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IRS Charitable Deduction Audit

IRS Charitable Deduction Audit by Chris Moss CPA Welcome to TaxView with Chris Moss CPA Tax Attorney All taxpayers at one time or another have made tax deductible charitable donations under IRS Code 170. But would your charitable deduction hold up during an IRS Charitable Deduction Audit? While Façade Easements were recently the focus of IRS Charitable Deduction Audits, the IRS in addition to disallowing Façade Easements deductions still routinely disallows your normal cash and noncash donations during an IRS Charitable Deductions Audit. In fact, the IRS is just as likely to commence a regular and routine IRS Charitable Deductions Audit against you in many cases years after you file your tax return. So if you have made a donation to your favorite charity and plan on deducting these donations on your 2015 income tax return in accordance with IRS Code 170, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to comply with Government regulations for legal record keeping of cash and non-cash charity donations, and see where IRS Charitable Deductions Audits are trending in 2016 so you can make sure you don’t lose an IRS Charitable Deduction Audit headed your way soon. Regarding noncash donations to Purple Heart, Goodwill, Salvation Army and other similar organizations, the IRS seems to be just waiting to disallow all these deductions during an IRS Charitable Deduction Audit just as they did to Kenneth and Susan Kunkel in Kunkel v IRS US Tax Court 2015. The Kunkels deducted on their 2011 Sch A tax return noncash charity donations of $37,315 comprised of household items, books, clothing, furniture, and toys donated to the Lutheran Church, Goodwill Industries, Purple Heart, and Vietnam Veterans. The Government not only disallowed the whole deduction in an IRS Charitable Deduction Audit claiming the Kunkels had lack of substantiation but also hit the Kunkels with an accuracy related penalty plus interest. The Kunkels fought back appealing to US Tax Court in Kunkel v IRS US Tax Court 2015. Indeed the Kunkels produced for the Court the receipts given to them by the various organizations and in my view very detailed spreadsheets of exactly what they had contributed but unfortunately this wasn’t good enough to overrule an IRS Charitable Deduction Audit. Judge Lauber of the US Tax Court observed that Section 170 indeed allows the Kunkels to deduct their charity contribution, cash or noncash, made within the taxable year to a charitable organization. However charity cash or noncash deductions are allowed only if the Kunkels can satisfy statutory and regulatory requirements of 170(a)(1) andRegulation 1.170A-13. Whether cash or noncash, if you make donation over $250 you must obtain a contemporaneous written acknowledgement from the charity. For a noncash donation that exceeds $500 then you are subject to even more rigorous substantiation requirements, and finally if the noncash donation is higher than $5000 you are subject to highest substantiation requirement including a qualified appraisal which must be included in the tax return prior to filing. The Court also noted that similar items of property must be aggregated in determining whether the noncash gift exceeds the $500 and the $5000 thresholds as per Section 170(f)(11)(F). While clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware are considered separate categories the Government in an IRS Charitable Deduction Audit in many cases aggregates as much of your donation as they can into one category so that they can push you into the next more rigorous substantiation threshold. Unfortunately for the Kunkels the Court aggregated their donations in 2011 to add up to $21,920 for clothing, $8000 for books, which subjected them to the $5000 threshold. The rest of the donations were aggregated over the $500 category threshold. There was little that the Kunkels could do to dispute these groupings because their tax return lacked contemporaneous evidence within the tax return itself. The Court went on to list the