On June 22, 2023, National Taxpayer Advocate Erin Collins reported the IRS has substantially improved services. Collins noted, "This year, for the first time, the clouds are beginning to part, and I can see some blue sky."
Collins releases a midyear report each summer. She explained the IRS should be commended for reaching an 85% level of service (LOS) benchmark. However, when all the different operations of the IRS are considered, the actual percent of calls completed or answered by the IRS is only 35%.
The IRS did reach 85% on the general management phone lines, but there were other factors to consider. Millions of taxpayers hung up on the IRS and did not talk to a representative before being helped. Other calls were sent automatically to a recorded response line.
A major problem was the IRS call center handling installment agreements and payment of past-due taxes. This line had a success rate of only 46% even though it had implemented new voice bots.
Collins noted, "One would suspect the utilization of this bot would free up [customer service representatives] to assist more taxpayers on the line and improve its overall LOS." In addition, the failures on this line could subject some taxpayers to more serious enforcement actions include bank or wage levies.
Nevertheless, Collins noted, "the big picture shows taxpayers had a much easier time reaching the IRS this filing season."
The credit for the improvement was largely due to new funds in the Inflation Reduction Act. The IRS was able to hire more customer service representatives and answer an additional four million calls this year compared to last year.
Kenneth Corbin is the Commissioner of the IRS Wage and Investment Division. Mr. Corbin noted the IRS is directly hiring many representatives and that there are plans to "really double down on that for 2024."
The report from Collins also explained there are trade-offs when the IRS created the 85% level of service goal. The IRS customer representatives can either be answering taxpayer questions or processing mail correspondence. The focus on answering taxpayer questions caused a backlog on correspondence. It also resulted in many representatives being idle at various times.
The IRS has enhanced its efforts to scan paper returns. The new scanning technology has a 95% accuracy rate. However, the IRS is seeking to improve the accuracy of the scanned returns.
In April 2023, the IRS had 13.3 million paper returns stacked up at its centers. This year, the number of paper tax returns awaiting processing was reduced to 2.6 million. However, the IRS still has approximately 5 million unanswered taxpayer letters and correspondence.
The IRS has increased its efforts to improve the scanning software and hopes to expand scanning. By the end of this year, the system should cover all 180 forms that can be attached to your IRS Form 1040.
Hog Farmland Easement Approved
In Murfam Enterprises LLC et al. v. Commissioner;
No. 8039-16; T.C. Memo. 2023-73, the Tax Court approved a charitable deduction for $5,637,207, even though the taxpayer failed to comply with substantiation and appraisal requirements. The taxpayer's failures were excused because the IRS failed to initially assess the deficiency and was unable to meet its burden of proof.
The Murphy family is one of the largest hog farmers in North Carolina. They operate over 50 hog-farming facilities. In 1999 and 2000, the family acquired a tract of land in Bladen County, North Carolina. They were granted hog-farming certificates on 1,115 acres. While the hog farming certificates were no longer granted by North Carolina after 2007, in 2010 Murfam Enterprises deeded a conservation easement on 1,115 acres to the North American Land Trust (NALT).
Appraiser Andrew Piner completed a "before and after" valuation. He claimed the easement value was approximately $5.7 million. CPA firm Dixon Hughes prepared the tax returns and IRS Form 8283. However, IRS Form 8283 failed to include Page 1 and Page 2, Part I of Section B. The incomplete Form 8283 did not include the date or manner of acquisition, the donor's cost basis or whether there was a bargain sale.
The IRS audited the taxpayer and claimed the deduction should be reduced from $5,744,600, to $446,000. However, the IRS initially failed to assert a claim for any penalties. The IRS claim for penalties was first filed in the Tax Court proceedings.
The Tax Court reviewed the appraisals and evaluation and determined that the charitable value of the easement should be reduced to $5,637,207.
Because the IRS first assessed the penalties during the Tax Court proceedings, they constitute a "new matter." There is a potential reasonable cause defense to the new matter substantiation. However, the key issue is that a "new matter" shifts the burden of proof to the IRS.
Because taxpayer failed to fully complete IRS Form 8283, the taxpayer was not in full compliance. The Tax Court determined that the taxpayer did not meet Section 170(f)(11) substantiation requirements "either strictly or substantially." However, the IRS failed to meet its burden to prove an absence of reasonable cause.
The IRS Form 8283 did not report cost basis which is required for the substantial compliance section. The taxpayer also relied on a CPA firm but did not provide the basis information and did not explain why this was not provided. Therefore, the taxpayer was not in compliance. However, it was the Commissioner's burden to show a "lack of reasonable cause for omission of cost basis" and the IRS failed to do so.
With respect to the valuation, the parties agreed that the after-donation value was $5,801,000. The Tax Court accepted the taxpayer's capitalization rate and determined the deduction was $5,637,207. Because the charitable deduction value was only 2% below the reported value, there was no Section 6662 penalty.
Golf Course Easement Values Reduced
In Wendell H. Murphy Jr. et al. v. Commissioner;
No. 14536-16; No. 14541-16; T.C. Memo. 2023-72, the Tax Court determined two golf course charitable easements were qualified for a charitable contribution deduction. However, the value of the charitable deductions was reduced approximately 65% and a gross valuation misstatement penalty applied.
In 1993, the Murphy family acquired the River Tract and the Landing Tract in North Carolina. They eventually developed a residential community with two golf courses. The family granted conservation easements in 2010 to the North American Land Trust (NALT). They obtained a qualified appraisal from Mr. F. Bruce Sauter and reported easement values of $7,344,095 on River Tract and $1,080,814 on Landing Tract.
Taxpayers hired CPA firm Dixon Hughes to prepare the tax returns. However, IRS Form 8283 did not include complete information on Page 1 and Page 2 failed to include the date and manner of property acquisition, the cost basis or whether the property was part of a bargain sale.
The IRS issued a notice of deficiency but did not include any penalties. The IRS did not request the penalties until the Tax Court pleadings. The Tax Court reviewed the appraisals and determined the conservation easements were valued at $2,709,274 and $100,000.
Because the IRS did not assess the penalties until the Tax Court proceedings, this was a "new matter." With a new matter, the burden of proof on the reasonable cause exception is shifted to the IRS. While the Tax Court noted that the tax materials did not include a qualified appraisal or a qualified appraisal summary and the taxpayer did not comply either strictly or substantially to the requirements, the IRS did not prove that there was no reasonable cause.
Since this was a new matter, the IRS must carry the burden to show a lack of reasonable cause. Because the IRS failed in this responsibility to carry the burden of proof, the easement was determined qualified.
While the easement was held to be qualified, there was a substantial overvaluation of the charitable deduction. Because the valuation was more than double the amount determined by the Tax Court, the gross valuation misstatement penalty applied under Section 6662(a).
The net result is the taxpayer failed to comply with both the substantiation and the appraisal summary requirements, the IRS failed to meet the required burden to show an absence of reasonable cause and the charitable deductions were approved. However, the overvaluation resulted in a Section 6662 gross valuation misstatement penalty.
Applicable Federal Rate of 4.6% for July -- Rev. Rul. 2023-12; 2023-27 IRB 1 (15 June 2023)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2023. The AFR under Sec. 7520 for the month of July is 4.6%. The rates for June of 4.2% or May of 4.4% 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.