Monday October 3, 2022
IRS Tax Collection Voice Bots Successful
The voice bots are powered through artificial intelligence and available in both English and Spanish. They are able to authenticate a taxpayer's identity. After authenticating an individual's identity, they are able to provide personal assistance.
The initial rollout on June 14 was quite limited, but the bots were fully functional by June 24, 2022. They are able to assist tax delinquent taxpayers who owe the IRS $25,000 or less. The IRS estimates that this covers 93% of delinquent taxpayers.
The voice bots were able to handle 200,000 calls in the almost two weeks it has been operational. They enabled over 2,000 taxpayers to set up payment plans. This process ordinarily takes an IRS contact representative about 17 minutes. Guillot noted, "This allows our phone assisters more bandwidth, limited as they are, to answer more phone calls from taxpayers who want to penalty abate, who want to establish a hardship and they can't pay. You really want to be able to talk to those kinds of taxpayers and you need to have a thinking person with a heart who can go back and forth in a discussion with a taxpayer and establish that."
With the voice bots, the IRS has increased the phone service rate from approximately 25% to 40% of callers. This also is notable because approximately 300 IRS phone staff have been reassigned to clear the paper returns backlog and are not available to take collection calls.
The IRS anticipates adding more functions to the voice bots in the future. Taxpayers will be able to request tax return transcripts or the amount of the balance due for their taxes.
National Taxpayer Advocate Erin Collins indicates that the Taxpayer Advocate Service (TAS) is also developing authenticated voice bots. Collins noted, "We have the same issues: Too many calls coming in, not enough people to answer them." She believes that a voice bot service could help with general tax questions and with specific assistance from TAS.
Collins concluded, "We have to take the taxpayer for whom they are, not force them into a box that we — the IRS — think is the right answer." She notes that it will be important to have customer service representatives available to visit with and provide assistance to most taxpayers.
Airplane Gift Does Not Fly
In Joe Alfred Izen Jr. v. Commissioner; No. 21-60679 (5th Cir. 2022), a Tax Court decision to deny a charitable deduction for a gift of an airplane was upheld by the Fifth Circuit.
In 2009, Joe Alfred Izen transferred his 50% interest in an airplane to the Houston Aeronautical Heritage Society (Society). He reported charitable deductions for both 2009 and 2010.
The IRS denied the deduction because it was not properly substantiated. In 2016, Izen and the IRS engaged in litigation regarding his denied deductions. Izen had filed IRS Form 1040X to amend his 2009 return and attached additional materials. The Tax Court determined that these additional items were not sufficient and denied the deduction.
IRC Section 170(f)(8) establishes substantiation requirements for property gifts. Section 170(f)(12) specifies requirements for gifts of qualified vehicles. If the gift to an organization is for a related use, the vehicle may be deductible at fair market value. If this value exceeds $5,000, the taxpayer must provide a qualified appraisal. Noncash gifts, including airplanes, with values over $500 also require a contemporaneous written acknowledgment (CWA). The CWA must include the name and taxpayer identification number of the donor.
The IRS determined that Izen failed to provide the proper CWA as required by Section 170(f)(12)(B).
Izen did not provide the CWA, but did include a December 30, 2010 letter from the Society that was addressed to Philippe Tanguy. The letter does not name Izen or provide his taxpayer identification number. Izen also included a copy of the donation agreement between him, Tanguy and the Society.
Izen argued that he should be allowed the deduction because he substantially complied with the requirements. However, the Fifth Circuit noted that substantial compliance does not satisfy the statutory requirements. The Court noted that Congress specified that the CWA must include the taxpayer identification number. Therefore, the charitable deduction was denied and the Tax Court decision was upheld.
Editor's Note: Courts continue to be rigid in interpreting the requirements both for the CWA and the appraisal. Counsel for property donors should ensure that the CWA, the appraisal and the appraiser are fully qualified and in compliance with all Internal Revenue Code requirements.
Proposed Regulations on Present Value Calculation for Estate Deductions
IRC Section 2053 states that the estate may be reduced by deductions for (1) funeral expenses, (2) administration expenses, (3) claims against the estate and (4) unpaid mortgages or debt. The 2009 Final Regulations on Section 2053 limited deductions for claims and expenses to the amount actually paid. However, the regulations stated that Reg. 20.2053–1(d)(6) would subsequently include future guidance on present-value methods to calculate deductions.
In REG-130975-08, 87 F.R. 38331-38343, the IRS published "Guidance under Section 2053 Regarding Deduction for Interest Expense and Amounts Paid under a Personal Guarantee, Certain Substantiation Requirements, and Applicability of Present Value Concepts."
The goal of the proposed regulations is to set forth a method for determining the deduction amounts for future claims and expenses. The claims and expenses within three years from the decedent's date of death will be deductible at the amount actually paid. Certain claims and expenses paid later than three years will be deductible using a present value method.
The Treasury Department recognizes that most of the ordinary estate administration expenses are paid during the three-year period. However, the amounts that are "not paid or to be paid on or before the third anniversary of the decedent's date of death" will be subject to the present value method. The calculation will use the applicable federal rate under Section 1274(d) for the month of the decedent's date of death, compounded annually. The length of time from the decedent's date of death will be used to determine whether the Federal mid-term rate or the Federal long-term rate will be applicable.
A "reasonable assumption or methodology" may be used to calculate the present value. The expected date or dates of payment will be used to make fair and reasonable estimates. If the actual date of payment differs, then the amount would need to be adjusted.
Interest expense will also be subject to the new rules. Generally, interest expense on loans or obligations to pay estate taxes is deductible. However, the interest must be pursuant to an instrument or contract that constitutes debt under Federal tax law, the interest and the loan must be bona fide in nature and the interest and loan must be "actually and necessarily incurred in the administration of decedent's estate and are essential to the proper settlement of the decedent's estate (within the meaning of Reg. 20.2053-3(a))."
The deductions must be reported on IRS Form 706. They should reflect post-death events and those that are reasonably anticipated to occur. A written appraisal is required by an individual who is not a family member, a related entity of the decedent, a beneficiary of the estate, an employee of the decedent or a family member of the aforementioned individuals.
Applicable Federal Rate of 3.6% for July -- Rev. Rul. 2022-12; 2022-27 IRB 1 (15 June 2022)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2022. The AFR under Section 7520 for the month of July is 3.6%. The rates for June of 3.6% or May 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.