This week in Washington, an aide to Sen. Reid indicated that he favors including the tax extenders in the payroll tax cut bill. The tax extenders are 40 provisions have been passed each year for the past two decades. A provision of particular importance to philanthropy is the tax extender that permits qualified gifts from an IRA directly to a charity. These gifts are permitted for IRA owners over age 70½ and have a limit of $100,000 per year. The previous IRA rollover provision lapsed on December 31, 2011, so a new law must be passed for the IRA charitable rollover to be effective in 2012.
The key question for Senate and House leaders is the method of paying for the bill. The 10 months of additional payroll tax extension have an estimated cost of $99.5 billion. A one year extension of the tax extenders is estimated by the Joint Committee on Taxation to cost $36.9 billion.
Editor's Note: While there certainly will be debate over the best methods for paying for the extension, there does appear to be a general agreement that the tax extenders and the IRA rollover should be passed for 2012. However, given the uncertainties of an election year, it is possible that passage may be after the election. If this does occur, the IRA rollover will be retroactive to January 1, 2012. Donors with potential interest in using the IRA charitable rollover should stay tuned for future developments.
IRS Free File System Available
On January 17, 2012, the IRS announced that the Free File System is now available. There are two versions to help taxpayers. Those individuals with adjusted gross incomes of $57,000 or less can use the Free File Software System. All taxpayers with incomes of any level are permitted to use the Free File Fillable Forms.
Diane Fox, Director of the IRS Free File Program stated, "Free File can save you time and money. You can prepare and e-File your tax returns at no charge. And the software helps you find the tax breaks you are due. Free File helps make taxes less taxing."
An estimated 70% of taxpayers qualify for the Free File System. Under an agreement between the IRS and approximately 20 tax software providers, there are options available to use one of those software systems on www.irs.gov/freefile. The tax software providers must meet specific government standards and must qualify with the required security systems. Information transferred over the Internet must be appropriately encrypted so it is protected.
Taxpayers of any income level may use the Free File Fillable Forms from the IRS.gov site. These forms include some basic calculations and links to IRS publications. The Fillable Forms system requires a basic understanding of the IRS tax forms.
IRS Accuracy-Related Penalties
In Rev. Proc. 2012-15; 2012-7 IRB 1 (18 Jan 2012), the IRS updated earlier guidance on appropriate disclosures on a tax return to avoid the Sec. 6662(d) accuracy-related penalties.
The principal section of the ruling explains the basic penalties structure. Subsequent sections specify requirements for disclosure of various types of itemized deductions.
.01 Underpayment of tax will require a 20% penalty if the amount is deemed substantial. A gross valuation misstatement requires a penalty of 40% of the underpayment.
.02 A substantial understatement occurs if the underpayment is the greater of $5,000 or 10% of the tax due.
.03 A reasonable defense is permitted and will avoid penalties.
.04 The tax preparer may be subject to a Sec. 6694(a) penalty for understatements that are deemed an "unreasonable position."
.05 Taxpayers must furnish all required information for disclosure to be deemed adequate under Sec. 6662(d)(2)(B)(ii) and Sec. 6694(a)(2)(B).
.06 The procedures apply to both fiscal and short tax year returns.
.07 Complete disclosure of an uncertain tax position statement (UTP) may be made by a corporation on Form 8275 or Form 8275-R.
In the itemized deductions section of Rev. Proc. 2012-15, there is a description of requirements for charitable contributions.
- Amount – The amount of the charitable contribution must be reduced by the value of any substantial benefit in goods or services provided by the donee organization.
- Contemporaneous Written Acknowledgement – If the gift is $250 or more, the charity must provide a Sec. 170(f)(8) written receipt.
- Cash Below $250 – For cash gifts below this level, there must be a bank record or written acknowledgement.
- Non Cash Gifts Over $500 – Property transfers to charity will require filing IRS Form 8283, Non-Cash Charitable Contributions.
- Car, RV or Boat Gifts – If the value is over $500, then a contemporaneous written acknowledgement under Sec. 170(f)(12) is required.
Applicable Federal Rate of 1.4% for February – Rev. Rul. 2012-7; 2012-6 IRB 1 (19 Jan. 2012)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2012. The AFR under Sec. 7520 for the month of February will be 1.4%. The rates for January of 1.4% or December of 1.6% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.
