On March 28, 2023, the Internal Revenue Service (IRS) published a letter as part of its "Dirty Dozen series" warning taxpayers not to trust tax advice on social media. There are multiple claims on social media that filing certain IRS forms or documents allow a taxpayer to avoid reporting his or her actual income and receive a larger refund.
"There are many ways to get good tax information, including from a trusted tax professional, tax software and IRS.gov
. But people should be incredibly wary about following advice being shared on social media," stated IRS Commissioner Danny Werfel. "The IRS continues to see a lot of inaccurate information that could get well-meaning taxpayers in trouble. People should remember that there is no secret way to fill out a form and simply get a larger refund that they are not entitled to. Remember, if it sounds too good to be true, it probably is."
Each year the IRS convenes a Security Summit that includes state tax agencies and many tax preparers. The Security Summit attempts to protect taxpayers by warning them against using strategies that lead to tax fraud.
- Fraudulent Form Filing or False Advice — Social media can provide a vast diversity of information. However, some of the false advice will cause good taxpayers to potentially break the law. There are numerous tactics promoted by fraudsters and scammers. Many of these tax schemes will have catchy hashtags such as "#taxadvice" or "#taxtips." There are multiple strategies promoted that are not legitimate.
- IRS Form 8944 Fraud — IRS Form 8944, Preparer e-file Hardship Waiver Request is intended to be used by qualified tax return preparers. It enables them to request a waiver for a taxpayer so the tax return may be filed on paper rather than through an electronic method. However, fraudsters claim that anyone can use this form to avoid paying taxes. The IRS warns taxpayers that filing a form with false or fraudulent information can lead to civil or even criminal penalties.
- Form W-2 Fraud — Another scheme promoted widely on social media is to encourage taxpayers to manually complete IRS Form W-2, Wage and Tax Statement. The taxpayer creates a phantom employer, reports a large income and a substantial withholding amount. Next, the taxpayer files his or her return and claims a large refund. However, the IRS works directly with payroll companies, most large employers and the Social Security Administration. The IRS verifies W-2 information and is equipped to discover fraudulent forms.
The IRS warns taxpayers to be on the lookout for claims that are not likely to be true. The best way to learn how to properly fill out forms is to go to IRS.gov
and search for information on the topic.
If a taxpayer discovers an abusive tax scheme, he or she should use IRS Form 14242-Report Suspected Abusive Tax Promotions or Preparers. You can mail this to IRS Lead Development Center, Stop MS5040, 24000 Avila Road, Laguna Niguel, CA 92677-3405.
An estimated 79% of millennials or Gen Z members receive financial advice through social media. The "#taxadvice" or "#taxtips" hashtags have trended widely on TikTok and Twitter. These "advisors" claim to offer high-quality guidance from CPAs and other tax preparers. Taxpayers should be careful not to fall for these scams and only follow advice from trusted sources.
No Step-up in Basis for Irrevocable Trusts
In Rev. Rul. 2023-2; 2023-16 IRB 1
, the IRS ruled that irrevocable trusts that are grantor trusts during lifetime, but not included in the trustor's estate, do not receive a Sec. 1014(a) step-up in basis.
Many individuals have established irrevocable trusts funded with substantial assets. They file IRS Form 709, Gift Tax Return and report a taxable transfer. However, the grantor also retains a Sec. 675(4) or similar power that causes the trust to be a grantor trust. By the time the trust grantor passes away, the fair market value of the assets may have increased substantially, but the growth is excluded from the trustor's estate.
Section 671 treats the grantor of a trust as the owner if there are specific retained powers. Under Sec. 1014(a)(1), the basis of property in the hands of the person who acquires it from a decedent is stepped up to fair market value at the date of death.
There are at least seven types of property that are acquired from a decedent, as listed in Sec. 1014(b). A non-exhaustive list includes: the property acquired by bequest or devise, through a trust where the decedent retained the right to revoke the trust or change the beneficial enjoyment for recipients, through a trust with a retained general power of appointment, property that is a one-half share of community property or that is used in determining the value of the decedent's estate.
Reg. 1.1014-1(a) states that property acquired from a decedent will be stepped up in value. Reg. 1.1014-2(b)(2) states that the property is acquired from the decedent if it has been included in the gross estate.