requirements of any contribution (cash or noncash) over $250. There must be a “contemporaneous written acknowledgment of the contribution by the charitable organization citing Weyts v IRS T.C.Memo 2003-68. The charity also must give you a description of any property other than cash, and whether or not you received any goods or services back from the charity. If you did receive some sort of goods or services back from the charity, then the charity must provide you a good faith estimate of the value of those goods and services. Finally and most importantly the evidence that you receive in form of documentation from the charity must be “contemporaneous”. In other words the facts will have to show perhaps later that you had all your documentation in your possession by the date you filed your tax return. For noncash donations, the documented facts are a much difficult to gather contemporaneously but nevertheless essential to you winning an IRS Charitable Deduction Audit. As an example, Goodwill, Purple Heart and Salvation Army usually pick up clothes and other household goods direct from your doorstep, in many cases when you are not at home leaving a receipt hanging on your door handle. While the Court acknowledged that at times it might be difficult to obtain the required documentation, when property is left at a charity’s unattended drop site, the Court nevertheless placed on Kunkel the burden of obtaining the necessary documentation prior to them filing their tax return . The Court then went on to address noncash contributions exceeding $500. Citing Gaerttner v IRS TC Memo 2012-43Judge Lauber opined that the records Kunkel should have obtained prior to filling their tax return were at minimum: 1. The date the Kunkels acquired the property and how they acquired the property, 2. A description of the property, 3. The Cost of the property, 4, the Fair market value of the property at the date of contribution and 5, the method the Kunkels used in determining fair market value as per Section 170(f)(11)(B) and Regulation 1.170(A)-13(b)(2)(ii)(C) and (D). The Court was not without compassion for the Kunkels charitable intent, and conceded that “no doubt the Kunkels did donate some property to charity in 2011.” But the Court concluded that the IRS Code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when the consist of household property rather than cash and that the documentation required by law was simply not present in the Kunkels 2011 tax return that they filed with the Government. Indeed, the Court also found the Kunkels negligent in filing a tax return without supporting documentation and hit them with a substantial Section 6662(a) penalty plus interest. IRS wins, Kunkels lose. So how can you win an IRS Charitable Deduction Audit if you have noncash donations in excess of $500? First, have your tax attorney include in your tax return the facts and evidence you need to win an IRS Charitable Deduction Audit. Best practice for larger noncash donations would be insert the required documentation into tax return itself prior to filing to prove that the evidence was contemporaneously created. Second, do not make the donation if the charity cannot give you the IRS required information. If you don’t have the facts on your side simply don’t take the deduction. Not only are you not going to win the audit without the facts and evidence contemporaneously documented in your tax return, but you will also get hit with a substantial negligence penalty plus interest. Finally, if the charity cannot give you the required documentation simply consider donating to another similar charity which perhaps can provide you the required government documentation to sustain an IRS Charitable Deduction Audit. After you file your tax return with the required facts and evidence you can then sit back and relax, knowing that when the IRS Charitable Deduction Audit commences, perhaps years later, you are going to win big. Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney. See you next time on TaxView. Kindest regards and happy New Year 2016 from Chris Moss CPA Tax Attorney

