Tuesday November 28, 2023
National Tax Security Awareness Week
The 8th annual National Tax Security Awareness Week is from November 27 to December 1, 2023. The Security Summit is a coalition of the IRS, state tax administrators, tax software companies and the tax professional community.
With the holiday shopping season gathering momentum, the Security Summit partners advised both taxpayers and tax professionals to be extra cautious. During the holiday season, tax fraudsters ramp up efforts to trick individuals into revealing personal information. The fraudsters use email, text messages, social media and phone calls to try to gain access to personal information and steal 2023 tax refunds.
IRS Commissioner Danny Werfel noted, "This security week highlights ways for taxpayers and tax professionals to protect themselves against rapidly evolving identity theft schemes to steal tax and other financial data. The Security Summit effort is an innovative way that the IRS, the states and the private-sector tax industry work together to protect taxpayers and the tax community."
There will be major media efforts by the IRS to enhance awareness of National Tax Security Week. The IRS will make announcements on X (formerly Twitter), Facebook, Instagram and YouTube. The IRS will also provide additional educational materials. On November 30, there will be a webinar for tax professionals to assist them in developing the required Written Information Security Plan (WISP).
Identity thieves are becoming increasingly sophisticated in their approach. They impersonate the IRS through fake emails, texts and online scams. Peter Barca, President of the Federation of Tax Administrators Board of Trustees and Secretary of the Wisconsin Department of Revenue notes, "The Security Summit has made incredible strides to protect taxpayers across the nation, but identity thieves continue to evolve. We encourage taxpayers, businesses and tax professionals to remain on guard against these threats and the information in National Tax Security Awareness Week can help."
The IRS has developed an excellent website tool called the Identity Theft Information Sharing and Analysis Center (ISAC). This website tool helps the IRS track emerging scams and strategies of identity thieves.
Julie Magee, one of the original participants in the Security Summit and the Tax Regulatory Affairs Lead for Cash App Taxes, noted "Even with all the success made by the Security Summit to protect taxpayers and the tax system from identity thieves, more work remains to be done. Consumers and tax professionals play an important role in this effort; protecting their important information will also help the Security Summit partners in the battle against identity theft."
There will be a focus on specific safety strategies each day during National Tax Security Awareness Week. As Cyber-Monday is approaching, the week will highlight online safety. Taxpayers should use anti-virus software with a firewall to protect from intrusions. You should have strong and unique passwords for all accounts. All financial accounts should have two-factor authentication enabled. Do not shop online unless "https” appears in the web address with a padlock icon. Avoid using unsecured or public Wi-Fi.
Other notable topics that will be covered include tips for tax professionals. They should protect their business accounts with two-factor authentication. If professionals are working remotely, they should use a Virtual Private Network (VPN). All tax professionals are required by federal law to have a Written Information Security Plan. Tax professionals should also be on guard for “spearphishing” efforts by fraudsters.
The IRS also encourages taxpayers to use the Identity Protection PIN Program. The IP PIN is a six-digit code that is known to the individual and the IRS. It helps protect your Social Security Number. You should only give the IP PIN code to a trusted tax preparer.
The week will also focus on small business protection. The majority of cyberattacks are focused on businesses with fewer than 100 employees. Hackers have discovered that these small businesses are less likely to have sophisticated firewalls or website and email protections. Business owners may find it helpful to review the "Business” section on the IRS Identity Theft Central on IRS.gov.
Proposed Regulations on Charitable Partnership Easement Donations
In REG-112916-23, the Internal Revenue Service (IRS) published proposed regulations that implement limits on charitable easement deductions by syndicated partnerships. After December 29, 2022, the SECURE 2.0 Act of 2022 disallowed qualified conservation easement deductions for a partnership or Subchapter S corporation if the claimed deduction exceeded 2.5 times the relevant basis of a partner or shareholder. There are three exceptions to the disallowance rule: partnerships with property held for over three years, family passthrough entities and historic building preservation.
Charitable contributions are permitted under Sec. 170(a) and Sec. 170(c). While Sec. 170(f) disallows charitable deductions for most partial-interest gifts, Sec. 170(f)(3)(B) permits deductions for conservation easement gifts. Under Sec. 170(h)(1), a qualified conservation contribution must be a real property interest transferred to a qualified nonprofit exclusively for conservation purposes.
On December 23, 2016, the IRS published Notice 2017-10, 2017-4 IRB 544. In response to the perceived abuse of conservation easement deductions by syndicated partnerships, the IRS established certain easement transactions as listed transactions. Listed transactions require certain disclosures and list maintenance requirements. Transactions that are substantially similar to syndicated conservation easement transactions, include if a syndicated partnership transferred or published materials that offer investors a pass-through deduction that is 2.5 times or more the amount of the initial investment. In addition, these transactions include the investor directly or indirectly owning a portion of the entity and the passthrough entity then contributing a conservation easement to a qualified nonprofit.
The SECURE 2.0 Act of 2022 added Sec. 170(h)(7). The provision is referred to as the "Disallowance Rule." It requires a definition of the "relevant basis" and "modified basis."
The Disallowance Rule applies if the claimed contribution is 2.5 times the applicable basis of a partner or shareholder. If applicable, the qualified conservation easement contribution is disallowed. The "relevant basis” is "the portion of such partner's modified basis in the partnership that is allocable (under rules similar to the rules of Sec. 755 of the Code for allocating certain special basis adjustments to partnership property)." The allocated basis is related to the portion of the donated real property as described in Sec. 170(h)(7)(A).
