Welcome to TaxView with Chris Moss CPA Tax Attorney

If you have given a large donation to an IRS designated 501(c)(3) public charity in 2015 you all know that you get to itemize that contribution as a tax deduction on Schedule A of your Form 1040 you will file this April 2016.  But there is also another option: the 501(c)(3) Family Private Foundation or PF. While the super-rich have always had PFs, Bill and Melinda Gates Foundation for example, many more American taxpayers are giving PFs a try.  Your family gets significant control over the types of “grants” they make as well as substantial income and estate tax benefits.  Not to mention a permanent legacy for your family for generations to come.  But watch out: there are many IRS Government placed PF traps that can cause your PF to cost you more than its worth in penalty excise taxes when you get hit with an IRS Private Foundation Audit perhaps years later.  So if you have any interest in forming a Private Foundation, stay with us here on TaxView with Chris Moss CPA Tax Attorney to learn the steps in properly operating a PF so that you stay clear of IRS imposed excise taxes during a routine IRS Private Foundation Audit.

The legislative history of the Private Foundation is to say the least fascinating.  One of the first PFs in the early 20th century was the Rockefeller Foundation formed in 1913.  Did the newly enacted income tax enacted that same year and the estate tax three years later in 1916 have anything to do with this?  What do you think?

Over a 100 years and thousands of private foundations later Congress addressed the wide spread abuse of the tax exempt status of private foundations.  A leading 7th Circuit case, Quarrie Charitable Fund v IRS, 603 F.2d 1274 (7th Cir US Court of Appeals 1979) and the House Ways and Means 2005 Report rewinds us back to the Tax Reform Act of 1969. The Act imposed PF excise taxes on self-dealing between the founding family and the PF and a small 2% tax on investment income.  Even with these excise taxes, PFs continue to be extremely popular with many taxpayers and have evolved into Grant-Making Private Foundations (GPFs), Private Operating Foundations (POFs) and Exempt Private Operating Foundations (EPOFs’) which are relatively easy to set up and operate---that is as long as you know where the IRS traps are during an IRS Private Foundation Audit..

The first trap is easy to avoid, but apparently not to Todd v IRS US Tax Court (2002).  In 1994 Todd formed the Todd Family Foundation and transferred 6,350 shares of Union Colony Bancorp to the PF. Todd took a $500,000 charity deduction on Schedule A of his 1994 Form 1040 using form 8283 Noncash Charitable Contributions as substantiation for the deduction.  The IRS audited and disallowed all deductions including carryforwards to 1995-1997 arguing that there had been no qualified appraisal of the stock.  Todd appealed to US Tax Court in Todd V IRS US Tax Court (2002).  Judge Halpern easily finds for the Government citing IRS regulation 1.170A-13 that a qualified appraisal must be made no earlier than 60 days prior to the date of contribution, be prepared and signed by a qualified appraiser and must have been included in the tax return along with Form 8283.  IRS Wins Todd Loses.

The next two traps of control and self-dealing are more complex as discussed by the IRS themselves in their article Developments in the Private Foundation Area (1990). Unlike public charities, PFs are most likely controlled by the founding family, as in Bell v IRS US Tax Court (2009). Bell owned the Bell Family Foundation and numerous other profitable business entities.  Bell contributed stock in Northeast Investors Trust to the Bell Foundation and properly deducted a charitable deduction with a signed appraisal on his 1996 tax return.  There were in addition subsequent charitable carryforwards to years 1997-2000.  The IRS audited and disallowed all Bell’s donations to the Bell Foundation for all years claiming that Bell still controlled the stock because Bell controlled the Foundation. Since Bell still controlled the stock there was never a charitable donation to deduct because no charitable gift had ever been transferred.  The Bells appealed to US Tax Court in Bell v IRS US Tax Court (2009).  The Court noted that although the PF is controlled by the Bells, control alone is not sufficient to defeat the charity deduction by the Bells.  Judge Wells further argues that the IRS had not cited any authority in support of their contention that merely having control over the foundation disqualifies the Bells from claiming the charitable contribution deductions for the contribution of the shares of Northeast Investors Trust to the Foundation. Indeed the Court opines, the “Self-dealing” trap is more likely to trip up PFs as per IRS Code Section 4940 through Section 4945.  IRS loses, Bell Wins. 

