January 25, 2016 § Leave a comment
In September 2015, the IRS proposed new regulations that would have implemented an optional procedure for substantiating charitable contributions. Presently, charitable organizations are required to provide written substantiation to donors for charitable contributions of $250 or more.
The proposed regulations gave charities the option of filing with the IRS a new tax form that contained specific taxpayer information, including social security numbers. Charitable organizations would have to provide the forms to the IRS by February 28th each year, with a copy to the donor.
On January 7th, IRS withdrew the proposed regulations. The proposal was controversial because it required charities to obtain, store, and send to the IRS donor social security numbers and other confidential information. Is the IRS getting it? Did it realize the risk of asking thousands of charities to maintain confidential individual taxpayer information ripe for the picking by fraudsters?
Admittedly, this charitable receipt program was “optional”, but most likely it was expected to be a pilot project to expand information reporting by charities. The Internal Revenue Code requires 1099 reporting to the IRS for items of income and some deductions like mortgage interest, so why not charitable contribution deductions?
The IRS has been plagued with identity theft problems. In May of 2015, the IRS revealed that a criminal syndicate hacked the IRS web site tool called “Get Transcript” to steal the personal tax information of over 310,000 taxpayers. The hackers got names, addresses, social security numbers, and birthdays. The IRS started sending identity protection PINs to the affected taxpayers earlier this month.
Fraudulent tax return filings through the IRS efile system have been a problem for years and are not getting fixed quickly enough. IRS reported early in 2015 that tax refund fraud is expected to soar again this tax season, possibly costing $21 billion over the next five years.
I applaud the IRS for making the right decision by scuttling the charitable receipt proposal. Tax identity theft, however, won’t get solved just by limiting the needless expansion of identity theft opportunity. It needs the IRS to move out of the 1980’s way of doing things and the funds from Congress to enable it to happen.
Thomas Pflanz, CPA, CFP®
Partner – McGowen, Hurst, Clark & Smith, P.C.
January 14, 2016 § Leave a comment
If you are reading this blog post, there is a decent chance that you did not win the $1.5 Billion Powerball Jackpot last night. Something tells me that if you did indeed win the largest lottery jackpot in U.S. history, that you may have a few more important things to tend to and come to terms with this week than reading this blog.
For fun over dinner a couple nights ago, my family and I were dreaming a little of some of the things we might do with $1.5 billion. Travel? Retirement? Education? Charity? Vacation Home? The possibilities are endless indeed. I went along with the fun, and not wanting to be a buzzkill, decided not to even bring up the issue of the income taxes that would be owed on a prize of this magnitude. That is, until someone at the table asked the question….
The advertised jackpot of $1.5 billion is actually an annuity of 30 annual payments of approximately $50 million. To pay this annuity to the winner, the lottery has a pool of money available to invest of approximately $930 million, which is the gross amount you would receive (before taxes) if you opt for the cash option payout.
Working off of the cash option, the lottery would be required to withhold 25% federal tax and 5% state tax, assuming you are a resident of Iowa. This would bring your after-tax payout down to $650 million. My son quickly piped in “Are you sure that’s right, Dad? $650 million is a lot less than $1.5 billion.”
Indeed it is. And the story doesn’t end there. Much the same as when an employer withholds federal and state taxes from your monthly paychecks, the withholding is only a payment or credit towards the actual income taxes computed when you file your individual income tax return each year. The actual income tax owed on a $930 million cash prize would be closer to $410 million, meaning that in addition to the $280 million already withheld upfront, you would owe another $130 million when you file your tax return.
Now the $1.5 billion is down to $520 million. Talk about a buzzkill. At this point, I decided it was best not to even mention the potential estate, gift, and inheritance taxes that could be owed at some point in the future.
If you did indeed win the Powerball jackpot last night and for whatever reason find yourself reading this blog, call me ASAP for some tax planning advice. I promise I won’t be a buzzkill and will help in whatever way I can in fulfilling your dreams.
Mike Brinker, CPA
Partner – McGowen, Hurst, Clark & Smith, P.C.