IRS Issues Final Regulations Providing Relief for Certain Tax-Exempt Organizations

On May 26, 2020, the Treasury Department and the IRS issued final rules (T.D. 9898) stating that certain tax-exempt groups will no longer be required to provide the names and addresses of major donors on annual returns filed with the IRS. These regulations specify that only organizations described in section 501(c)(3) and section 527 organizations are required to continue to provide names and addresses of contributors on their Forms 990 (Return of Organization Exempt From Income Tax), Forms 990- EZ (Short Form Return of Organization Exempt From Income Tax), and Forms 990-PF (Return of Private Foundation). Most of the information filled out on these annual returns in available for public inspection.

Charitable Organizations (501(c)(3))’s and Political Organizations (Section 527)

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual. Organizations descried in 501(c)(3) are referred to as charitable organizations and such charitable organizations are barred from taking any action in an attempt to influence legislation as a substantial part of its activities, and this cannot participate in any campaign activity for or against political candidates.

This Treasury Decision revises §1.6033-2(a)(2)(ii)(F) to provide that organizations described in section 501(c)(3) generally are required to provide names and addresses of contributors of more than $5,000.  Similarly, §1.6033-2(a)(2)(iii)(D) is revised to remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to the following organizations:

  • Social and recreation clubs per 501(c)(7)
  • Fraternity Beneficiary Societies and Associations per 501(c)(8), and
  • Domestic Fraternal Societies and Associations per 501(c)(10).

Political organizations that are tax-exempt under section 527 of the code will also still have to report contributor names and addresses. A 527 group is created primarily to influence the selection, nomination, election, appointment, or defeat of candidates to federal, state, and local office. These final regulations also clarify that section 527 organizations with gross receipts greater than $25,000 generally are subject to the reporting requirements under section 6033(a)(1) as if they were exempt from taxes under section 501(a).

Social welfare organizations (501(c)(4)) and Business Leagues (501(c)(6))

Under the final regulations, social welfare organizations and business leagues are not required to provide donor names and addresses. The following organizations qualify as social welfare organizations under 501(c)(4):

  • Civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare;
  • Local associations of employees, where membership is limited to the employees of a designated person in a particular municipality, and the net earnings are used exclusively tor charitable, educational, or recreational purposes; and
  • Certain organizations that engage in substantial lobbying activities (i.e. the National Rifle Association, the American Civil Liberties Union, and Citizens United).

Additionally, the Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, under 501(c)(6), so long as they are not organized for profit and no part of the net earnings are used for the benefit of any private shareholder or individual. Organizations that qualify under 501(c)(6) are also allowed to engage in some political activity.

Commentators in favor of the IRS’s decision not to collect names and addresses of substantial donors to some tax-exempt organizations discussed the concern that supporters of certain organizations would face harassment if their status as contributors was publicly revealed. This would produce a “chilling effect,” discouraging potential contributors from giving to certain tax-exempt organizations and rise to a violation of a first amendment violation with regards to freedom of speech and freedom of association. On the other hand, critics asserted that the new rules will lead to an increase in the flow of money into U.S. elections through organizations described in section 501(c)(4) and (6). The IRS quashed this criticism and underscored section 6103 of the Code generally prohibits the IRS from disclosing any names and addresses of organizations’ substantial contributors to federal agencies for non-tax investigations, including campaign finance matters, except in narrowly prescribed circumstances.

As a final note, all tax-exempt organizations are required to maintain records regarding their substantial contributions, irrespective if they have to follow the annual reporting requirement. Still, states have the authority to impose their own reporting requirements as both the Treasury Department and the IRS expect each state to “determine the appropriateness of the burdens it may impose in light of its own tax administration needs.”

VW Contributor: Skylar Young
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Buyers Beware: Buying Real Estate Subject to Unpaid IRS Taxes

When purchasing real estate, it is important to be diligent in whether the seller owes unpaid taxes to the IRS.  In certain situations, the IRS can collect prior owner’s taxes from you the buyer of the real estate, even though the seller incurred those taxes.  A recent United States District Court, District of Nevada demonstrates this issue.

In the case of Shirehampton Drive Trust v. JP Morgan Chase Bank, No. 2:16-cv-02276 (D. Nev. 2019), the owner obtained a mortgage to purchase real estate property.  The owner later fell behind and failed to pay their monthly homeowner’s association (HOA) dues, and the HOA recorded a notice of delinquent assessment lien on the property.  The HOA then foreclosed on the property.  Shirehampton Drive Trust (Shirehampton), the plaintiff, purchased the property from the foreclosure sale and sued JP Morgan Chase Bank (the bank) to quiet title to the real property, and the bank filed a counter claim on the same grounds.  The IRS became involved as well and removed the case to Federal Court, filing a claim of its own on the grounds that the previous owner had outstanding unpaid Federal taxes.

