Tuesday August 16, 2022
IRS Highlights Improved Taxpayer Service
Corbin acknowledged that the 2022 tax filing season was "complex and challenging" for taxpayers and their professional advisors. However, he emphasizes that there are many steps that have been taken to improve the taxpayer experience.
- EIP/CTC Letters — The IRS sent out 250 million letters to help individuals claim the Recovery Rebate Credit (RRC) and the Child Tax Credit. Some individuals did not receive their third Economic Impact Payment letter and needed to know the amounts of their 2021 Advance Child Tax Credit payments in order to file their tax returns.
- Customer Callback Feature — The IRS implemented a plan to allow taxpayers to call and, rather than waiting on hold, request a callback from the Service. The offer was made to 5.3 million taxpayers who called in and over 57% accepted the callback option. Taxpayers have saved more than 1.7 million hours by not remaining on hold.
- Voice Bots and Chat Bots — The IRS has implemented voice and chat bots in both English and Spanish. This online assistance enables one IRS staff person to assist many different taxpayers at one time. These voice and chat bots are especially helpful for taxpayers who have a simple payment issue or have received a collection notice and wish to get information quickly.
- Saturday Service at Taxpayer Assistance Centers (TACs) — TACs enable many taxpayers to receive in–person assistance. By expanding the Saturday hours of the TACs, the IRS was able to assist individuals who are working during the week.
- Online Service Tools — Over 10 million taxpayers have created an individual online account. The IRS plans to continue expanding services with online accounts. Taxpayers with online IRS accounts will be able to authorize their tax preparers to represent them before the IRS and also may enable them to view tax returns with a Tax Information Authorization.
- Earned Income Tax Credit (EITC) Assistant — The EITC Assistant tool on IRS.gov helps individuals understand their eligibility for the EITC. It also reduces the number of improper claims for EITC.
Editor's Note: Congress has concerns regarding a large number of taxpayers reporting attempts to call the IRS for support and not receiving the desired assistance. The IRS continues to make efforts to provide improved service, particularly through chatbots and other electronic methods.
Leave-Based Gift Programs for Ukraine War Victims
In Notice 2022–28, 2022–23 IRB 1, the Internal Revenue Service (IRS) provided guidance for companies that wish to enable employees to assist Ukraine war victims.
On February 24, 2022, the Russian Army invaded Ukraine. The largest land war in Europe during the past eight decades has led to a tragic loss of life. As the war enters its third month and may continue for an extended period, there is a great need for shelter, food, medical care and jobs. The President declared a national emergency with respect to Ukraine on March 2, 2022 and the Department of Homeland Security selected Ukraine for Temporary Protected Status on March 3, 2022.
The IRS recognizes that many employers are interested in creating a leave-based donation program for their employees to assist residents of Ukraine. A leave-based donation program enables an employee to forego vacation, sick or personal leave. The employers are able to make a cash gift in the amount that otherwise would have been paid to the employee. The cash payments must be made to Section 170(c) organizations for relief programs for Ukraine.
Notice 2022–28 permits companies to create a leave–based donation program for Ukraine disaster relief. The program payments must be made during the 2022 calendar year.
The employee who makes a gift with the leave-based program will not be treated as receiving gross income or wages. Employers will not include the value of the charitable gifts on the employees' IRS Forms W-2. However, because the amount is not reported in income, the employees will not qualify for a charitable contribution deduction for these gifts.
The employer may transfer payments to a Section 170(c) organization for relief of individuals in Ukraine. The employer may report a charitable deduction under Section 170 or a necessary and ordinary business expense deduction under Section 162.
Micro-Captive Not a Qualified Insurance Company
In Reserve Mechanical Corp. v. Commissioner; No. 18-9011 (10th Circuit), the Tenth Circuit determined that a micro-captive insurance company was not qualified for an exemption and therefore taxed at 30% on the purported insurance premiums. The decision was based upon a determination that Reserve Mechanical Corporation was not operated as an insurance company and did not adequately distribute risk.
Reserve Casualty Corporation was renamed Reserve Mechanical Corporation (Reserve). It was controlled by Peak Mechanical Corporation (Peak) owners through a Peak Casualty parent entity. Peak had previously purchased commercial insurance policies for approximately $100,000 per year. It also paid Reserve around $400,000 per year for additional insurance.
Reserve was a micro-captive insurance company with respect to Peak. The Court noted, "The Code provides the parties to such an agreement with tax advantages. The insured party can deduct its premium payments as business expenses and many insurers can exclude those premiums from its own taxable income, under a tax break for small insurance companies. The result is that the money does not get taxed at all."
The benefit of the plan was that Peak could deduct the $400,000 in annual premiums. If Reserve received no more than $600,000 in premiums each year, it was exempt from income taxation under Section 501(c)(15).
The overall plan was created by Capstone Associated Services, Ltd. It advised the two owners of Peak that Reserve could be a qualified company if it were affiliated with PoolRe Insurance Corporation through a complex reinsurance strategy. In essence, Capstone created a pooled reinsurance fund for approximately 50 captive insurers.
However, the reinsurance plan did not result in actual transfer of insurance risk. While Capstone operated the purported reinsurance plan, Peak continued to maintain its existing policies, even though it was now paying four times the previous premium amount to Reserve.
Reserve issued 13 policies to Peak and the total 2008 premium was $412,089.02. The Tenth Circuit noted the policies were "executed with singular carelessness." There was no evidence that the premiums were commercially reasonable. Reserve handled only one claim and paid Peak a total of $339,820. The premiums were deducted by Peak and Reserve reported no income under Section 501(c)(15) because the total premium was under $600,000.
The Tax Court noted that the risk of loss was associated only with Peak and there was no evidence to support the commercially reasonable nature of the premiums. The claim was handled without the normal underwriting process. Therefore, Reserve did not prove that it was distributing risk as required for an insurance plan. In addition, Reserve was unable to demonstrate any element of "motive, purpose, or intent" that this was a capital contribution. Therefore, the contribution to Reserve was subject to the Section 881(a) 30% tax.
Editor's Note: The IRS will use this case to contest many of the micro-captive insurance plans. Companies involved in these plans should consult with counsel.
Applicable Federal Rate of 3.6% for June -- Rev. Rul. 2022-10; 2022-23 IRB 1 (16 May 2022)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2022. The AFR under Section 7520 for the month of June is 3.6%. The rates for May of 3.0% or April of 2.2% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.