At a Inflation Reduction Act industry conference held on June 5, Internal Revenue Service (IRS) Transformation Lead for Notifications and Scams, Kareem Williams, discussed the latest efforts to protect taxpayers. The IRS is exploring options with private companies to provide "real-time solutions" when new scams arise.

There is extensive interest by IRS staff in using artificial intelligence (AI) to uncover scams. Williams commented, "We need you to bring your expertise as to other ways that we can creatively and safely and responsibly use AI to disrupt scams and schemes."

The IRS is in the process of pursuing a "full-spectrum solution and an alert system to communicate across agencies and other stakeholders." This new communication effort could include the IRS, the Securities and Exchange Commission (SEC), the U.S. Chamber of Commerce and the banking industry.

The IRS and its Security Summit partners continue to provide guidance to taxpayers on avoiding tax and financial scams. There are specific strategies that help taxpayers reduce risk.

1. Slow Down - Scammers often use urgency to pressure victims. The IRS emphasizes that the process for audit and collection is deliberate. If a scammer demands immediate action, you should pause and ask questions. By slowing down and exploring the situation, you are much less likely to get into trouble.
2. Check Out Person - If you are contacted by an individual claiming to be from the IRS or another government agency, you should check the specific details. Find out who the individual is and their job title and role with the organization. You can use your favorite search engine to check the name, background and credibility of the person or the organization that is claiming to contact you. An effective method is to enter the name of the individual or organization and the word "scam" when doing your search.
3. Do Not Send Money or Gift Cards - The scammer will frequently demand an immediate transfer of funds to pay taxes or for another purpose. They may deliberately rush you into using an unusual payment method. This might be a gift card, cryptocurrency or a wire transfer from your bank. If the caller requests immediate payment with unusual methods, you should recognize it as a scam and refuse to send the funds.

If you think you are a victim of a scam, you should retain any emails, messages or paperwork. You can send emails to the IRS at [email protected] . If you discover a false tax return was submitted in your name, use the IRS Identity Theft Affidavit (Form 14039).

If you sent your credit card number or bank account information, contact the bank or credit card company immediately. Their fraud transaction division may be able to return your funds and stop additional transactions. If you used a gift card or wire transfer, contact the issuer or your bank. There may still be a possibility of stopping the transaction.

Finally, if you have given the fraudster your Social Security number or other personal information, the three major credit agencies (Experian, TransUnion and Equifax) can place a fraud alert on your credit report. This makes it more difficult for the scammer to open new accounts based on your stolen information.

Conservation Easement Notice Violated APA

In Green Rock LLC v. IRS et al.; No. 23-11041 (Green Rock), the Eleventh Circuit affirmed the decision of the District Court for the Northern District of Alabama that Notice 2017-10 violated the Administrative Procedure Act (APA).

Green Rock LLC (Green Rock) is a development company in Birmingham, Alabama and a sponsor of syndicated conservation easement partnerships. Green Rock brought suit in District Court to declare IRS Notice 2017-10 void for violation of the APA because there was not the required public notice and comment. The District Court ruled that Green Rock was correct and Notice 2017-10 was set aside.

The federal tax system includes the power for the Secretary of the Treasury to designate "reportable transactions" that have specific additional requirements. The transactions generally have "a potential for tax avoidance or evasion."

These "listed transactions" may cause taxpayers or advisors to face substantial penalties. Failure to disclose a listed transaction involves a minimum penalty of $10,000 ($5,000 if the taxpayer is a natural person) and potentially up to $200,000 ($100,000 if taxpayer is a natural person). A material advisor who fails to disclose a listed transaction could face a minimum penalty of $200,000 or up to 50% of the income from the transaction.

Notice 2017-10, Listing Notice-Syndicated Conservation Easement Transactions, 2017-4 I.R.B. 522, 544-45 (Jan. 23, 2017), was created to require syndicated partnerships to disclose transactions involving conservation easements. The notice stated that Section 170(h) syndicated partnership conservation easements were considered to be potential abusive tax shelters. Many of the valuations from syndicated conservation easements were dramatically in excess of the initial property acquisition cost by the partnership. Notice 2017-10 was designed to address this perceived abuse.