The proposed regulations apply to partnerships and S corporations, but there will be future guidance on other issues and on the statutory exceptions for assets held over three years, family contributions and historic structures. The "relevant basis” must be substantiated by a record-keeping requirement for the partnership or S corporation in order to compute the ultimate members’ adjusted basis. If there is a multi-tier partnership or S corporation, the Reg. 1.170A-14(j) test is applied at each tier level.
The individual must own either a direct or indirect interest. The "ultimate member" is defined as a "partnership or S corporation, any partner (that is not itself a partnership or S corporation) or S corporation shareholder that receives a distributive share or pro rata share, directly or indirectly, of a qualified conservation contribution."
The Disallowance Rule will apply to upper-tier partnerships and S corporations. If the test is applied to multiple tiers and one tier fails, all lower-level tiers will also be subject to the Disallowance Rule.
Some partnerships and S corporations may pass the 2.5 times basis test, but this is not a safe harbor. They may be subject to action by the IRS based on overvaluation or other failures.
Relevant basis is a potentially complex calculation. The proposed regulations establish multiple rules to determine the accounting adjustments required to calculate modified basis. There are at least four separate adjustments that will be used to calculate the modified basis in a partnership or a shareholder in an S corporation. The allocated basis is designed to accurately reflect the interest of a partner or shareholder in the gifted property for the conservation easement. The proposed regulations include multiple algebraic formulae that are used to calculate the various adjustments to basis.
The three exceptions to Sec. 170(h)(7) include a three-year holding period, family ownership and preservation of a historic asset. The three-year holding period is defined as the last date when property was acquired, the last date on which a partner or shareholder acquired an interest or the last date on which an upper-tier partnership or S corporation acquired an interest in the property. The family ownership exception applies when "substantially all" of the property is held, directly or indirectly by the individual or members of the family. The proposed regulations define substantially all as a 90% ownership standard for family members as defined in Sec. 152(d)(2)(A) through (G).
The proposed regulations establish specific reporting requirements for IRS Form 8283. If the gift is more than $5,000, there is a requirement for an appraisal and the signature of the appraiser. Section B of IRS Form 8283 must be completed. The proposed regulations require that if the form has a space for the insertion of a number and it is left blank, the taxpayer must include an attachment statement with an explanation for why it was left blank. It will not be acceptable to include statements such as information is "available upon request.” The proposed regulations would establish a general formula designed to require the sum of all ultimate members’ relevant bases and use that for calculating the 2.5 ratio. This sum would be required to be reported on IRS Form 8283 to be considered complete under the proposed regulations.
IRS Form 1099-K Reporting Relief
In Notice 2023-74, the IRS delayed a $600 Form 1099-K reporting threshold for calendar year 2023.
For the year 2023, taxpayers must report Form 1099-K if they have received over $20,000 in payments and have more than 200 transactions. The American Rescue Plan (ARP) created a plan to implement a $600 reporting threshold, rather than the current $20,000 reporting threshold.
There was strong adverse commentary about the Forms 1099-K reporting at the $600 threshold. Therefore, the IRS determined that it would be appropriate to implement a delay and a phase-in of the requirements.
IRS Commissioner Danny Werfel noted, "We spent many months gathering feedback from third party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements. Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to Form 1040. It is clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area."
There are many third party settlement organizations that include various payment vendors and online marketplaces. Under ARP, these payment processors were required to report payments of more than $600 on IRS Form 1099-K. The initial plan was for this to apply to the 2022 tax year. Because the change from the $20,000 amount and 20,000 transactions limit to $600 is so drastic, the IRS delayed the requirement for 2022.
The new change will apply to years 2023 and 2024. There will be a threshold of $5,000 for 2024 and, unless there is another change, the $600 limit will apply to tax year 2025.
Commissioner Werfel continued, "The IRS will use this additional time to continue carefully crafting away to minimize burden. We want to make this as easy as possible for taxpayers. We will work to make the new reporting requirements easier for them, and we will work closely with third party groups, tax professionals and others to find the smoothest path to ensure compliance with the law."
There are two possible impacts for individual taxpayers. For example, a taxpayer may sell an auto for a loss and receive a payment of $21,000. If they sell items at a loss, they need to report both the payment and an offsetting adjustment on Form 1040, Schedule 1. They will enter the Form 1099-K gross payment on Line 8z of Schedule 1 and note, "Form 1099-K Personal Item Sold at a Loss, $21,000." On Line 24z, an adjustment for the same dollar value would be made and include the same note. The two entries result in a zero dollar net result.
However, if the car were purchased for $15,000 and sold for $21,000, it would be sold at a gain and there would be taxable income. If the taxpayer received Form 1099-K in that case, it would be reported on Form 8949, Sales and Other Dispositions of Capital Assets and on Schedule D (Form 1040), Capital Gains and Losses.
Applicable Federal Rate of 5.8% for December -- Rev. Rul. 2023-21; 2023-49 IRB 1 (15 November 2023)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2023. The AFR under Sec. 7520 for the month of December is 5.8%. The rates for November of 5.6% or October of 5.4% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”