Tuesday January 22, 2019
Tax Scams Go International
Many U.S. citizens are employed overseas. They may qualify for the Foreign Earned Income Exclusion (FEIE). In 2018, the FEIE is $104,100. With this exclusion and, for some taxpayers, an added housing exclusion, they may not have a U.S. tax obligation.
However, the tax fraudster will claim the taxpayer still needs to file Form W-8BEN. In addition, the fraudsters may ask for passport numbers and bank PIN codes.
The Service urges all taxpayers to be cautious if they receive a letter claiming to be from the IRS or a tax software company. Tax fraudsters will use personal information to steal funds from bank accounts or other property.
The IRS published three "will nots" that are designed to protect taxpayers.
- Payments The IRS will not demand payment with a specific method such as a prepaid debit card.
- Immediate The IRS will not demand immediate payment. Taxpayers have the right to administrative appeals with the IRS and even an appeal to the Tax Court.
- Arrest The IRS will not threaten immediate arrest by local police, immigration officers or other law enforcement personnel.
Tax Exempt Organization Filing and Search
In FS-2018-10, the Service explained filing options for nonprofits.
By May 15 each year, nonprofits must file IRS Form 990, Form 990-EZ, Form 990-PF or Form 990-N (Postcard Return). The type of return filed by a nonprofit will depend upon gross receipts, total assets and the type of organization.
All private foundations must file Form 990-PF. Nonprofits with over $200,000 in gross receipts or $500,000 in assets must file Form 990. Those nonprofits with less than $200,000 in receipts or $500,000 in assets may file Form 990-EZ.
If a nonprofit has less than $50,000 in gross receipts, it may electronically file Form 990-N. While electronic filing is permitted for all organizations, it is mandatory if the organization has total assets over $10 million and has filed 250 returns of any type during the year. The 250 returns includes information returns, Forms W-2, Forms 1099, income, employment and excise tax returns.
Churches and many church-affiliated organizations are not required to file Form 990. If an organization is required to file and cannot do so before May 15, it may obtain a six month extension by filing Form 8868. If an organization has a pending application for exempt status using IRS Forms 1023, 1023-EZ, 1024 or 1024-EZ, it still should file the appropriate Form 990 by May 15.
The failure-to-file penalty for small organizations is $20 per day up to the lesser of $10,000 or 5% of gross receipts. Organizations with over $1,028,500 in gross receipts could be subject to a penalty of $100 per day up to $51,000 for failure to file.
The Service also announced a new nonprofit search tool. The "Select Check" tool on www.IRS.gov has been replaced with a new tool, known as the "Tax-Exempt Organization Search" (TEOS).
TEOS will be adding IRS Forms 990 to each nonprofit record. The Forms 990 filed in January and February of 2018 are now available. Other Forms 990 will be added as they are received.
Editor's Note: It is very helpful that the IRS has decided to add Forms 990 to charitable records. As future Forms 990 are added to the records of all nonprofits, TEOS will be a valuable search tool for both professionals and donors.
Taxation of College Endowments
A May 4 article by the Congressional Research Service (CRS) is titled "College and University Endowments: Overview and Tax Policy Option." Periodically, the CRS provides Congress with background papers to assist Members in crafting future legislation.
Historically, college and university endowments were exempt from federal income tax. However, the Tax Cuts and Jobs Act imposed a 1.4% excise tax on net investment earnings for certain college and university endowments. The 1.4% excise tax applies to institutions with endowments of at least $500,000 per student and over 500 students.
The CRS report starts with an overview of current endowments. The report is based upon data from The U.S. Department of Education, The National Association of College and University Business Officers (NACUBO) and Commonfund Institute, and the Internal Revenue Service.
The total college and university endowment value in 2017 was $567 billion. Endowment value declined after the 2008 recession and has been on a steady growth pattern since that time. These college and university endowments are quite concentrated. Just 12% of universities hold 75% of all endowment funds. The largest four universities (Yale, Princeton, Harvard and Stanford) all have over 4% of the total amount endowed.
The average endowment distribution in 2017 was 4.4%. Return for endowments in 2017 averaged 12.2%. However, the returns over the past decade averaged just 4.6%.
Four specific policy options were reviewed in the CRS article.
- Mandated Payouts It would be possible to require endowments to have mandatory payouts similar to the 5% requirement for private foundations.
- Modify Excise Tax The 1.4 % excise tax applies only to the largest endowments. It could be reduced, repealed or the application of the tax could be broadened.
- Limits on Charitable Deductions Donor gifts to endowments could be subject to a reduced amount or there could be specific percentage limits on these gifts.
- Debt-Financed Investment Endowments in 2017 were invested 35% in equities, 10% in fixed income and over 50% in alternative strategies. The alternative strategies included "private equity, venture capital, hedge funds, distressed (or private) debt, real estate or oil and natural gas." Many endowments have created "blocker corporations" in order to avoid unrelated business income tax (UBIT) on hedge fund and other alternative investment income. These investments involve borrowing and other types of debt strategies that could give rise to UBIT. The "blocker corporation" pays little or no tax on the hedge fund payouts because it is in a tax haven. The "blocker corporation" then transfers dividends which are not subject to UBIT to the endowment. The CRS article explains that the "blocker corporation" method could be subject to modification.
Applicable Federal Rate of 3.2 for May -- Rev. Rul. 2018-12 ; 2018-20 IRB 1 (24 Apr 2018)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2018. The AFR under Section 7520 for the month of May is 3.2%. The rates for April of 3.2% or March of 3.0% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.