Which brings us to the trap of self-dealing.  “Self-dealing’ includes the furnishing of goods, services or facilities between a PF and a disqualified person as per Section 4941(d)(1)(C).  There is one exception: Section 4941(d)(2)(E) allows “self-dealing” to family members if their service was of a professional nature and their compensation was not excessive.  But what about for example a janitorial service? 

In Madden v IRS US Tax Court (1997), Madden’s PF, the Museum of Outdoor Arts contracted with Madden’s Maintenance Company to perform maintenance, janitorial and custodial work.  The IRS audited six years’ worth of Madden’s tax returns from 1983-1989 and charged him self-dealing excise tax on all years. Madden appealed to US Tax Court in Madden v IRS US Tax Court (1997).  Judge Fay reviews the legislative history involving the “personal service” exception of Section 4941(d)(2)(E) noting that in order to prevent PFs from being used by their Founders for personal gain, Congress established a set of arm’s length standards for dealings between the foundation and the Founder members or “disqualified individuals”. H. Rept. 91-413 (Part 1), at 21(1969).  The Court notes that while the IRS regulations do not define the term “personal service” they offer several examples such as legal services, investment management services and general banking services.  The Court therefore concluded that janitorial service was not “personal service” and that Madden was subject to the “self-dealing” excise tax under Section 4941(a)(1).  IRS Wins Madden Loses.

So what can you do to set up your Private Foundation right now in 2016 and be protected during an IRS Private Foundation Audit?  First, choose what area you want to make a difference in the world. One family can change the world with the properly structured PF.  Look at Water Missions and see how this one family is changing the world working through the power of the Holy Spirit to provide fresh water to nations in need.  Next make sure to consult with your tax attorney.  She can set up your PF, including State entity formation, IRS EIN number, application to the IRS for tax exemption Form 1023 and can act as your PF in house legal counsel as well.  Third transfer assets to the Foundation either in cash, stock and/or real estate and begin the journey to create your legacy.  As a secondary yet important benefit your transferred assets are removed from your taxable estate saving you and your family estate tax upon your passing.  Last but not least is the annual income tax savings you receive as you deduct one very large charitable donation on Schedule A of your personal tax return and make sure your Tax Attorney includes her contemporaneously prepared opinion in your tax return prior to filing that your Foundation is legal and in accordance with IRS regulations and Federal law.  When the IRS comes knocking on your door years later you can rest assured you will win the IRS Private Foundation Audit.  All said and done, not a bad way to change the world.  Hope your Private Foundation goes well in 2016.  Thanks for joining us on TaxView, with Chris Moss CPA Tax Attorney. 

See you next time on TaxView,

Kindest regards and Happy New Year 2016

Chris Moss CPA Tax Attorney.

Welcome to TaxView with Chris Moss CPA Tax Attorney

Tax return identity theft is on the rise and will reach an all time high in 2016. Criminals or the perpetrators plan to illegally obtain your name and Social Security number, create phony W-2s and related forms, and file a bogus tax return before you can file your legitimate return. Many of these crooks are organized criminals who have figured out that it is easier to rip you off by filing a bogus tax return than robbing a bank or hijacking a car. These 21st century thugs are ripping off the US Government as well. Uncle Sam is losing millions of dollars if not potentially billions a year in bogus tax refunds and you the taxpayer are out in the cold if you are one of the unlucky taxpayers who get their identity stolen. Do you want to learn some basic prevention steps to keep your tax return safe from identity theft this year.? So stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to stop the perpetrators and protect and keep safe your tax return from identity theft in 2016.

