IRS removes e-file PIN retrieval tool

The e-file PIN retrieval tool was taken offline in June, following a suspicious uptick in attempts to use it, IRS Commissioner Koskinen reported at a security meeting in June. Taxpayers can no longer sign returns that they file online with an electronic filing personal identification number. The IRS is still trying to determine how many PINs may have been compromised.

Refund fraud continues to rise, but more is being caught, Koskinen said. From January through April 2016, the IRS caught $1.1 billion of fraudulent refunds claimed on more than 171,000 returns, compared with $754 million claimed on 141,000 returns in the same period in 2015, about 49% more money and 21% more returns.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Proposed Regulations

In June the ABA’s Section of Real Property, Trust and Estate Law sent its comments to the IRS on the Proposed Regulations on consistent basis. A wide variety of technical improvements were suggested. Four substantive changes also were included:

  • Reporting requirements should cease when an asset has been included in a subsequent estate.
  • Pecuniary bequests are treated as a sale of estate assets, so no basis reporting should be necessary as to these heirs.
  • There is no statutory authority for the “zero basis” rule for property not included in the estate tax return, so these parts of the Regulations should be dropped.
  • Similarly, there is no statutory authority for the “subsequent transfer” reporting requirement, which hypothetically could go on for generations. This also should be dropped, but if not dropped, a time limit should be added to the reporting requirement.

Substantial comments also were offered by the ABA Tax Section, the State Bar of Texas, the American Bankers Association, the New York City Bar Association, and the American Institute of CPAs.

(August 2016)

© 2016 M.A. Co. All rights reserved.

A stand-alone tax bill in September?

That was the hint dropped by Ways and Means Committee Chair Kevin Brady (R-Texas) in a July press conference, referring to the series of hearings held earlier this year. No specific legislation was identified. The key point is that Brady will be overseeing a new process for pushing tax bills through. “We are not bringing the extenders circus back to town. These bills either need to move [on a stand-alone basis]—one by one—or be part of the overall tax reform in 2017,” Brady told 
Tax Notes.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Charities Helping Americans Regularly Throughout the Year (CHARITY) Act

To the applause of the nonprofit community, Senate Finance Committee member John Thune (R-S.D.), and Committee ranking minority member Ron Wyden (D-Ore.), in April introduced Charities Helping Americans Regularly Throughout the Year (CHARITY) Act (S. 2750). Important elements of the bill include:

  • allowing donor-advised funds to receive charitable IRA distributions;
  • simplifying the standard mileage rate for using a personal vehicle for volunteer work;
  • replacing the two-tiered excise tax on the net investment income of private foundations with a single 1% rate; and
  • expressing the sense of the Senate that promoting charitable giving be a goal of tax reform.

Despite the bipartisan support, no action is expected this year, given the presidential nominating conventions in July, followed by the August recess and the fall campaigning.

© 2016 M.A. Co.  All rights reserved.


Health care reform task force

In February House Speaker Paul Ryan (R-Wisc.) appointed six task forces to study health care reform and ways to make the tax code reward work better. An early report was released April 29. Targets include eliminating the marriage tax penalty and bringing down the corporate tax rate, which is among the highest in the developed world.

Health insurance reform would follow the path established by the American Health Care Reform Act (H.R. 2653), introduced last year by Rep. David P. Roe (R-Tenn.). That bill allows a standard deduction for individually purchased health insurance, and it would modify health savings accounts.

The goal of tax reform would be a top individual tax rate of 25%, coupled with the elimination of special interest “tax expenditures.” The IRS would be dissolved, with responsibility for collecting revenue transferred to a new and smaller department at Treasury. The study calls for dynamic scoring of tax proposals and the creation of a tax-free “Universal Savings Account.”

Few observers expect action on these proposals during an election year.

© 2016 M.A. Co.  All rights reserved.

Sensible Estate Tax Act of 2016

Democrats on the Ways and Means Committee are supporting H.R. 4996, the “Sensible Estate Tax Act of 2016,” introduced by ranking minority member Sander M. Levin (D-Mich). Key elements of the bill include:

  • reducing the federal estate tax exempt amount to $3.5 million;
  • chopping the federal gift tax lifetime exemption to $1 million;
  • capping the Deceased Spouse’s Unused Exemption at $1 million;
  • boosting the estate tax rate to 45%.

