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Wednesday June 19, 2024

Washington News

Washington Hotline

Payment Options For Late Tax Filers

In IR-2024-116, the Internal Revenue Service (IRS) outlined ways that late tax filers could comply with filing and payment rules.

While over 139 million taxpayer returns were filed this year, there are some individuals who may have neglected to file because they were not able to pay their full tax bill. The IRS encourages these taxpayers to file and start making as many payments as possible. Taxpayers who file and start to make payments can reduce their late-filing penalties and interest.

The IRS explains that there are five main options for making tax payments.

  1. Direct Pay - Taxpayers may make payments directly from a checking or savings account. There is no cost for this service, and the payments may be scheduled up to 365 days after the amount is initially due. Taxpayers will receive an email confirmation for these payments.
  2. Electronic Federal Tax Payment System (EFTPS) - Individuals or businesses making large payments may use the EFTPS. This allows up to five payments per day. Taxpayers may enroll and schedule payments up to 365 days in advance.
  3. Electronic Funds Payment - A third option is to use an online tax software. The tax software will handle the electronic payments. If you are using a professional tax preparer, this tax preparer may establish your electronic funds withdrawal.
  4. Payment Processor - There are businesses that will handle your credit card, debit card or digital wallet payments. There is a service fee charge that is an additional amount to the taxes owed.
  5. IRS Online Account - The IRS encourages taxpayers to create an IRS Online Account. You may make payments using the online account. The account enables you to understand how much you owe, your payment history and potential payment plan details.

If you are paying a previous year's tax liability, you may want to include IRS Form 1040-V, Payment Voucher. You should be careful to mail the payments to the correct address. If you are paying by cash through a participating retail store, there is a $500 limit per payment, and a processing fee.

Some taxpayers are not able to pay in full and establish a payment plan. On IRS.gov, the Online Payment Agreement (OPA) tool can be used to set up a payment plan. Another option is an "Offer in Compromise," though which the IRS accepts an amount less than the original tax. You may use the Offer in Compromise Pre-Qualifier tool on IRS.gov to determine eligibility. Finally, there are circumstances in which taxpayers are in a difficult financial condition and the IRS grants them a delay in the tax collection.

Congress Concerned DAF Regulations May "Chill" Charitable Giving

A majority of the members of the House Ways and Means Committee sent an April 19 letter to Treasury Secretary Janet Yellen to express concern about the proposed donor advised fund (DAF) regulations. These DAF proposed regulations (REG-142338-07) may have a substantial negative impact on DAFs.

The 33 members note that DAFs distributed grants of $52.2 billion in 2022. This grant amount has doubled over five years and distribution rates for most DAF's have been over 20%.

The Members state the regulations are broad and may cause a chilling effect. In particular, "By making an investment advisor a donor-advisor, the Regulations could severely restrict the role of an investment advisor, and thus lead to donors choosing other vehicles." The proposed regulations provision that essentially makes an investment advisor unable to manage the DAF investments for a client would seriously impact charitable giving.

A second concern is the broad definition of a DAF. The proposed regulations may include many field of interest funds in the DAF category. If field of interest funds, designated funds or funds with advisory committees are required to meet DAF standards, this could be "confusing for donors, expensive for sponsors, and lead to less money getting to end-use charities."

Third, there is a broad definition for "taxable distribution." This broad definition for distributions could subject many community foundations to excise tax on necessary payments to philanthropic advisors or for due diligence fees.

Finally, the effective date could lead to retroactive application. Because major changes in the DAF proposed regulations would conflict with the common practices of many community foundations, this retroactive application could be very harmful.

The 33 members emphasize that DAFs are important both "during good economic times and bad." If the economy experiences major stress, the ability of DAFs to make record levels of grants is very important. This was particularly true during the COVID-19 pandemic but it could also occur during natural disasters, social unrest and economic downturns.

The 33 members conclude, "For these reasons, future regulations should not impede the success of this thriving and flexible charitable tool."

Editor's Note: This is a strong statement by a majority of the House Ways and Means Committee. This clear and bipartisan support for DAFs could have a substantial impact on the final DAF regulations.

