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Tuesday May 21, 2019

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IRS Security Summit Success

In 2015, the IRS recognized that "identity theft tax refund fraud (IDTTRF) had reached alarming levels." To meet the identity theft challenge, then IRS Commissioner John Koskinen convened the IRS Security Summit on March 19, 2015.

As noted in the latest IRS Electronic Tax Administration Advisory Committee report, the Security Summit brought together "senior IRS officials, state tax administrators, and the chief executive officers of the leading tax preparation firms, software developers, and tax financial product processors." They all committed to a joint approach to fighting identity theft and tax fraud.

The Security Summit divided into three working groups.
  1. Authentication Group - The group tried to identify ways to strengthen authentication efforts, to validate taxpayers identities and tax return information and to create new techniques for detecting tax fraud.
  2. Information Sharing Group - This group attempted to find methods for government and private entities to share information more effectively.
  3. Strategic Threat Assessment and Response Group - This group viewed the entire tax system and identified areas of vulnerability. It developed strategies to reduce risks, identify threats and create best practices similar to other information technology systems.
By year 2017, the Security Summit showed substantial progress. Identity theft reports declined 40% from 401,000 in 2016 to 242,000 in 2017. Tax returns with confirmed identity theft declined 32% from 883,000 in 2016 to 597,000 in 2017. Fraudulent refunds declined from $6.4 billion in 2016 to $6.0 billion in 2017.

The number of backlogged identity theft reports made by taxpayers also decreased. The "backlogged" reports indicated that the case had not been resolved during that year. In 2013, there were 372,000 backlogged cases, while in 2017 that number had declined over 90% to 34,000.

Editor's Note: Even a $6 billion fraudulent refund amount shows that there is more work to do. However, the Security Summit proves that a coalition of federal, state and local governments can join together with private sector companies to substantially reduce tax fraud crime and protect all Americans.

Charitable Benefits for Nonitemizers

At the American Law Institute Continuing Legal Education Conference in Madison, Wisconsin, University of Missouri-Kansas City School of Law Professor Christopher Hoyt stated, "Most donors over the age of 70½ should make all of their charitable gifts from IRAs."

Hoyt offered an example of "Mary Donor," who is over age 70½ with a required minimum distribution (RMD) of $10,000 per year. Mary takes the $12,000 standard deduction and, thus, is not able to claim itemized deductions for her $6,000 of generous charitable gifts each year.

Mary directs her IRA administrator to send $6,000 to her favorite charity as a Qualified Charitable Distribution (QCD). She takes the $4,000 balance of her RMD as a taxable distribution.

Because the QCD qualifies as part of her RMD, the $6,000 QCD and $4,000 taxable distribution fulfill her RMD for that year. On her tax return, Mary shows only $4,000 as taxable income and reports the balance as a QCD.

By using her IRA to make charitable gifts, Mary Donor has effectively implemented a "nonitemizer deduction." Hoyt suggests that all seniors who take the standard deduction should make charitable gifts from IRAs through IRA charitable rollovers, which the IRS refers to as QCDs.

Editor's Note: Those individuals who have larger IRAs and itemize deductions can also benefit. An owner of a large IRA may have a $100,000 RMD. He or she may make up to a $100,000 QCD each year. By directing the IRA administrator to distribute the $100,000 amount directly to charity, his or her RMD is fulfilled. The donor has simplified his or her tax return, will have a lower adjusted gross income (AGI), experience fewer phaseouts of deductions and credits and reduce the amount of income taxes paid.

House Members Oppose Donor Disclosure

In a June 27, 2018, letter to IRS Acting Commissioner David Kautter, House of Representatives Members Trey Gowdy (R-SC), Jim Jordan (R-OH) and Mark Meadows (R-NC) asked the Service to remove Schedule B from IRS Form 990.

The IRS requires most nonprofits to file Form 990 "Return of Organization Exempt from Income Tax." Section 501(c)(3) nonprofits must include a list of substantial donors. The IRS defines a substantial donor as an individual who contributes $5,000 or more. Schedule B, "Schedule of Contributors," is used by nonprofits to list substantial donors. The IRS also requires Sec. 501(c)(4) and Sec. 501(c)(6) entities to file Schedule B.

Gowdy, Jordan and Meadows explained that First Amendment rights are "critical to the functioning of our system of government." They suggest that Schedule B "lends itself to misuse." Schedule B discloses the names of donors and this information could be used to target donors because of their political beliefs. This targeting could "chill" the exercise of donors' First Amendment rights.

Some states require Schedule B to be submitted when nonprofits register and request state tax-exempt status. The three members note, "States like California have previously publicly disclosed this sensitive information, revealing the names and addresses of donors."

Finally, Gowdy, Jordan and Meadows suggest, "Because the requirement that nonprofit organizations other than those described in Sec. 501(c)(3) submit Schedule B information to the IRS is imposed through regulation, it may be eliminated through a regulatory action."

Applicable Federal Rate of 3.4% for July -- Rev. Rul. 2018-19 ; 2018-27 IRB 1 (17 June 2018)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2018. The AFR under Section 7520 for the month of July is 3.4%. The rates for June of 3.4% or May of 3.2% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.

Published June 29, 2018
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