Green Rock was a material advisor and created syndicated limited partnerships that acquired property, encouraged investments by outside parties and granted conservation easements to qualified charities. Green Rock complied with Notice 2017-10 by filing IRS Form 8886 and Form 8918.

After the case was filed by Green Rock, the District Court determined the APA notice and comment procedures were required. Because the IRS did not follow the APA procedures, Notice 2017-10 was set aside.

The Eleventh Circuit noted there is an exemption to notice and comment requirements if Congress "does so expressly." This express exemption is "a high bar." However, there was no specific exception language in the statute. The IRS claimed that Section 6707A, which defines "reportable transaction" and permits the creation of regulations, was sufficient to support the Treasury Regulation. The IRS claimed that amendments to Section 6707A in 2004 essentially ratified the regulations.

However, the Eleventh Circuit rejected the IRS "under regulations prescribed under Section 6011" argument. It agreed with the Sixth Circuit that Section 6707A is merely a description of the types of transactions that would be affected.

The IRS also argued that Congress did not require the APA requirements and that insisting on these requirements would "invalidate sub silentio each and every one of the listed transactions already identified."

However, the Eleventh Circuit determined that the rules could be applied in a prospective manner. It concluded, "Because the notice was a legislative rule and Congress did not expressly exempt the Service from notice-and-comment rulemaking, Notice 2017-10 is not binding on Green Rock."

Redemption Insurance Paid to Company Included In Estate

In Thomas A. Connelly et al. v. United States; No. 23-146, a unanimous Supreme Court affirmed an Eighth Circuit decision and held that life insurance proceeds payable to a corporation were included in the fair market valuation.

Brothers Michael and Thomas Connelly were shareholders in Crown C Supply (Crown). The two brothers determined the building supply company should stay in the family if one of them passed away. Therefore, Crown purchased $3.5 million in life insurance on each brother. Under a redemption agreement, if a brother passed away and the surviving brother declined to purchase the shares, the company would use the insurance proceeds to redeem the decedent's shares.

When Michael passed away owning 77.18% ownership in Crown, the insurance proceeds were paid to the company. Thomas declined to purchase the shares from the estate of Michael and $3 million of the $3.5 million in life insurance proceeds was used to redeem the shares of Michael.

The estate filed IRS Form 706 and reported both $3 million in life insurance proceeds received by Crown and also a deduction for $3 million for the redemption obligation to repurchase the shares of Michael.

The IRS calculated the value of Crown as $3.86 million in other assets and $3 million of insurance, for a total of $6.86 million. The 77.18% share owned by the estate of Michael was valued at $5.3 million. The IRS assessed a deficiency for $889,914. The District Court and the Eighth Circuit both agreed with the IRS valuation.

The Supreme Court determined that estate value must be based on the actual fair market value of the corporation. When the life insurance proceeds were payable to Crown, that became a corporate asset. Estate tax is determined at the moment of death. While the corporation subsequently redeemed the shares of Michael, when he passed away the corporate value was augmented by the life insurance. If a third party were to purchase the 77.18% portion of Michael's corporate interests, the party would pay $5.3 million because that was the actual corporate value at that time.

The estate claimed the obligation to redeem the shares reduced the value of the corporation. However, the value of shares held by the surviving party was not affected by the redemption. The redemption at fair market value would leave any third-party shareholders holding shares worth exactly the same value. Therefore, the corporate value necessarily must reflect the corporation's total assets and this includes the insurance. See Section 2031(a).

Applicable Federal Rate of 5.6% for June: Rev. Rul. 2024-12; 2024-25 IRB 1 (15 May 2024)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2024. The AFR under Sec. 7520 for the month of June is 5.6%. The rates for May of 5.4% or April of 5.2% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."