IRS Publishes ‘Dirty Dozen’ Tax Scams

As the tax filing season nears the February peak, the IRS this week published the full “Dirty Dozen” tax scams. In previous weeks, the IRS has published separate releases that describe specific tax scams.

The full “Dirty Dozen” include the following scams:

1. Identity Theft – Taxpayers should protect their Social Security Numbers. To avoid tax refund identity theft, they should release this information only as needed.
2. Phone Scams – There has been a surge of phone scams in the past year with callers impersonating IRS agents. The phone scammer may threaten you with police arrest, deportation and revocation of your driver’s license. The IRS will not call you about your tax return.
3. Phishing – A large number of new emails claiming to be from the IRS have appeared. Do not click on any link on an email that claims to be from the IRS. The link is likely to install “malware” on your computer and the scammer will attempt to acquire your banking and other financial information.
4. Return Preparer Fraud – Exercise care by working with reputable tax preparers. Review your return before it is submitted. Insist that the tax refund be sent to you, not to the tax preparer.
5. Offshore Tax Avoidance – The IRS has successfully pursued many taxpayers who are hiding income in Swiss or other foreign bank accounts. The Offshore Voluntary Disclosure Program (OVDP) enables many taxpayers to disclose their accounts and pay the appropriate penalty.
6. Inflated Refund – Do not sign a blank tax return. You also do not want to pay a fee that is calculated based upon a percentage of your refund.
7. Fake Charity – Some fake charities create names similar to reputable charities. You should only give to known and recognized charities. On www.irs.gov there are lists to show you the recognized charities so your gifts qualify for charitable deductions.
8. False Business Deductions – Be careful to file an accurate amount of your current income and your deductions. Do not overstate your business expenses.
9. Excessive Business Credits – There is a fuel tax credit for off-road use of vehicles by farmers and many contractors. Consumers do not qualify for this off-road tax credit.
10. False Income To Claim Credits – Do not invent income to qualify for the Earned Income Tax Credit (EITC).
11. Tax Shelter – Some individuals set up a “pure trust” or a “corporation sole.” Promoters claim these entities allow you to avoid all income tax payments. The IRS regularly stops these inappropriate tax avoidance schemes.
12. Frivolous Tax Arguments – The “U.S. is no longer on the gold standard” or “U.S. currency is not valid” claims are sometimes used to avoid payment of all tax. These claims could lead to a $5,000 penalty for filing a frivolous tax return.

IRS Commissioner John Koskinen stated, “We are working hard to protect taxpayers from identity theft and other scams this filing season. Taxpayers have rights and should not be frightened into providing personal information or money to someone over the phone or in an email.”

Online or Phone IRS support?

At a February 23 public forum, IRS Commissioner Koskinen and National Taxpayer Advocate Nina Olson discussed the future of IRS taxpayer service.

Koskinen outlined his vision for moving taxpayers forward in the use of online support tools. He suggested using online tools could resolve questions about the Earned Income Tax Credit or assist a small business person with explanation of tax payment deadlines. These online methods even could be used to assist a large business in an audit or tax examination. All of these tax challenges may be resolved through use of virtual communications.

Olson expressed concern with this goal. She stated, “Where I differ with the IRS’ hopes and expectations and assumptions is how much that will actually eliminate the need for people talking to the IRS, rather than being able to take care of their issues, cradle to grave, and have all of their needs met on an online account. The only way the IRS’ vision of the future works is if taxpayers will move to online services for most if not all of their needs.”

While Olson recognizes the IRS goal to move taxpayers from phone support to online methods, she compares the success of the banks in this area. There is a 2015 Federal Reserve study that indicated 72% of bank customers visit a bank branch each month. Olson noted that online banking has not eliminated the need to provide personal support. She continued, “We are not a bank. We can do terrible things to taxpayers without going to a judge.”

Koskinen countered that the IRS has serious budget issues that force a change. As a result of the lack of human resources, Koskinen suggests that the IRS does not “have enough people to answer the phones; we don’t have enough people to answer the correspondence.”

He is hopeful that there will be greater funding in the future. Koskinen notes, “To the extent that we can get the Congress comfortable that if they give us money for specific initiatives…they will have a better idea than maybe in the past of exactly what they are going to buy for that money.”

Olson concluded by urging the IRS to see “the reality of the taxpayer, rather than the ideal taxpayer.” She hopes that the IRS will continue to maintain a substantial level of personal phone support for taxpayers.

Senators Propose Conservation Easement Panel

In a letter to IRS Commissioner Koskinen, Sens. Chris Murphy (D-CT) and Richard Blumenthal (D-CT) criticized current audit procedures for conservation easement gifts.

Connecticut landowners who have made conservation gifts told their Senators that the IRS conducts “an unnecessarily lengthy, confrontational and expensive audit process.”

In December of 2015, the Congress enacted the PATH Act. This bill made permanent expanded deductions for conservation easement gifts. Even though the property is appreciated, most donors benefit from a deduction usable to 50% of adjusted gross income, with a 15 year carryforward for gift amounts over that level.

Murphy and Blumenthal indicate that Congress has clearly shown a desire to encourage conservation easements by enacting the enhanced deduction provisions. However, the IRS is limiting conservation gifts by enforcement that is seen as “antagonistic, aggressively adversarial, lengthy and expensive.”

Murphy and Blumenthal propose a solution that is similar to the IRS Art Advisory Panel. Each year experts with backgrounds in various areas of art value both gifts to charity and transfers from donors to family members. The transfer valuations for both charitable and transfer tax purposes are accepted by over 95% of taxpayers. This process greatly reduces the need for expensive audits or litigation with the IRS.

A similar option could involve the creation of a “Conservation Easement Panel.” A group of experts in real estate and conservation easements could determine the fair market value for the “before and after” determination.

Murphy and Blumenthal believe that this plan “would be beneficial for both the IRS and many of our constituents, whose actions Congress wholeheartedly endorses.”

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.