Thursday November 21, 2019
IRS Offers Advice to Taxpayers Who Missed the Tax-Filing Deadline
For those who did not file by April 15, penalties and interest will not apply if a refund is due. Penalties and interest may apply, however, if taxpayers owe taxes and did not file their tax returns by April 15 (or April 17 for taxpayers residing in Maine or Massachusetts). As such, the IRS urges taxpayers who have not filed and owe taxes to file a return as soon as possible. Taxpayers may use "IRS Free File" on IRS.gov through October 15 to prepare and file their returns.
There are, however, some taxpayers who have additional time to file their taxes and pay any taxes due. This includes some disaster victims, military service members, eligible support personnel in combat zones and U.S. citizens and resident aliens who live and work outside the U.S. and Puerto Rico (see IRS publication IR-2019-73 for more information).
The IRS also notes that there may be penalty relief available for those whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. The IRS is waiving the penalty for taxpayers who paid at least 80% of their tax liability through federal income tax withholding and/or quarterly estimated tax payments.
For those who do not have additional time to file or do not qualify for penalty relief, penalty fees can add up quickly, so it is important to file as soon as possible. The IRS explains that the late filing penalty on unpaid taxes, also known as the failure-to-file penalty, is usually 5% of the unpaid balance for each month, or part of each month, that the return is late. Note that the failure-to-file penalty may be reduced for any month where the failure-to-pay penalty also applies (see IRS.gov/penalties for more information). If a return is more than 60 days late, then the minimum penalty is the lesser of $210 or 100% of the unpaid tax.
In some instances, taxpayers may qualify for penalty relief. If the taxpayer has a legitimate reason for filing late, he or she should contact the IRS to explain why it was not possible to file or pay by the due date. Additionally, if a taxpayer has not been assessed a penalty for the past three years, he or she may qualify for penalty relief. For more information, visit the first time penalty abatement page on IRS.gov.
The IRS also provided tips for the following issues:
- Errors on Already-Filed Returns – Taxpayers typically are not required to submit amended returns for mathematical errors or missing forms or schedules. The IRS will normally correct mathematical errors and notify the taxpayer if there are missing forms or schedules. An amended form may be required to change filing status, correct total income or amend deductions or credits claimed. To determine if the error necessitates an amended return, use the "Interactive Tax Assistant" tool on the IRS website.
- Taxes Owed or Additional Payments Needed – If taxes are owed, taxpayers can view their balances online and pay using IRS Direct Pay. Other electronic payment options are available on IRS.gov/payments.
- Refund Information – Taxpayers can use the IRS's "Where's My Refund" tool to check on the status of their federal income tax refund. The tool is available on IRS.gov, the "IRS2Go" app or by phone at 800-829-1954. Taxpayers will need to provide the primary Social Security number on the return, the filing status and the expected refund amount.
- Responding to an IRS Notice or Letter – Notices and letters from the IRS will typically explain why the IRS is contacting the taxpayer and provide the steps that should be taken. If taxpayers have additional questions after receiving a letter or notice from the IRS, they should visit "Understanding Your Notice or IRS Letter" on IRS.gov or call the Taxpayer Advocate Service office at 877-777-4778.
- Amending Withholding Amounts –The Tax Cuts and Jobs Act (TCJA) implemented far-reaching tax changes. As such, the IRS urges all employees to check their withholding amounts using its "Withholding Calculator" on IRS.gov to avoid an unexpected tax bill and penalties.
Legacy IRA Act of 2019 Introduced
On May 1, Senators Kevin Cramer (R-ND) and Debbie Stabenow (D-MI) introduced the Legacy IRA Act of 2019. The bill would extend the IRA charitable rollover to allow tax-free distributions to life-income charitable gifts, including charitable remainder trusts and charitable gift annuities.
Currently, IRA owners over the age of 70½ can make tax-free qualified charitable distributions of up to $100,000 from their traditional IRAs through the IRA charitable rollover. The Legacy IRA Act (S. 1257) would expand the IRA charitable rollover by permitting individuals age 65 and older to transfer up to $400,000 per year from their IRAs to life income plans. The available plans include charitable gift annuities, charitable remainder unitrusts and charitable remainder annuity trusts. The permitted life income recipients under the bill include the IRA owner and/or his or her spouse.
Tax-free transfers from an IRA to one of these charitable life income plans would be permitted once the IRA owner reaches age 65, while outright charitable IRA rollover gifts would remain available for IRA owners age 70½ and older and would remain capped at $100,000 per year. The total transferred amount, taking into account both transfers to life income plans and outright IRA charitable rollover gifts, would be capped at $400,000 per year.
