Many taxpayers need a transcript of a prior tax return to qualify for a home loan or other business loan. The IRS “Get Transcript” online service exists to help taxpayers obtain their records. However, this service was disabled in 2015 after over one million unauthorized attempts to obtain tax returns.

Following extensive efforts by the IRS and private digital security experts, the “Get Transcript” service was relaunched on June 7. The new “Get Transcript” service enables you to receive the tax transcript online or by mail. This online “Get Transcript” process has 5 requirements.

1. Social Security Number – You will start by entering your social security number.
2. Email Accounts – You must have an email account in order to receive an authentication code.
3. Tax Return Information – Enter your name, birthdate, mailing address and filing status.
4. Financial Information – You will need an account number from a credit card, auto loan or home loan.
5. Mobile Phone – Enter the number with an account in your name. The phone must be able to receive a text message.

This new system is much more secure but also will be more difficult to use. IRS Commissioner John Koskinen stated, “The IRS is committed to the protection of taxpayer information and the security of our systems. Criminals are becoming increasingly sophisticated and continue to gather vast amounts of personal information as the result of data breaches outside the IRS. In the face of that threat, we must provide the strongest possible authentication processes, while trying to enhance the ability of taxpayers to legitimately access their data and use IRS services online. We recognize that enhanced security will increase the challenge for taxpayers accessing our online services.”

Estate Regulations “Zero Basis” Rule Questioned

In a letter to IRS Commissioner John Koskinen on June 1, 2016, the American Institute of CPAs (AICPA) asked the Service to remove the Prop Reg. 1.1014-10(c)(3) “Zero Basis Rule.”

The Surface Transportation and Veterans Healthcare Choice Improvement Act in 2015 amended Sec. 1014. This IRC Section “steps up” the basis for most estate assets to fair market value. The amendment requires reporting to insure a consistent basis in the hands of the estate and the estate beneficiaries. If a return is required under Sec. 6018(a), then the executor must notify both the IRS and each beneficiary of the appropriate basis for federal tax purposes.

The AICPA previously made recommendations that were accepted in the purposed regulations. The letter notes that it is pleased that the proposed regulations do not require “the estate basis reporting for estate tax returns filed solely for electing portability” or “estate basis reporting for assets of de minimis value.” The reporting therefore is not applicable for household goods, cash or income in respect of a decedent (IRD).

Under Sec. 1014, the basis of most property is stepped up to the date of death value. However, under Prop. Reg. 1.1014-10(c)(3)(i)(B), “if the executor does not report the after-discovered or omitted property on an initial or supplemental estate tax return filed prior to the expiration of the statute of limitations (generally three years from the filing of the estate tax return), the basis to the beneficiary of the omitted property is zero.”

This “Zero Basis” rule is deemed a punitive overreach. AICPA suggests that a better solution would be to permit an executor to file a supplemental 706 at any future time. The supplemental Form 706 would exist solely to comply with Sec. 6035 basis rules.

In addition, AICPA recommends that the Prop. Reg. 1.6035-1(f) reporting requirement for subsequent transfers be removed. This provision applies if the transfer is to a related transferee, such as a lineal descendant, controlled entity or grantor trust.

AICPA deems this requirement impractical and unenforceable. Particularly for foreign beneficiaries, the rule is quite burdensome and not required. Other types of reporting should be sufficient to ensure compliance.

Enhanced Deduction for Inventory Gifts

In a June 7th letter to IRS Associate Chief Counsel Scott Dinwiddie, the AICPA proposed changes to the basis rules for inventory gifts. Sec. 170(e)(3) provides special rules that permit enhanced deductions for gifts of appreciated foods and other qualified inventory. The deduction is the lesser of the cost plus one-half of the appreciation or twice the basis.

However, Reg. 1.170A-4A(c)(3) requires reducing cost of goods sold by the basis. Therefore, the basis is taken as a charitable deduction. Due to the 10% income limit for inventory gifts and the 15% limit for gifts of “apparently wholesome” food inventory, the deduction may not be fully utilized. See Sec. 170(e)(3)(C)(i).

AICPA proposes that the cost of goods sold be reduced by the amount of the basis. As a result, the “enhanced deduction” reflects only the additional amount.

Assume that a corporation has inventory with a basis of $1,000 and a fair market value of $1,400. The corporation transfers the inventory to a public charity and the gift qualifies under Sec. 170(e)(3).

Under the current regulations, the charitable deduction is $1,200. The basis plus one-half of the appreciation is less than double the basis and is therefore the appropriate limit. The corporation reduces the cost of goods sold by $1,000 and reports a $1,200 deduction.

However, if the corporation has $3,000 of taxable income, the deduction is limited to 10% or $300 and there is a carryforward of $900.

AICPA proposes allowing the cost of goods sold to be reduced by the $1,000 in basis. The charitable amount would then be $200 and fully deductible in the year of the gift.

Applicable Federal Rate of 1.8% for June—Rev. Rul. 2016-13; 2016-25 IRB 1 (17 May 2016)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2016. The AFR under Section 7520 for the month of June will be 1.8%. The rates for May of 1.8% or April of 1.8% 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.