The Savers Credit and Savers Match

 

I am looking at a tax change for 2027.

It is an expansion of an existing retirement provision, one that I very rarely see because of its income limitations. I like the intent, however.

Let’s talk about the retirement savers match, which is the post-2026 version of the retirement savers credit. The credit was created in 2001 in an effort to encourage low- and moderate-income workers to save for retirement. It provided a tax credit of 50% on retirement contributions of up to $2,000. The maximum credit per person was therefore $1,000 ($2,000 times 50%). The maximum for qualifying marrieds would be twice that amount: $2,000 for the two spouses.

There were two immediate issues with the savers credit. First, the income limitations were relatively low and - in addition – clumsy. For example, here are the income limitations for marrieds filing jointly: 

		50%	20%	10%
		Adjusted Gross Income Of
Married filing jointly		$48,500	$48,501 to	$52,501 to
		and below	$52,500	$80,500

Marrieds with AGI of $70 grand and contributing $1,500 to a 401(k) would receive a credit of $150 ($1,500 times 10%) – maybe.

The second issue was that “maybe”: the credit was nonrefundable. Say that your tax had already been reduced to zero (via child tax credits, for example). Your savers credit of $150 would now be worth $-0- because tax was already at zero and any excess below zero could not be refunded.

There is no surprise that the Aspen Institute estimated that only 25% to 30% of eligible taxpayers even claimed the savers credit.

Starting in 2027 the savers “credit” will change to a savers “match.”

While the income limitations remain relatively low, there are two main changes:

(1)  The credit is now refundable, and

(2)  The money will go to your retirement account, not to you via a tax credit. There is a de minimis exception of $100, in which case you can choose to treat the match as a tax credit on your return.

Congress replaced the 50%/20%/10% scheme with something closer to a sliding scale, with a slight bump in allowable income.

		Full 50%	Partial	No
		Match	Match	Match
		Adjusted Gross Income Of
Married filing jointly		$41,000	$41,001 to	$71,000
		and below	$70,999	and above

There are - of course - eligibility requirements:

• Be at least age 18 by the end of the tax year.
• Make qualifying retirement savings contributions.
• Not be claimed as someone else’s dependent.
• Not be a qualifying full-time student.
• Meet the applicable income requirements.

You can anticipate a bit of behind-the-scenes programming to make this work. For example, say that your employer offers a 401(k) and elects to accept the savers match to your account. Implementation is going to require time. Fortunately, the first returns to qualify for the match will the 2027 returns due on April 15, 2028. The old law is still in place for 2026 returns due on April 15, 2027.

COMMENT: Note that the money is from the federal government, not from your employer.

While an employer may accept the match, it is not required to do so. I presume that the match would instead go to an IRA in your name, as it cannot go to your employer-based plan.

BTW one does not need an employer-based plan to power the match. The match is looking at retirement savings, and a contribution to your IRA will work. In fact, one could fund a Roth IRA and still receive the savers match. Mind you, the match would be pre-tax (that is, like a regular IRA) and not Roth, but it is still free money.

Not surprisingly, rollover contributions will not qualify. The Code is looking for fresh retirement money.

There is also a clawback should someone abuse the intent of the match. Withdrawal of contributions generating a match during a “testing period” will allow the IRS to recover 100% of the match. Congress wants to reward long-term savings, not short-term binges.

Failing To Update A Plan Beneficiary Designation

 

Technically it is not a tax case, but it is so tax-adjacent it might as well be.

Let’s talk about beneficiaries on a retirement account – and, more specifically, an employer-sponsored retirement account.

Carl Kleinfeldt participated in the Packaging Corporation of America (PCA) Thrift Plan for Hourly Employees. In 2006 he designated his (then) wife – Dena Langdon – as his primary beneficiary.

Kleinfeldt and Langdon divorced in 2022. The divorce included a Qualified Domestic Relations Order (QDRO). A QDRO is a court order authorizing distribution to the nonparticipating (ex) spouse. The PCA Benefits Center distributed to Langdon as directed.

However, even after the QDRO there is one more step: has the ex-spouse been formally removed as beneficiary?

Kleinfeldt faxed a request to the Benefits Center to remove Langdon from both his health and life insurance as well as his retirement plan. The Benefits Center updated her status on the retirement account to “ex-spouse.” Mind you, this was not the same as removing her as a beneficiary altogether.

Why not?

There were written plan procedures to follow. Kleinfeldt’s fax was a good start but was not quite enough.

