Each year the IRS warns taxpayers about the "Dirty Dozen" tax scams. Prior articles in this newsletter have covered various scams, but on February 17, the IRS published the full list for 2017.
IRS Commissioner John Koskinen stated, "We continue to work hard to protect taxpayers from identity theft and other scams. Taxpayers can and should stay alert to new schemes which seem to constantly evolve. We urge them to do all they can to avoid these pitfalls – whether old or new."
– Taxpayers continue to receive emails from fraudsters. The emails regularly contain links to fraudulent sites. You should not click on any links from a suspicious email. The IRS states it "will never initiate contact with taxpayers via email about a bill or refund." The latest scam is an email to tax preparers with an "Access Locked" statement. In order to supposedly unlock his or her tax software account, it asks the tax preparer to click on a link and log on with his or her username and password. The fraudster will then use that information to steal client information. If you receive a suspicious email, you should forward it to firstname.lastname@example.org
2. Phone Scams
– Americans continue to be threatened with arrest, deportation or loss of a driver's license if they do not immediately send funds to a fraudster who claims to be from the IRS. The funds have been sent through iTunes cards or other immediate electronic payment methods.
3. Identity Theft
– You should always safeguard your financial information. Shredding important documents is a very good practice. You may choose to file early and should try to protect your Social Security number to reduce the risk of an identity theft.
4. Tax Return Preparer Fraud
– Most tax preparers are honest and reputable. Be careful if the tax preparer overpromises on your refund. He or she may create false deductions and understate your taxes.
5. Fake Charities
– Americans are the most generous people on the earth. There are over one million recognized and reputable charitable organizations in our nation. Americans give very generously to charities throughout the land. However, some individuals create fake charities to receive gifts. You should give to charities that you know are reputable. You also may use the tools on www.irs.gov
to check out your favorite charities.
6. Inflated Refunds
– Some tax preparers promote their business by promising large refunds. The IRS indicates "fraudsters use wires, advertisements, phony storefronts and word of mouth via community groups where trust is high to find victims." You should use caution and determine whether you are using a credible tax preparer who will file an accurate return.
7. Excess Business Credits
– Some tax preparers improperly claim the fuel tax credit or research credit. The fuel tax credit is permitted for off road or agricultural use of vehicles. You should only claim these credits if you properly qualify for them.
8. Padding Deductions
– You must only claim deductions you can support. If you make a charitable gift of $250 or more, you must receive a receipt called a contemporaneous written acknowledgement. The receipt will indicate there were "no goods or services" given in exchange for the gift. This receipt must be in your possession before filing your returns. You also should be careful when claiming business deductions. There are specific records required to support those deductions. Help is available on www.irs.gov
9. False Income
– Do not report extra income to increase your earned income tax credit. If you receive excess benefits from this refundable credit, you could be subject to a claim by the IRS for back taxes, interest and penalties.
10. Abusive Tax Shelter
– Some promoters claim that you can purchase a tax shelter and reduce or eliminate your tax. Many of these tax shelters are very complex. Be very careful if you are approached by someone selling a tax shelter that looks too good to be true.
11. Frivolous Tax Arguments
– Promoters may tell you that the dollar is no longer legal tender, only foreign income is taxable or the federal government is not actually permitted to collect tax and therefore you do not have to pay income tax. These arguments have led too many unsuspecting taxpayers into negotiations with the IRS over back taxes, penalties and interest.
12. Offshore Tax Avoidance
– The Offshore Voluntary Disclosure Program has enabled tens of thousands of Americans who hold offshore accounts to disclose those to the IRS. They have paid billions in taxes and penalties. All income is taxable, including interest from foreign bank accounts.
One Hundred Years of Giving Fly-In
On February 16, over 200 leaders of nonprofits flew to Washington for meetings with their Senators and Representatives. After a dinner meeting on February 15 and training on making a Congressional visit, the 200 charitable presidents, board members and staff held meetings with many Members of Congress.
The purpose of the event was to create a broad-based message in support of philanthropy. Jason Lee, Interim President and CEO of the Association of Fundraising Professionals, is Chair of the Charitable Giving Coalition. He stated, "Today has been a great opportunity for our Coalition members to engage Members of Congress and their staffs about the importance of the charitable deduction and its positive impact on the people and community served by the charitable sector."
Another enthusiastic participant was Michael Kenyon, President and CEO of the National Association of Charitable Gift Planners. He continued, "This is a critical time for the nonprofit sector. Congress is poised to undertake the largest re-write of the tax code in over thirty years and whatever lawmakers ultimately do this year could have an enormous effect on charitable giving in this country."
