Tuesday September 21, 2021
Economic Impact Payments for Individuals Experiencing Homelessness
Many individuals experiencing homelessness do not have a permanent address or a bank account. However, they still may qualify for a $1,400 Economic Impact Payment. The IRS is attempting to get information to individuals who are experiencing homelessness, the rural poor and other historically under-served groups. Community groups, employers and staff of homeless shelters are urged to help individuals learn about EIPs.
IRS Commissioner Chuck Rettig stated, "The IRS has been continuing to work directly with groups inside and outside the tax community to get information directly to people experiencing homelessness and other groups to help them receive Economic Impact Payments. The IRS is working hard on this effort, enabling millions of people who do not normally file a tax return to receive these payments. But we need to do more, and we appreciate all the help we've been receiving from national and local groups to assist in this effort to reach the people who desperately need this help."
Commissioner Rettig reminds employers and advisors that Economic Impact Payments are available even if an individual has little or no income and does not file a tax return. An EIP is available if the individual has a Social Security number and is not a dependent on another tax return.
Individuals do not need a permanent address or a bank account and qualify to receive an EIP even if they are not employed. Although they may not have filed a tax return in many years, they can file a basic 2020 tax return. On this return, they can claim a Recovery Rebate Credit. The third round of payments is $1,400 for an individual and an additional $1,400 for each dependent.
Individuals experiencing homelessness may use the address of a friend, relative or shelter. If they do not have a bank account, the IRS will send a check or debit card for the EIP.
Some financial institutions permit individuals to open a low or no-cost bank account. The website of the Federal Deposit Insurance Corporation has information in both English and Spanish that will assist individuals in locating an institution.
The IRS makes it easy to file a 2020 tax return for the Recovery Rebate Credit. Go to IRS.gov and use the Free File program. This is available through a web browser on a smartphone or a computer. Individuals who are employed may also qualify for the Earned Income Tax Credit (EITC).
There is also assistance available through the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs. These programs will assist tens of thousands of individuals during this tax season.
The EITC is available to a number of individuals experiencing homelessness who are employed. Single persons with an income at or below $15,820 in 2020 qualify. Couples with three or more children qualify if their income is less than $56,844. The maximum EITC for a family is $6,660 and it is a refundable credit.
The IRS also announced that another two million payments worth $3.4 billion have been released. The 159 million stimulus payments to individuals now totals $376 billion. The most recent payments were sent to Veterans Affairs beneficiaries and Social Security recipients who did not use the Non-Filer's tool.
IRS Suggests Exiting Abusive Micro-Captive Insurance Plans
In IR–2021–82, the Internal Revenue Service (IRS) advocated exiting micro-captive insurance transactions if they are likely to be abusive.
The IRS has won multiple cases on this issue. The Tax Court has held that many of the micro-captive insurance arrangements brought before the Court did not qualify as insurance. Because they did not qualify as insurance, they do not enable the investor to claim federal tax deductions. In Caylor Land & Dev. v. Commissioner, T.C. Memo. 2021-30 (2021), the Court determined that the plan did not qualify as insurance and assessed penalties in addition to rejecting the tax deduction.
The IRS urges individuals to consult independent tax advisors who are not the promoters of the micro-captive insurance plan. If an independent advisor evaluates the plan and determines that it is likely to be abusive, the individual should not report deductions.
IRS Commissioner Chuck Rettig stated, "In multiple cases before the courts, judges have held that these 'fanciful' and 'unreasonable' arrangements don't add up to insurance in the commonly accepted sense. I strongly urge participants in these arrangements to get independent legal advice separate from those who helped steer them into these abusive arrangements."
In 2016, the IRS published Notice 2016–66, 2016–47 IRB 745. This Notice classified micro-captive insurance as a transaction of interest and created a requirement for disclosure. In 2020, the IRS sent letters to many taxpayers who were participating in micro-captive transactions. The letters required disclosure and notice to the IRS. The letters resulted in "a significant number of taxpayers who participated in these transactions [exiting] the transaction."
The Tax Courts have referred to case law and note that insurance must involve "risk shifting, risk distribution and insurance risk." In Caylor, there were brother-sister entities and the court found an insufficient level of risk distribution. The Tax Court noted that the taxpayer did not "make reasonable attempts to ensure his businesses' entitlement to deductions were appropriate." Because the taxpayer had not obtained advice from a tax professional regarding the captive insurance company, he could not qualify under a reasonable clause defense and the Section 6662(a) penalty was applicable.
The IRS has formed 12 micro-captive examination teams. It is examining a large number of micro-captive insurance transactions and disallowing tax benefits from those that are deemed to be abusive.
Editor's Note: This is a broad-based IRS clampdown on abusive micro-captive insurance plans. Individuals who have participated in these tax strategies should obtain independent counsel prior to filing their 2020 tax returns.
New Battle Over SALT
The Tax Cuts and Jobs Act (TCJA) of 2017 limited deductions for state and local taxes (SALT) to $10,000. Governors and representatives from New York, New Jersey and other high-tax states sued the federal government on the ground that it had unfairly targeted them. These suits failed, but there still is a strong sense of resentment over the perceived targeting of high-tax states through the TCJA.
The President has proposed a $1.9 trillion infrastructure bill that includes major tax legislation. On April 13, seventeen representatives from New York sent a letter to House Speaker Nancy Pelosi (D–CA) and House Majority Leader Steny Hoyer (D-MD). The New York Representatives stated they "reserve the right to oppose any tax legislation that does not include a full repeal of the SALT limitation."
The leaders of the group are Representative Jerrold Nadler (D-NY) and House Ways and Means Committee member Tom Suozzi (D-NY). In the letter, they pointed to the loss of jobs during the COVID-19 pandemic and stated, "Over 10% of the state's workforce vanished, with New York City taking the hardest hit and losing over 500,000 jobs."
Representative Suozzi and New Jersey Representatives Bill Pascrell, Jr. and Josh Gottheimer have previously demanded the SALT limit repeal. They stated to House leadership, "No SALT, no deal."
Senate Majority Leader Chuck Schumer (D-NY) and Finance Committee member Robert Menendez (D–NJ) also support abolishing the SALT limit.
House Majority Deputy Whip Dan Kildee (D-MI) indicated his district is not substantially affected by the SALT limit, but emphasizes the fairness issue. He noted, "We have been having discussions, and increasing the threshold is something that is being seriously mentioned."
Representative Lauren Underwood (D-IL) proposed an increase in the SALT limit from $10,000 to $15,000. She holds this number would help middle-income taxpayers, while not granting excessive benefits to millionaires.
Editor's Note: New York Reps. Alexandria Ocasio-Cortez (D) and Kathleen M. Rice (D) did not sign the letter. Some Representatives have been concerned that the SALT limit repeal would benefit high-income taxpayers. Because there is a narrow Democratic majority in the House and a tax bill will not pass without the New York votes, it is quite possible there will be a compromise that results in a higher SALT limit.
Applicable Federal Rate of 1.2% for May -- Rev. Rul. 2021-8; 2021-18 IRB 1 (15 Apr 2021)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2021. The AFR under Section 7520 for the month of May is 1.2%. The rates for April of 1.0% or March of 0.8% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.