Tax News & Views Filched Checks and Frappes Roundup

Millions of Dollars in Tax Refund Checks Are Getting Stolen - Ashlea Ebeling, Wall Street Journal:

And then, when the Treasury Department issues the taxpayer a new check through the mail, the replacement is getting stolen too.

Rep. Nicole Malliotakis (R., N.Y.) said her office has fielded 218 cases of stolen checks totaling $3.8 million, with amounts ranging from a few hundred dollars up to $500,000. In one case, it took a constituent four tries to get a refund check delivered.

...

But these refunds delivered by mail have become a popular target for check fraud, according to a Treasury Department report last year. Those who elect to receive a paper check aren’t able to switch to direct deposit for that tax year in the event of lost or stolen refunds.

I have had clients insist that they get their refunds in the mail, on the grounds that they don't trust the IRS with their bank account information. Of course the IRS gets 1099s telling them about your bank accounts, and they can get all the details in the unlikely event that they care.

Whatever you might think about the IRS, your bank information is safer in their hands than your refund check is floating around the postal system.

IRS Finalizes Conservation Easement Transaction Reporting Rule - Caleb Harshberger, Bloomberg ($):

The final rules (TD 10007, RIN 1545-BQ39) come after the agency first proposed the regulations in 2022, and follow court decisions to invalidate a 2016 notice on the same topic.

The rules formally name conservation easements and similar transactions as “listed transactions,” a designation the agency uses to identify transactions deemed to be tax avoidance strategies.

The IRS defeat on the 2016 notice was based the the IRS failing to follow required procedures when it issued a notice to shut down the preposterous syndicated easement shelters. These shelters rely on purchasing marginal land, imagining lucrative mining or development schemes that somehow never seemed economical to the prior owners or anyone else, and taking charitable deductions based on the imaginary potential income.

The rules require taxpayers participating in "listed transactions" to report their participation to the IRS, with severe financial penalties for non-compliance.

Link: TD 10007

Treasury and IRS issue final regulations identifying syndicated conservation easement transactions as abusive tax transactions - IRS:

The Department of the Treasury and the Internal Revenue Service today issued final regulations identifying certain syndicated conservation easement transactions as "listed transactions" – abusive tax transactions that must be reported to the IRS.

Syndicated conservation easements have been included in the IRS’ annual list of Dirty Dozen tax schemes for many years.

...

In these transactions, investors typically acquire an interest in a partnership that owns land and then claim an inflated charitable contribution deduction based on a grossly overvalued appraisal. Going forward, participants and material advisors will need to report their participation in these transactions using Forms 8886 and 8918.

Elections and Taxes

Trump’s Plan Boosts Budget Deficits by $7.5 Trillion, Double Harris’s Proposal - Richard Rubin, Wall Street Journal:

Donald Trump’s flurry of recent tax-cut promises pushed his fiscal plan deep into red ink, and he would increase budget deficits by more than twice as much as Democratic rival Kamala Harris would, according to a new study that is among the most comprehensive estimates to date of the candidates’ proposals.

Trump’s combination of tax cuts, tariff increases, military expansion and mass deportations would widen budget deficits by an estimated $7.5 trillion over the next decade, according to the Committee for a Responsible Federal Budget, or CRFB, a nonpartisan group that favors lower deficits. Meanwhile, Vice President Harris’s plans—social-policy spending, middle-class tax cuts and tax increases on corporations and high-income households—would increase deficits by $3.5 trillion.

It says something when even the more-frugal candidate plans big increases in already-big deficits.

Tips, overtime, Social Security: A look at Donald Trump's no-tax pledges and what they might cost - Meg Kinnard, Associated Press via ABC News. "Donald Trump has pledged to end taxes on everything from tips to Social Security and overtime pay if he's elected to the White House again. But he hasn't detailed how he would fund those ideas and avoid creating a huge budget shortfall, beyond arguing he will usher in an economic boom."

Tariffs to Pay for Tax Cuts? Not So Fast, Says GOP in Congress - Chris Cioffi, Bloomberg ($):

“I don’t know that we want to just carte blanche go look at adding tariffs as a way to increase revenue, because it’s going to add up and affect that economic growth,” Rep. Ron Estes (R-Kan.) said in a recent interview.

