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Audit Scam Warning, Identity Protection, IRA Funding Denied

The increase in telephone scams, phishing activity, and identity theft has resulted in a new policy as of May 6, 2016, from the Internal Revenue Service: When launching an audit, the IRS will contact you by mail, never by telephone.

The change was prompted by an apparent scam in Iowa, where taxpayers were receiving phone calls from alleged IRS employees trying to set up audits. An unexpected call from someone claiming to be from the IRS is almost certainly a scam.

The IRS is also re-examining other areas in which taxpayers are contacted by the IRS via telephone.

Should the IRS launch an examination, you will receive notification in a contact letter that identifies an IRS representative. You then have 14 calendar days from the mailing of the letter to respond before the IRS will try to contact you by phone.

In a separate phone scam, taxpayers have received calls from IRS impersonators demanding payment for the federal student tax and threatening to report the taxpayer to the police. There is no federal student tax. Do not wire money. Ignore this call.

Questions? Contact your Berdon advisor

IRS Expands Scope of Tax Relief for Identity Protection Services

Recognizing the increasing threat of identity fraud today, the IRS has expanded the scope of its tax treatment of identity protection services provided to employees to coverage before a data breach occurs.

Back in 2015, the IRS issued Announcement 2015-22 stating that it “will not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach.” Employers were not required to report the value of the identity protection services provided on information returns such as W-2s and 1099s.

In response to a wave of comments from employers and industry professionals, both the Treasury Department and the IRS agreed that 2015-22 should be extended to include identity protection services provided to employees (and other individuals) before they experience a data breach.

Questions? Contact your Berdon advisor

IRA Funding Structure Ruled a Prohibited Transaction

The Tax Court held that a couple participated in a prohibited transaction by personally guaranteeing loans to a company owned by their IRAs.1 This left them liable for tax on deemed distributions from their IRAs as well as a 10% early distribution penalty.

As part of a plan to buy the assets of a business, the couple rolled over their tax-deferred retirement funds into newly formed IRAs, which then acquired the initial stock of a newly-formed company. That new company acquired the assets of the business they had targeted to buy. The couple guaranteed the repayment of a loan that the new company received from the seller as part of the acquisition price.

The IRS held the couple was liable for a tax deficiency primarily due to unreported IRA distributions. The IRS asserted that the couple’s loan guaranties were prohibited transactions under section 4975(c)(1)(B) – exposing them to penalties for deemed distributions of the IRAs’ assets.

The Tax Court agreed with the IRS argument that prohibited transactions occurred when the couple guaranteed the loans. The Court further held the couple liable for income tax on the distributions, as well as an additional tax at 10 %, because neither was 59 1/2 years old at the time of the transaction.

1 Thiessen v. Commissioner, 146 T.C. No. 7, March 29, 2016

Questions? Contact your Berdon advisor

Berdon LLP, New York Accountants