"Our charitable organizations do such important work and depend on generous contributions from many American families," said Stabenow. "Our legislation cuts red tape in the tax code to make it easier for people to give to the charity of their choice."
Many charitable organizations have voiced their support for the Legacy IRA Act and are enthusiastic about the philanthropic possibilities that the bill will provide IRA owners.
"This legislation is a win-win, both for seniors who want to support philanthropic causes and for charitable organizations that benefit from individual philanthropy," said Suzie Upton, Chief Operating Officer for the American Heart Association. "By building on the IRA Charitable Rollover, which has generated millions of dollars in new or increased contributions to local and national charities, this bill would allow more seniors to benefit from the rollover and make tax-free charitable contributions."
Daniel J. Cardinali, President and CEO of Independent Sector, praised the bill, noting the Legacy IRA Act would encourage charitable giving while providing income to seniors during their retirement years.
"The existing IRA Charitable Rollover has been extremely beneficial for charities overall, but many Americans cannot afford to give away their retirement income during their lifetime," said Cardinali. "The Legacy IRA Act would give prospective donors one more critical way to invest in the common good in a way that works for them."
Penalty for Overvalued Easement Affirmed
In John L. Roth et ux. v. Commissioner; No. 18-9006 (29 Apr 2019), the Tenth Circuit affirmed a decision from the Tax Court that imposed a 40% penalty for grossly misstating the value of a conservation easement donation.
In 2007, John and Deanne Roth donated a conservation easement (2007 Easement) to the Colorado Natural Land Trust. The 2007 Easement encumbered 40 acres of land in Prowers County, Colorado and provided, among other things, the right to mine gravel from the property. The Roths claimed a $970,000 charitable income tax deduction for the conservation easement donation.
In 2011, the IRS audited the Roths' tax returns and hired an independent appraiser to value the 2007 Easement. The appraiser initially determined that the 2007 Easement was of no monetary value, but the parties later stipulated to valuing it at $40,000.
IRS agent Denise Soss determined that, based on the revaluation, the Roths were subject to a 40% "gross valuation misstatement" penalty under Sec. 6662(h), which permits a 40% penalty on unpaid taxes when the claimed value of property exceeds its actual value by 200% or more. Soss' "Group Manager" signed a "Civil Penalty Approval Form," approving the gross valuation misstatement penalty.
The Roths filed a protest in response and sought administration review of Soss' determination with the IRS Office of Appeals. While IRS Appeals Officer Mark Kawakami agreed that the penalties should be fully sustained, he also stated that the Roths were liable for an "accuracy-related" penalty under Sec. 6662(a) amounting to 20% of their unpaid taxes and revised the penalty amount to 20%. Kawakami's supervisor signed the memo and the IRS sent the Roths a notice of deficiency, reflecting the revised 20% penalty.
In 2012, the Roths filed a petition with the Tax Court, challenging the penalty. They argued that, before imposing the penalty, the IRS failed to obtain written, supervisory approval for its "initial determination" of a penalty assessment as required by Sec. 6751(b). In the IRS's answer, it asserted that the Roths were liable for the 40% gross valuation misstatement penalty. The Tax Court found that the "initial determination" written-approval requirement under Sec. 6751(b) was met and noted that the IRS is allowed to assert additional penalties in an answer to a taxpayer's petition. See Sec. 6214(a); Graev v. Commissioner (Graev III), 149 T.C. 485 (Dec. 20, 2017); and Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). As such, the Tax Court entered judgment against the Roths and upheld the 40% penalty.
The Roths appealed the Tax Court decision, arguing that the 20% penalty determination constitutes the IRS's "initial determination" of the penalty under Sec. 6751(b) and, as such, the IRS cannot impose anything other than the 20% penalty it "initially determined."
The Tenth Circuit rejected the Roths' argument, explaining that Sec. 6571(b) does not restrict the IRS's "initial determination" with respect to a penalty assessment to the penalty included in the statutory notice of deficiency. The Court explained that the IRS is not required to include its initial determination in a notice of deficiency and that it is possible that the IRS's determination could precede the sending of that notice.
In addition, the Court noted that Sec. 6214(a) permits the IRS to "bring claims for 'any addition' to a taxpayer's deficiency in a proceeding before the Tax Court" and that the Tax Court has "jurisdiction to redetermine the correct amount of the deficiency." As such, the Tax Court's decision to impose a 40% penalty for grossly misstating the value of the 2007 Easement was affirmed.
Applicable Federal Rate of 2.8% for May -- Rev. Rul. 2019-12; 2019-19 IRB 1 (16 Apr 2018)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2019. The AFR under Section 7520 for the month of May is 2.8%. The rates for April of 3.0% or March of 3.2% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.