The IRS reviewed all of the categories in Sec. 1014(b) and determined that an irrevocable grantor trust "does not fall within any of the seven types of property listed in Section 1014(b)." The trust is not property that is bequeathed or devised. It may include property transferred through the trust, but it is not included in the gross estate.
Congressional committee reports on Sec. 1014(b), citing case law, explained "that property cannot be said to come from a decedent by 'bequest, devise, or inheritance' unless it is part of the decedent's probate estate under the laws of the state of his domicile."
Therefore, the irrevocable grantor trust in which the trustor is treated as the owner for income tax purposes but does not have the trust assets included in his or her estate does not receive a step up in basis upon the death of the grantor.
House Ways and Means Committee member Bill Pascrell, Jr. (D–NJ) applauded the IRS ruling. He stated, "aggressive tax avoiders will be stopped in their tracks." He suggested that Congress should also pass specific legislation to close the perceived loophole. While some commentators have claimed that the termination of the irrevocable grantor trust qualifies for a step-up in basis, it now is clear the IRS will oppose that position.
No Deduction for $25,000 Used Clothing Gift
In Duncan Bass v. Commissioner
; No. 833-20; T.C. Memo. 2023-41, the Tax Court sustained the majority of an IRS deficiency and penalty for a claimed gift of clothing in excess of $25,000.
Taxpayer was employed by Hirschfeld industries and Supreme Maintenance Organization (SMO). During 2017 he earned $97,888 in wages. He also operated Bass & Co. a landscaping and janitorial business, a used clothing store called Cheap Shop and a North Carolina nonprofit named Lend-A-Hand.
Through Bass & Co. and various contacts, he received large quantities of used clothing. Some of the clothing was distributed to disadvantaged individuals through Lend-A-Hand, but taxpayer made 173 trips to Goodwill and The Salvation Army to make gifts. He filled out his own receipts and reported charitable gifts to the three nonprofits of more than $30,000 in value and deducted $18,999. The majority of the receipts were for gifts of used clothing, but there were various additional household items.
Bass hired a preparer to assist with his IRS Form 1040. He reported $18,999 of noncash gifts on Form 8283 but did not obtain any appraisals. The IRS audited the taxpayer and issued a notice of deficiency.
Gifts to charity are deductible under Sec. 170(a)(1). However, the deduction must comply with Reg. 1.170A-13 requirements. A contribution of $250 or more requires a contemporaneous written acknowledgment. Noncash contributions over $500 must include a description of the property contributed and a taxpayer must maintain appropriate records to document the transaction. Reg. 1.170A-13(b)(3)(i). If the noncash charitable contribution exceeds $5,000, the taxpayer must obtain a qualified appraisal, attach the IRS Form 8283 appraisal summary to the income tax return and maintain records to document the gift. See Reg. 1.170A-13(b)(2).
If the taxpayer gives "similar items of property" to a nonprofit, then those items are aggregated for purposes of the $500 and $5,000 thresholds. Sec. 170(f)(11)(F). The phrase "similar items of property" generally includes items of the same category or type.
While the taxpayer did report the gifts to the nonprofits on separate Forms 8283, the information was only reported on Section B. The taxpayer reported gifts of various items in "Good Used" condition. However, Bass failed to obtain the required appraisals for the aggregated gifts of clothing that were approximately four times the threshold for obtaining a qualified appraisal. The Court noted, "Since there was no such appraisal, petitioner is not entitled to the deductions claimed on his 2017 Schedule A for noncash charitable gifts of clothing to Goodwill and The Salvation Army."
However, the furniture, toys and other items were over the $500 threshold but were not in aggregate over the $5,000 threshold. Therefore, Bass was permitted to deduct these items at the claimed value.
A taxpayer who is subject to a deficiency may also be required to pay a Section 6662(a) accuracy penalty. The IRS must prove that taxpayer has not correctly valued the property. At that point, the burden of proof shifts and the taxpayer must demonstrate that he or she had reasonable cause for the failure. Because Mr. Bass did not demonstrate reasonable cause, the penalty was applicable.
Applicable Federal Rate of 5.0% for April -- Rev. Rul. 2023-6; 2023-14 IRB 1 (15 March 2023)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2023. The AFR under Section 7520 for the month of April is 5.0%. The rates for March of 4.4% or February of 4.6% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.