Estes is a member of the tax-writing House Ways and Means Committee and leads one of 10 working groups examining the 2017 tax law’s impact. Lawmakers generally didn’t completely rule out the use of tariffs, but said scrutiny of their potential economic impact is needed.

Your Guide to Tax Policy in Harris’s ‘New Way Forward’ - Martin Sullivan, Tax Notes ($). "If the detail-oriented members of the tax community were hoping to uncover more specificity about the Harris tax plans in the “New Way Forward,” they will face only disappointment. (Of course, we were not the intended audience.) The text, photos, and figures are a clever mishmash of three things: a Madison Avenue version of the fiscal 2025 green book; a selective recounting of the Biden administration’s legislative victories; and a smattering of thinly supported aspirations for future legislation. The document has the look and feel of a corporate annual report — minus those tedious, audited financial statements."

Republican Election Sweep Would Intensify IRS Budget Targeting - Doug Sword and Cady Stanton, Tax Notes ($). "Ways and Means Committee member Blake D. Moore, R-Utah, said Republicans will always be looking at rescissions to the IRS’s mandatory funding as an option, especially in areas other than customer service and technology upgrades. Like other Republicans, Moore would target enforcement and operations support dollars, which make up the bulk of the IRA funding, while emphasizing modernization over expanding the agency’s workforce."

October 7 and taxes

U.S. hostages still owe taxes. Congress might not help. - Jacob Bogage and Julie Zauzmer Weil, Washington Post:

When Post columnist Jason Rezaian returned to the United States in 2016 after 544 days in Iranian captivity, he paid a $6,000 tax penalty. Rezaian said in an interview that Smith’s assertion that his bill will help people held hostage by Hamas is based on a misunderstanding: The IRS has a long-standing practice of forgiveness for people who are held hostage by non-state organizations, including Hamas and groups like the Islamic State or Boko Haram, Rezaian said. The goal of the new bill is to expand that to people held by foreign governments, like Russia or China.

“When I returned home from Iran in 2016 after being imprisoned for nearly a year and a half, I found that the IRS had charged me with thousands of dollars in penalties for not filing my taxes on time,” Rezaian wrote in The Post last month, after several Americans were released from captivity in Russia.

At least four U.S. citizens remain as hostages in Gaza.

IRS announces new relief for taxpayers affected by terrorist attacks in Israel: 2023 and 2024 returns and payments are now due Sept. 30, 2025; other relief available - IRS. "Today’s notice (along with Notice 2023-71) postpones various tax filing and payment deadlines that occurred or will occur during the period from Oct. 7, 2023, through Sept. 30, 2025, for taxpayers eligible for relief under both notices. As a result, affected individuals and businesses have until Sept. 30, 2025, to file returns and pay any taxes that are due during this period."

Blogs and Bits

24 states will participate in IRS’ enhanced 2025 Direct File - Kay Bell, Don't Mess With Taxes. "Treasury said that the new additions mean that more than 30 million taxpayers next year will be eligible to use the IRS’ tax prep and e-filing program. You can see the number of eligible taxpayers in each state at the ol’ blog’s Direct File 2025 Participating States page."

October 15 Deadline for Extended Individual Filings - Chris Korban, Tax School Blog. "Individual taxpayers who filed for an extension for 2023 income tax returns have just one week left to timely file their returns."

Tax Breaks: The There’s No Crying In Baseball Edition - Kelly Phillips Erb, Forbes. "The IRS acted quickly to announce relief for individuals and businesses affected by the storm, including the entire states of Alabama, Georgia, North Carolina, and South Carolina and parts of Florida, Tennessee, and Virginia. These taxpayers now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. That date is particularly noteworthy as it's after the traditional tax filing deadline of April 15, 2025. Additionally, some of the areas hit by Helene were already extended because of Hurricane Debby—those due dates have also been pushed forward to May 1, 2025."

The post has a wonderful illustration.

