Washington Hotline – July 6, 2021


Leave Donations Extended for 2021

While the COVID-19 pandemic is slowly subsiding, there are still new cases every week. Many charitable organizations continue to provide relief services to COVID-19 patients and their families. In 2020, the IRS authorized a program to encourage gifts to organizations providing COVID relief services. Employees of companies could donate their sick, vacation or personal leave days to a qualified charity providing relief services.

After the days were transferred, employers were permitted to make cash payments to the charities in exchange for the sick, vacation or personal leave days. The gift was not treated as income to the employee, but because he or she did not report it as income, there also was no income tax deduction. It was merely an opportunity for the employee to make a gift to assist individuals who were served by these nonprofits.

COVID is still affecting individuals in 2021. Therefore, the Internal Revenue Service extended the leave-donation program for this year. If employees give 2021 sick, vacation, or personal leave days to qualified nonprofits, the employers will have a deductible payment for the cash amount to charity and the nonprofit may then use the cash gifts to provide needed services to COVID-19 patients and their families.

Ransomware and Phishing

Ransomware continues to be a growing problem in the nation. A hacker or fraudster may acquire access to the computer system of a financial institution, utility company or nonprofit. The hacker then encrypts the data on the victim’s servers and demands a ransom payment. If the victim makes the payment, the hacker then reveals the key needed to decrypt the information and restore access to the organization’s data.

There have been regular ransomware attacks on financial institutions, educational and health care organizations. The attacks on all organizations have increased substantially this year. Many nonprofits are vulnerable because they lack strong cybersecurity controls and secure system backups.

Ransomware attackers often acquire access to software servers through targeted spear-phishing campaigns. The phishing campaign involves sophisticated strategies. Many of the phishing emails sent to professional advisors claim to be from the IRS or other tax organizations.

The IRS cautions professionals to be careful about opening emails and clicking on links that claim to be from the IRS. Unsuspecting professionals have unfortunately downloaded malicious software to their networks as a result of various types of phishing strategies.

A frequent tactic involves the “New Client” scam. A scammer sends an email to a CPA or other tax professional, stating, “I just moved here from Illinois. I have an urgent tax issue and I was hoping you could help. Attached is my latest tax return. I hope you are open to taking on a new client.”

The email includes a link or attachment that appears to be a tax return or notice from the IRS. If the tax professional attempts to access the file, malware is loaded on his or her computer. The malware will be used to access client data or to encrypt the files and demand a ransom.

Fraudsters are progressively targeting larger enterprises. They refer to this process as “big game hunting.” Many are also using a double extortion scheme. They remove data from networks, encrypt the network and then demand ransom. Thus, even if the victim is able to get past the encryption, the key data is missing.

Organizations can face severe harmful effects with loss of sensitive or proprietary information. Professionals and taxpayers should continue to upgrade their cybersecurity defenses to reduce the risk of ransomware.

IRS Warns Seniors with “Dirty Dozen” List

In IR-2021-141, the Internal Revenue Service warned seniors and other individuals about a variety of dishonest tactics that may deceive and harm taxpayers. The IRS listed five strategies used by fraudsters to harm victims.

1. Fake Charities

Americans are the most generous people on the planet. However, tricksters use tragedies, disasters and events like the pandemic to take advantage of this generous spirit.

Fraudsters frequently use a phone call strategy to ask for donations for disaster relief, using pressure and urgency to require an immediate donation. Taxpayers should always be careful to ensure that gifts are made to qualified charities. The IRS Tax Exempt Organization Search tool is available for individuals and their professional advisors.

Individuals should always be certain that they are giving to the correct charity. Some telemarketers use fake charity names that sound like major charities to trick individuals. The callers may also demand payment by a gift card or wiring funds. Individuals should be urged to make gifts by check or credit card to a recognized charity.

2. Senior Fraud

Fraudsters often target individuals who are seniors or have limited English skills. The most common scam is to claim to be from the IRS and threaten the victim with arrest, deportation or revocation of his or her driver’s license.

This is particularly a problem with individuals who are not primarily English speakers. The IRS has added Schedule LEP to the Form 1040 tax return to permit taxpayers to choose their preferred language for communication. The IRS also now makes many of its publications available in Spanish, Chinese, Vietnamese, Korean and Russian.

Taxpayers who believe they are victims of fraud should contact the Federal Trade Commission or the Consumer Financial Protection Bureau.

3. Offer in Compromise Mills

Unfortunately, some taxpayers have large unpaid tax bills. Scammers attempt to persuade individuals with tax problems that they can settle with the IRS for “pennies on the dollar.”

IRS Commissioner, Chuck Rettig stated, “We’re increasingly concerned that people having trouble paying their taxes are being duped into misleading claims about settling their tax debts for ‘pennies on the dollar.’ The IRS urges people to take a few minutes to review information on IRS.gov to see if they might be a good candidate for the program — and avoiding costly promoters who advertise on radio and television.”

The IRS does have an “Offer in Compromise (OIC)” program. If a taxpayer owes taxes to the IRS and qualifies, he or she may be able to settle the tax claim for less than the full amount. The IRS urges taxpayers who are in that situation to go to IRS.gov and search for the Offer in Compromise Pre-Qualifier Tool. If you qualify under this tool, you should contact the IRS directly and request administrative relief.

4. Unscrupulous Tax Return Preparers

Most CPAs and tax preparers are ethical and trustworthy. However, some are not and create red flags that should alert individuals of the danger.

Individuals who prepare Federal tax returns must have a valid Preparer Tax Identification Number (PTIN). They are required by law to sign the return and include the PTIN on it.

If a tax preparer is unwilling to sign the return, requires payment in cash, invents income to increase a tax credit, claims a fake deduction or directs the tax refund into his or her personal account, the taxpayer should realize that this person is not honest. Taxpayers should use the “Choosing a Tax Professional” page on IRS.gov to find a reputable tax preparer.

5. Unemployment Insurance Fraud

Another strategy by fraudsters is to obtain improper payments through unemployment insurance. A frequent strategy is to steal the identity of a person and file for unemployment. In addition, some employees have cooperated with a corrupt employer and filed for unemployment insurance and received a reduced wage payment.

Another fraudulent strategy is to continue working while claiming to be unemployed and receiving unemployment payments. Some individuals have created a fictitious company and claimed to be laid off from that company, thereby qualifying for unemployment insurance. Finally, some state employees have improperly manipulated forms to send unemployment payments to fraudsters.

Applicable Federal Rate of 1.2% for July — Rev. Rul. 2021-12; 2021-27 IRB 1 (16 June 2021)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2021. The AFR under Section 7520 for the month of July is 1.2%. The rates for June of 1.2% or May of 1.2% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.