You can guess that Kleinfeldt died.

You know that Langdon wanted that retirement money.

You also know the matter went to court.

And we are in legal weeds immediately.

We are talking here about an employer-sponsored plan, which (almost always) makes the plan subject to ERISA.

ERISA in turn uses a “substantial compliance” doctrine when reviewing actions required under a plan document. It is what it sounds like: if you miss a minor clerical step, the law presumes that responsible parties know what was meant and are expected to act accordingly.

The Kleinfeldt Estate argued the substantial compliance doctrine with a white-knuckle grip.

The Court observed that substantial compliance has two steps:

1.  Was there intent to make the change?
2.  Was the attempt to make the change similar (in all material aspects) to the proper procedures required by the plan?

There was no argument about the first test: the fax was clear evidence that Kleinfeldt intended to remove Langdon as a beneficiary.

On to the second test.

The plan documents wanted Kleinfeldt to either (1) call the Benefits Center or (2) update his beneficiary designation online.

The plan documents nowhere stated that he could update beneficiaries by fax.

The Court did not consider this a minor clerical step.

Kleinfeldt did not follow the rules.

Meaning that Langdon won.

And fair had nothing to do with it.

Our case this time was Packaging Corporation of America Thrift Plan v Langdon, No 25-1859 (7^th Cir. Feb. 2, 2026)

IRS Collection Alternatives: Pay Attention To Details

 

I was glancing over recent Tax Court cases when I noticed one that involved a rapper.

I’ll be honest: I do not know who this is. I am told that he used to date Kylie Jenner. There was something in the opinion, however, that caught my eye because it is so common.

Michael Stevenson filed his 2019 tax return showing federal tax liability over $2.1 million.

COMMENT: His stage name is Tyga, and the Court referred to him as “very successful.” Yep, with tax at $2.1-plus million for one year, I would say that he is very successful.

Stevenson had requested a Collection Due Process (CDP) hearing. It must have gone south, as he was now in Tax Court.

Why a CDP hearing, though?

Stevenson had a prior payment plan of $65 grand per month.

COMMENT: You and I could both live well on that.

His income had gone down, and he now needed to decrease his monthly payment.

COMMENT: I have had several of these over the years. Not impossible but not easy.

The Settlement Officer (SO) requested several things:

·      Form 433-A (think the IRS equivalent of personal financial statements)

·      Copies of bank statements

·      Copies of other relevant financial documents

·      Proof of current year estimated tax payments

Standard stuff.

The SO wanted the information on or by November 4, 2021.

Which came and went, but Stevenson had not submitted anything.

Strike One.

The SO was helpful, it appeared, and extended the due date to November 19.

Still nothing.

Strike Two.

Stevenson did send a letter to the SO on December 1.

He proposed payments of $13,000 per month. He also included Form 433-A and copies of bank statements and other documents.

COMMENT: Doing well. There is one more thing ….

The SO called Stevenson’s tax representative. She had researched and learned that Stevenson had not made estimated tax payments for the preceding nine years. She wanted an estimated tax payment for 2021, and she wanted it now.

COMMENT: Well, yes. After nine years people stop believing you.

Stevenson made an estimated tax payment on December 21. It was sizeable enough to cover his first three quarters.

COMMENT: He was learning.

The SO sent the paperwork off to a compliance unit. She requested Stevenson to continue his estimated payments into 2022 while the file was being worked. She also requested that he send her proof of payments.

The compliance unit did not work the file, and in July 2022 the SO restarted the case. She calculated a monthly payment MUCH higher than Stevenson had earlier proposed.

COMMENT: The SO estimated Stevenson’s future gross income by averaging his 2020 and (known) 2021 income. Granted, she needed a number, but this methodology may not work well with inconsistent (or declining) income. She also estimated his expenses, using his numbers when documented and tables or other sources when not.

The SO spoke with the tax representative, explaining her numbers and requesting any additional information or documentation for consideration.

COMMENT: This is code for “give me something to justify getting closer to your number than mine.”

Oh, she also wanted proof of 2022 estimated tax payments by August 22, 2022.

Yeah, you know what happened.

Strike Three.

So, Stevenson was in Tax Court charging the SO with abusing her discretion by rejecting his proposed collection alternatives.

Remember the something that caught my eye?

It is someone not understanding the weight the IRS gives to estimated tax payments while working collection alternatives.   

Hey, I get it: one is seeking collection alternatives because cash is tight. Still, within those limits, you must prioritize sending the IRS … something. I would rather argue that my client sent all he/she could than argue that he/she could not send anything at all.

