Tuesday December 5, 2023
Top Tax Season Scams
IRS Commissioner Danny Werfel noted, "Email and text scams are relentless, and scammers frequently use tax season as a way of tricking people. With people anxious to receive the latest information about a refund or other tax issue, scammers will regularly pose as the IRS, a state tax agency or others in the tax industry in emails and texts. People should be incredibly wary about unexpected messages like this that can be a trap, especially during filing season."
The IRS, state tax agencies and tax software companies all participate in the Security Summit. The Security Summit publishes warnings that are designed to reduce the vulnerability of taxpayers to identity theft. This warning focuses on both email and text frauds.
- Phishing — Fraudsters will send emails to millions of taxpayers. The fraudster claims to represent the IRS, a state tax organization, a tax preparer or a financial firm. The emails may take many different forms. It may promise a phony tax refund. Another common strategy is to frighten the taxpayer by threatening false criminal charges for tax fraud if there is not an immediate response. All of these tricks are designed to enable scammers to make contact with the victim and obtain personal financial information.
- Smishing — With the common usage of smartphones, a scammer may send millions of text messages that use similar techniques to their email tricks. The message might state, "Your account has now been put on hold," "Unusual Activity Report" or "Click For Solution." The links take the victim to the fraudster's website and an attempt is made to obtain the financial information of the taxpayer.
The IRS urges taxpayers to be cautious about clicking on unsolicited emails. A more sophisticated phishing strategy is to send three or four emails. After the relationship has been developed, the scammer sends the victim an email with the link that downloads malware.
Many of the latest scams include emails that claim to be from friends or family. A scammer monitors your email account to acquire information and sends an email that appears to be from someone you know. This has been an effective strategy to target both individuals and tax preparers. The final goal is always to obtain your financial information so they can file for a fraudulent refund.
An additional scam is currently popular. The scammer offers to provide "free help" in setting up an IRS Online Account. IRS Commissioner Danny Werfel noted, "Scammers are coming up with new ways all the time to try to steal information from taxpayers. An Online Account at IRS.gov can help taxpayers view important details about their tax situation. But scammers are trying to convince people they need help setting up an account. In reality, no help is needed. This is just a scam to obtain valuable and sensitive tax information that scammers will used to try stealing a refund."
If you are approached by someone who wants to provide help in setting up an IRS Online account at IRS.gov, you should use the IRS website yourself to set up the account. Do not allow a third party to help you set up your IRS Online Account.
If you think you received an email or text from a scammer, you can send the email or a copy of the text to [email protected]. You should also include the caller ID, his or her email address or phone number, the date, time, and the number that receives a text message.
There is a "Report Phishing and Online Scams" page at IRS.gov with additional details.
Most NFTs Are Collectibles
In Notice 2023-27, 2023-15 IRB 1, the Internal Revenue Service (IRS) published Section 408(m) guidance for individual retirement accounts. The guidance indicated that some non-fungible tokens (NFTs) would be treated as collectibles.
An NFT is a digital identifier that is recorded in a blockchain. The ownership may be transferred and many NFTs are sold or traded. NFTs are often digital files that include a photo, video or audio recording. They are uniquely identified and therefore different from cryptocurrency, which is a fungible asset.
In Notice 2023-27, the IRS indicated that NFTs will generally be subject to Sec. 408(m). Section 408(m)(1) indicates that items which are collectibles are treated as a distribution from IRAs. The collectible items could include a work of art, a rug or antique, an item of metal or gem, a stamp or coin, an alcoholic beverage, or any other tangible personal property specified by the Secretary of the Treasury.
A Sec. 408(m) collectible is subject to Sec. 1(h). If the collectible is held for more than one year, it is a capital asset and may be sold, but it is subject to the tangible personal property 28% capital gains tax rate. However, an NFT that is not a collectible would be subject to the normal 15% or 20% capital gain rate.
The purpose of Notice 2023-27 is to publish guidance and to classify some NFTs as Sec. 408(m) collectibles. This will generally exclude them from ownership in retirement accounts.
The NFT is defined with a "look-through analysis" by the IRS. Typical collectibles are items such as a gem or rare wine. The exception is an NFT used to record a right to use or develop "a plot of land." The right to use or develop land is an exception to the collectible rule based on the look-through analysis.
