As Hurricane Matthew pummels eastern Florida, Georgia and South Carolina, the IRS published IR-2016-128 to show you how to protect tax records.

1. Emergency Plans — Both individuals and businesses should have an emergency plan. Many persons and businesses in the direct path of Hurricane Matthew have been ordered to evacuate. You should plan an evacuation route in the event that an evacuation order applies to you. Individuals could use a safe, safety deposit box or other method for secure storage of tax records. Businesses should maintain backups of important local network data offsite in order to facilitate recovery. Your emergency plan should be updated each year.
2. Electronic Copies — Scan or save PDFs of your tax returns, financial statements, certificates and insurance policy declaration pages. Keep the electronic copy in a safe or safety deposit box. You may save electronic records to a USB flash drive, CD or DVD.
3. Document Valuables — Photograph and retain records for all of your high-value items. These items may include jewelry, art or other collections. IRS Pub 584 gives suggestions on how to document these valuables. Photos are particularly helpful if there is a hurricane or other natural disaster that destroys property. In that case you will need to file an insurance claim and show evidence of the lost item.
4. IRS Help — You may call 1-866-562-5227 to speak to an IRS Disaster Specialist. A taxpayer may request copies of prior IRS Forms 1040 with Form 4506, Request for Copy of Tax Return. Another option is the Get Transcript service on www.irs.gov. A third method is to call 1-800-908-9946 to request assistance in recovering your IRS documents.

IRS Defends Sec. 2704 Proposed Regulations

In REG-163113-02 the IRS published proposed regulations that could reduce gift and estate valuation discounts for many family-owned properties and businesses. There has been strong opposition to the proposed regulations from the estate planning community. Several bills have also been introduced in the House of Representatives in opposition to these proposed regulations.

Speaking at the American Bar Association Section of Taxation meeting in Boston on September 30, Treasury Office of Tax Legislative Counsel representative Catherine Hughes defended the IRS position.

Hughes stated that the new Sec. 2704 regulations are not “intended to do away with all minority discounts.” She observed that a number of judicial decisions and state laws facilitate easy avoidance of the Sec. 2704 provisions. The IRS merely desires to restore the initial purpose and validity of Sec. 2704.

It appears that the IRS’s goal is to narrow the regulatory exceptions to Sec. 2704. Hughes explained that the proposed regulations apply only to family transfers and not to gifts to charity. If a disregarded restriction is not considered because of family control, the intent is to value the property as if there is no restriction. She offered an example with two different properties, one with a disregarded restriction and one without. The intention of the IRS is that those two properties would be valued the same.

Hughes also explained that the types of entities are now clarified. The new rules are intended to apply to a corporation, partnership or other entity.

If a transfer is made to both family and charity, it may be valued as separate interests. She stated, “For the first time, we have made it explicit in these proposed regulations that on the asset side of the estate tax return you can value those interests as two separate interests.”

It is uncertain when the final regulations will be published. Hughes noted that the federal government has provided additional time for comments. The probable date for the final regulations may be any month during 2017.

Independent Sector Supports Expanded Charitable Giving Concepts

In a September 22 publication titled “United for Charity, How Americans Trust and Value the Charitable Sector,” Independent Sector proposed expanding the charitable deduction and also creating charitable giving accounts.

The charitable income tax deduction was first created in 1917. Congress determined that charitable gifts could improve our “education system, expand access to health care, advance scientific and medical research, deepen our appreciation of history and cultural heritage, and help our neighbors both near and far.”

An independent survey suggested that 63% of battleground voters believe that the IRS should make charitable deductions easier to report. Over 79% of taxpayers support an “above the line” charitable deduction. This has been commonly described as the “nonitemizer charitable deduction.”

A new proposal is for charitable giving accounts. These could be a charitable form of an IRA or 401K. The charitable giving account would allow pre-tax allocation of funds into the account held by the financial services custodian. Account distributions must be made only to qualified charities. Allocations to the account would reduce adjusted gross income in a manner similar to an IRA or 401K.

Editor’s Note: A charitable giving account is an interesting and creative new idea. It combines effectively the nonitemizer deduction with a plan similar to a donor advised fund. While this is still a future idea, if it ever passes there will be widespread interest in the giving accounts.

Applicable Federal Rate of 1.6% for October—Rev. Rul. 2016-25; 2016-41 IRB 1 (18 Sep 2016)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2016. The AFR under Section 7520 for the month of October will be 1.6%. The rates for September of 1.4% or August of 1.4% 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.