On June 28, the IRS held a Security Summit in Washington. The IRS reported a reasonable level of success in its efforts to reduce tax refund fraud. IRS Commissioner John Koskinen outlined several specific accomplishments.

• Refund Fraud - In January through April of 2016, the IRS discovered $1.1 billion of fraudulent refunds on 171,000 returns. This was up from $745 million on 141,000 returns the prior year.
• Industry Partners - The IRS worked together with tax reporting firms to review 36,000 suspicious returns. These covered $148 million in claimed refunds. The “suspicious returns” number also was up about 40% from the prior year.
• Identity Theft Affidavit - IRS Form 14039 is used to report identity theft by taxpayers. There was a 48% drop this year in the use of the identity theft form. This indicates that there were a smaller number of fraudulent returns.

Koskinen also reported several initiatives to assist in the future.

• Small Preparers - Koskinen stated, “We are very concerned that identity thieves, in their never-ending hunt for taxpayer data, are turning their attention more and more to focus on tax return preparers. We already saw evidence of this during the last filing season.”
• Data Center - The IRS Information Sharing and Analysis Center (ISAC) has been upgraded to provide greater monitoring of all of the tax returns that are filed. It is a very useful anti-fraud device that allows the IRS to compare tax returns in various ways to uncover fraud.

Koskinen also reported that the Earned Income Tax Credit (EITC) Summit, held on June 29 and 30, would review problems with the EITC and help in identifying additional ways to improve compliance.

Koskinen concluded, “One of the great advantages of the Summit is sharing security information with some of the smartest and best security people in the country.”

Crowdfunding for Charities

As described by Oklahoma attorneys Brandee R. Hancock and Monika N. Turek in “Risks and Abuses of Crowdfunding for Charity,” there has been a dramatic rise in the number of gifts to internet crowdfunding sites. These sites include “Rally, HopeMob, Start Some Good, Crowdrise, Causes, Indiegogo, FirstGiving, RockHub and Razoo.”

The crowdfunding sites are frequently used after a tragedy. The person who sets up the site is willing to ask strangers for help. With the rapid growth of multiple crowdfunding sites, an estimated $60 to $90 billion could be given by year 2020.

After the Boston Marathon Bombing, crowdfunding sites raised more than $1 million for victims. Following an Umpqua Community College shooting, the victim received $800,000 from 24,000 donors. When a vehicle was driven into spectators and four were killed at an Oklahoma State University homecoming parade, there were 12 sites created that produced approximately $200,000 in gifts.

There are several potential income tax consequences for crowdfunding sites.

• Taxable to Donees - The IRS could take the position that the transfer to a donee is taxable income. The IRS in a few cases has actually issued a deficiency and penalties to recipients.
• Excluded Gifts - Most donors and donees take the position that this is a nontaxable gift transfer. Donees normally do not pay income tax on gift transfers. If the donor is giving less than $14,000 in 2016, the transfer qualifies for present interest gift exclusion. Another potential option is for the payments to be made directly to a medical center and to qualify for the medical gift exclusion.
• Charitable Deduction - Donors to crowdfunding sites generally do not qualify for charitable deductions. While the donor might hope to receive such a deduction, there is no deduction for a gift to benefit a specific person. A deductible gift must be made to a qualified charity. Gifts over $250 would require a contemporaneous written acknowledgement from the charity. For these reasons, there is usually no charitable income tax deduction for crowdfunding gifts.

Crowdfunding is essentially unregulated and therefore there could be a risk of abuse.

• Donees - If a recipient has benefited from a transfer in excess of $20,000, many sites will issue IRS Form 1099. If a related party sets up a site for a family member and receives the gifts, the transfer to the recipient is technically a gift from the related party. If that amount is over $14,000 and therefore exceeds the annual gift exclusion, the related party should technically file an IRS Form 709 Gift Tax Return and use a portion of his or her applicable gift exclusion amount.
• Donors - Those who make gifts through the sites should exercise caution. Some sites are fraudulent with no actual victims to receive the transfers. Even if the victim does exist, some site mangers have absconded with the funds.
• Corporations - Another potential abuse is that a corporation could use the crowdfunding site to make payments to employees. Normally, these payments would be taxable income subject to all of the typical employer and employee taxes.

Conclusion

Crowdfunding has great benefits. The internet permits many thousands of individuals with good intentions to provide quick aid to those in need.

However, crowdfunding sites should disclose their tax practices. There is normally no income tax deduction and there could be a potential gift tax consequence for large transfers. The sites should be careful to avoid incorrect or misleading statements.

Capitol Hill Responds to Proposed Tax Reform Plan

On June 24 House Ways and Means Chairman Kevin Brady (R-TX) and Speaker Paul Ryan (R-WI) held a press conference to explain their proposal “A Better Way for Tax Reform.” Brady described the plan by stating, “Today we propose a new tax code for the American people - a tax code built for growth: for the growth of paychecks, for the growth of local jobs and economy, and the growth of America’s economy.”

The proposed plan reduces the top tax bracket to 33% for ordinary income and the top dividend and capital gain rate to 16.5%. The alternative minimum tax, Medicare tax and estate tax are repealed. Most itemized deductions are eliminated - only the mortgage interest and charitable deductions are retained. Personal exemptions are converted into tax credits.

Business income is generally taxed at a top rate of 25%, except for “C” corporations. Their top rate is 20%. Most business deductions such as net investment interest are repealed. However, there is 100% expensing for equipment purchases. Exports are not taxed, but there is a “destination-basis” tax on imports.

Ranking Member of the House Ways and Means Committee Sander Levin (D-MI) described the plan as “Huge, unpaid for tax cuts mostly directed to the wealthy.” He criticized the reduction in top income and capital gains tax rates because the benefits accrue to upper-income taxpayers. The large increases in the standard deductions will “effectively eliminate all itemized deductions.” Finally, the plan relies heavily on dynamic scoring, based on the belief that the new tax system will stimulate job growth and increase taxable income. Levin claimed, “Dynamic scoring has proven to be extremely unreliable.”

Editor’s Note: When the actual bill is drafted, the Joint Committee on Taxation staff will “score” this bill. Levin is correct that the bill will rely heavily on dynamic scoring. The repealed taxes and lower brackets will not be fully offset by reduced deductions and import taxes. As is true with all comprehensive tax reform bills, there will be a lively debate over taxes in 2017.

Applicable Federal Rate of 1.8% for July—Rev. Rul. 2016-17; 2016-27 IRB 1 (17 June 2016)

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