"Fantasy" Conservation Easement Valuation Rejected

In Buckelew Farm LLC et al. v. Commissioner; No. 14273-17; T.C. Memo. 2024-52, the Tax Court reduced the claimed $47.6 million charitable deduction to under $5 million and assessed a 40% valuation misstatement penalty.

The 1,561-acre parcel in Jones County, Georgia was initially owned by former major league baseball players Ryan Klesko and John Smoltz. They acquired the property for approximately $4 million. In 2012, after the economic downturn of 2008, they were unable to sell it for $9. There were also several appraisals over that period that estimated the value from $4 million to $7 million.

The property was sold to Big Knoll Farms (Big K) in 2012. The syndicated partnership planned to develop 307 residential lots surrounding a lake. The development would not qualify under existing zoning regulations and would an approved variance. In 2013, appraiser Dale Hayter, Jr. was asked to value the property. Hayter based his appraisal on an assumption there was a "very likely" probability that the rezoning would permit "development of a 307 lot hunting and conservation oriented residential community."

Based upon this assumption, he determined the property was worth $50.48 million before the conservation easement and $2.68 million after the conservation easement. The net charitable deduction was $47.6 million. His analysis was based on a discounted cash flow method.

Big K sold 49 units at $200,000 each in the syndicated partnership. The members voted on December 26, 2013 to proceed with the conservation easement. The partnership filed its tax return with IRS Form 8283 to report the $47.6 million charitable deduction. The IRS audited the return, denied the deduction and asserted a 40% penalty for gross valuation misstatement and a 20% penalty under Section 6662(a) and (b) for negligent disregard of rules. In an amendment to the Answer, the IRS also asserted a 75% civil fraud penalty under Section 6663(a).

The Tax Court recognized taxpayer appraiser Dale Hayter, Jr. as a qualified expert. The IRS expert was Zac Ryan, who used a comparable sales method for his valuation. Ryan noted the population growth in Jones County followed negative growth trends in 2013. Ryan also indicated the development would not be successful, but the highest and best use would be "extremely low-density residential use in conjunction with long-term speculative investment."

Mr. Ryan estimated, based on comparable properties, that the value was $7.395 million before and $2.8 million after. Therefore, the charitable deduction was $4.595 million.

The Tax Court noted a Section 170(h)(1) conservation deduction requires a qualified real property interest to be deeded to a qualified organization exclusively for conservation purposes. The IRS argued that the deed was defective because the extinguishment clause did not require the nonprofit to receive a proportionate share of the extinguishment proceeds. The Tax Court determined that the deed was valid, and the partnership did have the requisite intent to make a charitable gift.

A qualified appraisal must have a correct description of the property, the date of the appraisal, the property's fair market value, the method used to value the property and the specific basis for the valuation. The Tax Court determined that Mr. Hayter was a qualified appraisar and, even though he did not reference comparable sales, the appraisal was a qualified appraisal under Section 170(f)(11).

However, the Tax Court noted that Mr. Hayter used a discounted cash flow analysis while IRS expert Ryan used a comparable sales analysis. The highest and best use is available as an appraisal option if the potential use is legally permissible, physically possible, financially feasible and maximally productive. Because the Hayter analysis failed to meet this standard, it was disregarded.

Mr. Hayter determined that it was "very likely" that the subject property would be rezoned. However, while the Jones County Zoning Director indicated that was possible, the director did not realize that the proposed development would be using gravel roads and community septic. This would not be permitted under the zoning guidelines and therefore the proposed development was not practical. The Tax Court noted, "the probability of development at the selling price of $50,480,000 million is firmly planted somewhere in the realm of fantasy."

Therefore, the Tax Court accepted the IRS deduction number of $4.595 million.

The IRS claimed a 75% civil fraud penalty under Section 6663(a). However, the civil penalty requires clear and convincing proof that the managers knowingly understated the income. The IRS failed to provide that level of proof and there was no civil fraud penalty. However, the 40% gross valuation misstatement penalty under Section 6662(e)(1)(A) was sustained.

Applicable Federal Rate of 5.4% for May; 2024-19 IRB 1 (16 April 2024)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2024. The AFR under Sec. 7520 for the month of May is 5.4%. The rates for April of 5.2% or March of 5.0% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."


Published April 26, 2024
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