By H Christopher Moss CPA Tax Attorney

IRS Offset Tax Audit

Chris Moss CPA Tax Attorney IRS Offset Tax Audit by Chris Moss CPA Welcome to TaxView with Chris Moss CPA Tax Attorney Have any of you ever had your income tax refund from the IRS or your social security retirement income intercepted by the Government because you owed income tax or child support or were in default on your student loan? Unfortunately for those Americans who owe taxes there are more offsets coming your way. Just weeks ago Congress passed H.R 22 Surface Transportation Reauthorization and Reform Act of 2015 which allows the Government to confiscate your Passport if you owe back income tax. Many feel the Government is overstepping its collection powers in restricting international travel as if you had been indicted in a criminal investigation and being ordered by a Federal Judge to surrender your passport so you don’t flee the country before trial. So stay with us here in TaxView with Chris Moss CPA Tax Attorney to see where the IRS Offset Tax Audit is trending in 2015 and beyond and what you need to do now to protect yourself against an IRS Offset Tax Audit. The Government Accountability Office (GAO) has been conducting ongoing studies called “High Risk Enforcement of the Tax Laws” for years, but the March 2011 study entitled Federal Tax Collection, “Potential for Using Passport Issuance to Increase Collection “appears to be the basis of Congressional legislation to revoke passports of folks who owe income tax. The 21 page study claims that there were 224,000 individuals issued passports in 2008 who owed a total of $5.8 billion in unpaid Federal taxes. The report concludes that because Federal law already allows linkage of debt collection to passport issuance in the area of Child Support Enforcement there is reason to believe the same linkage can be made to delinquent taxes. From this GAO study a consensus in the Senate seemed to take hold that it was time to add passport confiscation for taxpayers who owe income tax to the Government. Who authored the provision in Senate Bill 1813 revoking or denying a passport to anyone who owes certain unpaid income taxes to the Federal Government? A Forbes article claims Senator Harry Reid originally proposed the idea to Orin Hatch and links a Press Release from Senator Orin Hatch as the source. Regardless of who inserted the provision, the bill cleared the Senate 65-34 on July 30, 2015 and passed in the House 363-64 on November 5, 2015 with the passport provision still intact. HR 22 Surface Transportation Reauthorization and Reform Act 2015 was then sent to Conference last week. The bill left Conference and was approved by both Houses 359-65 in the House and 83-16 in the Senate on December 3 2015 and was sent to the White House for President Barack Obama's signature. The President signed the bill this week andHR22 FAST Act is now law. Section 32101 of the bill Subtitle A Tax Provisions requires that Section 7345 will be added to the IRS Code, requiring the Secretary of the Treasury to transmit to the State Department in accordance with the Passport Act of 1926 a request the passport of any individual who has a seriously delinquent tax debt be revoked. More specifically, HR22 Fast Act reads in part "If the Secretary receives certification by the Commissioner of the Internal Revenue Service that any individual has a seriously delinquent tax debt in tan amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation or limitation of a passport pursuant to Section 32101 Subtitle A of FAST Act HR22. Some scholars are questioning the Constitutionality of revoking a passport for back taxes owed. A February 2015 Penn State Law Review article by Gancarlo Seratto points out that Passport revocation is usually reserved for criminals or individuals who pose national security risks. But as the GAP study points out there are certainly similar statutes as described in 22 CFR 51.60 which requires the State Department to deny the issuance of a passport to any applicant who has been certified by the Secretary of Health and Human Services to be in arrears of child support. For example, the Passport Denial Program (PDP) established by Federal law in 1997 requires that if you are owe more than $2500 in back child support your passport will be restricted and revoked. So assuming the law is deemed Constitutional, if your passport can be revoked for back child support or back taxes, can your passport also be revoked for other Federal infractions. While 31 USC 3716 specifically excludes and exempts Title IV delinquent unpaid student loans all other student loans backed by the Government are subject to offset. Indeed, as far back as 1983 the Senate Finance Committee Subcommittee on Oversight of the IRS had a hearing specifically addressingTax Refund Offset Program for Delinquents Student Loans. One more point: What about taxpayers who have not filed tax returns? It appears that there is no provision in HR 22 for Americans who have joined the underground economy and have not filed income tax returns for many years. Perhaps an income tax nonfiler for 3 successive years should also lose his or her Passport? In conclusion, regardless of whether you agree or disagree with expanding the Government offset program to Passports, there is no question that the ever expanding US Government offset program will keep growing its collection of enforcement tools against Americans who owe back taxes to the IRS. One may ask what could be next on the horizon of Government offset enforcement if you are a delinquent taxpayer. What about Professional licenses? Government Contracts? Drivers Licenses? Or simple Business Licenses? What about denial of Federal Home Loan approved mortgages, low income housing or even Federal subsidized health care? What can you do now? The best advice is to hire the best tax advisors you can afford, pay your taxes in full and timely file your tax returns each year knowing with confidence that you can withstand any IRS Offset Tax Audit the Government throws your way. Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney See you next time on TaxView Kindest regards Chris Moss CPA Tax Attorney

