On July 1, the President signed the Taxpayer First Act (TFA). The bill to reform the IRS passed the House and Senate with strong bipartisan support. It is designed to increase taxpayer rights and improve IRS customer service.
Members of Congress, CPAs, enrolled agents and other tax preparers welcomed the passage of the TFA. Rep. Mike Kelly (R-PA) is the Ranking Member on the House Ways and Means Committee. He explained that the bill is designed to encourage the IRS to focus on taxpayers as customers. Kelly stated, "The relationship between the taxpayer and the IRS should not be adversarial."
Many tax preparers were pleased that identity theft victims will have a single IRS contact. There will also be a new Identity Protection Personal Identification Number (IPPIN) program. This program should increase protection for taxpayers if identity thieves acquire their Social Security Numbers.
Enrolled Agent Jennifer MacMillan is the former Chair of the Internal Revenue Service Advisory Council (IRSAC). She praised the new IRS programs. MacMillan commended Congress for permitting electronic signatures and enhancing the role of the Taxpayer Advocate.
Robert Kerr is Executive Vice President of the National Association of Enrolled Agents. He appreciated the new IRS efforts to improve customer service. Kerr noted, "Training, both on the enforcement side and the customer service side, is essential for a well-running tax administration system and for efficient representation."
The TFA bill is a major step forward, with benefits for both the IRS and taxpayers. If the IRS truly looks at taxpayers as customers, it will dramatically increase the level of customer service.
Proposed Regulations on 1.4% College Endowment Tax
The Tax Cuts and Jobs Act created a 1.4% excise tax on the endowment income of about 40 colleges and universities. The excise tax applies if the school has over 500 full-time equivalent (FTE) students and $500,000 in endowment per student.
On July 3, 2019, the IRS published proposed regulations that answered many questions about the new tax. See REG-106877-18
- Which Schools are Included? Schools described in Sec. 25A(f)(2) are included. Several are excluded. State colleges and universities and schools with over 50% of their students residing outside the United States are excluded from the tax.
- Which Students are Included? Tuition-paying students who are at least half-time and enrolled in a degree or similar program are included in the calculation. If the student resides part of the year in the United States, he or she is counted.
- Who is Considered Full-Time? The school may use normal enrollment methods to determine the number of full-time students and the average daily number of students.
- What is the Endowment Net Investment Income (NII)? Under Sec. 4940(c)(1), NII is generally the gross income and capital gain over certain deductions. The basis of school property held on January 1, 2017 is established at the fair market value on that date.
Nonprofit leaders and CFOs of the 40 affected colleges and universities are carefully studying the proposed regulations. Liz Clark of the National Association of College and University Business Officers stated, "This is a complex new tax and the rules will influence which nonprofit colleges must pay the excise tax as well as the calculation of the tax itself. Each college and university across the country is uniquely organized, and the proposed regulation is likely to have disparate impacts. It will likely take several weeks or more to fully understand the effects."
Karin Johns is a representative of the National Association of Independent Colleges and Universities. She was concerned by the difficulty of calculating the tax. Johns stated, "Each institution affected by this tax will have to carefully review the details of the proposal and determine if the information is helpful, creates unwanted burdens, or if additional information or changes to the proposal are necessary that can be communicated in comments. The private nonprofit endowment tax remains an unfair new tax on one sector of higher education. It should be repealed entirely."
CRS Reviews Conservation Easements
Following an increase in conservation easement deductions from about $1 billion in 2012 and 2013 to over $3 billion in 2014, Congress and the IRS have been reviewing the deduction. On June 27, 2019, the Congressional Research Service (CRS) published a study on façade and conservation easement deductions.
Conservation easement deductions are permitted if a qualified property interest is deeded in perpetuity to a conservation organization. The charitable deduction limit for a conservation easement is increased from the normal 30% of the contribution base for appreciated property to 50%.
Farmers and ranchers may deduct up to 100% of adjusted gross income for conservation easements. The carryforward for conservation easement charitable deductions is extended from five years to fifteen years.
CRS reports that conservation easements have grown substantially in value during the prior decade.
Some of the growth in deduction value may be the result of syndication of conservation easements. This occurs when a partnership acquires property, sells the partnership interest in the property to investors, creates a qualified conservation easement, obtains an appraisal from a qualified appraiser and passes through large charitable deductions to the investors. Since December 23, 2016, syndicated easements are "listed transactions" and must be disclosed to the IRS.
The Charitable Conservation Easement Program Integrity Act of 2019 has been introduced in the House and Senate (S. 170/H.R. 1992). It proposes to limit the charitable deduction for a conservation easement to 2.5 times the original basis of the investor. Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) are conducting an investigation into conservation easements. Some future limits on the easement deductions or additional reporting for these gifts may be the result of their review.
Applicable Federal Rate of 2.6% for July -- Rev. Rul. 2019-16; 2019-28 IRB 1 (18 June 2018)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2019. The AFR under Section 7520 for the month of July is 2.6%. The rates for June of 2.8% or May of 2.8% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.