Tuesday June 6, 2023
IRS Plans to Hire 4,000 Customer Service Workers
IRS Taxpayer Experience Officer and Wage and Investment Commissioner Ken Corbin stated, "The IRS continues to increase its workforce in 2022 to improve the taxpayer experience. We have a variety of jobs available all over the country. Contact representatives, among other things, deal directly with taxpayers by helping them with their tax obligations."
The new positions compensation will start at a GS-5 level. There will be openings for the day shift, the mid-shift and the swing shift in 22 cities, including Puerto Rico.
The IRS will host six virtual webinars to describe the qualifications and job duties for contact representatives. These webinars will also help applicants understand the hiring process. The webinars will be hosted on June 3, 7, 10, 14, 21 and 24. There also will be in-person events at Andover, MA; Atlanta, GA; Philadelphia, PA; Fresno, CA; Oakland, CA; Brookhaven, NY; Cincinnati, OH; Memphis, TN and Caguas, Puerto Rico. The IRS career page on IRS.gov has additional information on registration.
Job seekers are asked to provide two forms of identification, such as a driver's license, birth certificate, U.S. passport, military ID or Social Security card. The IRS representatives have authority make tentative job offers at in-person events to qualified candidates.
Editor's Note: The IRS is acknowledging a critical need for additional staff. Prior efforts to hire new staff have led to a small fraction of the new positions being filled. The IRS hopes that the new hires will be able to improve the historically low level of taxpayer phone service during the past year. The IRS is still working through a large paper backlog and needs thousands of new representatives to handle a fivefold increase in taxpayer requests for assistance.
"Dirty Dozen" Tax Schemes
In IR–2022–113, the IRS announced the first four of the "Dirty Dozen" list for 2022. The four transactions are potentially abusive and the IRS will focus on the tax returns that include these strategies. The first four abusive transactions include charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales.
IRS Commissioner Chuck Rettig stated, "Taxpayers should stop and think twice before including these questionable arrangements on their tax returns. Taxpayers are legally responsible for what is on their return, not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know they can trust."
The IRS emphasizes that it is responsible for identifying "emerging threats to compliance" and informing taxpayers so they do not become victims of unscrupulous promoters.
1. Charitable Remainder Annuity Trust (CRAT) — While there are appropriate uses for a CRAT, there is an abusive application for this agreement. Some taxpayers claim that a transfer of assets into a CRAT will produce a step-up in basis to fair market value in a manner similar to a sale. The CRAT accountant reports the sale of the appreciated asset with no gain because there is a claimed step-up in basis. The cash proceeds are invested by purchasing a single premium immediate annuity (SPIA). Payments from the annuity are treated as though the CRAT were funded with cash and therefore only a small portion of the payment is taxable. Under the four-tier accounting methodology of Section 664, the CRAT accountant classifies the contribution as tier four principal and reports only the income portion of the SPIA as taxable under Section 72 principles. The IRS notes the claimed step-up in basis is contrary to Section 72 and 664.
2. Maltese or Foreign Pension Arrangements — U.S. citizens may attempt to avoid tax by contributing to foreign individual retirement arrangements in Malta or other foreign countries. Some countries allow contributions of appreciated property rather than cash and do not limit contributions to earned income. The taxpayer claims that the foreign arrangement is a "pension fund" under the U.S. tax treaty. The taxpayer mistakenly claims that the earnings on the invested amounts are exempt from U.S. income tax.
3. Captive Insurance in Puerto Rico or a Foreign Nation — The U.S. owner of a business creates a captive insurance company in Puerto Rico or another foreign nation. There is a "fronting insurance carrier" and this entity reinsurers the claimed insurance coverage. The promoter claims the large insurance premiums are deductible. However, these insurance arrangements fail due to implausible risks, no arms-length pricing or lack of business purpose. The IRS will deny the claimed insurance deductions by the U.S. business.
4. Monetized Installment Sales — Under Section 453, an individual is permitted to create an installment sale of appreciated property. However, the monetized installment sale involves a contract with a buyer and then a sale of the same property to an intermediary with an installment note. The intermediary claims to sell the property to the buyer for cash. However, there is a purported nonrecourse loan back to the buyer. In essence, the seller receives cash and claims the gain is spread out over the installment loan duration.