The typical identity theft scheme is for the perpetrator to file an early tax return with your social security number and your name but a different address around February through March up to the first week in April. The bogus tax return always shows a refund from a bogus W2 for a company you don't work with an address you don't live at. The mailing address on the tax return could be a PO Box or an executive office suite or any rented house. Sometimes the address could be an abandoned or foreclosed property where there is an outside mailbox or a mail slot in the door with no occupants to get the mail.

Here is how the scheme works:  For manual checks, the refund check comes to the designated address and the mail is picked up by the perpetrator. The check is then either forged and cashed or deposited into a legitimate account but with a fictitious owner. There could be hundreds if not thousands of these refunds for hundreds of taxpayers from the same address to which the perpetrator has stolen identities from. Currently the IRS has absolutely no mechanism to detect such mass refund requests originating from the same address. For electronic refunds, bank accounts are opened and then closed immediately after thousands of bogus refunds have been deposited with the money wired abroad without a trace. While the Government eventually discovers the identify theft when the IRS computer system matches the bogus W2 to the company you supposedly work for, that matching process does not happen immediately when the tax return is filed, but perhaps sometimes months later.  By then the refund had already been issued and soon a few weeks later stolen by the perpetrator all prior to the IRS discovering the identify theft.

In addition the crooks know this crime must be a high volume scam to success. Criminals realize that many of their bogus tax returns will be delayed or questioned by the IRS. So when for example a few hundred of the refunds are received of the thousands of returns filed, the perpetrators close shop and move on. By the time the government investigates the crooks have moved on, new locations have been secured and the illegal operators get ready for the next year’s filing season to start the whole operation again.

How serious is tax return identity theft?  IRS Commissioner Koskinen during a prepared speech on November 19, 2015 in Washington DC noting that "increasingly, these crimes are being perpetrated by sophisticated, organized syndicates. They’ve been able to gather almost unimaginable amounts of personal data from sources outside the IRS. They use this data to file fraudulent federal and state tax income returns, and claim huge refunds."  More specifically, the inspector general of the IRS indicate that bogus tax filings are in the millions with billions of dollars potentially at stake. A new proposed bill “Stop Identity Theft Act of 2015” calls for the Attorney General to: (1) make use of all existing resources of the Department of Justice (DOJ), including task forces, to bring more perpetrators of tax return identity theft to justice; and (2) take into account the need to concentrate efforts in areas of the country where the crime is most frequently reported, to coordinate with state and local authorities to prosecute and prevent such crime, and to protect vulnerable groups from becoming victims or otherwise being used in the offense.

What can you do right now? In addition to the obvious, which is filing as early as possible to beat the perpetrator to filing first,  have your tax attorney continuously check on line with IRS Electronic Account Resolution (EAR) throughout tax season to make sure you are safe up to the moment you file your tax return. When your tax attorney will make her inquiry with the EAR portal prior to the tax return being filed, she will hopefully get a zero transcript indicated no tax return has yet been received by the Government. But beware if you file late and the response is like this one you will know there has been identify theft: Dear Tax Professional, Your office submitted a request for taxpayer information. We apologize for the inconvenience but we are not able to process your request at this time. Please have your client contact the Identity Protection Specialized Unit (IPSU) at 800-908-4490. Sincerely Yours Director, Electronic Products & Services Support.

What happens to you after your tax return has been filed by the identity theft perpetrator? While I hope you never have to call the Identify Theft Department of the IRS, once you get a hold of them you realize the road ahead is not going to be easy. You are required to complete Form 14039 Identity Theft Affidavit and submit copies of various documents like a passport and drivers license proving you are who you say you are. All documents and original tax return have to be submitted in a paper version and mailed either snail mail or overnight delivery. Processing takes up to six months or longer.

