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Sunday August 30, 2015

Washington News

Washington Hotline

IRS Increases Efforts to Reduce Identity Theft

On August 26, Sen. Kelly Ayotte (R-NH) held a hearing of the Senate Budget Committee in Manchester, New Hampshire. Sen. Ayotte expressed concern about the growth of tax-related identity theft.

She stated, “Tax-related identity theft is a serious problem that is growing at epidemic proportions. According to the Treasury Inspector General for Tax Administration, about 2.4 million taxpayers’ names or Social Security numbers were used to file fraudulent tax returns in 2013. That is nearly a tenfold increase since 2010.”

IRS Commissioner John Koskinen agreed that from 2010 to 2012 there was a substantial increase in identity theft. He noted that identity theft, “for a time overwhelmed law enforcement and the IRS.”

However, Koskinen reported progress for 2013. During that year the IRS prevented $24.3 billion in identity theft refund fraud. Nevertheless, an estimated $5 billion in fraudulent refunds was paid during 2014.

The first witness at the Senate Budget Committee hearing was a New Hampshire mother whose daughter Maddi lost her life in a tragic car accident. Maddi’s Social Security number was stolen and three tax returns were filed claiming refunds. When the New Hampshire mother contacted the IRS, they refused to disclose the fraudulent returns to her.

As a result, Sen. Ayotte and other Senators from both parties responded by introducing the Social Security Identity Defense Act of 2015. The bill requires the IRS to notify individuals if a Social Security number has been stolen. In addition, the Social Security Administration must notify employers of any stolen Social Security numbers.

Attorney Christopher Lee of the Taxpayer Advocate Service (TAS) described federal government efforts to assist taxpayers. TAS Case Advocates work with taxpayers and the IRS to resolve identity theft cases.

Lee explained the two types of identity theft. First, a thief may obtain a Social Security number and file early in January or February to claim a refund. When the victim files, his or her refund will be delayed by two to six months to resolve the identity issue.

Second, some individuals will use the Social Security number of another person to obtain employment. They often will have low or no withholding. At the end of the year, the employer will issue a W-2 with the Social Security number of the victim. The identity thief has received the income and pays no income tax. When the victim files his or her tax return, the IRS will catch the underreporting and demand payment for additional taxes from the victim.

The Taxpayer Advocate Service is working with the IRS to improve administration of identity theft cases. TAS claims that a more centralized approach will result in better taxpayer service and quicker resolution of identity theft cases.

Corporation Sole Tax Avoidance Plan

In Fredric A. Gardner et ux. v. Commissioner; 145 T.C. No. 6; Nos. 14877-13L, 2940-14L (26 Aug 2015), the Tax Court levied Sec. 6700 penalties of $47,000 on a husband and wife who marketed a “corporation sole” tax avoidance plan.

The “corporation sole” entity is permitted under state law. It normally is used by leaders of a diocese or religious order. A corporation sole enables one person to hold title to real estate and efficiently manage the legal operation of a diocese or religious order. Under applicable state law, title to the real estate does not pass to heirs but is transferred to the next religious leader of each entity.

Fredric and Elizabeth Gardner are husband and wife. Fredric has a background in finance. He holds himself out as an accountant and financial planner. Both are graduates of a Texas Bible college and have held employment as ministers and owners of a Christian bookstore.

In 1992 they closed the Christian bookstore. That was also the last year they filed a tax return. In 1993 the Gardners created “Bethel Aram Ministries” as an incorporated association. In 1999 they signed a “vow of poverty” and attempted to assign all income to BAM. On September 27, 2001, Elizabeth filed forms to incorporate BAM in Nevada as a corporation sole.

Fredric and Elizabeth conducted seminars and created print and electronic materials to promote the corporation sole. They claimed that a corporation sole had no tax return, was not subject to IRS review, was immune from government regulation, did not have to withhold employment taxes and the staff were treated as ministers, not employees. Numerous individuals used BAM services to create a corporation sole.

The IRS initiated an investigation in 2004. IRS Investigator Kurt Kuxhausen estimated that BAM had assisted approximately 300 individuals who created a corporation sole. On March 24, 2008, the U.S. District. Court of the District of Arizona issued an injunction that permanently enjoined the Gardners from promoting a corporation sole. See Gardner, 2008 WL 909696.

Under IRS Sec. 6700, the Service assessed a penalty for promoting an abusive tax shelter on September 19, 2011. Based upon the investigator’s evidence that 47 corporations sole were created in year 2003, the Service assessed a penalty of $47,000 to Fredric and to Elizabeth.

The court noted that Sec. 6700 creates a $1,000 penalty per violation for individuals who promote an abusive tax shelter. Because IRS representative Kurt Kuxhausen had demonstrated to the satisfaction of the District Court that the 47 abusive transactions did occur during 2003, the Tax Court rejected the claim by Fredric and Elizabeth that the IRS did not prove all elements of the offense. Therefore, because the District Court was the trier of fact and had determined that the requisite proof was provided by the Service, the $47,000 penalty for each person was affirmed.

Executor Asset Valuation Statement Delayed

In Notice 2015-57; 2015-36 IRB 1 (20 Aug 2015), the IRS delayed implementation of the Sec. 6035(a)(1) reporting requirement until February 29, 2016.

If an estate is required to file IRS 706 Estate Tax Return under Sec. 6018(a), then all returns filed after July 31, 2015 are subject to Sec. 6035(a)(1). The executor is required to value each asset of the estate and report that amount both to the IRS and to the asset heir.

Sec. 6035(a)(3)(a) requires this information to be transferred to the IRS within 30 days of the date of filing or the date the estate tax return was due, whichever is earlier.

Because the regulations implementing the specifics of the reporting requirement have not yet been published, for estate tax returns due after July 31, 2015, the IRS determined that it would delay the due date for the required statements. The due date under the notice is now delayed until February 29, 2016. Executors should not file the valuation statements until the regulations are published.

Applicable Federal Rate of 2.2% for September -- Rev. Rul. 2015-19; 2015-36 IRB 1 (18 August 2015)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2015. The AFR under Section 7520 for the month of September will be 2.2%. The rates for August of 2.2% or July of 2.2% 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 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published August 28, 2015
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