IRS Taxpayer Support in 2016

Each year the IRS alerts taxpayers about potential tax problems and scams. Four of the 2016 “Dirty Dozen” scams were described in IRS letters this week. First, unscrupulous tax preparers may plan to file an inflated tax refund for you. IRS Commissioner John Koskinen stated, “Be wary of tax preparers that tout outlandish refunds based on federal benefits or tax credits you have never heard of or were not eligible to claim in the past.”

Some tax scammers promise large refunds from “fictitious rebates, benefits or tax credits.” You can seek qualified tax preparers in order to avoid any unusual or excessive tax refund claim.

Second, some tax preparers will “pad” or overstate your deductions. The IRS examines numerous returns each year with excessive and unsupported deductions. The most frequent excessive deductions are claimed for improper business expenses or unsupported charitable contributions. The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) also are subject to frequent errors. If you file a “padded” deduction and underpay your taxes, you may be subject to additional payments of tax, interest and penalties. It is best to protect yourself by using programs such as IRS Free File or contact a volunteer tax assistance person in your local community.

Third, scammers may attempt to use excessive business credits. Koskinen reports, “The IRS is committed to stopping the improper use of business credits and catching the promoters of erroneous claims.” The most common business credit scam is use of the fuel tax credit. Individuals who are engaged in farming or off-road construction may obtain a fuel credit, but most Americans who use public roads do not qualify. Other tax scammers have improperly suggested that you could qualify for the business research credit. Most taxpayers do not qualify for either the business research credit or the off-road fuel credit.

Fourth, gifts to organizations with names similar to respected, legitimate charities may lead to problems. Koskinen reports, “Fake charities set up by scam artists to steal your money or personal information are a recurring problem. Taxpayers should take the time to research organizations before giving their hard-earned money.” You should take care to make gifts and receive receipts from recognized charities. All public charities are willing to provide you with their Federal Tax Identification Number.

The week after President’s Day is the busiest time of the year for calls to the IRS. Koskinen notes, “The entire week of the President’s Day holiday marks a peak time for the IRS. We are keeping our phones open over part of the holiday weekend to manage the increased demand.” He also urges taxpayers to go to www.irs.gov first to obtain information. After you file, you may use “Where’s My Refund” on IRS.gov or the phone app “IRS2Go” to check on your refund status.

Estate Basis Reporting Delayed

In Notice 2015-57, 2015-36 IRB 294, the IRS implemented a reporting requirement of the Service Transportation and Veterans Healthcare Choice Improvement Act of 2015. That act required executors to file a statement under Sec. 6035(a)(3)(A). The first filing was scheduled for February 29, 2016. The intent of the provision is to require the estate and beneficiaries to use the same basis for all estate assets.

In Notice 2016-19, 2016-9 IRB 1 (10 Feb 2016), the IRS delayed this reporting requirement until March 31, 2016.

Sec. 1014(f) requires the basis of property acquired from the decedent to be a maximum of the value as finally determined for federal estate tax purposes. If the value is not finally determined, the amount as reported under Sec. 6035 is applicable.

Sec. 6035(a)(1) requires executors who must file under Sec. 6018(a) to furnish both the IRS and property recipients with a statement identifying the appropriate asset value. For estates after the initial reporting date, the Sec. 6035(a)(1) statement must be provided the earlier of 30 days after the estate filing date (including extensions, if any) or 30 days after the date the return is filed.

The IRS is expected to issue proposed regulations in the near future that will clarify Sec. 6035 requirements.

Dynasty Trust Charitable Deduction Approved

In Mart D. Green v. United States; No. 5:13-cv-01237 (9 Feb 2016) the U.S. District Court of the Western District of Oklahoma held that a dynasty trust properly deducted a charitable contribution.

The David and Barbara Green 1993 Dynasty Trust is a 99% limited partner in Hob-Lob Limited Partnership (“Hob-Lob”). Hob-Lob operates multiple Hobby-Lobby stores. In 2004, Hobby-Lobby gave $4.75 million to public charities. Because the gift was intended to be made by Hob-Lob, corrected financial statements were prepared and filed.

The IRS claimed that charitable deductions may not be “exchanged, sold or distributed” from the donor to another entity and denied the Hob-Lob deduction.

The Court noted that “a transaction is to be given its tax effect in accord with what actually occurred.” There was a clerical error that was corrected through financial record changes, affidavits and payment of $4.75 million from Hob-Lob to Hobby Lobby. The actual gift was made by Hob-Lob and therefore qualified for the charitable deduction.

Editor’s Note: In many tax cases the IRS has argued “substance over form.” In this case the taxpayer successfully claimed the “substance” was a gift by Hob-Lob and the “form” was a clerical error.

Applicable Federal Rate of 2.2% for February—Rev. Rul. 2016-4; 2016-6 IRB 1 (20 Jan 2016)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2016. The AFR under Section 7520 for the month of February will be 2.2%. The rates for January of 2.2% or December of 2.0% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.