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Wednesday December 13, 2017

Washington News

Washington Hotline

IRS Warning on Inflated Refunds and Preparer Fraud

In two letters this week (IR-2017-23 and IR-2017-26) the IRS warned taxpayers about inflated refunds and tax preparer fraud.

Some tax preparers promise excessive refunds. This issue is part of the "Dirty Dozen" tax schemes highlighted each year by the IRS.

IRS Commissioner John Koskinen urged taxpayers to be aware of these excessive claims. He stated, "Exercise caution when a return preparer promises an extremely large refund or one based on credits or benefits you have never been able to claim before. If it sounds too good to be true, it probably is."

There are several specific strategies that a preparer may use improperly. These may include falsely claiming Social Security benefits, educational credits or the earned income tax credit (EITC).

Some preparers also have wrongly suggested that you may file a return and report zero wages. Another improper strategy is to claim that there are secret government accounts for U.S. citizens and that by filing IRS Form 1099-OID you can obtain a refund from your secret account.

All of these ideas have been used to obtain excessive refunds, but many taxpayer fraudsters have been discovered by the IRS and forced to repay an appropriate amount.

The second IRS letter urges taxpayers to understand how to select a good tax preparer. Most tax preparers are reputable and honest, but it is helpful to know methods that enable you to select a good preparer.

Koskinen noted, "Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected. Most preparers provide high-quality service but we run across cases each year where unscrupulous preparers steal from their clients and misfile their taxes."

The IRS offers several tips for selecting a good tax preparer.

1. Preparer Tax Identification Number (PTIN) – Tax preparers are required to register with the IRS. They receive a PTIN and it must be included on any tax return.

2. Professional Credential – A tax preparer may be a CPA, an attorney or an enrolled agent. These are all appropriate certifications for a tax preparer. Many of these persons will also be members of a professional association.

3. Qualifications – The preparer should share his or her qualifications with you. There also is an IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. It is available on www.irs.gov.

4. Better Business Bureau – Many tax preparers are listed on this directory or through another agency. CPAs will be members of the State Board of Accountancy. Attorneys will be members of their State Bar Association. Finally, Enrolled Agents are listed on www.irs.gov.

5. eFiling – Koskinen explains that eFiling is the safest and most accurate method. Nearly all tax preparers offer an eFiling service.

6. Audit Representation – If you have a dispute with the IRS, an attorney, CPA or Enrolled Agent may represent you before the agency.

7. Signing Returns – You should review your return before signing. Do not sign a blank return. Your tax refund should be directed to your bank account or your personal address.

Border Adjustable Tax Debate Continues


Chairman of the House Ways and Means Committee Kevin Brady (R-TX) and Members of the House and Senate all weighed in this week on the proposed border adjustable tax.

Brady gave the keynote at the International Tax Policy Forum on February 3. While the bill is still being drafted, he revealed several specifics that are expected to be included in this initial version of the 2017 Tax Reform Bill.

Brady expects the top corporate tax rate to be 20%. Private business will be taxed at 25%, but wages and other income will be subject to the top 33% personal rate. The bill is expected to repeal both the estate tax and the alternative minimum tax. Another benefit for business is immediate deductions for capital investments. This will simplify their taxes by eliminating depreciation schedules.

The reform bill includes a territorial tax with border adjustments. Brady noted, "To ensure we leapfrog America back into that lead pack and keep us there, we are proposing to replace our worldwide tax system with a territorial tax approach and to end the 'Made in America' tax on U.S. exports."

Brady continues to be a strong advocate of the border adjustable tax. He continued, "Our proposal is simple and it is based on one powerful idea: all products consumed in America will be taxed at an equal rate, regardless if they are made in America or abroad."

Rep. Peter Roskam (R-IL) is the House Ways and Means Tax Policy Subcommittee Chair. He responded to concerns that the border adjustable tax could be in conflict with the World Trade Organization (WTO) rules that prohibit export subsidies. Roskam noted, "We are moving toward a consumption tax, we are mirroring essentially what the rest of the world is doing, and we are asserting a right to be treated in the same fashion as the rest of the world. We think when it all comes down to it, we will be exonerated on that."

Several commentators have criticized the complexity of the border adjustable tax. In a blog post for the Urban-Brookings Tax Policy Center, commentator Howard Gleckman stated, "Taxwriters will have to resolve scores of legal and economic problems before enacting this plan. Addressing any one will be complex and time-consuming. Dealing with them all could be a policy nightmare."

Members of the Senate have been reluctant to support a new tax on imports. Sen. David Perdue (R-GA) sent a letter to the other 99 senators reflecting his concern with the border adjustable tax. Perdue stated, "Since all imports would be taxed, the clear effect of the proposed border adjustment tax is an increase in consumer prices. This would hammer consumer confidence and lower overall demand, thus putting a downward pressure on jobs."

Editor's Note: The House is rapidly moving forward with drafting a complex tax bill that may be 3,000 pages. House Ways and Means member Kenny Marchant (R-TX) suggested that the target date for transfer of an actual bill to the Joint Committee on Taxation (JCT) is early March. When an actual bill is released, there will be a thundering herd of Washington lobbyists contacting members of the House and Senate.

Council on Foundations (COF) Cautions on Political Activity


In 1954 then-Senate Majority Leader Lyndon Johnson added an amendment to a bill that was subsequently passed. The amendment prohibited Sec. 501(c)(3) organizations from intervening in political elections. The intent of the amendment was to preclude nonprofits from supporting candidates for office.

Bills currently pending in both the House and Senate propose modifying or repealing the "Johnson Amendment." In a letter to members of the 115th Congress, Hadar Susskind, Senior Vice President of Government Relations for the Council on Foundations, urged caution about changes to Sec. 501(c)(3).

Hadar explained that nonprofit organizations exist "to channel the generosity of private citizens" toward charitable causes. He suggests that it is essential for broad support of charities that they have a high level of "public trust" and for this trust to not be diminished by involvement in partisan activities.

Hadar recognized that religious organizations desire to have the ability to speak according to their particular beliefs. However, he cautions action that could constitute "engagement or intervention in political campaigns." The bills would potentially clarify the rights of over 300,000 religious organizations, but would also apply to the other 900,000 nonprofits in America.

Hadar concludes by urging Congress "to consider the wide range of unintended or indirect consequences that would occur as a result of altering Sec. 501(c)(3) of the Internal Revenue Code, and reject any proposal that would result in our sector being tainted with instances of charitable resources being diverted for campaigns and political activity."

Editor's Note: There is a balance between the First Amendment right to speak out on moral or religious grounds and a desire to avoid nonprofit support of specific candidates for office. Most larger nonprofits have a diverse range of donors. While advocacy is important, nonprofits must be careful to avoid political entanglements.

Applicable Federal Rate of 2.6% for February -- Rev. Rul. 2017-4; 2017-6 IRB 1 (19 Jan 2017)


The IRS has announced the Applicable Federal Rate (AFR) for February of 2017. The AFR under Section 7520 for the month of February will be 2.6%. The rates for January of 2.4% or December of 1.8% 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.

Published February 10, 2017

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