And the amount of tax debt can be a factor.

How much did Stevenson owe?

$8 million.

The Court decided against Stevenson.

Here is the door closing:

The Commissioner has moved for summary judgement, contending that the undisputed facts establish that Mr. Stevenson was not in compliance with his estimated tax payment obligations and the settlement officer thus was justified in sustaining the notice of intent to levy.”

Our case this time was Stevenson v Commissioner, TC Memo 2023-115.

An IRS Payment Plan And Tax Evasion

 

Let’s talk today about IRS payment plans. More specifically, let’s talk about common paperwork in requesting a payment plan.

A common one is Form 433-A, and it is used by W-2 workers and self-employeds.

The IRS is trying to figure out how much you earn, own, and owe.

There are questions about whether you (or your spouse) own a business, are a beneficiary of a trust or have gifted property worth more than $10,000 over the last 10 years. Yes, they wanna know stuff.

You will have to list your bank accounts, as well as other investments, real estate and other assets.

You will have to provide an accounting of your monthly income and expenses.

There is also expanded disclosure if you are self-employed (that is, a sole proprietor).

There are other ways to own a business than as a proprietor (for example, a shareholder in a C corporation). The IRS will want to know about that, too.

Part of tax practice is avoiding this series, if possible. For example, if you have personal tax debt of $50,000 or less, you can bypass the 433 series and request a “streamlined” payment plan. You are still entering into a contract with the IRS (you must stay current with your filings, make all payments as required, and so on), but in exchange the IRS lifts some of the paperwork requirements. Sometimes advisors recommend hybrid arrangements (taking out a second mortgage, for example), leaving the IRS debt at $50 grand or less. And sometimes you are simply into the IRS for more than $50 grand, leaving no choice but to run the 433 gauntlet. This can be a rude awakening, as the IRS uses standards for certain expense categories (for example, housing and utilities). You might google that you can request an increase from these standards. You can request; don’t expect to receive, though. Barring significant factors (think care for chronic medical conditions), it is unlikely to happen. Depending on the numbers, you might be forced to downgrade a vehicle or pull the kids from a private school. This is not a friendly loan.  

And you do not want to be … sly … when running the 433 hurdles.

Let’s look at someone who was too clever by half.

Kevin Crandell is a medical doctor. He contracted with two hospitals, one in Mississippi and another in Alabama, for $30 to $40 grand per month.

From 2006 through 2012 he did not file returns or pay taxes.

The IRS started garnishing his wages in 2010.

COMMENT: I find it remarkable that he still did not file or pay even when garnished.

The doctor racked up close to a million dollars in taxes, penalties, and interest.

Somewhere in there he formed a couple of corporations. He used one to receive monies earned as a contractor. The second appeared to serve as asset protection.

He finally hired someone (Blue Tax) to help out with tax returns and attendant debt.

Blue Tax drafted a 433. The first draft showed Crandell’s salary as $17 grand per month (I don’t know where the rest of the money went either). The doctor howled that the number was much too high and should be closer to $12 grand.

Oh, the 433 also left out bank accounts for those two corporations (which he controlled). And a $50,000 gun collection. And the $40 grand he drew from the corporations shortly after submitting a 433 stating that his salary was around $12 grand.

Doc, you have to know when to stop. Lying, and then lying about the lying is called something in tax.

Crandell was indicted for fraud.

That pattern of non-file and non-pay looked bad now. That “creative” 433 also gleamed like a badge of fraud, leaving off income, assets and so on.

Crandell argued that he relied on Blue Tax.

It is a good argument - an excellent argument, in fact - except that he did not fully disclose to Blue Tax. If you want to show reliance on an advisor, you have to … you know … actually rely on the advisor.

Crandell was convicted for tax evasion.

Our case this time was US v Crandell, 2023 PTC 178 (5^th Cir. 2023).

Choose The Lesser Of IRS Grumpiness

 

Let’s talk about the failure to file (FTF) penalty.

Most of us must file an annual income tax return. Unless one is an expat (that is, an American living overseas), the return is due April 15. One can extend the return for six months (that is, until October 15), but the extension is for filing paperwork and not for payment of tax.

How is one supposed to estimate the tax if a significant amount of information is unavailable? Many times, there are estimates or informed guesses; the tax preparer will extend the return using those. Sometimes there are no estimates and no informed guesses; one then does their best. I doubt there isn’t a veteran tax preparer that hasn’t been blindsided by a Schedule K-1.

