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Friday January 27, 2023

Washington News

Washington Hotline

Where's My Refund?

As the tax filing season continues at full speed, the Internal Revenue Service (IRS) reminds taxpayers the best way to check your tax refund is to use the "Where's My Refund?" tool on IRS.gov. You may also check your refund status on the IRS2Go smartphone app.

Millions of Americans will receive refunds this year, even if they normally do not file tax returns. Many of the refunds are the refundable Child Tax Credit or the Child and Dependent Care Credit that were expanded by the American Rescue Plan.
  1. Refund Status — If you would like the most prompt refund, you should file an electronic return and select direct deposit. The "Where's My Refund?" tool will show your status within 24 hours after you file an electronic return or four weeks after you mail in a paper return. The refund tool shows whether your return has been received, if your refund has been approved or when refund has been sent.
  2. Delayed Refund — Most refunds are issued within 21 days. Refunds could be delayed for several reasons. An earned income tax credit (EITC) or Child Tax Credit (CTC) may delay the refund. Your bank may not process a refund on weekends or holidays. If your return has errors, requires additional review or you are a victim of identity theft, the refund will be delayed.
  3. Earned Income Tax Credit or Additional Child Tax Credit — The EITC or a CTC will cause a delayed refund. The IRS expects to start sending EITC or CTC refunds in early March. The refunds will initially be sent to those who file electronically and select direct deposit.
  4. Refund Myths — You are not able to obtain a more rapid refund by ordering a tax transcript, calling the IRS or calling your tax preparer. None of these options or "refund myths" will help you accelerate your tax refund. You should use the online "Where's My Refund?" IRS tool or the IRS2Go smartphone app to view the latest update on your status.

Secure Act Required Minimum Distributions Proposed Regulations

On February 20, 2022, the Department of the Treasury issued REG–105954–20. The proposed regulations described a multitude of rules that are applicable to IRAs, 401(k), 403(b) and other types of qualified retirement plans. The proposed regulations generally modify Section 401(a) provisions to conform them to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

Section 401(a)(9) — Required Minimum Distributions

The basic rule is that the interest of an employee must be distributed over the life expectancy of the employee and a designated beneficiary. If the employee dies after the required minimum distribution (RMD) date, distributions must be made at least as rapidly as the method used by the employee. If the employee dies before the RMD date, distributions are generally made over the life expectancy of the designated beneficiary or within a period of five years. The SECURE Act modifies the RMD from age 70 to April 1 of the calendar year after the employee attains age 72. An exception exists for a less than 5% owner of a business who may delay distributions until retirement.

The major change by the SECURE Act is a new "eligible designated beneficiary (EDB)" category. The EDB is permitted to continue to use the existing distribution methods. A qualified EDB is a surviving spouse of the employee, a child who has not reached the age of majority, an individual who is disabled under Section 72(m)(7), a chronically ill person under Section 7702B(c)(2) or an individual who is within ten years of the age of the employee.

Section 401A(9)(H)(i) – Ten Year Rule

If an individual is not an EDB, then the plan distribution is required within ten years. The payouts may be on any schedule during the ten-year period. If there is a multi–beneficiary trust, it may be divided upon the death of the employee into separate trusts. The separate trusts may permit payments over life expectancy for EDBs. The amendments under the SECURE Act generally apply to employees who die after December 31, 2019.

Section 402(c) — Rollovers

Rollovers may generally be made in two ways. An individual may make a rollover of a qualified plan to a new custodian within 60 days following receipt of a distribution under Section 402(c)(3)(B). Alternatively, it is possible to direct a trustee–to–trustee transfer. A rollover is also permitted to an annuity contract under Section 403(a).

A rollover is different from a series of "substantially equal periodic payments payable for the life" of an employee or for a specified term of ten years or greater. If the rollover is from a designated Roth account, it must be to another Roth account or a Roth IRA.

Section 4974 — Excise tax.

If the distribution is less than the applicable required minimum distribution, then Section 4974(d) levies a tax of 50% of the RMD shortfall. This penalty may be waived by the Secretary if there is reasonable error and prompt action to remedy any shortfall.

Editor's Note: There is an IRS hearing on June 15, 2022, and it may be an extended period of time before the final RMD regulations are published. However, the general pattern is for final regulations to conform fairly closely to the proposed regulations.