Federal IRS Tax Liens arise by an operation of law when taxes are assessed.  Once the IRS records the tax debt, it has an interest in the taxpayer’s property, which generally includes real estate.  The IRS lien is generally made in the local county records and must be recorded to generally be valid.

The issue hung on which lien was superior, the IRS or the HOA lien.  Generally, the “first in time, first in right” rule applies, looking to the timing of when the liens were filed.  Shirehampton argued that the HOA lien was superior and thus they purchased the lien clear of the IRS Federal Tax Lien.  The IRS argued the HOA lien wasn’t perfected before the Federal Tax Lien, as under Nevada state law, the HOA lien would not be perfected until after notice was sent to the owner of the delinquent assessment.  The US District Court for the State of Nevada ruled for the IRS in that the IRS lien filed on May 1, 2009 was before the date the delinquent assessment was sent to the prior owner on July 24, 2009, even though the owner became delinquent of the HOA dues on March 1, 2009.  As notice of the lien was not perfected in being sent to the previous property owner, the IRS’ lien was superior.  Thus, Shirehampton purchased the property subject to the IRS’ lien and had to pay those unpaid taxes of the previous owner.

When dealing with tax issues and liens when buying property it is important to consult a tax attorney that can help you understand the consequences of liens encumbering the property, and not end up paying the unpaid taxes of the previous owner!

VW Contributor: Ryan Coufal
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IRS Issues Notice on State and Local Tax Deductions

On May 23, 2018 the U.S. Department of Treasury and the Internal Revenue Service issued Notice 2018-54, which announced new  proposed regulations addressing state and local tax payment deductions for federal income tax purposes.

The 2017 Tax Cuts and Jobs Act places limits on an individual’s deduction to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of state and local taxes paid during the calendar year.  Any state and local tax payments above those limitations   are no longer deductible.  This new limitation is effective January 1st, 2018 and applies to taxable years after December 31, 2017 and before January 1, 2026.  This limitation will  have implications for many Nebraska residents according to data research  by The Pew Charitable Trusts. Based on IRS data from 2015, 28 percent of Nebraskans claimed a state and local tax deduction amount higher,  than $10,000.[1]

Several state legislatures, in response to this limitation, are considering adopting legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, in exchange for credits against the state or local taxes already required.  New York, Connecticut, and New Jersey, states known for having higher state taxes, have already enacted measures that allow taxpayers to fund municipal governments by making charitable donations that are both fully federal income tax deductible and satisfy state and local tax liabilities.   In these states, a taxpayer would be able to apply any amount of state and local taxes over $10,000 toward a municipal government fund and report the transfer as a charitable donation.   The  treatment of these state and local tax payments as charitable contributions effectively reduces  the taxpayer’s  federal income tax liability.

Notice 2018-54 informs taxpayers that the upcoming proposed regulations will assist them in understanding the relationship between federal charitable contribution deductions and the state and local tax payment deduction.  The notice also warns taxpayers to be mindful and cautious in making such transfers or donations, and to remember that federal laws control the proper characterization of payments for federal income tax purposes.  Finally, the Notice states the proposed regulations intend to clarify the requirements of the Internal Revenue Code, and that “substance-over-form” principles govern the federal income tax treatment of such transfers.  In colloquial terms the Treasury and IRS are stating that “if it looks, smells and operates like a state tax deduction those payments will most likely be characterized as state tax deductions with the applicable deduction limits.

[1] Phillip Oliff & Brakeyshia Samms, Cap on the State and Local Tax Deduction Likely to Affect States Beyond New York and California, The Pew Charitable Trusts (Apr. 10, 2018) http://www.pewtrusts.org/en/research-and-analysis/analysis/2018/04/10/cap-on-the-state-and-local-tax-deduction-likely-to-affect-states-beyond-new-york-and-california.

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IRS Issues Guidance on Health Care Reporting Requirements for 2017

by Joshua A. Diveley

The IRS issued guidance October 17, 2017, indicating Forms 1040 for the 2017 tax year will not be accepted if the taxpayer does not report on the health coverage reporting requirements of the Affordable Care Act (ACA). For prior tax years, returns that did not report required ACA information were delayed for processing, but it did not prevent the return from ultimately being processed and any applicable refund from being issued.

