Due to the COVID-19 pandemic, millions of Americans were unemployed during 2020 and 2021. Most of these individuals qualified for unemployment compensation benefits. However, criminals also benefited by targeting these individuals for identity theft. The U.S. Department of Labor Inspector General estimates that criminals captured $89 billion of unemployment compensation through fraud and identity theft during 2020.
IRS Commissioner Chuck Rettig stated, "Identity thieves always look for opportunities, and the unemployment surge presented a new opportunity to exploit the pain and financial hardships faced by Americans. This particular scam is especially egregious because 23 million Americans were jobless or underemployed last year, and desperately needed these benefits."
Unemployment compensation is taxable income. However, Congress passed an exclusion for up to $10,200 in unemployment compensation for the 2020 tax year in the American Rescue Plan Act of 2021. To qualify for the exclusion, taxpayers in all filing statuses must have less than $150,000 of adjusted gross income (AGI). Tax advisors and victims of unemployment compensation fraud should take multiple steps to correct the fraudulent activity.
- Identity Theft Affidavit — If a victim has filed a tax return and it is rejected because his or her Social Security number has been previously used, the tax preparer should file IRS Form 14039, Identity Theft Affidavit.
- State Agencies — The unemployment compensation fraud should be reported to state workforce agencies. The victim can request a corrected Form 1099–G from those state agencies.
- Income Tax Return — Tax returns should only report actual income received. Even if the IRS Form 1099–G with the correct information has not yet been received, report only the wages and income received.
- Identity Protection PIN — If your personal information was used for criminal actions such as filing a fraudulent tax return, you should go to the "Get an Identity Protection PIN" page on IRS.gov and request an Identity Protection PIN. This will enable the IRS to know you are the correct person when you file your tax return.
- Federal Trade Commission (FTC) — The FTC has information available that enables you to protect your credit through specific actions. This is available on DOL.gov/fraud.
Unemployment fraud affects a variety of victims. Some taxpayers have been victimized by criminals filing unemployment compensation claims in multiple states. An individual who receives Form 1099–G from multiple states should retain records of the fraud reports made to each state.
Commissioner Rettig is correct that this is a particularly outrageous form of identity theft. Many of the victims desperately needed to receive their unemployment tax benefits. By following the guidelines and reporting this fraud to the Internal Revenue Service, the Department of Labor and the Federal Trade Commission, the advisor can enable a victim to recover his or her status and qualify again for federal benefits.
IRS Publishes Specimen Conservation Easement Deed Language
In ILM 202130014, IRS Branch 2 Counsel Bridget E. Tombul articulated the current position on judicial extinguishment of conservation easements. She also provided specimen language for future conservation easement deeds.
Under Section 170(f)(3)(A), a gift of a partial interest normally does not qualify for a charitable deduction. However, Section 170(h)(1) permits a charitable deduction for a "qualified conservation contribution" to a qualified organization if the use is exclusively for conservation purposes. Section 170(h)(5)(A) states that the limitation for conservation purposes must protect the property in perpetuity and be enforceable in perpetuity.
It is possible that property subject to a conservation easement may undergo a change of use that makes the conservation purpose impossible or impractical. In this case, the easement may be extinguished by a judicial proceeding. Under Reg. 1.170 A–14(g)(6)(ii), there are specific requirements if there is a judicial extinguishment of the conservation easement. The essential requirement is that the perpetual conservation restriction creates a vested property right in a qualified nonprofit organization that is at least equal to the "proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole." This proportionate value must remain constant unless there is a state law provision that mandates the donor receive the full proceeds from the conversion. The donor must agree to these provisions to protect the nonprofit's right in perpetuity at the time of the gift.
The Tax Court has strictly interpreted Reg. 1.170A–14(g)(6)(i). If the proceeds of the nonprofit are reduced by the value of post–donation improvements or have increased in value due to those improvements, the extinguishment provision violates Reg. 1.170A–14(g)(6).
The Chief Counsel offered specific deed language that is deemed to qualify under the requirements. The language is as follows:
"Donor agrees that the donation of the perpetual conservation restriction described in this deed gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction, at the time of the gift, bears to the fair market value of the property as a whole at that time. For purposes of this paragraph, the proportionate value of the donee organization's property rights shall remain constant. On a subsequent sale, exchange, or involuntary conversion of the subject property, the donee organization will be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction."
The language of the Chief Counsel protects the rights of the donee organization. All proceeds from a judicial extinguishment must be used in a manner consistent with the deed conservation purposes.
The IRS is responding to requests from counsel for specific judicial extinguishment language that will be a "safe harbor" for drafting conservation easement deeds. This ILM response to those requests provides helpful guidance for drafting future conservation easement deeds.
Debate Continues Over Donor Disclosure
In T.D. 9898, the Treasury Department issued final regulations that remove the requirement for disclosure of contributors giving $5,000 or more to nonprofits (other than Section 501(c)(3) and Section 527 organizations).
In the final regulations, the IRS determined that it was not necessary for tax law administration to collect names and addresses of substantial contributors to organizations other than Section 501(c)(3) nonprofits. Exempt organizations are required to maintain the names and addresses of substantial donors, but do not need to disclose those amounts unless specifically required to do so for IRS purposes.
The rationale of the final regulations is that sharing the names of substantial donors could lead to inadvertent disclosure. Because exempt organizations represent a diverse set of viewpoints, donors to these entities could be subject to harassment.
Some Members of the House and Senate expressed concern over the final regulations. Thirty House Members released a letter dated May 26, stating that the final regulations would weaken "federal tax laws, campaign finance laws, and longstanding efforts to pursue foreign interference in U.S. elections." The letter asked the IRS and Treasury to change the regulations. More than 40 Senators signed on to a similar letter to the IRS. The Senators explained that donor disclosure was "a critical step in preventing special interests and foreign actors from exploiting loopholes at the expense of the American people."
Representative David Price (D–NC) introduced the Spotlight Act (H.R.77 4) in the House and Finance Committee Chair Ron Wyden (D–OR) introduced a companion bill in the Senate. Both bills would restore the original donor disclosure rule.
On July 30, House Ways and Means Committee Member Mike Kelly (R–PA) introduced the Don't Weaponize the IRS Act (H.R. 4889). This bill would codify the final IRS regulations.
Kelly stated, "Americans should be able to donate to causes they believe in without fear of retribution from Washington bureaucrats who have a long, sad history of targeting individuals and organizations because of their political beliefs."
There is a strong and vibrant debate underway in Washington over disclosure of substantial donors to organizations other than Section 501(c)(3) organizations. A diverse group of nonprofit Section 501(c)(4) organizations with many different viewpoints prefer to protect their respective substantial donors. This debate will continue in the future. Your editor does not take a specific position on any of the above legislation. This information is offered as a service to our readers.
Applicable Federal Rate of 1.2% for August -- Rev. Rul. 2021-14; 2021-31 IRB 1 (15 July 2021)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2021. The AFR under Section 7520 for the month of August is 1.2%. The rates for July of 1.2% or June of 1.2% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.