What can you do right now to prevent your 2015 tax return from being stolen from you when you file this Spring in 2016? First and most important, file early in 2015. There is no better way to stop identity theft than to file early. What if you have not received your K1s yet or other supporting documentation.  By all means have your tax attorney record the information direct from the issuers of the K1s by phone or emails. Create a fairly accurate record of what your K1 will show.  File early and true up any small immaterial differences the following year.  Disclose to the Government what you are doing in your tax returns prior to filing and explain you are filing early to avoid identity theft.

Second, if you move, please have your tax attorney notify the IRS of your new address. Call the government and make sure they have your new address on file before you file your tax return and explain that you are concerned about identify theft. Tell your CPA Attorney you are concerned about identify theft so your tax professional will check up on your account throughout the year. Never give your entire social security number to anyone on the phone. Vendors will be happy to have you call them back to verify who they are before you give them your social security number.

Perhaps sometime soon, the Government will refuse to refund any money to anyone based on a filed income tax return until the taxpayer’s identify is confirmed either by a follow up phone call or a special PIN# identification entered by email or text. This security identification process would significantly delay you all from receiving your refunds but would dramatically reduce the high volume of identify theft in 2016. When you compare the inconvenience of delayed refunds to the absolute nightmare of having your tax return hijacked by criminals I would choose the delay of having my identify confirmed. If you agree with this approach, ask your tax attorney to communicate with your elected officials about your concern with tax return identify theft. Together we can help the IRS fight back against tax return identity theft and help you all keep your tax returns secure from theft. 

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.  

Kindest regards from Chris Moss CPA Tax Attorney

IRS Charitable Deduction Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

All taxpayers at one time or another have made tax deductible charitable donations under IRS Code 170. But would your charitable deduction hold up during an IRS Charitable Deduction Audit?  While Façade Easements were recently the focus of IRS Charitable Deduction Audits, the IRS still disallows Façade Easements as well as your normal routine cash and noncash donations during an IRS Charitable Deductions Audit. In fact, the IRS is just as likely to commence a regular and routine IRS Charitable Deductions Audit against you in many cases years after you file your tax return.  So if you have made a donation to your favorite charity and plan on deducting these donations on your 2015 income tax return in accordance with IRS Code 170, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to comply with Government regulations for legal record keeping of cash and non-cash charity donations, and see where IRS Charitable Deductions Audits are trending in 2016 so you can make sure you don’t lose an IRS Charitable Deduction Audit headed your way soon.

Regarding noncash donations to Purple Heart, Goodwill, Salvation Army and other similar organizations, the IRS seems to be just waiting to disallow all these deductions during an IRS Charitable Deduction Audit just as they did to Kenneth and Susan Kunkel in Kunkel v IRS US Tax Court 2015.  The Kunkels deducted on their 2011 Sch A tax return noncash charity donations of $37,315 comprised of household items, books, clothing, furniture, and toys donated to the Lutheran Church, Goodwill Industries, Purple Heart, and Vietnam Veterans. The Government not only disallowed the whole deduction in an IRS Charitable Deduction Audit claiming the Kunkels had lack of substantiation but also hit the Kunkels with an accuracy related penalty plus interest. The Kunkels fought back appealing to US Tax Court in Kunkel v IRS US Tax Court 2015. Indeed the Kunkels produced for the Court the receipts given to them by the various organizations and in my view very detailed spreadsheets of exactly what they had contributed but unfortunately this wasn’t good enough to overrule an IRS Charitable Deduction Audit.

Judge Lauber of the US Tax Court observed that Section 170 indeed allows the Kunkels to deduct their charity contribution, cash or noncash, made within the taxable year to a charitable organization.  However charity cash or noncash deductions are allowed only if the Kunkels can satisfy statutory and regulatory requirements of 170(a)(1) and Regulation 1.170A-13. Whether cash or noncash, if you make donation over $250 you must obtain a contemporaneous written acknowledgement from the charity. For a noncash donation that exceeds $500 then you are subject to even more rigorous substantiation requirements, and finally if the noncash donation is higher than $5000 you are subject to highest substantiation requirement including a qualified appraisal which must be included in the tax return prior to filing.