In general, the ACA requires taxpayers to obtain minimum essential health insurance coverage for themselves and any dependents. If sufficient coverage is not obtained, the ACA imposes a penalty. Form 1040 directs taxpayers to report the existence or non-existence of essential coverage or whether an exemption from coverage applies.

The IRS guidance is available at: https://www.irs.gov/tax-professionals/aca-information-center-for-tax-professionals.

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IRS Notice Provides Penalty Relief to Certain Partnership Return Filing Taxpayers

by Monte L. Schatz

The IRS has issued Notice 2017-47 that provides penalty relief to partnerships that filed certain untimely returns or untimely requests for extension of time who filed those returns for the first taxable year that began after December 31, 2015.

Section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Surface Transportation Act), Public Law 114–41, 129 Stat. 443 (2015), amended section 6072 of the Internal Revenue Code (the Code) and changed the date by which a partnership must file its annual return. The due date for filing the annual return of a partnership changed from the fifteenth day of the fourth month following the close of the taxable year (April 15 for calendar-year -2- taxpayers) to the fifteenth day of the third month following the close of the taxable year (March 15 for calendar-year taxpayers). The new due date applies to the returns of partnerships for taxable years beginning after December 31, 2015.

Many partnerships failed to timely file their various partnership returns (1065, 1065-B, 8804, 8805 or 7004 Extension requests for any of the other various partnership returns).  The assumption of these taxpayers was that the normal deadlines for their 2016 Partnership returns applied (namely April 18, 2017 for the actual returns and September 15, 2017 for those that filed the Form 7004 extension for any of these returns).    Normally in these circumstances the taxpayer is subject to late filing penalties; however, the new filing deadlines shortening the return filing period by one month resulted in many taxpayers filing late returns and the IRS has provided relief for those late filed returns.

The IRS in Notice 2017-47 has announced relief will be granted automatically for penalties for failure to timely file Forms 1065, 1065-B, 8804, 8805, and any other returns, such as Form 5471, for which the due date is tied to the due date of Form 1065 or Form 1065-B. Partnerships that qualify for relief and have already been assessed penalties can expect to receive a letter within the next several months notifying them that the penalties have been abated.  For reconsideration of a penalty covered by this notice that has not been abated by February 28, 2018, contact the number listed in the letter that notified you of the penalty or call (800) 829-1040 and state that you are entitled to relief under Notice 2017-47.

SOURCE: IRS Guidewire Issue Number N-2017-47

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IRS Adopts Simplified Form for Small Nonprofits

By James Pieper

The Internal Revenue Service (IRS) has adopted a new, shorter online form for small charitable organizations seeking nonprofit status.

The Form 1023-EZ reduces the existing 26-page form to three pages for qualifying groups.  Organizations with gross receipts of $50,000 or less and assets of $250,000 or less will be able to use the streamlined process.

In a media release, IRS Commissioner John Koskinen stated: “This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well. The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new form can only be completed online and will help the IRS clear its backlog of more than 60,000 pending nonprofit applications.

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IRS Denies Tax-Favored Status to Certain “Self-Funding” Health Plans

By James Pieper

The Internal Revenue Service (“IRS”) has issued a memorandum (“Memorandum”) indicating that it will deny tax-favored status to payments received under certain health plans marketed by their promoters as “self-funding.”

The Memorandum indicates that payments made under such plans will be considered “income” on the part of the employee (and thus not excluded from “gross income” for purposes of the income tax), and will be considered “wages” for purposes of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes paid by the employer.

The Memorandum cites plans being offered by promoters as “fixed indemnity health plans” with associated “wellness plans.”  The benefit promoted is that the plans are “self-funding” because the purported tax benefits will offset the expense, and employees can gain apparently tax-favored payments as a result of the plan while reducing the FICA purportedly owed by the employer.

The key to the plans is that the employee receives a monthly payment, not as income, but as a “health benefit” in return for a simple but voluntary act such as calling a toll-free number to obtain health advice or participating in biometric screening.  So long as the employee undertakes one act per month, then the benefit is paid.  Promoters of such plans contend that the employee receives comparable take-home pay and the employer receives tax benefits, all on a self-funded basis.

The IRS, however, concludes in the Memorandum that the plans do not constitute “insurance” because the “health benefit” is almost certain to be paid, and, on an actuarial basis, the amount of “benefits” is almost certain to exceed the amount paid as “premium.”

Accordingly, the IRS concluded that payments related to the so-called “self-funding” plans will be considered “income” and “wages” – and, therefore, the apparent “self-funding” mechanism obtained via tax-favored treatment is illusory.

Any employers considering any sort of “self-funding” plan should consider the Memorandum as strong evidence that such a plan is not likely to produce the tax benefits promised.

