It is helpful to know the IRS requires tax preparers to have a data recovery plan, since many taxpayers use a CPA, attorney, enrolled agent or other tax professional. In letter IR-2019-143, the Service explained the steps tax professionals must take to protect client data. The "Security Six" checklist is published jointly by the IRS and its Security Summit partners.
Step Five on the "Security Six" checklist is for tax professionals to create a data theft security plan. IRS Commissioner Chuck Rettig notes, "The number of tax professionals reporting data theft to the IRS remains too high, and it puts tens of thousands of taxpayers at risk for identity theft. We hope tax professionals will use the Security Summit Checklist as a starting point, not an endpoint, to protect their clients' data - and themselves. "
If your data professional discovers a security breach, there are several steps to follow.
- Contact IRS and Law Enforcement - When you promptly contact the IRS and law enforcement agencies, the authorities may take action to protect taxpayers. The IRS may be able to protect the named taxpayers from a fraudster who may use the stolen data to file a tax return in order to claim a large refund.
- Contact State Revenue Office - A tax professional should promptly contact the state tax agency. This would enable the state office to protect named taxpayers from the filing of fraudulent returns and claims for state refunds.
- Contact Security Expert - An expert computer security engineer can stop further fraudulent activity on your servers. The computer expert will be able to set up improved firewalls and virus protection.
- Contact Agencies and Clients - The tax professional must contact the Federal Trade Commission and the major credit bureaus. He or she must also send a disclosure letter to clients. The disclosure letter notifies clients of the data breach and encourages them to watch for a false tax return or to be suspicious if they receive an unexpected tax refund.
The good news is that the IRS Security Summit procedures have greatly reduced taxpayer fraud during the past four years. IRS Commissioner Rettig concluded, "Our objective is to get every tax professional to think about client data security. The Taxes-Security-Together checklist is intended as a starting point, spelling out the basic steps necessary to start a security review."
No Estate Tax Return Delay for "Financial Disability"
In Elizabeth R. Carter v. United States;
No. 5; 18-cv-01380 (8 Aug 2019), the U.S. District Court for the Northern District of Alabama, Northeastern Division, held the three-year estate tax statute of limitations was not extended by the financial disability of the executor.
Decedent E.P. Roper passed away on September 21, 2007. Elizabeth R. Carter was designated as her personal representative. The largest estate asset was a block of Colonial BancGroup stock with value of $17,604,767. Within six months the stock declined in value to $8,548,947 and the estate elected to use that number. The estate filed IRS Form 706 and paid tax of $6,169,892. The Colonial stock was 46.8% of the gross estate, based upon the alternate valuation date.
Subsequently, there was a criminal fraud involving Colonial and the stock value declined to zero. The estate filed amended returns in 2013 and 2016 requesting a refund of approximately $3.7 million. The 2016 amended return claimed executor Carter suffered a "medically determinable physical or mental impairment" under Sec. 6511(h) and therefore the three-year statute of limitations was extended.
Under Sec. 6511(h) the statute of limitations is suspended if an "individual" is unable to manage his or her financial affairs due to an impairment of his or her abilities. However, the IRS differentiates between individuals and estates. There are separate income tax tables for individuals and estates. Therefore, the Sec. 6511(h) tolling of the statute of limitations for individuals does not apply to an estate.
In addition, the estate valuation must be determined based on information available on the date of death or the elected alternate valuation date. Subsequent events are not a valid method for revising the valuation. The request for a refund was denied.
In 2007, the Colonial stock was approximately 70% of the total estate. This would have been an excellent time to use a tax-free sale and charitable remainder unitrust plan to diversify. The diversification and sale of the Colonial stock could have locked in the higher value. The heirs could have been income recipients under the provisions of the charitable remainder trust.
DAF Best Practice Guidelines
Paul Streckfus is Editor of the Exempt Organizations Tax Journal. In an August 12 letter, he offered guidelines for donor advised fund (DAF) custodians. Streckfus is a "longtime observer of donor advised funds." He suggested guidelines to help DAF custodians to avoid improper procedures.
- Avoid Overstated Deductions - For gifts of real estate, art, family business interests or similar assets, encourage donors to obtain qualified Form 8283 appraisals with reasonable valuations. If an asset is sold within three years at greatly reduced value, the nonprofit must file IRS Form 8282. The lower number could create a substantial tax risk for your donor.
- Disguised Political Contributions - Some DAF custodians operate both a Sec. 501(c)(3) and a Sec. 501(c)(4) organization. Make certain the DAF funds are allocated to Sec. 501(c)(3) organizations and not to Sec. 501(c)(4) politically active entities.
- Donor Control - Be cautious if a donor plans to give 90% of a C corporation to the DAF and then leaves the stock in the DAF for an indefinite period. The DAF is merely being used as a control method and the donor enjoys a large income tax deduction.
- Tangible Personal Property - Transfer of art, coins, collectibles and other tangible personal property to a DAF does not qualify for a Sec. 170(e)(7) related use deduction. This is true even if the DAF custodian holds the tangible personal property for three years.
The vast majority of DAF gifts are cash or public securities. However, with the explosive growth of DAFs, in the future there will be an increased number of property gifts. Many of these property gifts are an excellent option for funding a DAF. However, with the ongoing Congressional oversight of DAFs and property gifts, DAF custodians are urged to follow these best practices.
Applicable Federal Rate of 2.2% for September -- Rev. Rul. 2019-20; 2019-38 IRB 1 (16 August 2018)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2019. The AFR under Section 7520 for the month of September is 2.2%. The rates for August of 2.2% or July of 2.6% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.