Explore Free Guided Tax Software” link to find a program. You can browse the eight trusted partners and select your preferred software. Some have different AGI limits for regular taxpayers and active-duty military. When you click on a link, you will be taken to the software website. Follow the indicated steps to complete your tax return.

If you do not have a computer, the Free File software also will work on a smartphone or tablet.

The eight Free File 2025 partners are1040Now, 1040.com, ezTaxReturn.com, FileYourTaxes.com, OnLine Taxes, TaxAct, FreeTaxUSA and Tax Slayer. The ezTaxReturn.com program is also available in Spanish.

Third U.S. District Court Blocks Corporate Transparency Act

In Samantha Smith et al. v. United States Department of the Treasury; No. 6:24-cv-00336, the United States District Court for the Eastern District of Texas issued an injunction to block the implementation of the Corporate Transparency Act (CTA).

Samantha Smith and Robert Means formed LLCs in Texas to hold property. They challenge the constitutionality of the CTA and the final rule issued by the Financial Crimes Enforcement Network (FinCEN).

The CTA was passed in 2021 and applies to existing corporations and LLCs, as well as the two million new ones "formed under the laws of the States each year." Congress was concerned there would be "malign actors" and "money launderers" that could take advantage of the opportunity to evade detection by law enforcement. The CTA was designed to "better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity."

The CTA requires a "reporting company" to report the beneficial owners (at least 25% interest). The report must include the "legal name, date of birth, residential or business address, and driver's license number or other ‘unique identifying number.’" The FinCEN final rule stated the required reporting date for companies was January 1, 2025. There were 23 types of entities excluded. The excluded entities include banks, public accounting firms, nonprofits and companies with more than $5 million in gross receipts who employ more than 20 full-time employees and have a U.S. office.

FinCEN has the right to share ownership information with other federal entities. The District Court noted that the CTA criminalizes providing false or fraudulent information, willfully failing to report complete or updated beneficial ownership or improperly disclosing beneficial ownership information. Failure to comply could lead to a penalty of $500 per day. Additionally, they may also be fined up to $10,000 and be imprisoned for up to two years.

Smith created a Texas LLC to own a single rental property in Austin, Texas. Means created a Texas LLC to own a single office building in Tyler, Texas.

The Court noted there are limits to the enumerated powers granted to Congress. The Court stated, "as the separation and independence of the coordinate branches of the Federal Government serve to prevent the accumulation of excessive power in any one branch, a healthy balance of power between the States and the Federal Government will reduce the risk of tyranny and abuse from either front."

The Commerce Clause was designed to regulate commerce. It has been expanded by the U.S. Supreme Court to include "activities that ‘substantially affect’ interstate commerce." The CTA is not regulating the channels or the instrumentalities of commerce. It merely regulates the formation of a private company under state law. The statute regulates these companies, regardless of whether they are "in the stream of interstate activity."

In addition, at $500 penalty per day, failure to comply with the CTA reporting could lead to $182,500 in civil penalties each year.

The Commerce Clause is intended to regulate activities when they are “economic in nature.” The filing of a formation document is not an economic activity. The CTA does not regulate an activity but regulates the existence of these entities.

There are malign actors who do create entities. However, they could use "almost any method to conceal their crimes." The existence of an entity does not have a "substantial effect on interstate commerce." If Congress could regulate the existence of an entity, it would have unlimited power and would eviscerate the concept of enumerated powers granted to Congress and other powers retained by the States.

The regulation of foreign commerce is also an enumerated power. However, the existence of an entity under state law is an internal affair and not a matter of foreign affairs. Another claim was the right to pass the CTA under the taxing power. However, the taxing power does not provide the right for Congress to regulate the mere existence of a state entity.

An injunction is permitted if there is irreparable harm. The Court determined, "Plaintiffs will almost certainly incur substantial, incompensable monetary costs and constitutional harm." The Court concluded that the CTA is likely unconstitutional and there is a risk of irreparable harm, the balance of equities and public interest support injunctive relief.

Editor's Note: There are three District Court decisions that find the CTA unconstitutional and some that claim the opposite. The U.S. Supreme Court will eventually need to decide the issue. This decision is a cogent analysis of the need to expand the scope of the Commerce Clause to justify the CTA. The Supreme Court will need to render a decision before the CTA registration proceeds.

SALT Battle Underway

Members of Congress plan to meet with staff from the incoming administration this coming weekend. The members of Congress represent states with substantial income taxes and are strongly opposed to the $10,000 cap on the state and local tax (SALT) deduction. The $10,000 SALT cap was passed in the Tax Cuts and Jobs Act (TCJA).

Congress is going to be holding hearings on the potential provisions of a 2025 major tax bill. Because many of the TCJA provisions expire at the end of 2025, there will need to be a comprehensive tax bill to determine federal tax law in 2026 and future years.

If the various provisions of the TCJA were extended for a decade, the estimated cost would be $4.5 trillion. In addition, the incoming President has suggested there should no longer be taxation on tips. This change is estimated to cost from $62 billion to $195 billion over a decade.

Representative Michael Lawler (R-NY) is among the members of Congress who will meet with incoming administration staff. Lawler introduced a bill on January 7 to expand the SALT deduction to $100,000 for single filers and $200,000 for joint filers. This would have an estimated cost of $67 billion per year, or $670 billion over a decade.

Senate Finance Committee Chair Mike Crapo (R-ID) has been involved in the conversations between members of Congress and the incoming administration. He acknowledges the issue will be a significant challenge. Crapo noted, "All of the solutions that I have heard… involve lowering the revenue."

In 2017, the TCJA passed, but 13 members of Congress from the Republican party voted against the legislation. Some of them claimed that the SALT cap was the reason for their negative vote. Because the majority party in the House only has a two-vote margin, there is great concern that it will be difficult to pass a major tax bill without an increase in the SALT cap. A further factor is that a change in the SALT cap is likely to benefit high-income taxpayers.

Crapo concluded, "I think that whichever way the negotiations move, it will create tensions on one side or the other."

Editor's Note: A major part of the discussion on both the full tax legislation and SALT will be whether there are offsets. An offset is a Washington term for a tax increase. The challenging part of tax legislation is to decide where taxes will increase in order to offset tax reductions. This debate will be an intense discussion for most of the 2025 year.

Applicable Federal Rate of 5.2% for January: Rev. Rul. 2025-1; 2025-3 IRB 1 (16 December 2024)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2025. The AFR under Sec. 7520 for the month of January is 5.2%. The rates for December of 5.0% or November of 4.4% 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”