IRS Warnings During Peak Filing Season

Each year, the IRS publishes its “Dirty Dozen” list of tax scams. This week, the IRS warned taxpayers to avoid “phishing scams” and not to falsify income or make frivolous arguments.

As of February 18, the IRS reports that there is a 400% increase in “phishing” emails. The email scammer attempts to trick taxpayers into thinking that this is an official inquiry about their tax refund or filing status.

IRS Commissioner John Koskinen noted, “This dramatic jump in these scams comes at the busiest time of tax season. Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.”

There are two major risks in clicking on email links from a scammer. First, the link may take you to an “official-looking” website and attempt to gain access to your Social Security Number, bank account numbers or other financial information.

Second, the link may load “malware” on your computer. This is a program that gives a hacker access to your computer and may lead to disclosure of your banking or other personal information.

If you receive a suspicious email, do not click on links. Forward the email to phishing@irs.gov. There also is a “Report Phishing and Online Scams” page on www.irs.gov that has extensive helpful information.

When the IRS receives a phishing email, it will work with state and local law enforcement to apprehend the tax scammers.

Koskinen urges taxpayers to watch out for suspicious email subject lines. Some of the phishing email subject lines include phrases such as “Your tax refund,” “Your W-2” or “Order your tax transcript.”

A second IRS warning is to avoid claiming improper tax credits by falsifying income. This action could lead to civil penalties and even tax prosecution. It may be encouraged by unscrupulous tax preparers.

Koskinen cautions, “Taxpayers should not falsify their income or other information on their tax returns to improperly claim tax credits. Misrepresenting facts is cheating and taxpayers are legally responsible for all the information reported on their returns.”

The IRS website also includes a note with a title “The Truth about Frivolous Tax Arguments.”

Some tax scammers tell individuals that they may avoid payment of all tax by claiming a First Amendment exemption based upon their religious status or their moral beliefs. The tax scammer claims that the person may use one of these strategies to avoid payment of all tax.

There are valid exemptions from income tax for qualified religious and other nonprofit organizations. However, these exemptions do not apply to individual taxpayers.

The frivolous claim that you are not subject to income tax for any of these reasons may subject you to back taxes, interest and penalties. Repeat offenders who are classified as tax protesters may even face criminal action by the federal government.

Koskinen reminds taxpayers that the “Dirty Dozen” tax scams are published each year by the IRS. The goal of this publicity is to protect taxpayers from abusive promoters and to reduce your potential tax return errors.

Brady Promotes Comprehensive Tax Reform

In a February 12 Washington speech to the Tax Council Policy Institute Symposium, House Ways and Means Chairman Kevin Brady (R-TX) outlined his plans for comprehensive tax reform.

Brady stated, “In the months ahead and beyond, the Ways and Means Committee will be the center of the tax reform discussion and debate. In the nearly 30 years since enactment of the Tax Reform Act of 1986, the world has changed and countries around the globe have adapted their tax systems to maximize their competitiveness in today’s global economy while the United States has fallen behind. The code we have is too costly, complex and unfair. It is abundantly clear that now is the time to overhaul our tax system from top to bottom.”

Brady outlined six core principles for his comprehensive tax reform plans.

1. Simple and Fair – The tax code must have a flatter structure with fewer deductions and lower rates.
2. Loopholes – The new code will reduce complexity and the number of deductions. The existing complexity is used to the advantage of the wealthy because they have sophisticated tax advisors.
3. Business Taxation – There must be a fair and competitive tax structure for all businesses. This includes the subchapter S and LLC entities that are now very popular.
4. International – The United States must stop shipping jobs abroad. There has been a dramatic increase in the number of “inversions” in which corporations move their headquarters abroad for tax-saving purposes. The United States needs to join all of the other major industrial countries in creating a territorial tax system.
5. Growth – A comprehensive system with lower rates will grow the economy and increase employment.
6. Debt Bailout – The problem of the $19 trillion in national debt must not be solved by increasing tax revenue. There must be a focus on spending control.

Brady sees the PATH Act of 2015 as an important step toward tax reform. He noted, “Our success with the PATH Act serves as a springboard to our objective of comprehensive tax reform.”

Brady and the Ways and Means Committee will continue to lay groundwork in 2016 for comprehensive reform. He will submit “bold and innovative ideas” from all parties. The Committee will initiate international tax reform in 2016. Following the election and installation of a new Congress and new President, Brady hopes to complete the tax reform process in 2017.

Brady concluded, “The American people expect leadership and action – and that’s what they will see from the Ways and Means Committee. And, I can assure you that I am committed to making pro-growth tax reform a reality.”

Editor’s Note: Tax reform is a very challenging endeavor. However, Chairman Brady may be able to build on the work of former House Ways and Means Chairman Dave Camp (R-MI) and actually move tax reform forward in 2017.

Supporting Organization Proposed Regulations

In REG-118867-10 (19 Feb 2016) the IRS published proposed regulations that cover Type I and Type III Supporting Organizations (SOs). Most of the requirements were established in the Penson Protection Act of 2006 (PPA).

1. Donor Control – A donor may not have Sec. 509(f)(2) control over the supported organization. Control is defined as “an act that significantly affects it operations.” Preventing an action or opreration of the supported organization is also prohibited.
2. Type III Notice Requirement – Sec. 509(f)(1)(A) requires a Type III SO to deliver its Form 990, a copy of governing documents and other information annually to supported organizations. This must be done by the 15th day of the fifth month of its taxable year.
3. Type III Responsiveness Test – Under the Reg. 1.509(a)-4(i)(3)(i) test the Type III SO is responsive if the supported organization has a “significant voice” in the investments, grants and selection of grantees. For a Type III SO with multiple supported organizations, this applies to all nonprofits, but the information sharing and relationship may be facilitated through meetings or in other ways.
4. Type III Integral Part Test – Under Reg. 1.509(a)-4(i)(4) the Type II SO is in a parent relationship and elects a majority of the supported organization directors or trustees. It also must have power to remove directors or trustees.
5. Governmental Supported Organization (GSO) – A Type III SO may support up to two GSOs within a fixed geographic area.
6. Single Supported Organization – A Type III SO is functionally integrated if there is only one non-GSO supported organization.

Applicable Federal Rate of 1.8% for March—Rev. Rul. 2016-7: 2016-10 IRB 1 (18 Feb 2016)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2016. The AFR under Section 7520 for the month of March will be 1.8%. The rates for February of 2.2% or January of 2.2% 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.