In IR–2022–29 the Internal Revenue Service urged Americans to file 2021 federal income tax returns. There are many key benefits in the American Rescue Plan (ARP) and other laws that will help moderate-income families receive refunds. Even families who normally do not file tax returns should file this year to qualify for their refund.
IRS fact sheet FS–2022–10 explains in more detail the benefits of filing. It states, "This is a year when many people who do not normally need to file a return should consider filing so they can take advantage of such expanded benefits as the Recovery Rebate Credit, Child Tax Credit, Credit for Child and Dependent Care Expenses and Earned Income Tax Credit."
Families with a new child in 2021 should all file. They will qualify for a Recovery Rebate Credit of up to $1,400. They may also be able to claim a Child Tax Credit for up to $3,600. The IRS fact sheet offers specific examples of taxpayers who may receive credit refunds.
- Recovery Rebate Credit — Some Americans did not receive their third round of Economic Impact Payments and could recover up to $1,400 per person. By filing, a family of four may receive a total payment of $5,600. You may wish to create an IRS Online Account to review your status. The IRS is also sending Letter 6475 if you have received an Economic Impact Payment or a "plus–up" amount. Taxpayers should file electronically to receive a prompt refund for the correct amount.
- Expanded Child Tax Credit — There is an increased Child Tax Credit (CTC) for 2021. If you qualify, you should attach Schedule 8812 to your return. The ARP increased the credit for 2021 to $3,000 per child for dependents age 6 through 17 and $3,600 for dependents age 5 and under. The CTC is available for single persons with incomes under $75,000 and married couples filing jointly with incomes under $150,000.
- Repayment of Advance Payments — Some individuals received advance CTC payments during the last half of 2021 and may not have fulfilled all of the requirements. Those with moderate incomes are protected from repayment. Moderate incomes are defined as married couples filing jointly with incomes under $60,000 and a single person with income under $40,000. For higher income individuals, it will be necessary to use Schedule 8812 and determine an amount for repayments.
- Child and Dependent Care Credit (CDCC) — The CDCC percentage and qualifying amounts have been increased for 2021. The percentage of qualifying expenses is increased from 35% to 50%. In addition, it is possible to qualify for dependent care expenses of $8,000 for one child, or $16,000 for 2 or more children. The 50% credit could equal $4,000 for one child or $8,000 for 2 or more dependents. The child and dependent care credit generally phases out with incomes over $125,000.
- Earned Income Tax Credit With No Children — The Earned Income Tax Credit (EITC) is available to many moderate–income workers. This credit has previously been available for families. For 2021, it is also available for workers with no dependents. The EITC maximum is $1,502 for these individuals. Students under age 24 generally do not qualify.
- Nonitemizer Charitable Deduction — Individuals who made gifts of cash up to $300 or married couples who gave up to $600 may take a 2021 above–the–line deduction. The deduction is reported on IRS Form 1040 on Line 12b. The cash contribution is generally to a public charity and may not be to a donor advised fund, supporting organization or charitable remainder trust. The gift must be in cash and may not be volunteer service, a gift of a security or a household item.
- 100% Deduction Limit on Cash Gifts — Taxpayers who itemize deductions normally may give cash up to 60% of adjusted gross income (AGI). For 2021, donors who made large cash gifts may elect to deduct up to 100% of the AGI limit. IRS Publication 526 explains the process for claiming the larger deduction.
IRS Suspends Many Collection Letters
In IR–2022–31, the Internal Revenue Service announced that it is suspending the issuance of a dozen or more letters. These letters generally are balance due notices and unfiled tax return notices.
Because the IRS has several million unprocessed tax returns, there have been many incorrect notices issued to individuals who are waiting for paper tax returns to be processed. In response to concerns raised by tax preparers, IRS Commissioner Chuck Rettig stated, "IRS employees are committed to doing everything possible with our limited resources to help people during this period. We are working hard, long hours pushing creative paths forward in an effort to be part of the solution, rather than the problem. Our employees continue to extend every effort to balance a confluence of multiple, unprecedented demands — including successfully starting the filing season, working our inventory of unprocessed tax returns as well as looking for additional ways to minimize burdens for taxpayers, tax professionals and businesses."
