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Tuesday October 25, 2016

Washington News

Washington Hotline

New Hurricane Matthew Tax Relief

On October 17 the IRS announced in IR-2016-135 that it will provide additional tax relief to victims of Hurricane Matthew. The relief will apply to affected counties in North Carolina, South Carolina, Georgia and Florida. Tax deadlines on or after October 4, 2016 are generally extended to March 15, 2017.

Some taxpayers in the affected counties had filed for an extension on their 2015 tax returns. The tax extension filing date of October 17, 2016 is now extended to March 15, 2017.

There are other tax waivers in the announcement. If your business was due to deposit tax funds or excise tax amounts between October 4 and October 19, the IRS will waive the late-deposit penalties as long as the amounts were paid by October 19.

If you are in one of the disaster counties and lose your records, the IRS will provide assistance if you call 866-562-5227. In addition, workers who are assisting recognized government or relief organizations may also qualify for the more lenient tax deadlines.

If you have uninsured or disaster losses as a result of Hurricane Matthew, you have an option to deduct them on your 2016 return or on your 2015 return. IRS Pub. 547 may be helpful in choosing the best option.

Editor's Note: If you plan to use the later tax filing deadline, you should check to be certain that your county qualifies. The affected counties are listed in IRS letter IR-2016-135.

IRS Reviews Private Foundation Grants to DAFs

The Community Foundation Public Awareness Initiative (CFPAI) is an advocacy group for over 100 community foundations in 45 states. In a letter from the steering committee to the IRS, CFPAI urged the IRS to allow private foundations to use donor advised funds in certain circumstances.

The Treasury Department is developing regulations that will affect donor advised funds. One of the areas under study by Treasury is whether there should be limits on grants by private foundations to donor advised funds. Some private foundations have been fulfilling their 5% minimum distribution requirement by making grants to donor advised funds. Congress and Treasury are concerned that the goal of the 5% private foundation distribution is to fund current charitable activities.

CFPAI offers several examples of appropriate uses of a donor advised fund by a private foundation.

The Community Foundation of Atlanta reports that a private foundation made a grant of $200 million to a DAF for the support of Grady Hospital. Grady is the only public hospital in the Atlanta area. The original four year distribution plan was stretched to over eight years. The grant was an important part of the plan for Grady to continue to offer medical services to Atlanta residents.

The Oregon Community Foundation in Portland also was involved with a private foundation that had previously created a donor advised fund. Following the major economic downturn in 2008, the private foundation had committed to multi-year grants of fixed amounts for charitable purposes. The DAF proved very valuable because over half of the DAF reserves were utilized to maintain the much-needed grants until the economy recovered.

A third example occurred with the Minnesota Philanthropy Partners in St. Paul, Minnesota. A private foundation held most of its assets in the shares of a founder's company stock. With the economic downturn in 2008, the private foundation experienced reduced value of the shares, and as such did not want to sell the shares at a distressed price. The solution was to transfer shares to a donor advised fund. When the economy and stock recovered, the private foundation proceeded to repurchase the shares from the donor advised fund. It is now making grants from the donor advised fund to area charities.

Editor's Note: Since donor advised fund reforms were included in the Pension Protection Act of 2006 by then-Senate Finance Committee Chairman Chuck Grassley, Congress has focused on making certain that grants will be used to fund current charitable projects. CFPAI properly suggests that future regulations should include some flexibility to recognize that there are times where a distribution over several years from a donor advised fund may be consistent with this goal.

IRS Security Delay on eServices

On October 14 the IRS announced an indefinite delay on the efforts it is making to provide secure access to the "Get Transcript Online" accounts.

The delay will permit the IRS additional time to review various security access and identity-proofing procedures. During 2015 and 2016, the IRS had experienced fraudulent use of the Get Transcript Online service. As a result, it terminated use of the service for a time and then announced a plan to open up the service again with higher levels of authentication.

The Get Transcript service is primarily used by financial advisors. However, many individuals also would like the service to be available so they can retrieve their prior tax records.

The IRS states that there will be a new and improved system with higher levels of security. The latest system had involved logging on to www.irs.gov and receiving an activation code sent to your cell phone. After entering the activation code, your identity was then deemed authenticated and you could download the transcript. If you did not have a cell phone, it was necessary to wait five to ten days for the authentication to be mailed to you.

Editor's Note: National Taxpayer Advocate Nina Olsen indicated that the system with the phone authentication had a fairly low success rate for individuals. She estimated that only 27% of taxpayers who used the system were able to obtain the transcript. Professional advisors are likely to have a higher rate, but the IRS is attempting to provide service while continuing to improve the security methodology.

Applicable Federal Rate of 1.6% for November -- Rev. Rul. 2016-26; 2016-45 IRB 1 (18 Oct 2016)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2016. The AFR under Section 7520 for the month of November will be 1.6%. The rates for October of 1.6% or September of 1.4% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published October 21, 2016
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