The bill isn’t expected to get much traction this year, but could be a preview of coming attractions should the Congress change hands next year.

© 2016 M.A. Co.  All rights reserved.

2016 Filing snapshot

In early March the Treasury Inspector General for Tax Administration (TIGTA) took a snapshot of how this year’s filing season is going. The report was released on March 31. Among the observations:

  • 93.9% of returns were filed electronically. Only 4 million returns came in on paper, to that point.
  • 53.5 million refunds, totaling more than $160 billion, had been issued.
  • More than 2.7 million taxpayers admitted that they had no health insurance in 2015. As a consequence, they paid more than $1 billion in “shared responsibility payments” (or, in the words of Chief Justice Roberts, a “tax”).
  • 1.4 million returns claimed a total of $4.4 billion Premium Tax Credits for their health insurance.
  • 194 tax returns claimed unreasonably large Advance Premium Tax Credits, totaling more than $7.9 billion. Those returns are being investigated.
  • 42,148 fraudulent returns were identified, and more than $180 million in fraudulent refunds was blocked.
  • 31,578 fraudulent returns involved identity theft.

Recommendations have been slated for a future report.

© 2016 M.A. Co.  All rights reserved.

Washington Talk

Deadline deferred. On July 31, 2015, the President signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. One minor component of the legislation implemented an idea that had been included in the President’s earlier budget messages: requiring consistent basis reporting for income and estate tax purposes. To this end, executors of estates large enough to be required to file a federal estate tax return will have additional paperwork requirements. They have to inform both the IRS and beneficiaries of the tax basis of all bequests.

The law requires such filing within 30 days of the due date for the estate tax filing or 30 days after the actual filing. There was no transition rule, so the IRS created one with Notice 2015-57, 2015-36 IRB 294, which provided that no such filings would be due before February 29, 2016. Next the IRS further extended the deadline to March 31, 2016. Proposed Regs. had not yet been issued, and the Service suggested that executors wait for the Regs. before filing.

Temporary Regulations (T.D. 9757) were published codifying the delayed deadline to March 31, with an effective date of March 4, 2016.

Regulations proposed. On the same day as the temporary Regs. on the transition rule was published, the IRS issued the anxiously awaited Proposed Regs. on consistent basis reporting (REG-127923-15). The new rules apply only to property that increases the federal estate tax obligation. The proposed Regs. confirm that property that qualifies for the marital or charitable estate tax deduction is exempt from basis reporting, because it does not generate a federal estate tax

The Regs. cover the situation is which additional estate property is discovered after the time for submitting basis reports, as well as the application of the rules to property that is sold during the period of estate administration.

Early reactions to the proposed Regs. have been positive, and practitioners have found them helpful. However, some called for an additional extension of time for these filings. Form 8971 for reporting “Information Regarding Beneficiaries Acquiring Property From a Decedent” to the IRS was only released in January. The IRS has allowed less than a month for the filings, following release of the proposed Regs., and it comes at the height of the tax filing season to boot.

According to the preamble to the newly proposed Regs. on consistent basis reporting, only about 10,000 taxpayers are expected to be affected by the information reporting per year. According to the analysis of the fiscal effects of the new law created by the Joint Committee on Taxation (JCX-105-15), the change will raise $117 million this year alone. That comes to $11,700 per taxable estate. The increased revenue grows each year, reaching $173 million in 2025.

As seen on Craigslist. The following ad really appeared on Craigslist: “Wanted: kids to claim on income taxes — $750 (Springfield, MO)[.] If you have some kids you aren’t claiming, I will pay you $750 each to claim them on my income tax. If interested, reply to this ad.”

The poster of that ad has now been indicted for filing false tax returns using real Social Security numbers for persons who were not his dependents.

