Washington Hotline – January 13, 2015


Washington Hotline

IRS Free Tax Services

In the IRS Guide to Free Tax Services, there is a comprehensive description of available services for taxpayers. These services may be quite helpful for taxpayers as they prepare to file their 2014 returns.

1. www.irs.gov

The main IRS website includes extensive information on filing and payment options. It also has the popular features, “Where’s My Refund?,” the “Interactive Tax Assistant (ITA),” the “IRS Tax Map” and the “IRS Withholding Calculator.”


The smartphone application from the IRS allows you to check your refund. It also provides access to helpful tax tips. IRS2GO is available for an iPhone or Android phone.

3. eNews For Tax Professionals

This is the latest IRS news for the tax professional community. There also are links to the irs.gov sections that are of interest to CPAs, attorneys and enrolled agents.

4. EO Update

The exempt organization update is helpful for tax professionals and staff of nonprofit organizations. It discusses IRS rulings and the latest developments that affect nonprofits.

5. Taxpayer Advocate Service (TAS)

The TAS is an independent organization within the IRS that is designed to protect taxpayer rights. TAS will help if you have a problem causing financial stress, you are facing an immediate adverse action such as an IRS levy against your bank account and you have not been able to obtain a response from the IRS. You can contact TAS on irs.gov or at 877-777-4778.

6. YouTube

The IRS YouTube video channel includes many short explanations of questions that arise in the filing process. There are videos available in English, Spanish and American Sign Language.

7. Volunteer Income Tax Assistance (VITA)

The volunteer assistance program is designed to help individuals with low-to-moderate incomes. The volunteers will help to prepare your tax return and file for a refund. The sites are listed on irs.gov or can be obtained at 800-906-9887.

8. Tax Counseling for Seniors (TCE)

The AARP Foundation and the IRS offer assistance at approximately 7,000 sites. The volunteers assist low and moderate-income taxpayers who are age 60 or older. The sites can be found at www.AARP.org by typing “taxaide” in the search field or by calling 888-227-7669.

9. Free File

Over 40 million Americans have used the IRS “Free File” program. If you have income under $60,000, you can go to irs.gov and select the Free File option. Using the IRS online software or free commercial software, you may prepare your return and file it electronically. When you file electronically, you will join the 122 million taxpayers who filed electronically the past year.

Mortgage Precludes Conservation Easement Deduction

In Ramona L. Mitchell v. Commissioner; No. 13-9003 (5 Jan 2015), the court denied a conservation easement charitable deduction due to a mortgage on the property.

In 1998, Charles and Ramona Mitchell purchased 105 acres in Colorado on a trust deed from owner Clyde Sheek. Charles also purchased an additional 351 acres in 2001. In 2002, the property was transferred to the C.L. Mitchell Properties LLLP. In 2003, the partnership deeded a conservation easement to the Montezuma Land Conservancy. The transfer was in perpetuity and restricted use to “open space, for wildlife, and for agricultural purposes.” However, at the time of the transfer, previous owner Clyde Sheek still held the trust deed on the property.

The Mitchells obtained an appraisal for a charitable deduction valued at $504,000 and reported that gift on their 2003 tax return. Subsequently, the required subordination agreement from Clyde Sheek was obtained in 2005. The IRS audited the return and denied the deduction because the subordination agreement had not been created prior to the 2003 gift. The Tax Court ruled in favor of the IRS and taxpayers appealed.

Reg. 1.170A-14(g)(2) notes there is no deduction for conservation “property which is subject to a mortgage unless the mortgagee subrogates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.”

The taxpayers noted that there was no explicit timeframe required for subordination under the regulation. Therefore, the subordination two years after the gift date should qualify. In addition, the payments were appropriately made under the terms of the trust deed and therefore the potential for a default was “remote.” Because there was no potential for default, the subsequent subordination agreement should be permitted under the “harmless” error standard.

The court noted that the regulation is clear that there must be subordination of the mortgage as of the date of the gift. While the factual record indicated a low probability of foreclosure, that is not a relevant issue. The exception for a remote future event does not include a foreseeable event such as a foreclosure. Therefore, the deduction was denied.

Late Filing Penalty Due To Attorney With Brain Cancer

In Janice C. Specht et al. v. United States; No. 1:13-cv-00705 (5 Jan 2015), a U.S. District Court upheld an IRS late-filing penalty even though the attorney was suffering from brain cancer and relinquished her license to practice law in a malpractice action.

Decedent Virginia Escher passed away December 30, 2008 with an estate of $12,506,462. The estate tax return was due September 30, 2009.

Virginia’s cousin, Janice Specht, accepted the position of executor. She had not previously served as executor and had no experience working with attorneys. She hired attorney Mary Backsman, who had previously drafted the final Escher will, as the attorney for the estate.

Executor Specht was informed that the due date for the return was September 30, 2009. When Backsman had not filed by that date, she indicated to Specht that she had obtained an extension. Eventually, Specht was notified that several probate deadlines had passed and she contacted attorney Vincent Salinas. Salinas replaced Backsman and the estate tax return was filed 15 months late on January 26, 2011. The estate paid $3,909,951 in tax and $210,601.74 in interest. However, the IRS assessed a late-filing penalty of $1,198,261.38.

Under Sec. 6651(a)(1), a failure to file may be excused if there is “reasonable cause and not due to willful neglect.”

The court observed that Specht had not previously served as executor, she had no prior contact with attorneys, that attorney Backsman claimed she filed for extension and that Backsman subsequently relinquished her law license during the malpractice case. In addition, Backsman was suffering from brain cancer at the time.

The court noted that the factual circumstances are quite significant. However, reliance on counsel did not negate the notices to Specht and her knowledge of the nine month filing date. Therefore, she did not meet the reasonable cause standard. In addition, Specht had received four probate notices and should have taken action prior to the filing date by recognizing that Backsman was not fulfilling the required duties of attorney for the estate. Therefore, she also was guilty of willful neglect and the penalty applies.

Editor’s Note: The judge noted that this case had very difficult facts. However, the result emphasizes the high obligation of the executor to comply with the statute. Even though there were extensive extenuating circumstances, the court felt obligated to apply the penalty.

Applicable Federal Rate of 2.2% for January — Rev. Rul. 2015-1: 2015-1 IRB 1 (19 Dec 2014)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2015. The AFR under Section 7520 for the month of January will be 2.2%. The rates for December of 2.0% or November 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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