Editor's Note: NFTs have existed for a number of years. However, in 2021 trading of NFTs skyrocketed from $82 million to $17 billion. In a manner similar to cryptocurrency, the NFT market suffered a colossal collapse during 2022. However, there are organizations that now are creating NFTs through customer rewards programs. One large international corporation is now offering NFTs as a customer reward. They plan to post a marketplace so the customers can buy and sell their NFTs. If a significant number of large companies start using NFTs as a customer reward, there could eventually be a billion NFTs. For this reason, the IRS determined that it would need to issue guidance. It is highly probable that additional guidance will be forthcoming.
IRS Exempt Organizations Technical Guide
On March 17, 2023, the Internal Revenue Service (IRS) published the latest version of the Publication 5781, Exempt Organizations Technical Guide. This guide sets forth many of the specific criteria for qualified charitable deductions.
- Exempt Purpose — A qualified Section 501(c)(3) nonprofit may exist for many charitable purposes. These could include relief of the poor, advancement of religion, education, or science, lessening the burdens of government, eliminating prejudice and discrimination, defending human and civil rights, combating community deterioration and multiple other charitable purposes.
- The Needy — Reg. 1.170A-4A(b)(2)(ii)(D) specifies the needy as individuals who are impoverished, low income, hungry, homeless, victims of a natural disaster, victims of a civil disaster, victims of violent crime, a refugee or immigrant who has language, cultural or financial problems, an orphaned minor child, a former prisoner or a patient at a mental institution.
- Charitable Class — A nonprofit may exist for a class of beneficiaries. The class must be large enough that potential recipients cannot be individually identified. A nonprofit that benefits a single individual or individuals from one family is generally not qualified because the class is too narrow. However, many nonprofits could benefit a group of individuals in a city, county, or state if the potential beneficiaries cannot be individually identified.
- Organizational Test — The nonprofit must exist for an exempt purpose, prohibit inurement of private individuals, prohibit political activity and have only an incidental or less than substantial non-exempt activity.
- Operational Test — The organization must primarily function in pursuit of the exempt purposes. The earnings must not inure to the benefit of private individuals.
- Relief of the Poor — A nonprofit may assist low-income families, the aged, the sick, the handicapped or provide low-income legal assistance.
- Self–Help Programs — A self-help program, such as a residential recovery facility that assists individuals discharged from rehabilitation treatment centers, may operate entities to provide employment, even though profits may be applied to operating costs. For example, a nonprofit may operate a thrift shop or a furniture shop with items constructed by residents of the halfway house. Self-help programs may also be conducted through a domestic corporation that assists individuals in other developing countries.
- Assistance to the Elderly — Many retirement homes are not exempt because they are supported by fees from the residents. However, if a home for aged people provides care at rates that are "substantially less than the actual costs of the services furnished," it may be entitled to exempt status.
- Assistance to Sick and Handicapped — Relief provided for the sick and handicapped qualifies for exempt status.
- Advancement of Religion, Education or Science — Nonprofits may be organized for exclusive religious or educational purposes. The nonprofit may also have subsidiary entities that are commercial in nature and would not be qualified. Many large universities and medical centers have multiple for-profit subsidiaries.
- Educational Advocacy — Organizations that are primarily educational may engage in a limited advocacy function that is directly related to their exempt purpose.
- Conservation of Natural Resources — A nonprofit that creates a sanctuary for wildlife or encourages environmental improvements will be exempt.
- Lessening the Burdens of Government — Some nonprofits assist government organizations. They may provide volunteers for a law enforcement auxiliary, educational programs to reduce vehicle deaths or services to first responders.
- Defending Human and Civil Rights — A nonprofit may exist to encourage or support the development of both human rights and civil rights. While civil rights are protected by the U. S. Constitution, an organization may exist to advocate and support them.
Applicable Federal Rate of 5.0% for April -- Rev. Rul. 2023-6; 2023-14 IRB 1 (15 March 2023)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2023. The AFR under Section 7520 for the month of April is 5.0%. The rates for March of 4.4% or February of 4.6% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.