By H Christopher Moss CPA Tax Attorney

IRS Mortgage Interest Audit

IRS Mortgage Interest Audit by Chris Moss CPA Welcome to TaxView with Chris Moss CPA Tax Attorney Just about all of us at one point or another have deducted mortgage interest as an itemized deduction allowed under IRS Code Section 163 on Schedule A of your Form 1040 tax return. IRS Publication 936 and IRS Regulations 1.163 allow a married couple or single individual to deduct interest paid on debt no greater than $1.1M or $550K each filing separately. That is until Charles Sophy and Bruce Voss two unmarried joint owners of a home decided to file a tax return claiming $1.1 Million each or $2.2 Million total. So if you are not married and jointly own a home stay with us here on TaxView withChris Moss CPA Tax Attorney to find out how in 2015 it appears that you are now able to deduct interest paid on $2.2 Million and learn how to protect that deduction from an almost certain IRS Mortgage Interest Audit perhaps many years later. In 2002 Charles Sophy and Bruce Voss purchased a house in Beverly Hills California as joint tenants financed by $2.2 Million in debt. They filed a federal income tax return in 2006 and 2007 with all interest on over $2M in debt deducted onSchedule A of their personal 1040 Tax return. The IRS commenced an IRS Mortgage Interest Audit and disallowed all interest on debt over $1.1M. Sophy and Bruce appealed to US Tax Court in Sophy v IRS US Tax Court (2012). Sophy and Voss argued to the Court that Section 163 limitations were applied per taxpayer with respect to co-owners who are not married and therefore they should be allowed interest on debt up to $2.2M. The Government argued that whether married or unmarried you still live in one house and get to use only one $1.1M limitation. Judge Cohen therefore had to decide whether or not the statutory limitation of Section 163 was properly applied on a per-residence or per-taxpayer basis where residence co-owners were as in the case of Sophy and Voss not married. The Court reviewed the legislative history of Section 163 and concluded that because married couples filing separate returns had to split the exemption in half, so should unmarried couples. Sophy and Voss countered that Congress intended to create a special rule for married couples, the marriage penalty if you will, which should not apply to unmarried couples. Congress was silent on unmarried couples and therefore the marriage penalty should not apply to them. The Court ultimately found for the Government concluding that that nothing in the legislative history of Section 163 suggests that Congress had any other intention than to view mortgage debt on a per-residence basis. Therefore the per-taxpayer basis used by Sophy and Voss was overruled by the Court with a win for the IRS. Sophy and Voss then appealed to the US Court of Appeals for the 9th Circuit in Pasadena California filing on August 7, 2015, in Voss c. Commissioner 796 F.3d 1051 (9th Cir. 2015). An Amici Curiae brief was filed by Shannon Minter and Christopher Stoll of the National Center for Lesbian Rights and Sophy and Voss were represented by Sideman & Bancroft LLP of San Francisco and Hone Maxwell LLP of San Francisco. The Government was represented by Assistant Attorney Generals Keneally, Cohen and Schumann from the US Dept. of Justice Tax Division in Washington DC Sophy and Voss continued to argue that the US Tax Court should be overruled because Section 163 debt limits apply to unmarried co-owners on a per-taxpayer basis. Circuit Judge Jay Bybee acknowledges that Section 163 is specific with respect to a married couple but notes the IRS Code does not specify whether in the case of residence co-owners who are not married the debt is limited per residence or per taxpayer. The gap in the Code is the source of the present controversy Judge Bybee opines. The Court argues that because Voss and Sophy were unmarried they were required to file separate single tax returns not joint or married filing separately returns. Knowing that married couples file as one person, either jointly or separately, Congress on many other occasions has provided half-sized deductions for married couples filing separately including a capital gain limitation of $3000 for married, $1500 for married filing separately. If Congress, the Court reasons, wanted to go further and ensure that two or more unmarried taxpayers were treated as a single taxpayer for purposes of Section 163, then Congress could have done that with specific language in the Code. The Court gave as an example Section 36 of the Code the First Time Homebuyer credit where unlike the mortgage debt interest limitation in Section 163, First Time Homebuyer credit Section 36 says “Married filing separately each can take $4000 of the total $8000 credit AND if two or more individuals who are not married purchase a principal residence, the amount of the credit can not exceed $8000”. The Court concluded that a per-taxpayer reading of the statute debt limit provisions is most consistent with Section 163 and Treasury regulation 1.163 as a whole. The Court therefore reversedSophy v IRS US Tax Court (2012) and remanded back to the US Tax Court the job of determining in a manner consistent with the 9th Circuit Opinion the proper amount of qualified residence interest under Section 163. Voss Sophy win, IRS loses. But there’s more: Circuit Judge Ikuta writes a blistering dissenting Opinion claiming that the majority opinion allows unmarried taxpayers who buy expensive residences to deduct twice the amount of interest than married spouses would be allowed to deduct. The Dissent shows how over the years the IRS has promulgated numerous regulations and rulings showing how exactly unmarried taxpayers who jointly own a home can apportion the interest on the $1.1 M debt limitation of Section 163. Voss and Sophy’ s approach should be rejected because due respect and deference should be given the US Treasury interpretation of the statute citing Christensen v Harris 529 US 576 (2000). The Dissent called the Majority “an absurd” marriage penalty with the better solution being to defer to the IRS reasonable interpretation of the statute. Therefore Judge Ikuta concluded in his Dissent that he would affirm the US Tax Court below. What does all this mean to any of you purchasing a home with debt of over $1.1M? First, in my view, even if you don’t live in the 9th Circuit, if you are unmarried in 2015 and co-own a home together with a larger mortgage than $1.1M make sure you consult with a tax attorney before you file your 2015 income tax return. It sure looks at least for now until the other Circuits chime in that you will have a good chance of supporting an interest deduction on debt of up to $2.2 million. Second, have your tax attorney include in your tax return Voss c. Commissioner 796 F.3d 1051 (9th Cir. 2015) to support your position. Finally until Congress amends Section 163 and the other Circuits chime in, you should expect an IRS Mortgage Interest Audit within perhaps years after you file your tax return. With proper preparation and planning you will have an excellent chance to win an IRS Mortgage Interest Audit as did Voss and Sophy. Thank you for joining us onTaxView with Chris Moss CPA Tax Attorney. See you next time on TaxView Happy Thanksgiving 2015 from Chris Moss CPA Tax Attorney

By H Christopher Moss CPA Tax Attorney