© 2017 Vandenack Weaver LLC
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Federal Judge Orders IRS to Refund Tax Preparers for PTIN Fees

In 2014, tax return preparers brought a federal class action lawsuit challenging the legality of fees charged by the IRS for PTINs (Preparer Tax Identification Number). Regulations promulgated in 2010 and 2011 imposed requirements on tax return preparers including obtaining a specific PTIN and paying a fee associated with obtaining such PTIN. Currently, the application and renewal fee for a PTIN is $50.00.

The preparers in the class action argued that the fees are unlawful since tax preparers receive no special benefits from the PTIN and secondly the fee is unreasonable in comparison to the costs the IRS incurs to issue the PTIN.

On June 1, 2017, Judge Royce C. Lamberth of the United States District Court for the District of Columbia held that the IRS may continue to require PTINs but granted summary judgment in favor of the tax preparers stating, in part, that the IRS may not charge fees for issuing PTINs. Following a review of applicable case law, the Court found that PTINs are not a “service or thing of value” provided by the IRS. The IRS will be enjoined from charging fees in the future and is required to refund fees charged for the PTINs to all members of the class.

The order granting summary judgment is not yet a final judgment. Such final judgment will indicate the amount owed to each member of the class and may be subject to appeal by the IRS.

For more information, including court documents and the opinion rendered by Judge Lamberth see http://ptinclassaction.com/

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IRS’s Large Business & International Division to Implement Campaigns

The Internal Revenue Service (“IRS”) Large Business and International (“LB&I”) division recently announced the roll-out of thirteen campaigns as part of the IRS’s examination process.  A campaign is an issue-based compliance process that centers on focused examinations.  These campaigns cover a range of topics, including positions on related party transactions and S Corporation losses claimed in excess of basis.  Campaigns are a new approach to enforcement by the IRS that the IRS hopes will identify the most serious tax administration risks, create specific plans to move toward compliance, and effectively deploy IRS resources.  A taxpayer can be the subject of multiple campaigns during an examination.

The IRS will issue “soft letters” to some taxpayers, in which the IRS identifies the campaign issue and indicates the taxpayer’s return appears to include this position.  The letter will articulate the IRS’s legal position and ask whether the taxpayer agrees to change its position by amending the return.  Soft letters will not be released publicly.

The IRS recently informed taxpayers that the receipt of a soft letter does not mean the IRS has opened an examination.  Further, taxpayers are not required to respond to the letters.  However, failure to respond could lead to an examination.

Taxpayers should be aware that this new approach means businesses and high-net-worth individuals dealing with any of the identified issues may face increased IRS audit risk.  These taxpayers should work with their legal advisors to avoid or prepare for IRS challenges.

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IRS Issues Tax and Reporting Relief for Proposed Fiduciary Standard Consistent with Department of Labor Regulations

By Monte Schatz

There have been a significant series of regulatory announcements and rulings related to the fiduciary duty and its application to employee benefit plans.  The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The President by Memorandum to the Secretary of Labor directed the Labor Department to examine the impact of the fiduciary duty rule.  On March 2nd the DOL published 82 FR 12319 seeking public comments about questions raised in the Presidential Memorandum.  The March 2nd notice also provided that a 60-day delay in implementation would be effective on the date of publication of a final rule

The Principal Transactions Exemptions and the accompanying Best Interest Contract provisions, included as part of the fiduciary duty rule, also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. The BIC Exemption effectively states that the fiduciary advisor must sign a “Best Interests Contract” (BIC) with the client, stipulating that the advisor will provide advice that is in the Best Interests of the client.   The Principal Transactions Exemption allows compensation for certain transactions by certain broker-dealers, insurance agents, and others that will act as investment advice fiduciaries that would otherwise violate prohibited transaction rules that trigger excise taxes and civil liability.

Most investment industry groups’ concerns regarding any non-compliance during a “gap period” of the financial fiduciary rule focused on Department of Labor and its potential civil liability enforcement provisions as outlined under ERISA.  Additional concerns were raised concerning Internal Revenue Service enforcement provisions found in Internal Revenue Code §4975 prohibited transaction rules that provides for the imposition of excise taxes for violations of that rule.

As a result of delays of the Fiduciary Standard rules, the Department of Labor published Field Assistance Bulletin (FAB) 2017-01.  FAB 2017-01 provides that, to the extent circumstances surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance.

In Announcement 2017–4 the IRS stated, Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

SOURCES:

http://www.asppa.org/News/Article/ArticleID/8480

https://www.irs.gov/pub/irs-drop/a-17-04.pdf

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