In IR-2020-160, the Internal Revenue Service announced its annual "Dirty Dozen" list of tax scams. Each year, the Service warns taxpayers about criminals who target individuals. The IRS encourages taxpayers to be on the lookout for these schemes.
IRS Commissioner Chuck Rettig stated, “Tax scams tend to rise during tax season or during times of crisis, and scam artists are using pandemic to try stealing money and information from honest taxpayers. The IRS provides the Dirty Dozen list to help raise awareness about common scams that fraudsters use to target people. We urge people to watch out for these scams.”
The scammers may attempt to contact individuals online or by phone. Taxpayers should understand the basic scam strategies so they can protect themselves and their family. The top four scams are phishing, creating fake charities, making threatening phone calls and using social media to install malware.
Individuals should be on the lookout for fake emails. The IRS has a policy that it will not contact you through email about your tax bill, refund or Economic Impact Payment. If you receive a suspicious email claiming to be from the IRS, be careful and do not click on links. The latest scam emails often include the words "Coronavirus," "COVID-19" or "Stimulus." A scammer will send emails to a large number of individuals, with the hope of obtaining financial information, account numbers and passwords. The most successful scams this year use the fear of the virus and the desire to receive a stimulus payment.
2. Fake Charities
When there is a natural disaster or other crisis, such as the COVID-19 pandemic, criminals will set up fake charities. There are many individuals with good intentions who are vulnerable to these fake charity scams. The criminal creates a fake charity and then contacts individuals through phone calls, text messages, social media, email or even in-person. The bogus charity often has a name similar to a legitimate charity. You should only give to charities that you recognize. There is a helpful search tool for qualified charities on IRS.gov
3. Threatening IRS Impersonator Phone Calls
A common strategy for scammers is to call a taxpayer on the phone. The scammer claims to be an IRS representative and threatens the victim. The IRS emphasizes that it will never threaten a taxpayer or "surprise him or her with a demand for immediate payment" by telephone. The scammer may threaten to arrest or deport the victim or revoke his or her driver's license. The IRS emphasizes it does not demand immediate payment, threaten or ask for financial information over the phone. If you are contacted and suspect a problem, hang up and use one of the IRS numbers to contact the Service.
4. Social Media Scams
The latest social media scam is to use COVID-19 as part of a social media strategy to trick people. The scammer may use social media to learn about a potential victim’s family members. From this knowledge, the scammer will then impersonate a relative of the victim. Alternatively, the scammer may attempt to convince the victim that he or she is working with a friend or relative. With this relationship established, the fraudster then emails the victim. When the victim clicks on a linked file, malware is loaded on the victim's computer. This malware enables the scammer to acquire passwords and financial information.
The first note in a three-part series to cover the top four "Dirty Dozen" strategies. The next installment will cover four more strategies. Taxpayers should understand all of the ways scammers may attempt to take advantage of unsuspecting victims.
Thousands of Nonprofits Request Federal Support
On July 13, 2020, several thousand nonprofits sent a joint letter addressed to leaders of the House and Senate from both parties. The letters were also sent to all members of Congress.
The nonprofit coalition emphasized that "charitable nonprofits play a significant role in our nation's economy as the third largest employer." The government programs passed as a result of the COVID–19 crisis have been a "lifeline for many nonprofits." However, the nonprofit sector faces major challenges during the next several months.
The House and Senate are now developing a fourth COVID–19 relief package. The nonprofit coalition emphasizes that it has "widespread bipartisan support in both the House and Senate," and requests assistance in four specific areas.
- Emergency Funding Programs – The Paycheck Protection Program ("PPP") has been essential for maintaining employment at many nonprofits. The coalition suggests this program be expanded to cover nonprofits with over 500 employees.
- Loans to Midsized and Larger Nonprofits – Nonprofits with 500 or more employees do not qualify for PPP loans. They also are not able to benefit from the Federal Reserve Main Street Lending Program. The coalition encourages Congress to consider a similar lending program for midsized and larger nonprofits and to offer loan forgiveness in a manner similar to the PPP loans.
- Universal Charitable Deduction – The CARES Act created a $300 above–the–line charitable deduction for cash gifts for nonitemizers. There are bills in both the House and the Senate with the title “Coronavirus Help and Response Initiative Through Year 2022 Act.” These bills would create a universal charitable deduction of $4,000 for individuals and $8,000 for married couples. The coalition urges Congress to pass this enhanced charitable deduction.