Electrical Contracting Company Fails to Qualify for Sec. 179D Deduction - Parker Tax Pro Library. "The court concluded that the company served merely as an installer... and while it received the technical specifications for the architects of record, it was those architects that provided plans specifying what types of fixtures should be installed, where, and how each fixture should be wired, along with a schedule of light fixtures that would meet the plan's parameters."

Your Disaster-Related Tax Questions Answered - Thomas Gorczynski, Tom Talks Taxes:

Personal casualty losses in a disaster area are only deductible to the extent they exceed 10% of the taxpayer’s adjusted gross income for that tax year. However, if the disaster loss is a “qualified disaster loss,” the 10% floor is not applicable and the taxpayer does not need to itemize deductions to claim the loss.

A disaster loss is not a qualified disaster loss unless Congress passes a law explicitly designating it as such. Congress has not taken this action concerning a disaster since the Taxpayer Certainty and Disaster Tax Relief Act of 2020; in that law, Congress designated disasters declared between January 1, 2020, and February 25, 2021, as qualified disaster losses. There have been no other designations since that date.

Engineering a Tax Court loss

Engineer Didn't Qualify as Real Estate Professional - Tax Notes. "The Tax Court, in a summary opinion, held that an individual who renovated a home to be used as an assisted living facility was not entitled to an exception to the section 469 disallowance of passive activity losses because he was primarily employed as an engineer for another business and could not claim to be a real estate professional."

This case provides a useful reminder of how the "passive loss" rules work. These rules were enacted in the 1980s to shut down tax shelters that were popular at the time. If losses are "passive" under these rules, they can only be taken against other passive income; otherwise, they are deferred until the "passive activity" is sold.

A loss is passive unless the taxpayer "materially participates" in a business, based on time spent working in the business. Rental losses are automatically passive unless a taxpayer qualifies as a "real estate professional." This case shows how hard it is to qualify as one.

From the opinion (taxpayer name omitted; emphasis added):

A taxpayer qualifies as a real estate professional in a given tax year and is not engaged in a passive activity under section 469(c)(2) if

(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and

(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.

That first condition - "more than one half..." - makes it hard for anyone with a full-time job outside of real estate to qualify as a real estate pro. If you work 2,000 hours in your day job, you need to work at least 2001 hours in real estate to qualify - not just 750. This taxpayer falls short:

Mr. Taxpayer does not qualify as a real estate professional under section 469(c)(7)(B) because he worked fewer hours at the group home than he did at Lockheed. Mr. Taxpayer's employee status at Lockheed was personal service in a trade or business. Mr. Taxpayer worked 1,913 hours at Lockheed, and his job duties did not involve real property activities. To meet the first requirement of the section 469(c)(7)(B) test, Mr. Taxpayer needed to spend more than 1,900 hours working at the group home. Even if we accepted Mr. Taxpayer's second log as accurate, the total time spent on the group home totaled only 1,628 hours. Thus, Mr. Taxpayer does not satisfy the section 469(c)(7)(B) test to qualify as a real estate professional.

The taxpayer also made a common error: trying to document time spent in the activity only after the losses were disallowed:

Mr. Taxpayer did not keep contemporaneous logs of his time spent renovating the group home. In preparation for trial, Mr. Taxpayer created — and presented — two time logs. The first log maintained that Mr. Taxpayer worked 1,421 hours at the group home; it was created one week before trial. The second log maintained that Mr. Taxpayer worked 1,628 hours at the group home; it was created the night before trial. Mr. Taxpayer testified that the second log contained corrected information derived from emails and other records he maintained. Some of the hours listed on Mr. Taxpayer's logs are supported by reference to emails, work permits, and invoices, but most remained unsupported beyond Mr. Taxpayer's testimony.

Tax Court maven Lew Taishoff comments on the taxpayer's last-minute logging: "Pulling an all-nighter only works if you pass the test."

The moral? It's hard to qualify as a real estate pro. Also, if you want to have convincing evidence that you are participating a business activity, you need to track your hours as you go. The night before your Tax Court appearance is too late.

What day is it?

Forget the diet, it's National Frappe Day!

Tax News & Views Filched Checks and Frappes Roundup

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Joe B. Kristan, CPA