IRS Attacks CRAT Tax Shelter

In United States v. John Hugo Eickhoff Jr. et al.; No. 2:22-cv-04027, the IRS filed a complaint to enjoin individuals from using a charitable remainder annuity trust (CRAT) to sell appreciated property and avoid tax both on the sale and the distribution of income payments to individuals.

Defendants John Hugo Eickhoff, Jr. and Rhonda K. Eickhoff are licensed insurance professionals. Rhonda is the managing member of Hoffman Associates, LLC. The LLC encouraged individuals to fund a CRAT and promised both tax-free sale and largely tax–free distribution of payments from the CRAT. The plan also involved CPA Aric Elliott Schreiner and attorneys John Gray and Damon Thomas Eisma.

Hoffman Associates published an ad with the title "Capital Gains Taxes Forgiven." The ad stated, "Capital Gains tax legally forgiven on the Sale of Real Estate, Stocks, C–Corps, S–Corps, Livestock, Family Businesses, even if selling to family members, without having to do a 1031 exchange. We have the capability of converting taxable income to Tax–Free Lifetime Income. Income Taxes Eliminated. Maintain 100% control of your current assets. Magnify the value of your estate for your heirs, Tax–Free."

Over 70 CRATs were created with an estimated $40 million in unreported income and $8 million in tax revenue losses. Within two or three months after the property was transferred to the CRAT, the trust transferred approximately 10% of the value to a qualified exempt nonprofit and used 90% of the value to purchase a single–payment insurance annuity (SPIA) contract. The SPIA amounts were sent directly to the donor or donor couple who funded the CRAT. However, the insurance company sent IRS Form 1099–R (Distributions from Pensions, Annuities, etc.) to the trustee of the CRAT. The CRAT filed IRS Form 5227 (Split–Interest Trust Information Return) each year. However, the CRAT tax preparer claimed there was a step–up in basis when the asset was transferred to the CRAT and the payments to the trust grantors were primarily tax free.

Trust accountant Aric Schreiner did not follow Section 664(b) four-tier ordering rules. Therefore, the payments from the SPIA to the beneficiary were claimed generally non-taxable. The net result was the trust grantors received distributions without reporting taxable gain on the sale or taxable income on the payments.

The IRS notes that Section 1015(b) requires a gift transfer to carry forward the grantor's cost basis and it was not proper for CPA Schreiner to claim a stepped-up cost basis. The individuals also had IRS Forms 1040 prepared by CPA Schreiner or Attorney Eisma that did not report taxable income for nearly all the SPIA amounts. The position by Schreiner and Eisma was that distributions from the CRAT were trust corpus and therefore not taxable. They also claimed the CRAT was a "charitable organization" under the Internal Revenue Code.

The IRS Complaint listed specific customer examples. In one case, Customer deeded real property with an estimated value of $1,745,934 and basis of $619,468 to the CRAT. The property was sold for $1,750,000. Approximately 10% of the proceeds were distributed directly to a qualified exempt charity and 90% of the proceeds were invested in an SPIA contract. The CRAT claimed that 99% of the distributions made directly from the third–party insurance company to Customer were tax-free distributions of the trust corpus. CPA Schreiner prepared the 2016 IRS Form 5227 and the Schedule K–1 for Customer. The CRAT did not file IRS Form 1041. CPA Schreiner claimed the basis was stepped up to $2,934,376. Therefore, the distributions were from trust principal. The trust accounting did not comply with the ordering rules of Section 664(b). There was an underreporting over the five years of distributions of $1,126,466 of taxable income and an estimated understatement of $225,000 in tax liabilities.

Editor's Note: The defendants claimed that a transfer to a CRAT qualified for a step-up in basis and was not subject to Section 1015(b) carryforward rules. There was no application of the Section 664 four-tier rules. The case will now proceed to trial and the defendants will have an opportunity to explain why these statutes are not applicable to a CRAT.

Applicable Federal Rate of 2.0% for March -- Rev. Rul. 2022-4; 2022-10 IRB 1 (16 Feb 2022)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2022. The AFR under Section 7520 for the month of March is 2.0%. The rates for February of 1.6% or January of 1.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.

Published February 25, 2022
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