All visits focused on maintaining and supporting the charitable deduction. House Ways and Means Committee Chairman Kevin Brady (R-TX) and his staff are busy writing a comprehensive tax reform bill. The 2,000 to 3,000 page bill may be released for scoring by the Joint Committee on Taxation in late March.
The proposed bill may greatly increase the standard deduction. This may reduce the number of Americans who itemize from approximately 30% to as low as 5%. Because a majority of charitable giving comes from persons who itemize, this could impact philanthropy.
Most participants thought the meetings were quite helpful. Jim Cooper, President and CEO of the United Way of the Pacific Northwest, commented, "I think the meetings have gone well. Generally, everyone understands the impact of the charitable sector on the nation, which is a good thing. There are tax proposals out there that will almost certainly reduce charitable giving in the United States. So, they seemed really open to our discussions on expanding the charitable deduction."
The Charitable Giving Coalition includes many charitable associations and larger nonprofits. The members include the American Council on Gift Annuities, Association for Healthcare Philanthropy, Association of Fundraising Professionals, Council for Advancement and Support of Education, Council on Foundations, Independent Sector, Jewish Federations of North America, National Catholic Development Conference and National Association for Charitable Gift Planners.
Brueghal Old Masters Valued in Estate
In Estate of Eva Franzen Kollsman et al. v. Commissioner
; T. C. Memo. 2017-40; No. 26077-09 (22 Feb 2017), the Tax Court generally followed the IRS appraiser's valuation for 17th Century paintings by Pieter Brueghal and Jan Brueghal. There were modest discounts permitted for cleaning the paintings.
Decedent Eva Franzen Kollsman died in New York City on August 31, 2005. She owned two Old Master paintings on wood panels. The paintings were (1) Village Kermesse, Dance Around the Maypole (Maypole) by Pieter Brueghal the Younger and (2) Orpheus Charming the Animals (Orpheus) by Jan Brueghal the Elder or Jan Brueghal the Younger.
The expert for the estate was George Wachter, Vice President of Sotheby's North America and South America. On September 28, 2005, he provided a letter and estimated the value of Maypole to be $500,000 and Orpheus to be $100,000. Wachter also obtained a five year consignment of the paintings to Sotheby's for a potential sale.
Because the paintings needed to be cleaned, in December of 2005 the paintings were cleaned at a cost of $4,500 and $4,350, respectively.
The estate timely filed Form 706 and reported the value of Maypole at $500,000 and Orpheus at $100,000. The IRS contested the valuations and assessed a deficiency of $781,488.
After three and one half years Maypole was sold by Sotheby's for $2.1 million, with a cost including the buyer's premium equaling $2,434,500.
The Tax Court noted that Wachter claimed the change in valuation from $500,000 to $2.43 million over three and a half years was because the painting initially was dirty and there was a major growth in art valuation during that time. However, the Court observed that he had a significant conflict of interest. Wachter wanted to sell both paintings. The cleaning was a relatively inexpensive and low-risk practice that would likely be undertaken by any potential purchaser.
Wachter also did not provide comparables to support the claimed $500,000 valuation for Maypole and $100,000 valuation for Orpheus.
IRS appraiser Paul Cardile produced multiple comparables. He valued Maypole at $2.1 million and Orpheus at $500,000 if attributed to Jan Brueghal the Elder or $325,000 if attributed to Jan Brueghal the Younger.
The court determined that the Cardile comparables and values were far more credible. It allowed a 5% discount for cleaning and reduced the $2.1 million valuation for Maypole by that amount.
With respect to Orpheus, the court noted that there was a "cogent explanation" why it should be attributed to Jan Brueghal the Elder. However, because there was a potential attribution issue, the court permitted a 25% discount to $325,000.
The court refused to recognize the historical increase in art valuation during the period of three and a half years between the passing of the decedent and the sale of the art. If the estate had had a valuation by an objective third party, it is very probable that a much lower valuation could have been accepted by the court. Because the estate offered only the valuation by Wachter, who had a major conflict of interest, the court essentially accepted the IRS valuation.
Applicable Federal Rate of 2.4% for March -- Rev. Rul. 2017-7; 2017-10 IRB 1 (17 Feb 2017)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2017. The AFR under Section 7520 for the month of March will be 2.4%. The rates for February of 2.6% or January of 2.4% 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 2017, 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