The IRS cautions, "Taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits."
The IRS reminds taxpayers that the use of these fraudulent strategies may lead to accuracy-related penalties of 20% to 40% or a civil fraud penalty of 75% on the underpayment of tax.
IRS Claims Conservation Easement Appraisals Not Qualified
In Green Valley Investors LLC et al. v. Commissioner; No. 17379-19, the IRS filed a motion for partial summary judgment and attacked the validity of appraisals on four conservation easements. The appraisals were completed by Martin Van Sant and Thomas Wingard. The IRS notes that the appraisals represented an increase of 80 times in value during the course of one year. The motion requests the Tax Court declare these appraisals are not qualified.
The IRS filed a memorandum of law in support of that request. The basis for invalidating the appraisals for the parcels transferred to four LLCs was that they assumed the vacant land was an existing mining entity. The motion also noted that the Section 664(c)(3) reasonable cause exception is not applicable.
In 2011, Bobby and Elizabeth Branch purchased 607 acres of land in North Carolina for $2,237,600. They transferred the property to an LLC and then deeded parcels to four other LLCs.
The four LLCs were then syndicated. The investors in each LLC paid $5 million dollars, with approximately a $1 million syndication fee. The net total was approximately $20 million paid by the investors and there were approximately $4 million in syndication fees paid to promoters.
Appraisers Van Sant and Wingard prepared appraisals for the four LLC conservation easements. The IRS disallowed the approximately $90 million in claimed charitable deductions. It also assessed accuracy–related penalties for gross valuation misstatements under Section 6662(d).
The initial purchase price on the 607 acres was $3,745 per acre. There was an appraisal in 2013 of $2,500 per acre and the appraised value for the conservation easement property reflected an increase to $200,600 per acre.
The eightyfold increase in value was based on the assumption "that there is a viable mining operation... on the subject property as of the effective date of valuation." The IRS notes that appraisers Van Sant and Wingard knew there were no mining operations functioning, but valued the properties as though they were operating mines.
The Tax Court has previously noted that there can be determinations based upon probable future valuations, but the requirement is not fulfilled by a "purely hypothetical" theory. The basic requirement is that the property must be valued at "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Reg. 1.170A–1(c)(2). Because there rarely are comparable marketplace sales, the customary method for appraising conservation easements is the "before and after" valuation methodology. The value is the "difference between the fair market value of the property unencumbered before the granting of the restriction and the fair market value of the encumbered property after." Reg. 1.170A–14(h).
The valuation must be based on the unimproved land, immediately prior to the easement. There was a potential for a mining operation, but there was no objective assessment of the likelihood that this property would be developed. Therefore, the appraisals violated the qualified appraisal requirements because the "before-easement valuation is based on factual assumptions which are indisputably false."
Appraisals must conform with the Uniform Standards of Professional Appraisal Practice (USPAP). These standards are designed to ensure appraisals maintain credibility. The use of a hypothetical condition that the donated properties had existing mining operations is in conflict with USPAP.
In addition, the appraisers falsely stated they had "performed no services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding excepting acceptance of this assignment." They had appraised the property in 2013 at $1,520,000. Approximately one year later, they valued the land at $91 million to determine the value of the conservation easements.
In addition, the IRS maintained the appraisals were over 200% of the correct value. Therefore the reasonable cause exception under Section 6664(c)(3) was not applicable.
Editor's Note: The Tax Court is now squarely faced with the conservation easement valuation issue. While the IRS has argued in some estate tax cases for an increased value based on probable development, the Tax Court will need to determine better guidelines for when a "hypothetical" development assumption is permitted. This case is likely to be decided in the appellate courts.
Applicable Federal Rate of 3.6% for June — Rev. Rul. 2022-10; 2022-23 IRB 1 (16 May 2022)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2022. The AFR under Section 7520 for the month of June is 3.6%. The rates for May of 3.0% or April 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.
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