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COVID Tax Penalty Relief Deadline

With the number of taxpayers who were unable to meet with their tax preparer and file returns during 2019 and 2020, the Internal Revenue Service has decided to allow relief from tax penalties for these late-filers.

The relief has two benefits. First, individuals and businesses that failed to file may now file by the September 30, 2022 deadline and receive penalty relief. Second, the IRS will be able to focus on clearing its backlog of paper tax returns and get ready for the filing season next year.

IRS Commissioner Chuck Rettig stated, "We thought carefully about the type of penalties, the period covered and the duration before granting this penalty relief. We understand the concerns being raised by the tax community and others about the September 30 penalty relief deadline."

The IRS had multiple staff discussions about the right deadline and the time needed to prepare the IRS staff and computers for the filing season in 2023. Rettig continued, "Given the planning for the upcoming tax season and ongoing work on the inventory of tax returns filed earlier this year, this penalty relief deadline of September 30 strikes a balance." In his view, the selected date will enable the IRS to focus their efforts during the balance of the year on preparations for the 2023 filing season.

The failure–to–file penalty can be 5% per month up to 25% of the unpaid tax. If taxpayers have gotten behind and failed to file, it is important to file by September 30, 2022. If a taxpayer has not filed by that date but is able to file later this year, there will be a partial relief. The failure-to-file penalties will start on October 1, 2022.

This penalty relief applies only to failure-to-file and does not apply to the failure-to-pay penalty. The failure-to-pay penalty is one half of 1% per month. The interest rate is currently 5% annually, but it will increase to 6% on October 1, 2022.

The favorable news is that the failure-to-file penalty relief is automatic. Taxpayers who have filed a late return and paid a penalty will receive refunds. The IRS will attempt to process the penalty refunds by the end of September.

There are three exceptions to the penalty relief. If there was a fraudulent return, a taxpayer and the IRS entered into an offer in compromise or the penalties were determined by a court, they will continue to be applicable.

Editor's Note: With the dramatic impact of the COVID-19 lockdowns, many taxpayers were not able to meet with their tax preparers and receive filing assistance. As a result, there are a significant number of taxpayers who have not yet filed a 2019 or 2020 tax return. This penalty relief announced by the IRS will be welcome. However, these taxpayers should still move forward promptly and file their tax returns.

Conservation Easement Appraisers with Potential Criminal Liability

In Oconee Landing Property LLC et al. v. Commissioner; No. 11814-19, the Tax Court declined to grant two appraisers immunity from criminal prosecution.

A trial in Tax Court is scheduled for November 14, 2022 for Oconee Landing Property (Oconee). The syndicated partnership had purchased property and created a conservation easement charitable deduction. Oconee obtained an appraisal to support the charitable deduction from Thomas Wingard and Martin Van Sant. The IRS was able to obtain an order for depositions from Wingard and Van Sant. However, with respect to any questions on syndicated conservation easements, counsel for Wingard and Van Sant invoked a Fifth Amendment privilege against self-incrimination.

The IRS filed a motion to compel Wingard and Van Sant to answer the questions. The Tax Court determined that it would be appropriate for Wingard and Van Sant to answer up to 45 written questions rather than undergo a second deposition. The Tax Court noted the Fifth Amendment "only protects against real dangers, and not remote or speculative possibilities."

Counsel for Wingard and Van Sant requested that the IRS grant them immunity from prosecution relating to this testimony. The IRS did not grant the immunity and counsel for Wingard and Van Sant asked the Tax Court to use its "inherent authority" and grant immunity from criminal prosecution.

The Tax Court noted that 18 U.S.C, Section 6001–6003 states the "Tax Court is not authorized to grant immunity." Immunity from criminal prosecution may only be granted by a United States District Court after there is an application by a United States Attorney. Therefore, the Tax Court does not have jurisdiction to grant immunity from criminal prosecution. Counsel for Wingard and Van Sant cited several cases, but these cases were not deemed relevant.

Finally, Wingard and Van Sant requested a finding from the Tax Court that the appraisal was a "qualified appraisal" prepared by "qualified appraisers." Under Section 170(f)(11)(A), the determination of the qualification of the appraisal and appraisers is a question of material fact and must be reserved for trial.

Therefore, the Tax Court refused to grant immunity from future potential criminal liability.

Editor's Note: The IRS continues to litigate syndicated conservation easement deductions in Tax Court and there are ongoing prosecutions in Federal District Court. The IRS effort to oppose the perceived overvaluation of charitable deductions for conservation easements by syndicated partnerships will continue. This week, Senate Finance Committee Chair Ron Wyden (D-OR) continued to promote limiting the charitable deduction to 2.5 times the basis of the limited partner. Wyden remains hopeful the Secure 2.0 Act will include this provision in an end-of-year appropriations bill.

Nonprofit Coalition Renews Disaster Relief Request

A coalition of nonprofit organizations sent a letter to the President, The Speaker of the House, the Minority Leader of the House, the Majority Leader of the Senate and the Minority Leader of the Senate. The letter asked for specific provisions to be renewed due to multiple natural disasters.

The coalition stated, "With great urgency, we ask Congress to enable charitable nonprofits to provide the assistance sought by the millions of residents whose lives have been disrupted. Specifically, we call on Congress to restore and improve charitable giving incentives and reinstate and enhance the Employee Retention Tax Credit so charitable nonprofits have the resources and staff they need to provide relief and recovery to Americans now."

The latest natural disasters include floods in Kentucky and Missouri. There are wildfires burning in Arizona, California, New Mexico, Oregon and Texas. During recent weeks, there have been major storms in Kansas, Maryland, Minnesota, Nebraska, Oklahoma and North and South Dakota. A major landslide occurred in Alaska. Finally, exceptional drought continues to have widespread impact in California, Idaho, Nevada, Utah and Wyoming.

With the proliferation of natural disasters, the demands are even greater on nonprofit organizations. However, some of these organizations have been forced to shut down and lay off staff due to the disasters.

There are three urgently needed charitable incentives to deal with these disasters.
  1. Universal Charitable Deduction — The nonitemizer deduction of $300 per individual or $600 per couple should be extended through at least 2022. It also should be increased as proposed in the Universal Giving Pandemic Response and Recovery Act.
  2. Expanded Deductions — The provision that allows individuals to give cash and deduct up to 100% of their adjusted gross income, and permits C corporations to deduct up to 25% of taxable income should be restored for 2022.
  3. Employee Retention Tax Credit — The refundable payroll tax credit should be extended for 2022. The "gross receipts" test and definition of eligible payroll expenses should be expanded to include childcare and education programs.
The nonprofit coalition concludes, "The people you and charitable nonprofits serve urgently need help now: those without homes, their businesses, and basic necessities of food, water, clothing, and more cannot wait for assistance until after the elections."

Applicable Federal Rate of 4.0% for October -- Rev. Rul. 2022-18; 2022-40 IRB 1 (16 September 2022)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2022. The AFR under Section 7520 for the month of October is 4.0%. The rates for September of 3.6% or August of 3.8% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.

Published September 23, 2022
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