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Thursday February 27, 2020
Data Security Requirements for Tax Preparers
During tax year 2017, the IRS reported that 80 million tax returns were filed by professional tax preparers. About 56% of taxpayers needed the assistance and advice of a professional tax preparer.
If you are in the majority of taxpayers who use a professional tax preparer, you benefit from the efforts of the IRS and the Federal Trade Commission (FTC) to protect your personal tax information. In IR-2019-131 the IRS offered tips to tax preparers on ways to safeguard client information.
"Protecting taxpayer data is not only a good business practice, it is the law for professional tax preparers," IRS Commissioner Chuck Rettig stated. "Creating and putting into action a written data security plan is critical to protecting your clients and protecting your business."
The FTC requires all tax preparers to comply with the "Safeguards Rule." While the scope and complexity of a plan will relate to the size of the tax preparation organization, all tax preparers must have a written data security plan.
The plan must include the following five components:
AICPA Requests DAF Flexibility
In a July 24 letter to Acting Treasury Secretary David Kautter and IRS Commissioner Charles Rettig, Christopher Hesse, Chair of the American Institute of CPAs (AICPA) Tax Executive Committee, commented on IRS Notice 2017-73 provisions affecting donor advised funds (DAFs).
Notice 2017-73 offered guidance on DAF incidental benefits, DAF payments for a pledge and DAF distributions used to claim "public support" status for public charities.
Passthrough Workaround for SALT $10,000 Limit
The Tax Cuts and Jobs Act (TCJA) created a $10,000 cap on state and local tax (SALT) deductions. Several states created charitable funds to "work around" the $10,000 cap on SALT deductions.
In final regulations published on June 11, the IRS essentially eliminated the workarounds for individuals by making the state credit a "quid pro quo." This credit reduces the federal deduction (with the exception of a state credit at or under 15%).
However, TCJA did not apply the $10,000 SALT cap to business deductions. As a result, Connecticut passed a SALT limit workaround for passthrough businesses. Connecticut Revenue Commissioner Scott Jackson reports that about 110,000 passthrough businesses plan to use the Connecticut SALT workaround.
To counter the Connecticut plan (and other states considering a SALT passthrough workaround), the IRS is reported to be developing SALT regulations on passthroughs. The future SALT passthrough regulations will target the state workarounds, but attempt to not limit existing SALT deductions for other businesses.
Editor's Note: Treasury has a major challenge with these passthrough SALT cap regulations. It wants to limit the workarounds, but there are millions of legitimate businesses that need to take their normal SALT deductions. It will be most difficult for the IRS to deny the workaround deductions and still permit legitimate business deductions. Proposed passthrough SALT regulations are expected later in 2019.
Applicable Federal Rate of 2.2% for August -- Rev. Rul. 2019-17; 2019-32 IRB 1 (17 July 2018)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2019. The AFR under Section 7520 for the month of August is 2.2%. The rates for July of 2.6% or June of 2.8% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.
Published July 26, 2019