Washington News

On July 21, the Internal Revenue Service announced it sent out an additional 2.2 million Economic Impact Payments. With the additional payments, the American Rescue Plan has now distributed 171 million payments with a total value of over $400 billion.

The IRS continues to send out payments each week. The 2.2 million payments had a value of approximately $4 billion. These included 1.3 million distributions to individuals who were previously not known to the IRS because they were not typically required to file tax returns. These individuals received an Economic Impact Payment by filing a 2020 tax return, many used the IRS Free File system.

There were also 900,000 "plus-up" payments with a value of $1.6 billion. These were paid to individuals who based on filing their 2020 tax return qualified to receive the supplemental payments.

The IRS reminds taxpayers that they may file at any time. While the tax deadline was May 17 (or October 15 for those who filed for an extension), the Economic Impact Payments will be distributed to eligible individuals who file at any time.

Another benefit of filing a return is the ability to receive the 2020 Recovery Rebate Credit, the Child Tax Credit or the Earned Income Tax Credit. The return may also qualify you to receive Advance Child Tax Credit (ACTC) payments during the second half of 2021. The first ACTC payments were sent on July 15.

The 2020 tax return is also important if you have a new qualifying dependent. The IRS will be able to identify your qualifying dependent based upon your 2020 tax return and increase your monthly payments through the end of this year.

Many individuals are not required to file a tax return, but may receive a federal benefit if they file a 2020 tax return. These include individuals experiencing homelessness, the rural poor and historically under-served groups. These individuals should all file a 2020 tax return. They may go to IRS.gov and view a note on "Claiming the 2020 Recovery Rebate Credit."

Economic Impact Payments are phased out for higher income taxpayers. The 2020 Recovery Rebate Credits will be adjusted for individuals with adjusted gross incomes (AGI) over $75,000 or married couples filing jointly with over $150,000 in AGI.

IRS Announces Tax Pro Account

The Internal Revenue Service launched a new online account for tax professionals and their clients. This is a groundbreaking step forward that is designed to enable tax professionals and clients to view online information in a manner similar to financial accounts.

IRS Commissioner Chuck Rettig stated, "The ability for taxpayers to connect online with their tax professional is a groundbreaking step for the IRS. This is the first, basic step toward a more fully integrated digital tax system that will benefit taxpayers, tax professionals and the IRS."

The individual must first create an Online Account. With the Online Account, you may access your tax records, view your tax data from your recent return or use the "Get Transcript" function. If a taxpayer has a balance owed, he or she may view the balance and make payments from a bank account or through a debit or credit card. The IRS Online Account also includes descriptions of various payment plans and options.

Future features in the Online Account may permit viewing your profile, updating your address or scheduling email notifications.

After the taxpayer creates an Online Account, it is possible for the tax professional to access the taxpayer's information. The tax professional must have a Centralized Authorization File (CAF) number. He or she will log on to a Tax Pro Account and validate his or her identity. After creating the account, the tax professional may request a power of attorney (POA) or tax information authorization (TIA) for a client. The tax professional will need the name, address and tax identification number (TIN) for the individual. After the Tax Pro requests authorization for access to an Online Account, he or she must then inform the taxpayer that the request is pending.

Following these steps by the tax professional, the taxpayer must log in to his or her Online Account and validate his or her identity. There is an "Authorizations" tab to enable a taxpayer to review the request from the tax professional. If the taxpayer approves the request, he or she will complete a digital signature.

There are specific requirements for using this service. The names of both the tax professional and taxpayer must match exactly. The tax professional must have a CAF number and a Tax Pro account. Taxpayers will maintain control over the authorization.

There are many benefits for the new online account system. The Tax Pro Account enables digital access, reporting of authorizations to the CAF and electronic signatures. Taxpayers will be able to provide their professionals with regular access to their applicable records. Features for both the professional and the taxpayers will be enhanced in future updates.

Editor's Note: This Online Account for both taxpayers and tax professionals is a major step forward. It will enable both parties to use the online services of the IRS for many tax-related functions. The IRS envisions a system that is fully digital in the future. In many ways, this is similar to online accounts used on a daily basis for retirement and investment planning.

Exempt Status A Pipe Dream

In New World Infrastructure Organization v. Commissioner; No. 12457-17X; T.C. Memo. 2021-91, the Tax Court determined that the organization was not qualified for exempt status.

Scott and Pam Johnston owned The Pipe Man Corporation (TPMC). The corporation developed a "Portable Pipe Manufacturing System" and an "Arching Machine" that built and reshaped corrugated metal pipe. TPMC was not successful in attracting capital. On January 5, 2015, the Johnstons incorporated New World Infrastructure Organization (NWIO) as a successor to TPMC. NWIO was a Nevada nonprofit corporation and received permission to use the intellectual property of TPMC for manufacturing pipes.

The NWIO organization existed for the following purposes: "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals." The goals of the organization were "encouraging economic development throughout the United States" and to "save time, money and lessen the burden of government."

NWIO planned to create corrugated pipe for infrastructure process projects at "one fourth" of the existing costs. The IRS issued an adverse determination letter on April 7, 2017. It stated that NWIO did "not demonstrate that you will be operated exclusively for charitable, scientific, or other exempt purposes."

A Section 501(c) organization is exempt if it is "operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes." The IRS determined that the Johnstons created the Nevada nonprofit to conduct the same business functions as TPMC. It claimed that NWIO failed the operational, scientific purpose, charitable purpose and private inurement tests.

1. Operational Test — Under Reg. 1.501(c)(3)-1(c)(1), a nonprofit must engage "primarily in activities which accomplish one or more of such exempt purposes specified in Section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose." Because NWIO was operating in a commercial context, even if its "activities may be wholesome and commendable," this does not justify tax exempt status.
2. Scientific Purpose — A nonprofit may be exempt if it carries on scientific research. See Reg. 1.501(c)(3)-1(d)(5). However, constructing corrugated pipe is not within the definition of scientific research.
3. Charitable Purpose — The charitable purpose may include relief of the poor, advancement of religion, advancement of education or science or lessening the burdens of government. NWIO has not established that construction and sale of corrugated metal pipe to contractors will lessen the burden to government. There is no evidence of any contract or agreement to sell the product at cost.
4. Private Inurement — A nonprofit may not be primarily created to benefit the founders. NWIO was conducting essentially the same business activities as TPMC. The Johnstons owned TPMC and were the officers and directors of NWIO. Therefore, all benefits would accrue exclusively to the Johnstons.

For all four reasons, NWIO is not a qualified exempt organization.

Editor's Note: This analysis is a good summary of the principal requirements for a qualified exempt nonprofit. While the Johnstons' goal of creating a nonprofit was a "pipe dream," many professional advisors would benefit from understanding these tests before attempting to create a new nonprofit.

Applicable Federal Rate of 1.2% for August — Rev. Rul. 2021-14; 2021-31 IRB 1 (15 July 2021)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2021. The AFR under Section 7520 for the month of August is 1.2%. The rates for July of 1.2% or June of 1.2% 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.