Washington Hotline – November 17, 2015

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Washington Hotline

Debate on Tax Policy

At the November 10 debate for Republican presidential candidates, the lead topic was tax policy. In response to specific tax questions by the moderators, several candidates explained their tax proposals.

Dr. Ben Carson was asked about his plan for a 10% tax based on the biblical tithe. He previously stated, “Everybody should pay the same proportion of what they make. You make $10 billion, you pay a billion. You make $10, you pay one. You get the same rights and privileges. I do not see how anything gets a whole lot fairer than that.”

When Carson was asked about potentially removing the deduction for home mortgage interest and charitable gifts, he commented, “But the fact of the matter is, people had homes before 1913 when we introduced the federal income tax, and later after that started deductions.”

He also continued, “We had churches before that and charitable organizations before that. The fact of the matter is, I believe if you put more money in people’s pockets, that they will actually be more generous rather than less generous.”

Real estate investor Donald Trump discussed the need to encourage multinational companies to return the $2.5 trillion currently held overseas. He proposes a 10% tax on funds repatriated to America. Trump commented, “A lot of money is going to come back in. We are going to get rid of the bureaucratic problems and roadblocks, because that is also a problem. And we are going to have all of this money poured back into the United States. It is going to be used to build businesses – for jobs and everything else.”

Texas Sen. Ted Cruz has proposed a flat rate of 10% on individuals and 16% on businesses. He suggests that this flat tax plan will lead to “incredible economic growth.” Cruz noted, “It costs less than virtually every other plan people have put up here, yet it produces more growth and it is one of the very few plans that abolishes the IRS.”

Ohio Gov. John Kasich has promised to balance the budget over eight years by combining tax cuts with spending reductions. He stated, “We have got to be responsible with what we propose on the tax side.”

Former Florida Gov. Jeb Bush proposed reducing both the personal and corporate rates by eliminating most deductions. He suggested that his plan would lead to a revived economy. Bush noted, “A 4% growth strategy starts with tax reform.”

Former Hewlett-Packard CEO Carly Fiorina has proposed reducing the 74,000 pages of the Internal Revenue Code and Regulations to just three pages. She has not yet explained how to accomplish this task.

Florida Sen. Marco Rubio was asked to comment on child tax credits. He proposes adding an additional $2,500 to the existing $1,000 credit. The cost estimate for this is over $1 trillion during a decade. Rubio emphasized the pro-family nature of the concept and stated, “Yes, I have a child tax credit increase, and I am proud of it. I am proud that I have a pro-family tax code, because the pro-family tax plan I have will strengthen the most important institution in the country, the family.”

Editor’s Note: This information is offered as a service to our readers. Your editor will continue to share tax proposals from candidates of both parties.

Identity Theft Victims May See Fraudulent Returns

Stolen Identity Refund Fraud (SIRF) has grown dramatically over the past decade. In response to repeated requests from victims, the IRS posted instructions on www.irs.gov enabling the release of fraudulent returns to these persons.

The IRS stated, “A victim of identity theft or a person authorized to obtain the identity theft victim’s tax information may request a redacted copy (one with some information blacked-out) of a fraudulent return that was filed and accepted by the IRS using the identity theft victim’s name and SSN. Due to federal privacy laws, the victim’s name and SSN must be listed as either the primary or secondary taxpayer on the fraudulent return.”

The basic procedure requires the victim to send the IRS his or her name, Social Security Number, address, tax year and state, “I declare that I am the taxpayer.”

The IRS will acknowledge the request for the fraudulent return within 30 days. The victim of SIRF should receive a redacted return within 90 days.

There are limits to the policy. The false returns will only be sent to the actual taxpayers. If you are a listed as a dependent, you will not qualify to receive the information. However, if you are a parent or legal guardian, you may request your child’s return.

Editor’s Note: Sen. Dan Coats (R-IN) is a member of the Senate Finance Committee and has been a leader in highlighting the growth in SIRF. He stated, “This announcement is good news for individuals who are victims of tax fraud.” Many SIRF victims and their advisors have expressed an interest in viewing the false returns so they are better able to protect themselves in the future.

Donor Advised Funds (DAFs) and Pledges

In a Nov. 5 letter by Paul Berger to Treasury official Ruth Madrigal, he proposed a new standard for distributions from DAFs to charities. Berger is Chair of the Jewish Federation of North America Giving Incentives Committee.

IRC Sec. 4967(a)(1), passed in the Pension Protection Act of 2006, prohibits DAF transfers with more than “incidental benefit” for donors. The IRS generally uses the private foundation Sec. 4941 Self-Dealing rules to interpret this provision. Sec. 4941 prohibits a sale, lease or other transaction between a private foundation and a donor or his or her lineal ascendants or descendants. Therefore, payment of a legally-binding pledge through a DAF is prohibited because a donor’s legal obligation has been removed.

Berger proposes to subject DAFs to “the Section 170 standard rather than the private foundation excise tax rules found in Internal Revenue Code Section 4941.” In his view, Sec. 170 creates a “bright line” test – if a DAF transfer would not qualify for a charitable income tax deduction, it is permitted.

Under the Sec. 170 standard, “a donor whose charitable pledge is satisfied by a donor-advised fund realizes no benefit in the nature of cancellation of indebtedness, or an economic benefit cognizable for tax purposes.”

There are multiple reasons for moving to the Sec. 170 standard. These include lack of state uniformity on defining a “legally binding pledge,” uncertainty whether a donor has made a pledge or merely declared an intention to give, administrative difficulties and the ease for sophisticated donors to make legal gifts that the unsophisticated may make in an improper manner.

Applicable Federal Rate of 2.0% for November — Rev. Rul. 2015-22; 2015-44 IRB 1 (20 October 2015)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2015. The AFR under Section 7520 for the month of November will be 2.0%. The rates for October of 2.0% or September 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 2015, 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.

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