Artificial intelligence (AI) is advancing rapidly and will have dramatic effects on society. While AI has potential benefits in many areas including healthcare and education, there are also potential drawbacks. Haywood Talcove, chief executive of a major cybersecurity organization, cautions seniors that new AI capabilities are being used for romance scams, ransom efforts and IRS or government collection scams.

Talcove stated, "You have all of these people building this technology for good and they are working really, really hard. And you have another group working equally hard at applying their craft on the bad side." The bad actors use AI to enhance their scams and victimize seniors. Many scams have taken millions of dollars from seniors who did not protect themselves from romance scams, requests for ransom or false claims that they owe payments to the IRS.

1. Romance Scams — The new AI capabilities enable a scammer to create a visual image that appears to be real. The scammer can also craft a voice designed to appeal to a specific victim. The lifelike image and voice will encourage the victim to go on video dates. After the visual image and false voice have built a relationship with the victim, there will be the inevitable request for money.
2. Ransom Attacks — A fraudster can use a short recording to build a realistic duplicate of that voice. Many individuals have short videos with their voice on various social media outlets. The scammer may use the voice of a child, grandchild or other family member and create a conversation using their voice. Most individuals cannot tell that this is not their actual relative. The voice will claim that the relative is in serious trouble and must receive immediate funds to be rescued.
3. IRS Collection Letters — While many scammers have been using both letters and phone calls to impersonate the IRS and fraudulently collect funds, the AI capabilities greatly enhance the power of the letters. Many current AI systems can generate very realistic letters. While previous scammer letters often had typographical or grammatical errors that allowed them to be easily identified, the AI-enhanced letters look very realistic. Talcove stated, "It is very, very hard to tell. It is going to take a while for people to become aware of something like ChatGPT." Talcove warns seniors not to send money to anyone who you have not met in person.

It is important to understand the best ways to protect yourself. Lori Mars, Deputy Director of the National Center on Elder Abuse notes, "Older people are definitely targeted. The overall concept is that everyone is vulnerable. But with age can come mild cognitive impairment that is associated with poor financial decision making, as well as social isolation and loneliness."

While most financial abuse of elders is not reported, AARP estimates that individuals over age 60 lose more than $28 billion per year through elder exploitation. Approximately three-fourths of that loss is caused by an individual personally known to the senior but the other types of scams may involve up to $8 billion per year.

There are several practical tips for protecting yourself. If you receive a ransom phone call from someone claiming to be a relative, ask for specific identifying marks on their person or a special family password. Note that the IRS or other government agencies do not request payments through phone calls or email.

An excellent protection method is for a senior to have a trusted family member who will co-manage his or her accounts. If the senior is contacted by an individual requesting funds, he or she may then discuss the request with the family member. This is an excellent way to protect a senior person.

Finally, seniors are urged to have their Social Security or government checks directly deposited in bank accounts. They should not give any personal information over the phone to an unknown person. If a request for funds is made, ask the individual to send you a written request.

IRS Levy on Classic Italian Cello

In United States v. Omar G. Firestone et al.; No. 2:22-cv-01201, the Internal Revenue Service (IRS) sought to enforce a judgment against the executor of an estate by placing a levy on a classic Italian cello.

Omar G. Firestone was the executor of the Ghaida M. Firestone estate. The IRS audited the estate and an initial assessment of approximately $1.8 million was levied in 2013. One month later, Firestone created "The Firestone Irrevocable Cello Trust" and transferred a 200-year-old Italian cello into the trust.

In 2019, the IRS sought a judgment to collect the unpaid estate tax and foreclose on certain real property. The District Court for the Southern District of California entered judgment for over $2.5 million. In 2022, the IRS sought to collect the cello by preparing a writ of execution under the Federal Debt Collection Procedures Act (FDCPA).

The FDCPA allows a levy on property whether a "present or future interest, whether legal or equitable, in real, personal (including choses in action), or mixed property, tangible or intangible, vested or contingent, wherever located and however held."

Firestone claimed the writ of execution was barred by the statute of limitations and because the cello was in the trust and therefore not his personal property. The government noted that FDCPA has no time limit for collection of debts by writ of execution and, therefore, the levy was not barred.

The key issue was whether Firestone's property right to the cello was subject to the levy. Property is defined based on the "breadth of control of the taxpayer."

A trust is interpreted under local law. Under California law, Firestone held both the equitable and legal interest in the personal property. The trust provided Firestone with a "Life Estate Interest" in the cello with permission "to possess and play the cello."

Firestone claimed that another individual who was not named in the trust was the actual beneficiary. However, the court determined that the unnamed individual did not have a vested interest.

Because Firestone was both the settlor and beneficiary of the trust, he held a legal interest in the cello under California law. Therefore, the writ of execution could be exercised by the IRS. If the cello is outside the United States, Firestone is ordered to repatriate the cello.

IRS Skeptical on NIL Collective Exemption

In 2021, the National Collegiate Athletics Association (NCAA) created a new policy that allowed student athletes to be compensated for the use of their name, image and likeness (NIL). The student-athletes may generally receive NIL payments, with certain limitations.

In response to the policy, many supporters of sports teams at universities created NIL Collectives. Some of the NIL Collectives have been deemed exempt under Section 501(c)(3). While an IRS legal advice memorandum (AM 2023–004) is not an official ruling, the IRS has taken the position that the new NIL Collectives are not tax-exempt.

NIL Collectives often are supported by university fans and donors. The NIL Collective provides administrative services to connect student-athletes with paid NIL opportunities. While the NIL Collectives claim they are primarily raising awareness and support for charitable partners while compensating student-athletes for the use of their name, image and likeness, they frequently are performing substantial activities that benefit individual athletes.

A Section 501(c)(3) organization must serve a public rather than a private interest. It must be both organized and operated exclusively for one or more exempt purposes. Reg.1.501(c)(3)-1(c)(1). The operational test requires the nonprofit to serve a public interest. A single substantial nonexempt purpose can block exemption.

There is an exception for incidental benefits, which may permit some private benefits. However, if the direct benefit is to designated individuals, the private benefit is not "qualitatively incidental to exempt purposes."

Generally, exemption is denied if the private benefit is substantial compared with the public benefit. Many of the NIL Collectives provide benefits to private individuals. These benefits may be substantial, both qualitatively and quantitatively. The compensation of the student athletes for NIL is the very purpose of the NIL Collective. The collectives perform many business-related functions by negotiating terms and ensuring compliance with state and federal laws. Some also provide financial planning, legal advice and tax assistance.

The benefit is also not qualitatively incidental because funds are paid to a specific class. Boosters and fans of athletic programs are organizing collectives to support the athletes from that university.

Because a NIL Collective will not generate incidental benefits and may have a substantial nonexempt purpose, the IRS believes "many organizations that develop paid NIL opportunities for student-athletes are not tax-exempt."

Applicable Federal Rate of 4.2% for June -- Rev. Rul. 2023-10; 2023-23 IRB 1 (15 May 2023)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2023. The AFR under Sec. 7520 for the month of June is 4.2%. The rates for May of 4.4% or April of 5.0% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.