While the candidates vying for the Republican presidential nomination have proposed a variety of tax reduction plans for promoting economic growth, Hillary Clinton has called for a wide range of tax increases. Among them:

  • Implementing a 4% “millionaire’s surcharge” on adjusted gross income above $5 million.
  • Requiring a 30% minimum tax on individuals making more than $1 million, the so-called Buffett rule named after billionaire investor Warren Buffett, who contends many of the wealthy are not taxed enough.
  • Limiting the value of deductions and exclusions to 28%. While this would limit the home mortgage interest deduction, it would not apply to the deduction for charitable contributions.
  • Requiring the wealthy to hold assets for six years to benefit from the preferential 23.8% capital gains tax rate—20% plus the 3.8% net investment income tax enacted under the Affordable Care Act. Assets held less than six years would be taxed on a sliding scale that goes upward from 23.8%. Those holding assets less than one year, for instance, would face a capital gains rate of 43.4%.

Reducing the tax threshold on estates to $3.5 million ($7 million for married couples), along with increasing the top estate tax rate to 45% from the current 40% and setting a lifetime limit on the gift tax exemption at $1 million.

The entire Clinton tax proposal was projected by the Urban-Brookings Tax Policy Center to increase tax revenue by $1.1 trillion over the first decade of implementation. The current proposal does not include the elimination of stepped-up basis at death, which the President had proposed and sources in the Clinton campaign said will be forthcoming.

The Tax Foundation’s analysis came to a different conclusion, finding that just $498 billion would be raised. They use a dynamic scoring model. As the tax increases would be likely to slow economic growth, that development gets factored into their tax math.

Harper Lee’s will remains a mystery. The author of To Kill a Mockingbird and, more recently, To Set a Watchman, Lee died in February. Her estate is estimated to be worth tens of millions of dollars, and there is considerable interest in what will happen to her personal papers. Lee never married and had no children, so her only living relatives are nieces and nephews. However, we may never know the terms of her will because, at the request of the attorneys for her estate, the Alabama probate judge ordered it sealed. He ruled: “The court finds by clear and convincing evidence that information contained in the will and associated court filings pertains to wholly private family matters; poses a serious threat of harassment, exploitation, physical intrusion, or other particularized harm to persons identified in those documents or otherwise entitled to notice of this proceeding; and poses potential for harm to third persons not entitled to notice of this proceeding.” reported that Lee had apparently taken steps to prevent Hollywood from ever remaking To Kill a Mockingbird.

Scorecard. According to the Congressional Budget Office, the federal budget deficit through February 2016 was $352 billion. That’s $34 billion less than the year earlier period. Individual income and payroll tax collections were up 6%, and spending was up 2%. Spending on Social Security was up 4%, primarily due to an increase in the number of beneficiaries.

(April 2016)
© 2016 M.A. Co. All rights reserved.

A prelude to tax reform

ID-10013658Making many of the tax extenders permanent was a prelude to tax reform, because it will eliminate the annual tax debates in Congress that have plagued the institution in recent years.  That’s the view expressed by the new Ways and Means Committee Chair Kevin Brady (R-Texas), who took over the chairmanship in November when Paul Ryan became Speaker.

Corporate tax reform that is sensitive to international considerations is one area that may get consideration in 2016.  Republicans generally believe that reducing the corporate tax rate is the best way to head off corporate inversions, in which companies move their headquarters out of the U.S. largely for tax purposes.  Although earlier discussions have targeted a 25% corporate tax rate, “I am convinced that we have to be at 20% or below to keep us competitive for the longer run,” Brady told Tax Analysts in a December interview.

The difficult political question is whether tax reform should be revenue neutral, as Republicans have advocated, or whether it should raise new revenue, the Democratic position. “I don’t want tax reform to bail out Washington spending problems,” said Brady. “I want it to grow the economy.”

A more pessimistic view of the potential for tax reform in 2016 was expressed by George Callas, who is the senior tax counsel to Speaker Ryan. There just won’t be time to work through much significant tax legislation before everyone breaks for the November elections.  Tax reform ideas are likely to be grist in the presidential race, and may get a thorough airing through the campaign. However, Callas conceded that there is political pressure to “do something” about corporate inversions.

Should you need any further information, please do not hesitate to contact one of our experienced trust officers.


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