Category: News

There have been reported several incidents of practitioners being surprised by the new third party authentication procedure adopted by the IRS in October of 2017, effective January 3, and published in the IRM today at Section 21.1.3.3.

In response to several security compromises, IRS has revised its authentication process for third parties who contact the IRS on behalf of a taxpayer.

The former process included the requirement at the IRS ask for the taxpayer’s name and TIN and also the representative’s name and CAF number.

The new procedure, in addition to requesting the taxpayer’s name and TIN, calls for the agent to request the representative’s:

1. Name
2. CAF Number
3. Social Security Number
4. Date of Birth

Some practitioners are reporting that the new procedure is not being uniformly applied, and authentication requests for information such as the names, Social Security numbers and dates of birth of the representative’s children are being made, presumably to cross check that information with the representatives own tax returns.

The practitioner should have on file a current Form 2848 for the taxpayer that covers the tax periods and tax forms in question. Note that IRS will not accept versions of Form 2848 from before the October 2011 version. While the IRS will still provide assistance to third party representatives who file Forms 2848 from before October of 2011, the older form cannot be loaded into CAF.

Representatives of taxpayers using Form 8821, Tax Information Authorization, will, apparently, be subject to the same authentication requirements. Recall that Form 8821 does not empower the designee to represent the taxpayer before the IRS.

On November 10, 2017, P&D Special Counsel Dan M. Smolnik gave a presentation before the Federal Tax Institute regarding the new changes to the Disguised Sales Rules.  The presentation also identified key points for entities to consider in light of these changes.

With new changes in the Disguised Sale Rules, partnerships, including LLCs treated as partnerships, will need to consider the following:

1. Revisions to operating agreements to reflect suitable debt allocation mechanisms in light of the restriction to use only  of “partners’ share of the profits” method of debt allocation. Economic risk of loss and the other methods articulated in Reg Section 1.752-3(a)(3) are now explicitly excluded;
2. Immediate review of agreement terms to assure that Deficit Restoration Obligation terms do not threaten to violate the ban on Bottom Dollar Guarantees. As DROs are required to access the PIP safe harbor (and, thereby, provide the partnership agreement the required substantial economic effect to be respected by IRS) it will take some care to prepare these terms now;
3. Trial calculations of tax effects of anticipated contributions of appreciated capital property;
4. Advisability of placing debt at the entity level instead of the asset level.

In Notice 2017-48, released on September 5, 2017, the IRS announced that employees who donate vacation, sick, or personal leave in exchange for employer contributions to charitable organizations providing relief to victims of Hurricane/Tropical Storm Harvey will not be taxed on the value of that times as income. Also, employers may deduct the amounts so donated as business expenses.

This Notice is important because it represents a suspension of the normal constructive receipt rules of taxation. Ordinarily, when an employee earns income and has the right to receive such income, he or she is subject to tax on it, even if the employee instructs the employer to give the money, instead, to some other person. The IRS has provided such suspension of the rules before, such as in the cases of Hurricane Sandy (Notice 2012-69) and Hurricane Matthew (Notice 2016-69).

The IRS has now advised it will not assert the constructive receipt doctrine over such leave donations and associated payments so long as the payments are:

1. Paid to Code Section 170(c) charitable organizations. These are, generally, the organizations often referred to under Section 501(c)(3) of the Code;
2. For the relief of Hurricane Harvey victims; and
3. Paid to such organizations before January 1, 2019.

Employees who participate in a leave sharing program, sometimes called a leave “bank,” where the foregone leave is excluded from compensation for tax purposes, will not be able to claim a charitable deduction for contribution of value from such a bank.

As for employers, the IRS states in the Notice that it will allow them to treat donations from leave sharing programs as business expense under Section 162 of the Code rather than as charitable contributions under Section 170. This will allow employers donating value from leave banks to deduct that value without being subject to the several limitations on charitable contributions under Section 170.

The record keeping and reporting rules are also amended in this circumstance. Amounts representing leave sharing donations need not be included in Box 1 (wages, tips, other compensation), Box 3 (Social Security wages, as applicable), or Box 5 (Medicare wages and tips) of Form W-2.

In short, these amounts will be free from income and payroll tax withholding.

This Notice provides relief for both itemizing and non-itemizing taxpayers. A non-itemizing taxpayer who donates $2,000 worth of leave time would be able to take a deduction for $2,000. The same taxpayer would not receive the same tax benefit if he or she had taken the leave and contributed $2,000 in cash to the charity. As well, the reduction in AGI through application of the Notice provisions can make it possible for a participating employee to access a greater tax benefit among the various deductions and credits which decrease as AGI goes up. For example, a participant might be able to take a larger deduction for a contribution to a traditional IRA. On the other hand, participation in donation of leave time could yield a lower retirement plan contribution, if the employer’s plan defines wages to include the donated level and character of donated leave.

This memo is intended only as an illustration of general principles and is not legal or tax advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action. In some jurisdictions, this memo may be attorney advertising.