On October 24, 2023, the Internal Revenue Service (IRS) issued a warning that donors should be aware of criminals who falsely pose as legitimate charities. These fake charities may scam good-hearted donors into making gifts that are for the purpose of helping those in need. However, these contributions to fake charities are not deductible on the donor’s tax returns.

IRS Commissioner Danny Werfel noted, "We all want to help innocent victims and their families. Knowing that we are trying to aid those who are suffering, criminals crawl out of the woodwork to prey on those most vulnerable - people who simply want to help. Especially during these challenging times, do not feel pressured to immediately give to a charity you have never heard of. Check out the charity first and confirm it is authentic."

The IRS helps taxpayers on IRS.gov by offering a way to gather information on legitimate charities. There is a helpful Tax-Exempt Organization Search (TEOS) tool. It shows the existence of the charity, notes that it is eligible to receive tax-deductible contributions and lists the tax-exempt status and filings. Not all eligible charities will appear in this tool, some religious organizations may not be searchable.

The Federal Bureau of Investigation also has resources on "Charity and Disaster Fraud." This information also gives guidelines on protecting yourself.

Whenever there is an international crisis, such as a disaster or conflict, criminals take advantage of the generous spirit of Americans to create a bogus charity. Not only will they seek gifts, but they also ask for personal information that may assist them in identity theft.

These promoters will contact individuals using email or calls. They now are sufficiently sophisticated to "spoof" their caller ID to make it look like they represent a real charity. Many of the scammers target individuals who are seniors or have limited English proficiency.

You should be aware of strategies used by the fraudsters and scammers. They frequently will use names similar to legitimate charities. If an individual is uncertain about a call or email, he or she should ask the fundraiser for the exact charity name, website and mailing address. This information can be used to confirm that this is a legitimate nonprofit.

You should be cautious if you are asked for an immediate payment. Legitimate charities are willing to be patient and wait until the donor is prepared to make the gift. Scammers also will sometimes demand a large donation through a gift card or an immediate transfer by wire from a bank account.

Victims who make gifts to fraudulent charities do not qualify for an itemized charitable deduction. Only gifts to qualified tax-exempt nonprofits are qualified.

Editor's Note: Americans are among the most generous people on the planet. Their desire to help may make them vulnerable to scammers. It is admirable to make generous gifts to charity, but donors need to be certain that those gifts go to legitimate organizations.

IRS Announces Withdrawal Option for Employee Retention Credit Claims

On October 19, 2023, the Internal Revenue Service (IRS) announced an option for businesses to withdraw their pending Employee Retention Credit (ERC) claims.

The withdrawal option is consistent with the concerns and policies of the IRS with respect to ERC claims. The IRS announced on September 14 that there was a tsunami of applications and as a result, the IRS immediately created a moratorium on processing new ERC claims. The moratorium is expected to last for the balance of the year.

Many aggressive promoters have inundated small business owners with emails, calls and letters that pressured them into filing ineligible ERC claims. As a result of the extraordinary volume of claims, the IRS determined that it needed to act.

IRS Commissioner Danny Werfel stated, "The IRS is committed to helping small businesses and others caught up in this onslaught of Employee Retention Credit marketing. The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims. We want to give taxpayers a way out."

The IRS encourages all employers with pending claims to review the applicable requirements and their paperwork. They should consult with a trusted tax professional about pending ERC claims.

The ERC payments are subject to several bills passed during COVID-19. The credit against employment taxes was intended to assist businesses with substantial downturns during 2020 and 2021.

The initial bill allowed an ERC payment if there was a full or partial suspension of business due to COVID-19. A test for the 2020 quarters allowed credits up to 50% of $10,000 in wages for qualified employees if the business had a 50% reduction in gross receipts for the same quarter the previous year. The subsequent bill for 2021 increased the credit to 70% and allowed payments on a per quarter basis. If a business qualified for the maximum payouts in both 2020 and 2021, the tax credit per employee could be $26,000.

Many promoters aggressively approached businesses and promised large payments of up to $26,000 per employee. The IRS published FS 2023-24, a fact sheet for taxpayers to assist them with the ERC claim programs.

The ERC claim withdrawal is permitted if the business fulfills all four requirements. It must have filed an adjusted employment tax return, have claimed the ERC and made no other adjustments on the return, is willing to withdraw the entire amount of the ERC claim and the IRS has not yet issued a payment.

The IRS emphasized that businesses with intentionally filed fraudulent ERC claims may withdraw the claims, but they still are subject to potential criminal investigation and prosecution. Some employers who do not fulfill all four requirements may be able to file a new adjusted return and reduce the amount of the ERC claim to the proper level.

If an employer operates through a professional payroll company, it will need to involve that entity in withdrawing an ERC claim. These businesses should follow a similar process for the claim.

Fact Sheet (FS) 2023-24 provides procedures for three specific categories for the ERC withdrawal process.

1. No ERC Refund and Not Under Audit — If an employer filed the adjusted return and has not received a refund and is not under audit, then it may follow the specific process for each of the quarters that are applicable. The employer must copy the adjusted return, write "Withdrawn" on the left margin of the first page and on the right margin of the first page have an authorized person sign and date the return and print his or her name and title. The signed copy can be faxed to the IRS at 855-738-7609.

2. No Refund and Under Audit — If the employer is already under audit, the business owner may still withdraw the ERC claim with a similar procedure. Instead of faxing it to the IRS, they must communicate with their IRS examiner. The examiner will usually request the withdrawal request be made directly to him or her. If an examiner is not yet assigned, then the employer should follow the instructions for responses to the audit notice with a withdrawal request.