- Full Unemployment Benefit Reimbursement – Many nonprofits were forced by state and local shutdown orders to furlough or lay off staff. These layoffs triggered catastrophic unemployment bills for the nonprofits, stemming from a Labor Department ruling that requires nonprofits to pay their unemployment costs upfront. These government provisions are devastating for nonprofits that are in the midst of serious cash flow difficulties. The coalition urges Congress to "increase the federal unemployment insurance reimbursement for self-insured (reimbursing) nonprofits to 100% of costs.”
IRS Syndicated Conservation Easement Settlement Offer
In IR-2020-152, the IRS highlighted its syndicated conservation easement settlement offer. There are over 80 pending cases in Tax Court that are contesting charitable deductions of syndicated conservation easement partnerships. The IRS has made a limited settlement offer to these taxpayers. The letter notes, “The Internal Revenue Service calls on any taxpayer involved in syndicated conservation easement transactions who received a settlement offer from the agency to accept it soon.”
With the Tax Court regularly upholding the IRS position and denying conservation easement charitable deductions, the IRS believes these abusive tax strategies will not be successful. Recent notable Tax Court decisions disallowed $27 million of conservation easement charitable deductions.
IRS Commissioner Chuck Rettig stated, “The IRS will continue to actively identify, audit and litigate the syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions. These abusive transactions undermine the public's trust in private land conservation and defraud the government of revenue. We strongly recommend that participants seek the advice of competent, independent advisors. Ending these abusive schemes remains a top priority for the IRS.”
The IRS letter explains that it understands the role of "legitimate conservation easement deductions" that will preserve land for the future. However, there have been many abusive syndicated conservation easement partnership transactions. These have been highlighted and are being attacked by the IRS.
Some promoters of the syndicated partnerships have claimed that their cases are different and the partners will not be subject to tax payments and penalties. The Service notes "the real dispute is about value," and suggests that the partnerships’ claimed appreciation that exceeds "many multiples of reality" will fail.
IRS Chief Counsel Mike Desmond stated, “Taxpayers should ignore this nonsense, take an objective look at their cases, and cut their losses. Abusive transactions, like settlement offers, do not get better with time and this is a good opportunity to get out.”
Many promoters of syndicated conservation easement partnerships claim that the investors will benefit from charitable deductions that are over two and one-half times the investment amount. After the syndication is complete, an appraisal is obtained that inflates the value "based on a fictional and unrealistic highest and best use" of the property. The partnership then donates a conservation easement and the partners claim the deduction based on the inflated value. The Service notes the deduction amounts “grossly multiply their actual investment in the transaction and defy common sense.”
The attacks by the Service on syndicated conservation easement deductions are managed by Thomas A. Cullinan, Counselor to IRS Commissioner Charles Rettig. On July 14, 2020, Cullinan spoke at a webinar sponsored by the American Bar Association Section of Taxation. He noted, “There are only 80 docketed cases – we can easily handle that. If your client doesn't want to take the deal, that's okay. That is what the court is there for.”
The settlement offer made on June 25 is available to most of the partners involved in the 80 docketed Tax Court cases. Attorneys for the partners were unhappy that the settlement offer requires all partners to agree to the terms specified by the IRS.
Cullinan noted that the terms were generally reasonable. He did state that, “We are willing to entertain discussions with less than all the partners. But if we need to give up some of the efficiencies that would be gained through a complete resolution of the case, we are probably going to make some of the other terms more favorable to the IRS.”
Some promoters have claimed the IRS will not be able to litigate all 80 cases due to staff limitations. Cullinan responded, "That is just total nonsense. There are only 80 or so docketed cases, and they are all proceedings under the Tax Equity and Fiscal Responsibility Act. This is not a big part of our inventory. And IRS counsel is more than capable of handling what is out there."
Cullinan emphasized that this June 25 offer is likely to be the best available settlement. He notes, “Some were carved out because the partners are under criminal investigation, and we excluded cases for other reasons as well.” In the view of Cullinan, the IRS is now winning the war on syndicated conservation easements. He continued, “We have won just about every technical issue we have raised. Even for those few cases that can show complete compliance with Section 170, we are going to win on value.”
Cullinan concluded by noting that the Tax Court decisions are likely to continue to favor the IRS. He stated, "The Tax Court is asking the right questions there, and early results should suggest that it just is not buying that these properties somehow magically appreciated by several hundred percent just a few days after investors buy in.”
Applicable Federal Rate of 0.4% for August -- Rev. Rul. 2020-15; 2020-32 IRB 1 (16 July 2020)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2020. The AFR under Section 7520 for the month of August is 0.4%. The rates for July of 0.6% or June of 0.6% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.