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Wednesday January 18, 2017

Washington News

Washington Hotline

Top Seven 2016 Tax Law Changes

In FS-2017-1 the IRS published a summary of seven tax changes. Many of these changes will impact some of the 153 million Americans who file tax returns during 2017.

The significant tax changes include the following:

1. Three Extra Days – The tax filing deadline is delayed due to April 15 falling on a weekend and Emancipation day in Washington, DC. Returns may be filed until April 18, 2017. If you extend six months, the return will be due October 16, 2017.

2. Refund Delays – If you file early and claim the Earned Income Tax Credit (EITC) or Added Child Tax Credit (ACTC), the IRS must hold your refund until February 15. The first refunds for filers who claim these credits is expected to be the week of February 27.

3. Renewing Individual Taxpayer Identification Numbers (ITINs) – An ITIN is used by some taxpayers in place of a Social Security number. If it has not been used in three years or the middle digits are 78 or 79, the ITIN will expire. It may take up to 11 weeks to renew the ITIN. Taxpayers may contact the IRS Taxpayer Assistance Center (TAC) to obtain help in renewing their ITIN.

4. Olympic Medals – For 2016 Olympic and Paralympic winners with incomes of $1 million or less, their gold, silver or bronze medals and United States Olympic Committee (USOC) cash awards are not taxable.

5. ABLE Accounts – It is now possible to create a special account for persons who become disabled before age 26. Donors are permitted to make annual gifts with the current exclusion amount of $14,000 per year. While the gift does not qualify for an income tax deduction, the account may grow and distributions for a disabled person's qualified expenses are tax-free.

6. Standard Mileage Rates – The IRS publishes mileage rates each year for business use, medical and moving travel and charitable travel. For 2016, the business use qualifies for $0.54 per mile, medical and moving expenses are $0.19 per mile and charitable travel is $0.14 per mile.

7. IRA Rollover Self-Certification – The normal IRA rollover limit is 60 days. Self-certification may enable you to have an extended period of time for an IRA rollover. In order to self-certify, you must fall into one of 11 specific categories. These include "a distribution check that was misplaced and never cashed, the taxpayer's home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country."

The IRS asks IRA owners to use a "trustee to trustee" transfer instead of the 60 day rollover. A trustee to trustee transfer avoids the risk of exceeding the 60 day limit.

New Tax Scammer Attack on CPAs


In IR-2017-3 the IRS reported another type of "phishing" attack on CPAs and other tax preparers. This is a "two stage" attack.

The tax scammer first sends an email to a CPA asking him or her to become the scammer's tax preparer. Typically, the CPA or tax preparer will respond to the first email. Often, the CPA or tax preparer will describe his or her services and policy.

The tax scammer then responds and asks the CPA to review his or her tax documents. The tax documents are on a PDF or a web link.

When the tax preparer clicks on the PDF or web link, malware is loaded on his or her computer. The cybercriminal now may have access to information on the computer of the CPA or tax preparer.

Some sophisticated cybercriminals increase the CPA's challenge by first stealing the email password of a person who lives in the same town as the tax preparer. When the tax scammer appears to be a local person, the tax preparer is even more likely to fall victim to the cybercriminal.

The IRS warns all tax preparers not to click on links or PDFs from unknown senders. Instead, the CPA should ask the person to contact his or her office to make an appointment.

Editor's Note: In yet another tax scam, fraudsters now claim to be from the U.S. Tax Court. They may demand payment of court fees and taxes. The Tax Court published a press release this week and stated clearly that staff will not call or email to demand immediate payment of taxes. They also will not request a credit card or debit card payment.

Church Corporation Sole is Taxable


In Fredrick A. Gardner et ux. v. Commissioner; No. 13-72699 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court decision. The Tax Court ruled that a couple who established a church through a corporation sole and took a vow of poverty were still subject to income tax and self-employment tax.

Elizabeth and Fredrick Gardner created Bethel Aram Ministries (BAM) in 1993. The couple took "vows of poverty" and transferred all income rights to BAM in 1999. In 2001 Elizabeth incorporated BAM as a Nevada Corporation Sole. Both Gardners claimed that BAM was a church and therefore "1) The government was not able to interfere in any way; 2) All church workers would be classified as ministers of the Gospel and not as employees; 3) There were no filing requirements of any kind; 4) There were no withholding or self-employment taxes or income tax."

During 2002, 2003 and 2004 the Gardners traveled widely and helped many other persons set up similar corporations sole or LLCs. Their stated goal was to assist others in avoiding all income tax filing and all taxes.

The IRS audited the Gardners and determined that there were net taxable deposits in their Wells Fargo bank account for the three years of $100,070, $217,973 and $235,679. The IRS issued a deficiency notice.

The Tax Court determined that the account was taxable, even if they were a qualified church. The Tax Court stated, "Where a taxpayer has dominion and control over an account titled in the name of a church or other religious organization," it is taxable.

The Gardners claimed that their vow of poverty and the payments for religious services made the amounts nontaxable. They also claimed that as ministers they were not subject to self-employment tax.

The Court noted they had not filed IRS Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. In addition, the Gardners had total control over the accounts. Therefore, the amounts were subject to both income and self-employment tax.

Editor's Note: The vow of poverty exception applies to payments for religious services if a person is a member of a religious order. The payments must be made to the religious order and be under the control of officials of that order, not the specific person. If the individual has complete control over the funds, the amounts are taxable.

Applicable Federal Rate of 2.4% for January -- Rev. Rul. 2017-2; 2017-3 IRB 1 (19 Dec 2016)


The IRS has announced the Applicable Federal Rate (AFR) for January of 2017. The AFR under Section 7520 for the month of January will be 2.4%. The rates for December of 1.8% or November of 1.6% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published January 13, 2017

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IRS End-of-Year Advice

IRS Advice on Phishing Scams

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