$950 Million in Unclaimed IRS Refunds

In IR-2016-38 the IRS announced that one million taxpayers qualify for a potential $950 million in tax refunds. The one million taxpayers failed to file their year 2012 tax returns.

IRS Commissioner John Koskinen reports, “A surprising number of people across the country overlook claiming tax refunds each year. But the clock is ticking for taxpayers who did not file a 2012 federal income tax return, leaving nearly $1 billion in refunds unclaimed. We especially encourage students and others who did not earn much money to look into this situation because they may still be entitled to a refund. Don’t forget, there is no penalty for filing a late return if you are due a refund.”

Tax refunds may be obtained up to three years after the initial filing. The deadline for filing a late 2012 tax return and collecting a refund is April 18, 2016.

An estimated 1,037,600 taxpayers could claim an average refund of $718. Many of the non-filers are students or young persons with modest incomes.

If you choose to file and claim a refund for 2012, you also should file for years 2013 and 2014. The IRS has the right to use your tax refund to pay your federal tax bill for subsequent years. There also may be some persons who have obligations for child support or federal debts, such as student loans, who do not qualify for a refund.

Low-income individuals who have earned income may qualify for the Earned Income Tax Credit (EITC). The maximum EITC refund in 2012 is $5,891.

Chairman Brady Targets Fraud

On March 9, 2016, House Ways and Means Chairman Kevin Brady (R-TX) announced three new bills that are designed to reduce fraud. The three bills are planned to save $16.5 billion over two years and a total of $98 billion over a decade.

1. Child Tax Credit - The first bill requires taxpayers who are claiming the child tax credit to have a Social Security Number. The current practice of allowing a claim based on an Individual Taxpayer Identification Number (ITIN) would be changed.
2. Obamacare Subsidy - If taxpayers underreport their income, they may receive a larger than intended subsidy for their health insurance. The taxpayers who underreport income will be required to repay the excess healthcare subsidy to the IRS.
3. Social Services Grant - The Social Services Block Grant (SSBG) program transfers $1.7 billion per year to states and there is no accountability. This program would be repealed.

Chairman Brady commented, “The American people want Congress to fight fraud and cut wasteful spending - and that is what these bills do. I look forward to moving these commonsense bills through our committee and the House in the weeks ahead.”

The Ranking Member of the House Ways and Means Committee is Sander Levin (D-MI). He opposed the new bills and stated, “It is disappointing that the Republicans did not even attempt to work together with Democrats on real fraud and deficit reduction efforts. Their partisan efforts portend another attack on families struggling to join the middle class.”

Estate Must Pay Gift Tax Interest

In Estate of Anthony La Sala et al. v. Commissioner; T.C. Memo. 2016-42; No. 20773-13L (7 Mar 2016), an estate did not receive a waiver of the obligation to pay interest on federal gift tax. The Notice of Federal Tax Lien (NFTL) was upheld.

Decedent Anthony La Sala formed ALS Family LLC (ALSF) in 2001. At age 95 in 2003 he sold 99% of ALSF to his daughter for a $913,986 private annuity. The $2,781,900 annuity valuation was based upon discounts of 50% and 25% on fractional shares of business entities held by ALSF.

La Sala received one payment and passed away on January 9, 2004. The estate filed IRS Form 706 and reported the 1% interest in ALSF with value of $28,100. Because in 2003 La Sala was expected to live over one year, the estate assumed the IRS mortality tables were applicable and the 99% interest in ALSF was excluded. See Reg. 1.7520-3(b)(3).

The IRS audited and claimed excessive discounts and inclusion of the 99% of ALSF under Sec. 2036(a). It assessed a $1,999,845 deficiency.

Prior to the scheduled trial in 2009, the parties concluded an agreement and stipulation. The IRS agreed with the one year of expectancy and the estate consented to a 25% discount rate. The resulting estate tax was $160,176 and the 2003 gift tax was $235,207. On Nov. 15, 2010, the estate paid the estate tax and interest of $230,836. On Nov. 20, 2010, the estate paid gift tax of $235,207. The estate did not pay interest on the gift tax amount.

On Jan. 3, 2011, the IRS filed a NFTL with a late filing fee of $52,912, a late payment fee of $58,802 and interest of $137,752. After negotiation between the IRS and the estate, the late filing and payment fees were abated.

The estate claimed that the settlement involved a “notational amount” for payment of the gift tax and filing the IRS Form 709 Gift Tax Return for year 2003 was merely an administrative convenience. Second, the estate claimed an IRS waiver of the gift tax interest. The Tax Court held the filing of IRS Form 709 for 2003 created an obligation to pay gift tax and interest. Therefore, the NFTL was valid.

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.