On June 13, the Senate passed the Taxpayer First Act (TFA) and sent the bill to the President for his signature. The bill to reform the IRS received praise from leaders of both parties.
Senate Finance Committee Chairman Chuck Grassley (R-IA) supported the bill and noted it is "a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be."
Senate Finance Committee Ranking Member Ron Wyden (D-OR) also spoke favorably about the IRS reform act. He stated, "Our bill includes critical provisions to improve customer service, protect personal data, preserve tax preparation services, and shield low-income taxpayers from abusive private debt collectors."
The Taxpayer First Act includes seven specific areas designed to help taxpayers.
- Better Customer Service - The IRS will update and improve training of employees in its call centers. It will use detailed metrics to encourage call center employees to improve levels of customer services.
- Reasonable Settlements - Some taxpayers have financial problems and cannot pay their tax bills. In a few cases, the IRS will accept a lower amount for the tax bill under the "Offer in Compromise (OIC)" program. Low-income taxpayers will be able to waive the application fee and still qualify for the OIC program.
- Limits on IRS Property Seizures - If you owe tax, in some circumstances the IRS can take your property in order to pay that tax. Generally, TFA sets new limits on the circumstances under which the IRS can seize property.
- Protect Innocent Spouses - If one spouse files a tax return and does not pay the tax due, a spouse may not know that the bill was unpaid. In that case, a Tax Court Judge can review the facts and circumstances and excuse the innocent spouse from liability.
- Fewer Private Tax Collectors - The IRS currently uses private tax collectors for long-overdue tax bills. These private companies will not be permitted to collect tax from lower-income individuals.
- IRS Access to Taxpayer Records - IRS returns and taxpayer records are generally protected from disclosure. However, in some cases the IRS uses outside attorneys for complex cases. If the IRS uses an outside attorney or other contractor, access to a taxpayer's information will be limited to essential items.
- Protection from Identity Theft - For several years, the IRS has been attempting to reduce tax fraud and identity theft. TFA requires improved notice procedures for taxpayers if the IRS believes there is an attempted or actual identity theft.
Final Regulations Limit SALT Charitable Deduction
In T.D. 9864 (effective August 12, 2019 for gifts on or after August 27, 2018), the Service published Final Regulations to limit the benefits of state tax credits for charitable gifts.
The Tax Cuts and Jobs Act (TCJA) limited state and local tax (SALT) deductions to $10,000. Sec. 164(b)(6). Because several states with higher tax rates had many affected taxpayers, a number of states passed new tax credit plans in an attempt to replace the lost SALT deductions. The goal of most state tax credit plans was to enable taxpayers to receive the benefit of a full SALT deduction, even under the new TCJA rule with the $10,000 limit. The general strategy was to replace the former state and local tax deduction with an equivalent-value federal charitable deduction.
The plans often involved a charitable gift to a state charity. If the donor made the gift to the state charity, he or she would enjoy an 80% to 100% reduction in state taxes for the amount of his or her gift. The federal charitable deduction would replace the previous state and local tax deduction. The state charity funds would be used to finance state projects and services.
If the plan worked as intended, the "donor" would pay the normal amount to the state that previously had been paid as state income taxes. In addition, the federal deductions (SALT plus charitable) would equal the former state and local tax deduction amount.
Over 7,000 comments on the SALT charitable deduction regulations were received by the IRS. Commentators suggested deferring the effective date, excluding certain types of gifts and creating a safe harbor for gifts to state tax credit funds that are below $10,000 in value. The final regulations rejected all suggestions except the safe harbor. The safe harbor permits donors who give up to $10,000 to a state credit fund to take that amount as a SALT itemized deduction under Sec. 164 (with a total $10,000 SALT limit). See Notice 2019-12; 2019-27 IRB 1.
Under the final regulations, a state tax credit is "quid pro quo" and reduces the federal charitable deduction by the amount of any state or local tax credit received for the donation. Thus, if a state resident gives $20,000 to a state charity and receives a $20,000 state tax credit, the federal charitable deduction is zero. Reg. 1.170A-1(h)(3)(i).
The "reduce the federal deduction" rule also applies to a state deduction that exceeds the charitable gift amount. An exception applies for a state tax credit that is not more than 15% of the gifted amount. Reg. 1.170A-1(h)(3)(vi). Gifts with a state credit at or below 15% qualify for a full federal charitable contribution deduction.
The final regulations apply to gifts made on or after August 27, 2018. The IRS estimates that about 5% of taxpayers will be impacted by the $10,000 SALT deduction limit. While some states are contesting these regulations, very few CPAs will volunteer their clients as a test case in Tax Court. The final regulations reduce the value of state credits for some gifts. For example, the 40% Montana and North Dakota credits for planned gifts are reduced to an approximate effective rate of 25%, depending upon the federal tax bracket. However, an effective credit of 25% is still a significant motivator for planned gifts.
Opposition to SALT Limits
While 70% of the 7,000 comments on the SALT charitable deduction regulations supported the "quid pro quo" rules, many organizations and political leaders expressed strong opposition to the final regulations.
While the IRS opines that only 5% of taxpayers will be affected by the $10,000 SALT limit, many of these individuals reside in New York, New Jersey, Illinois and California.
New York Governor Andrew Cuomo accused the IRS of an "economic assault on New York." He stated, "The IRS should not be used as a political weapon. The regulations promulgated today lack any basis in the law, upend decades of precedent without authorization from Congress, and target programs established by New York and other states to incentivize charitable contributions."
New Jersey Senator Robert Menendez has introduced a bill to restore the full SALT deduction. He noted, "The IRS has allowed these charitable funds for decades and is only now banning them because states like New Jersey sought to utilize them and establish their own."
New York Assembly Member Amy Palin represents the Coalition for the Charitable Contribution Deduction. She stated, "This move puts at risk charitable funds in red states and blue states, from Arkansas to New York, to support worthy public issues like education, healthcare, the environment, and delivering high-quality public services."
Leaders of some nonprofits also expressed concern. Andrew Bowman, President of the Land Trust, stated, "Congress and the states have repeatedly affirmed that philanthropic Americans who donate conservation easements and land should be eligible for certain tax deductions because of the benefits conserved lands provide to the public."
Conservation and educational nonprofits supported by state tax credits were disappointed that Treasury refused to create exceptions to the "quid pro quo" rule. Chad Connelly is Executive Director of Exceptional SC, a South Carolina charity sponsoring private schools for special needs children. He noted, "My main message to them was that the states that had created these programs well prior to tax reform should not be punished because states like New Jersey, New York, and California created tax avoidance schemes in response to tax reform. Programs like ours were developed by legislators to do exactly what tax reform intended and make sure tax dollars were redirected to programs the government was not very good at."
Finally, the National Council of Nonprofits issued a press release. It stated, "Nonprofits benefiting from tax-credit programs may see little effect if they operate in very low-tax states (where their donors do not typically pay state and local taxes greater than $10,000) or if their typical donor taking advantage of tax credits are low-to-middle-income taxpayers. Nonprofits in higher-tax states with high net-worth donors may see reduced giving through programs incentivized through state or local tax credits."
Applicable Federal Rate of 2.8% for June -- Rev. Rul. 2019-14; 2019-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2019. The AFR under Section 7520 for the month of June is 2.8%. The rates for May of 2.8% or April of 3.0% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.