3. Received a Refund Check But Have Not Cashed or Deposited It — If the employer has received an ERC check but it is not cashed or deposited it, then he or she must follow the same steps and right "Void" in the endorsement section of the check. The employer should include a note with the words "ERC Withdrawal" and explain why he or she is returning the refund check. The employer should make copies of all documents and include the voided check with the withdrawal request. Mail the check and other documents to Cincinnati Refund Inquiry Unit, PO Box 145500, Mail Stop 536G, Cincinnati, OH 45250. You should use a tracking method to confirm delivery.

If the IRS accepts your ERC withdrawal, you may also need to speak with your tax preparer. It may be necessary to amend your business income tax return.

Conservation Easement Deduction Reduced to Basis

In Mill Road 36 Henry LLC et al. v. Commissioner; No. 11676-20; T.C. Memo. 2023-129, a Georgia partnership transferred 40 acres of development property to MR36, a TEFRA partnership. The original property was acquired in December of 2014 for $10,700 per acre. After the 40 acres were transferred to MR36, in September of 2016, investment fund (IF) purchased a 97% ownership interest for $1 million or $25,800 per acre.

In December 2016, MR36 transferred a conservation easement to a qualified charity and claimed a charitable deduction of $8,935,000. The IRS denied the charitable deduction and litigation ensued. The Tax Court held that there was a qualified conservation contribution with a qualified appraisal. However, the charitable deduction value was first reduced to $900,000 and then further reduced to $416,563 as a gift of inventory under Section 170(e)(1)(A). The Section 6662(h) 40% gross valuation misstatement penalty was applicable, but the Section 6663 fraud penalty was not applicable.

In December of 2016, the Mill Road 36 partnership deeded 33 of the 40 acres to Southern Conservation Trust, Inc. (SCT). The appraisal was based on the assumption by appraiser Ron Foster that a concept plan developed by professional engineer Adam Price for the creation of an assisted living project with 677 units was valid. While the tentative zoning application had been filed, it was subsequently withdrawn because the original owner held 10 other properties and desired to obtain tentative approvals for rezoning for those properties.

The easement deed protected habitat for "rare, threatened, and/or endangered species” within the meaning of Section 170(h)(4)(A)(ii). It also protected high-priority habitats under the Georgia State Wildlife Action Plan (SWAP). The court determined that the MR36 deed created a qualified conservation easement.

The Foster appraisal was based on an estimated 677 assisted living units. The valuation based on that assumption was $8,992,500 or $224,800 per acre. IRS Form 8283 was signed by appraiser Foster and Katie Pace on behalf of SCT.

Before the Tax Court, the taxpayer presented a new appraisal from James Clanton. The IRS responded through appraiser Ray Kinney. Based upon comparable sales, Clanton claimed that the value of the tract was $6,780,000. After rejecting the Clanton comparable sales, the Tax Court determined that the $990,000 value by Kinney was correct.

The IRS questioned whether there was a qualified real property interest since the investors lacked donative intent. The Tax Court determined that this was a valid conservation easement, and the purposes were within Section 170(h)(4)(A) because the deed protected the "relatively natural habitat of fish, wildlife, or plants, or similar ecosystem." The conservation easement also qualified as a protection of open space under Section 170(h)(4)(A)(iii)(I).

For a deduction greater than $5,000, a donation of noncash property requires a qualified appraisal. If the deduction exceeds $500,000, the taxpayer must, among other things, attach the qualified appraisal to the tax return for the applicable year.

The IRS contended the appraisal was not valid because the appraiser knew the asset was grossly overvalued. However, the Tax Court noted that the appropriate consequences for overstated value are the penalties for gross overvaluation of the charitable deduction.

Therefore, Foster was deemed to be a qualified professional appraiser and the appraisal was valid. Foster was assisted by subordinates Janet Gaskin and David Miller, but it is not required that subordinates sign the appraisal.

The key question in the case was the determination of fair market value. Because the application for rezoning was withdrawn prior to final approval, the assumption that a senior housing community would be legally permitted by zoning was "unwarranted on the facts as they existed at the time of the appraisal and of the contribution." In addition, Foster’s comparable sales from other counties were not appropriate. The comparable sales within the same county were between $6,000 and $10,000 per acre, which was dramatically lower than the Foster appraised price per acre of $197,550. Therefore, the IRS appraiser easement valuation of $900,000 was deemed applicable.

Because the original partnership that owned the property prior to transfer to MR36 was in the business of buying and selling land, the IRS claimed that the deduction was reduced to basis under Section 170(e)(1)(A) and Section 724(b). The question of assets held as inventory or for investment purposes is determined by a factual examination. The Tax Court considered whether the partners were in the trade or business of selling real estate, whether this property was acquired and held primarily for sale and whether the sales were generally "ordinary" in the course of that business.

Since the original partners who contributed the property to MR36 were real estate professionals who regularly bought and sold property, the 40 acres did constitute inventory. The subsequent sale of 97% ownership of MR36 to IF did not change the character of the asset. Therefore, under Section 170(e)(1)(A), the $900,000 easement charitable deduction was reduced to cost basis of $416,563.

Lastly, the parties did disclose the basis on IRS Form 8283, as such, there was no fraud under Section 6663, but there was a valuation overstatement. Therefore, the 40% penalty under Section 6662(e)(1)(A) was applicable.

Applicable Federal Rate of 5.6% for November — Rev. Rul. 2023-20; 2023-45 IRB 1 (15 October 2023)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2023. The AFR under Sec. 7520 for the month of November is 5.6%. The rates for October of 5.4% or September 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. 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.”