September – Excellent Time to Check Your Withholding
The "estimator" is a mobile-friendly tool with new features for self-employed individuals. Many taxpayers now are self-employed or have income from side gigs. Users can enter their wage, pension or other retirement income. Any side income may then be added.
The estimator will highlight your potential deductions from side income. These may include a self-employment health insurance deduction, a Simplified Employee Pension (SEP) or other qualified retirement plan. Side income is also subject to self-employment tax, but there may be a partial self-employment tax deduction.
The estimator tool has several user-friendly features. It uses plain language, permits users to target a specific refund amount, includes a progress tracker and shows the taxable portion of Social Security benefits.
September is an ideal time for this withholding checkup because taxpayers can adjust their withholding over the last four months of the year. By withholding the correct amount, taxpayers may avoid either a large refund (which is essentially an interest-free loan to the federal government) or a shortfall in payments that may result in a tax underwithholding penalty. The estimator has links to IRS Form W-4 to change or update withholding amounts.
If you desire further information, the IRS offers a two-hour webinar on the Tax Withholding Estimator on Thursday, Sept. 19 at 2:00 p.m. Eastern time. You may register for the webinar on IRS.gov.
Tax Advisors Seek Dismissal of Microcaptive Class Action Suit
Benyamin and Orna Avrahami owned jewelry stores and real estate in Arizona. After discussions with their CPA, estate planning attorney and attorneys with expertise with captive insurance companies, they incorporated Feedback Insurance Company, Ltd. (FIC) in St. Kitts. During 2009 and 2010 the Avrahami business interests deducted about $1,000,000 in insurance premiums paid to FIC. Avrahami relied on an election for FIC to be a small insurance company under Sec. 831(b).
The IRS audited the Avrahamis and their business entities, denied the deductions for payments to FIC and assessed taxes, interest and penalties. In Avrahami v. Commissioner, 149 T.C. 144 (2017), the Tax Court held that FIC was not a qualified insurance company because it did not properly distribute risk.
After losing the IRS audit, the Avrahamis brought a class action suit for fraud against the 11 CPAs, attorneys and other tax advisors who helped them create the microcaptive insurance company. The defendants filed motions to dismiss the class action lawsuit.
Defendant Celia Clark sought dismissal of all counts. Clark stated, "Plaintiffs failed to plead facts sufficient to establish the possibility of their various claims. For example, although almost all of Plaintiffs' claims are grounded in fraud, the Complaint fails to meet Rule 9(b)'s heightened pleading standard which requires that the 'who, what, when, where and how' of the alleged fraud be pleaded with particularity. Further, plaintiffs impermissibly lumped together all of the defendants in most cases, failing to identify which defendants are responsible for what conduct, thus failing not just Rule 9(b) but also the Twombly-Iqbal pleading standards."
Editor's Note: Microcaptive insurance companies are a sophisticated planning strategy. This was a case in which the implementation appears to be overly aggressive. Advisors who are working with sophisticated planning strategies should balance the creativity of the strategy with a reasonable measure of caution.
Proposed Regulations on Donor Disclosure
In REG-102508-16, the IRS published proposed regulations that may remove the donor disclosure requirements for nonprofits other than those exempt under Sec. 501(c)(3).
In Rev. Proc. 2018-38, 2018-31 IRB 280, the Service changed the Form 990 Schedule B reporting requirements for major donors. Under Sec. 6033(a), nonprofit organizations are generally required to report the names and addresses of donors who give over $5,000 per year. Revenue Procedure 2018-38 stated the IRS did not need the personally identifiable information of donors for organizations other than those exempt under Sec. 501(c)(3).
The State of Montana brought suit against the IRS and sought to have the change voided. Governor Steve Bullock (D-MT) stated, "We are holding the federal government accountable to following its own rules and making sure that people, not dark money groups, decide our elections." In Bullock et. al. v. IRS, No. 4:18-cv-00103-BMM (D. Mont. Jul. 30, 2019), the U.S. District Court held that Rev. Proc. 2018-38 violated the Administrative Procedure Act (APA).
While the District Court held that Rev. Proc. 2018-38 was not valid due to the conflict with APA, the proposed regulations generally parallel the Rev. Proc. They state, "Consistent with the Secretary's broad discretion under Sec. 6033(a) to set forth information reporting requirements for the purpose of carrying out the Internal Revenue laws... by forms or regulations, Reg. 1.6033-2(a)2)(ii) of the final regulations provides a list of items that are generally required to be included in the annual filings of organizations exempt under Sec. 501(a). The proposed regulations would amend the final regulations to clarify that the need to provide the names and addresses of substantial contributors will generally apply only to tax-exempt organizations described in Sec. 501(c)(3)."
Editor's Note: There are strong political differences over the nondisclosure rules, especially as they apply to Sec. 501(c)(4) organizations that may have influence over elections. With these strong differences, there will likely be further litigation.
Applicable Federal Rate of 2.2% for September -- Rev. Rul. 2019-20; 2019-36 IRB 1 (16 August 2018)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2019. The AFR under Section 7520 for the month of September is 2.2%. The rates for August of 2.2% or July of 2.6% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.