Five Million Returns on April 18
Over 13 million taxpayers will not finish their returns by the filing date. They must file IRS Form 4868 for an automatic six-month extension. Their taxes must be paid by the filing date, but they will be permitted to file their tax returns on or before October 17, 2016.
There are three categories of taxpayers who will receive an automatic extension. Those who live abroad may pay their taxes on April 18, but are permitted to file by June 15. Military personnel serving in Afganistan or any war zone are permitted to defer their filing until 180 days after departing the combat zone. They also may make payment for taxes at that time.
Finally, there are various specific extensions that are granted to victims of natural disasters by an act of Congress.
By April 8, 2016, the IRS had processed over 82 million refunds. The average refund was $2,798. Over 80% of refunds are made through direct deposit to the taxpayer’s bank account.
The refund also may be split between different accounts. Some taxpayers will choose to have part of the refund transferred to their bank account, with the balance to an IRA account or used to purchase U.S. Series I Savings Bonds.
IRS Commissioner John Koskinen repeated his warning about April 18 tax scams. He noted, “As the tax deadline nears, these criminals may try and trick honest taxpayers over the phone or via email, and people should remain vigilant. After the tax deadline, watch out for these scammers promising a refund or threatening you with an unexpected tax bill.”
Koskinen reminded taxpayers that the IRS will not demand an immediate cash payment. If you are contacted by someone who may be impersonating the IRS, you may call 800-366-4484 and report it to the Treasury Inspector General for Tax Administration (TIGTA). On www.IRS.gov, there is an “IRS Impersonation Scam Reporting” section that also may be used if you have been contacted by a tax scammer.
Koskinen Pledges Better Security
At an April 14 appearance before the House Science, Space and Technology Committee’s Research and Technology Subcommittee, IRS Commissioner Koskinen explained efforts to improve taxpayer account security.
Earlier this year, the IRS permitted taxpayers to use a www.IRS.gov application called “IRS Get Transcript.” Due to security concerns about unauthorized access, the electronic downloads of transcripts were halted. Since that time, the IRS software engineers have been rebuilding the application with better security.
National Taxpayer Advocate Nina Olson acknowledged a need for better security but is concerned that many taxpayers will not be able to complete the new questions. In her view, the “Get Transcript” application is not of great value if it is not usable.
Koskinen acknowleged that there would be challenges for many taxpayers. He recognized that perhaps 50% of taxpayers would be able to use the initial system when it is released. Koskinen continued, “As we get our systems more sophisticated and improved, we think over time more users will be able to complete the process. It depends a lot on our ability to have more information, such as telephone numbers and email addresses, for taxpayers.”
The new “IRS Get Transcript” application is being tested internally by Treasury. There are three basic steps in the process.
1. Taxpayer – He or she must complete a series of knowledge-based questions.
2. IRS Computers – They will use information from a national database to confirm the answers to specific questions.
3. Tax Transcript – If the IRS computers show that the taxpayer has correctly answered the various questions, then the tax transcript will be released.
Koskinen noted, “One of the goals is to try to make it as easy as possible for taxpayers to work through what will be a somewhat more complicated process. But thus far, the pilot is going well in that regard.”
Editor’s Note: This is the classic challenge for all banks and financial institutions. They are increasing their security by requiring customers to enter answers to two, three or four security questions. Their goal is to make the system user-friendly but still very secure. This is a challenge for the IRS because they must provide this level of security for all American taxpayers.
Brady Blueprint for 2017 Tax Reform
On April 15 the House Ways and Means Chairman Kevin Brady (R-TX) spoke to a Chamber of Commerce Conference in Washington. Brady discussed his plan to release a “consensus blueprint” of the potential 2017 tax reform bill in June.
There are six general principles that will govern the blueprint. Brady will attempt to make the tax code simpler, close loopholes, eliminate special interest provisions, reform the international tax system and lower both individual and corporate tax rates.
Brady also addressed the current political controversy over inversions – American companies who transfer their headquarters overseas to lower their total tax payments. The Department of Treasury has issued new regulations to try to reduce inversions. Critics have questioned the effectiveness of the new rules.
Brady commented, “I share the concern about inversions. But there is a right way and a wrong way to tackle them. In its haste to build a tax wall to keep American companies in, Treasury built an even bigger wall to keep investment in America out – routine, legal investments that create jobs and economic growth in our communities.”
Brady also expressed appreciation for the work done by former House Ways and Means Chairman Dave Camp (R-MI). Camp published a comprehensive tax reform bill with the title “Tax Reform Act of 2014.” Brady noted that the Camp Bill “proved you can produce Reagan-style tax reform within the tightest constraints possible.”
At a hearing of a subcommittee of the House Ways and Means Committee, Thomas Barthold, Chief of Staff of the Joint Committee on Taxation, explained the specifics of Camp’s proposed Tax Reform Act of 2014.
1. Individual Rates – Reduced to 10%, 25% or 35%.
2. Base Broadening – Repeal the state and local tax deductions; limits on mortgage, charitable and moving expense deductions.
3. Credits – Repeal the dependent care and the residential energy credits.
4. Alternative Minimum Tax – Repealed.
5. Corporate Rates – Reduced to 25% through changes in both deductions and credits.
Editor’s Note: Brady is purposefully building a base for potential tax reform in 2017. However, the Camp bill shows the major compromises that will be needed, such as the repeal of state and local taxes. Therefore, major tax reform will be politically difficult. However, it is possible that a comprehensive tax reform bill could be passed in 2017.
Applicable Federal Rate of 1.8% for April — Rev. Rul. 2016-9; 2016-14 IRB 1 (18 Mar 2016)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2016. The AFR under Section 7520 for the month of April will be 1.8%. The rates for March of 1.8% or February 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 2016, 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.