Washington Hotline – June – Week 2 – 2011

IRS Proud of Track Record
IRS Commissioner Douglas Shulman testified before the Senate Appropriations Subcommittee on Financial Services and General Government on June 8. He stated, “Mr. Chairman, the IRS is also proud of its implementation track record over the past few years.”

There are multiple areas the IRS views as significant successes.

1. Collecting Taxes on International Funds – The IRS created a “landmark deal” with the government of Switzerland and has recovered substantial amounts of income tax. Over 15,000 taxpayers participated in the Voluntary Disclosure Program (VDP). In addition, 4,000 other taxpayers have voluntarily disclosed bank accounts throughout the world. The bank accounts have produced substantial taxes and penalties for the IRS. In addition, the overseas funds will be subject to U.S. taxes in the future.

2. Preparer Tax Identification Numbers (PTIN) – The PTIN now is required for all tax return preparers. Over 700,000 preparers have registered. This enables the IRS to monitor preparers’ qualificatons and to identify preparers who are committing tax fraud.

3. Telephone Support – The IRS has a goal of 93% toll-free tax law accuracy. The toll-free customer satisfaction rating for the IRS the past year was 92%.

4. Website – www.irs.gov has been very popular with taxpayers. There were 305 million webpage visits to the site in the past year. This is up 14% over the prior year. The “Where’s My Refund?” electronic tracking tool also increased in popularity.

5. Smart Phone – The IRS unveiled its first application for smart phones called “IRS2Go.” This application allows taxpayers with smart phones to check the status of tax refunds and obtain additional information.

6. eFiling – Each year, over 100 million taxpayers use the eFile Program. The IRS has been able to close five of 10 sites that previously were processing paper returns because of the efficiency of the eFile System.

The IRS is also preparing for major increased responsibility that will be required under the Affordable Care Act (ACA). Under the wide-ranging healthcare law, there will be major changes for most Americans. The majority of these changes will affect individuals in 2014.

1. Premium Assistance Tax Credit – Individuals with lower and moderate incomes may qualify for a healthcare tax credit.

2. Advanced Premium Payments – Individuals who qualify for the healthcare tax credit may receive advance monthly payments to their healthcare insurance provider.

3. Reconciling Tax Credits – For those individuals who receive advance healthcare payments to providers, their tax return will necessarily require a reconciliation of the tax credits with the advance payments. It appears that the first date for this return will be April 15, 2015. IRS forms will include a reconciliation for the 2014 tax credits.

4. Individual Coverage Requirement – For individuals in 2014, there will be a mandatory coverage requirement. Those without coverage will be required to make a payment to the IRS.

5. Employer Payments – For employers who are required to participate in the healthcare programs for employees, they will need to report that participation or make an employer payment to the IRS.

Editor’s Note: Your editor and this organization take no position with respect to IRS practices and the comments of IRS Commissioner Shulman. This information is offered as a service to our readers.

How to Regain a Charitable Exemption

Under provisions of the Pension Protection Act and other statutes, charities that failed to file the required IRS Form 990, Form 990EZ or Form 990-N for three years have lost exempt status. Most organizations impacted by this rule failed to file for years 2007, 2008 and 2009.

Because many smaller organizations did not file the required Form 990-N ePostcard, their exemptions were automatically revoked. As a result of the large number of revocations, the IRS published guidance on methods to reinstate charitable exempt status.

Some larger organizations with receipts over $50,000 in 2010 failed to file IRS Form 990 or 990EZ. Rev. Notice 2011-44 explains the steps these organizations must take for reinstatement. The organizations are required to file IRS Form 1023, “Application for Recognition of Exemption Under Sec. 501(c)(c) of the Internal Revenue Code.” If there is a request for a retroactive reinstatement, reinstatement is available by showing reasonable cause for failure to file a return. However, this reasonable cause must exist for all three years of the failure to file.

A reinstatement request is permitted within 15 months after the publication of an IRS revocation letter or the date the IRS posts the organization name on the IRS website.

For small organizations that have lost exempt status, the requirements are specified in Notice 2011-43. These small organizations typically failed to file Form 990-N ePostcards for years 2007, 2008 and 2009. The small organization also must submit IRS Form 1023. A small organization must write “Notice 2011-43” on the top of the form. The small organization is permitted a reduced user fee of $100 for the application for reinstatement of its tax exemption.

The IRS also published Rev. Proc. 2011-36 to specify the $100 reduced fee for small organizations. In addition, it published frequently asked questions (FAQ) on automatic revocation and reinstatement procedures on www.irs.gov.

Charitable Deductions and Publication 78

The IRS maintains a comprehensive list of qualified charitable organizations in Publication 78. It initially had been published in print form, but now is only available on the IRS website. See www.irs.gov and search for Publication 78 to obtain the list.

The IRS also maintains an IRS Business Master File (BMF) with additional information on qualified exempt charitable organizations.

In Rev. Proc. 2011-33; 2011-25 IRB 1 (7 Jun 2011), the IRS explained the general guidelines for reliance on Publication 78 and the BMF.

Publication 78 and the BMF list all of the organizations that have received a determination letter of exempt status from the IRS. The deductions are allowable for organizations that are listed on the date of the charitable gift.

However, the IRS periodically notifies organizations by letter or by publication on www.irs.gov that they no longer are exempt. Thousands of charitable organizations have failed to meet the required IRS Form 990 or IRS Form 990-N Electronic Postcard filing requirement and are no longer exempt.

A donor to an organization will qualify for a charitable deduction if it is listed at the time of the gift. Therefore, even if the charity has had its exemption revoked, the donor may be able to qualify.

For a legally and enforceable pledge, the IRS may permit a deduction under Sec. 7805(b). This will not be permitted if the donor had knowledge of the impending revocation or had committed any act that contributed to revocation of exempt status.

Donor advised funds that make grants to qualified Sec. 170(c) organizations may also rely on the listing in Publication 78. Even if grants were made after exempt status was revoked, they may still qualify. Once again, if the granting charity had specific knowledge of the pending revocation or had contributed through any action toward that revocation, the exception will not apply.

Finally, a donor may rely on a written representation by a third party provided that the information is an accurate summary of the IRS BMF content.

Applicable Federal Rate of 2.8% for June – Rev. Rul. 2011-13; 2011-23 IRB 1 (18 May 2011)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2011. The AFR under Section 7520 for the month of June will be 2.8%. The rates for May of 3.0% or April of 3.0% 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 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

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