Let’s continue.

You extend your return. Your K-1 comes in heavier than expected. You owe $5,000 in tax with the return, which you file and pay on October 15.

You will have something called the Failure to Pay (FTP) penalty. The tax nerds know this as the Section 6651(a)(2) penalty. The penalty is as follows:

One-half of 1% for each month or part of a month

To a maximum of 25%

Let’s use our $5,000 example.

I count seven months from April through October (remember: a part of a month counts as a month).

The FTP penalty would be $5,000 times .005 times 7 = $175. It stings, but it is not crushing.

Let’s say the return was filed on October 30.

Has something changed?

Yep.

The IRS is strict about filing deadlines. If the return is extended to October 15, then you have until October 15 to file the return (or at least put it in the mail or submit the electronic file). The 15th is not a suggestion.

What happens if you miss the deadline?

You then filed your return late.

Back to our example. You file the return on October 30. You are just 15 days late. How bad can 15 days be?

It is not intuitive. If you file the return on October 30, you have blown the extension, meaning it is like you never submitted an extension at all. Any penalty calculation starts on April 16.

So what? The FTP penalty is still the same: $5,000 times .005 times 7, right?

The difference is that you have just provoked FTP’s big brother: the Failure to File (FTF) penalty. The FTF is the gym-visiting, MMA-training, creatine supplementing and aggressive sibling to the FTP.

Start with the FTP penalty. Multiply it by 10. The tax nerds know the FTF as the Section 6651(a)(1) penalty. 

Are we saying the FTF penalty is $5,000 times .05 times 7?

Nope, this is tax. There is a loop-the-loop to the FTF calculation.

• The maximum (a)(1) and (a)(2) penalty is 5% per month or part of a month.
• The math stops when you get to 25% in total.

The first loop means that the FTP penalty comes in at .005 and the FTF penalty comes in at .045 per month (or part thereof), as the maximum cannot exceed .050 per month.

The second loop means that the math stops when you get to 25%.

How does a tax pro handle this?

Easy: multiply by 25%.

Let’s go back to the math: $5,000 times 25% = $1,250.

This could have stopped at $175 had you just filed the return on October 15. Nah, you thought to yourself. What’s another couple of weeks?

$1,075, that’s what ($1,250 - $175). That is an expensive two weeks.

So, what got me fired up about this topic?

I saw the following on a tax return this past week:

Go to the bottom where it reads “Interest Penalties.” Go across to “Failure to File.” You will see $3,619.

Someone has just thrown away over three-and-a half grand by dragging their feet on filing. There goes a vacation, new electronics for the house, an IRA contribution - anything better than sending it to the government.

The client has two years of this, BTW.

But CTG, you say, maybe they did not have the money to pay.

The FTF does not mean that one is unable to pay. Granted, in real life the two issues often go together. One rationalizes. I do not have any money; if I delay filing maybe I can also delay IRS dunning letters and collection activity.

Maybe, but practice tells me it is rarely worth it. You have to go over four years with an FTP penalty before you equal just five months of FTF penalty. That money is just too expensive.

Let’s go back to our example.

Say the $5,000 is for tax year 2021. The taxpayer filed the return on or before October 15, 2022 and only now can pay the tax. What have we got?

First, the FTF penalty goes away, as the return was filed on time.

Second, the FTP penalty would be: $5,000 times .005 times 16 = $400. (I am running the penalty from April 2022 to July 2023)

Third, there will be interest, of course, but let’s ignore that for now.

$400 versus $1,075. Seems clear to me.

What can be done if one cannot get numbers together by October 15?

Here’s a thought.

I have a client who owns a successful drywalling company. We extended his return several years ago, and sure enough – closing in on October 15 – he was out-of-town, relaxed and unconcerned about any looming doom. However, I knew that he had a good year, and that any tax due was going to be significant. An FTF penalty on significant tax due was also going to be significant. We decided to file his return with the best numbers available, intending to amend whenever we obtained more precise numbers.

Did I like doing that?

That is a No.

Did he avoid the FTF?

That is a Yes, but he delayed getting us more accurate numbers. That delay created its own problems. Problems which were … completely … avoidable.

What is our takeaway?

File your return. Extend if you must, but file by the extension date. File even if you cannot pay. Yes, the IRS will penalize you. The IRS is grumpy about not getting its money. The IRS is grumpier, however, about not getting the tax return in the first place.

Remember: when given the option, choose the lesser of IRS grumpiness.