The Court also noted that similar items of property must be aggregated in determining whether the noncash gift exceeds the $500 and the $5000 thresholds as per Section 170(f)(11)(F).  While clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware are considered separate categories the Government in an IRS Charitable Deduction Audit in many cases aggregates as much of your donation as they can into one category so that they can push you into the next more rigorous substantiation threshold.   Unfortunately for the Kunkels the Court aggregated their donations in 2011 to add up to $21,920 for clothing, $8000 for books, which subjected them to the $5000 threshold.  The rest of the donations were aggregated over the $500 category threshold. There was little that the Kunkels could do to dispute these groupings because their tax return lacked contemporaneous evidence within the tax return itself.

The Court went on to list the requirements of any contribution (cash or noncash) over $250.  There must be a “contemporaneous written acknowledgment of the contribution by the charitable organization citing Weyts v IRS T.C.Memo 2003-68. The charity also must give you a description of any property other than cash, and whether or not you received any goods or services back from the charity.  If you did receive some sort of goods or services back from the charity, then the charity must provide you a good faith estimate of the value of those goods and services.  Finally and most importantly the evidence that you receive in form of documentation from the charity must be “contemporaneous”. In other words the facts will have to show perhaps later that you had all your documentation in your possession by the date you filed your tax return.

For noncash donations, the documented facts are a much difficult to gather contemporaneously but nevertheless essential to you winning an IRS Charitable Deduction Audit.  As an example, Goodwill, Purple Heart and Salvation Army usually pick up clothes and other household goods direct from your doorstep, in many cases when you are not at home leaving a receipt hanging on your door handle. While the Court acknowledged that at times it might be difficult to obtain the required documentation, when property is left at a charity’s unattended drop site, the Court nevertheless placed on Kunkel the burden of obtaining the necessary documentation prior to them filing their tax return.

The Court then went on to address noncash contributions exceeding $500.  Citing Gaerttner v IRS  TC Memo 2012-43 Judge Lauber opined that the records Kunkel should have obtained  prior to filling their tax return were at minimum: 1. The date the Kunkels  acquired the property and how they acquired the property, 2. A description of the property, 3. The Cost of the property, 4, the Fair market value of the property at the date of contribution and  5, the method the Kunkels used in determining fair market value as per Section 170(f)(11)(B) and Regulation 1.170(A)-13(b)(2)(ii)(C) and (D).

The Court was not without compassion for the Kunkels charitable intent, and conceded that “no doubt the Kunkels did donate some property to charity in 2011.” But the Court concluded that the IRS Code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when the consist of household property rather than cash and that the documentation required by law was simply not present in the Kunkels 2011 tax return that they filed with the Government.  Indeed, the Court also found the Kunkels negligent in filing a tax return without supporting documentation and hit them with a substantial Section 6662(a) penalty plus interest.  IRS wins, Kunkels lose.

So how can you win an IRS Charitable Deduction Audit if you have noncash donations in excess of $500? First, have your tax attorney include in your tax return the facts and evidence you need to win an IRS Charitable Deduction Audit.  Best practice for larger noncash donations would be insert the required documentation into tax return itself prior to filing to prove that the evidence was contemporaneously created. Second, do not make the donation if the charity cannot give you the IRS required information. If you don’t have the facts on your side simply don’t take the deduction.  Not only are you not going to win the audit without the facts and evidence contemporaneously documented in your tax return, but you will also get hit with a substantial negligence penalty plus interest. Finally, if the charity cannot give you the required documentation simply consider donating to another similar charity which perhaps can provide you the required government documentation to sustain an IRS Charitable Deduction Audit.  After you file your tax return with the required facts and evidence you can then sit back and relax, knowing that when the IRS Charitable Deduction Audit commences, perhaps years later, you are going to win big.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards and happy New Year 2016 from Chris Moss CPA Tax Attorney