Commissioner Rettig explains that many of the automatic notices have been temporarily stopped. If a taxpayer or tax professional receives notices, the individual is not obligated to respond. However, if a notice is accurate, he or she may wish to take the proper steps. If there is a balance due on an individual's taxes, the IRS will continue to accrue interest and penalties on that amount.
Rettig continued, "The IRS does not have the authority to stop all notices as many are legally required to be issued within a certain time frame."
Tax professionals have expressed major concern over the IRS delay in processing returns. The Tax Practitioners United for Taxpayer Relief Coalition is a group of tax professionals who have urged action by the IRS. National Association of Enrolled Agents spokesperson Thad Inge stated, "We appreciate that, but the bigger issue is the IRS has the return but has not applied the payment on the account." While the tax professionals appreciate the current IRS efforts, there still are major challenges. Inge continued, "Right now, we have not gotten any confirmation that there is really any additional, specific notices that have been turned off. We are encouraged that they are taking a look at this, but we are very interested in the details."
On February 10, 2022, 30 Senators sent a letter to Commissioner Rettig and Treasury Secretary Janet Yellin. The Senators expressed great concern about the problems at the IRS. They noted, "According to the latest IRS data, the IRS continues to have a backlog of 6 million Forms 1040 (Individual Income Tax Returns) and 2.3 million amended individual tax returns. In addition, the IRS has 1.1 million Forms 941 (Employer Quarterly Tax Returns) that must be processed before the nearly 440,000 amended Forms 941 may be processed."
The Senators recognize that the IRS is operating under unique challenges, but request that the IRS exercise all existing authority to bring immediate relief to taxpayers.
Summary Judgment Denied on the Conservation Easement Case
In Hickory Equestrian LLC et al. v. Commissioner;
No. 347-21 (Hickory), the Internal Revenue Service (IRS) filed a motion for summary judgment. It claimed the Hickory partnership did not substantiate a conservation easement deduction by omitting the basis and failed the "protected in perpetuity" requirement.
Hickory is a Georgia LLC that acquired property in 2002 for $111,715. In 2011, the property was transferred to the Hickory LLC and it granted a conservation easement to North American Land Trust (NALT) on December 30, 2011. The easement deed permitted various recreational and maintenance activities. It also required Hickory to notify NALT in writing before exercising any Reserve Right that "may impair the conservation interests associated with the Conservation Area."
If notice were required, Hickory must notify NALT 45 days before exercising a reserved right. If NALT does not grant approval within 30 days or within an additional 10 days after a second request, then NALT is "deemed to have granted consent."
Hickory claimed a charitable deduction of $6,366,711 on its 2011 tax return. It filed IRS Form 8283, Noncash Charitable Contributions, but did not include the 2002 basis of $111,715.
If a gift of property is valued in excess of $5,000, the taxpayer must obtain a qualified appraisal and file IRS Form 8283. Sec. 170(f)-11(c). The appraisal summary must include the "manner of acquisition and the dates of acquisition of the property by the donor" and "the cost or other basis of the property." Reg. 1.170A–13(e)(4)(ii)(D).
Hickory left the adjusted basis blank on IRS Form 8283. It claimed substantial compliance with the requirements of the code and regulations. The Tax Court noted that disclosure of the cost or adjusted basis "is necessary to facilitate the Commissioner's efficient identification of overvalued property." The land in this case was valued in 2011 at $6,718,111, but had been purchased for less than 2% of that amount in 2002. The entry of the basis is "essential in alerting the Commissioner as to whether (and to what extent) further investigation may be needed."
Therefore, Hickory did not comply with the regulatory reporting requirement. However, Hickory claimed it relied on tax professionals and therefore a reasonable cause defense is applicable. The court determined that this would require testimony at trial and therefore will not be determined as a matter of law. Hickory also claimed that the general saving provision should be sufficient to comply with the "protected in perpetuity" requirement.
The Tax Court noted the "deemed consent" provision could be inconsistent with the protected in perpetuity requirement. However, this is a question of fact because NALT may or may not have a practice of compliance with the notice requirements. The court determined that a trial is needed to determine whether the NALT internal procedures are in compliance with the code.
Applicable Federal Rate of 1.6% for February -- Rev. Rul. 2022-3; 2022-6 IRB 1 (18 Jan 2022)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2022. The AFR under Section 7520 for the month of February is 1.6%. The rates for January of 1.6% or December of 1.6% 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.