On March 18, 2024, the Internal Revenue Service (IRS) reminded taxpayers that the April 15 filing deadline is quickly approaching. To assist taxpayers, the IRS offered ten tips to help avoid tax errors and speed up any potential refund.

1. Tax-Related Paperwork — Taxpayers should collect all Forms W-2 and 1099. You may have other paperwork that supports your charitable tax deductions, education credits and mortgage interest payments. You should also have access to your 2022 tax return.
2. Electronic Filing — There are several ways to file electronic returns. Taxpayers can use the IRS Free File program or the new Direct File Pilot which is now available in 12 states. Filing online minimizes math errors, and the software will highlight potential tax credits or deductions. In addition, with electronic filing you can request a prompt refund through direct deposit.
3. Filing Status — You may file as a single person, a head of household, a married couple filing jointly or a married couple filing separate returns. It is important to select the correct filing status. If you have any questions, use the Interactive Tax Assistant on IRS.gov.
4. Names, Birthdates and Social Security Number — You must correctly report your name, date of birth and Social Security Number. A frequent error is failing to report this information for each dependent on your return. If a dependent does not have a Social Security Number, you should obtain and use an Individual Tax Identification Number for them.
5. Digital Assets — All taxpayers are required to answer "Yes" or "No" to the digital asset question. If you have any digital asset transactions, you are required to report the related income. The Digital Assets page on IRS.gov provides additional information.
6. All Taxable Income — Taxpayers are generally required to report all income. If you fail to report all your income, your tax refund may be delayed. Income could include interest earnings, unemployment benefits, gig economy earnings or payments from digital asset sales. IRS Publication 525, Taxable and Nontaxable Income may be helpful if you have questions.
7. Bank Routing and Account Numbers — Most taxpayers use direct deposit for their refund. To do so, they must provide the correct bank information to receive a direct deposit. It may greatly delay your refund if you do not have the correct routing and account number.
8. Sign and Date Your Return — If you are submitting a joint return, both spouses must sign and date the return. If you are filing electronically, both spouses will need to authenticate signatures by inputting the adjusted gross income (AGI) from their 2022 tax return. There is assistance on IRS.gov with the title "Validating Your Electronically Filed Tax Return."
9. Proper Address for Paper Return — If you choose to file a paper return, you must be careful to select the correct mailing address for the IRS. There are instructions for IRS Form 1040 to assist with mailing if you file a paper return.
10. Copy of Your Tax Return — Taxpayers should create and retain a copy of their return. This will help with future tax returns, identity verification and electronic filing.

New Senate Attack on GRATs

Senate Finance Committee Chair Ron Wyden (D-OR) and Sen. Angus King (I-ME) recently introduced the "Getting Rid of Abusive Trusts Act" or GRAT Act. The GRAT Act is a direct attack on strategies used by "the ultra-wealthy to minimize or zero-out any income, gift or estate tax liability on assets worth at least tens of millions of dollars."

Chairman Wyden stated, "This is a garden-variety tax dodge in which a billionaire signs some papers and moves some money around, and suddenly they have to pay little or no tax on appreciating assets worth tens of millions of dollars. This abuse of GRATs skates by because it is an incredibly complicated subject with a jargon-heavy name, but the bottom line is it is fundamentally unfair and it is past time for Congress to put a stop to it."

Sen. King continued, "The Getting Rid of Abusive Trusts Act would close a loophole many wealthy Americans use to escape their responsibility to society by redirecting the vast gains on their fast-appreciating assets, like tech stock, into tax-free trusts for their children."

The GRAT Act establishes a minimum term of 15 years or a maximum term of life expectancy plus 10 years. There may not be a decrease in the annuity during this term, and there will be a minimum value for gift tax purposes.

The GRAT Act will also tax property transfers between a trust and a deemed owner. If the trust permits the owner to substitute assets, the transfer will be treated as a sale. Generally, the transfer would be of high-basis assets in exchange for an asset of equivalent value but with a low-basis. This would trigger the recognition of capital gains tax.

A third section of the bill attacks the ability to pay income tax on an irrevocable trust and bypass gift tax. The payment of income tax will be deemed to be a gift by the trust grantor.

Editor's Note: There have been multiple attacks on GRATs and other transfer tax avoidance strategies. While the revenue obtained through these proposed changes is not large in federal terms, there will be increasing pressure on Congress to enact some of these provisions in the future. As the publicly held federal debt approaches 100% of gross domestic product (GDP), there is intense pressure on Congress to find new revenue. If these changes are not passed this year, these changes will likely be considered in future tax bills.

ABA Tax Section Offers Solution for DAF Regulations

The American Bar Association (ABA) Section of Taxation submitted comments on the proposed DAF Regulations (REG-142338-07). A major provision in the proposed regulations states that a personal investment advisor who manages the DAF and other investments is treated as a donor–advisor. If adopted, that provision would make the investment advisor subject to excess benefit provisions of Section 4958, which effectively eliminates the option for a personal investment advisor to also manage DAF investments.

The ABA Section on Taxation and multiple other commentators have explained to the IRS that this would have a dramatic negative effect on many community foundations. The foundation's ability to enable advisors to retain management and transfer funds into a DAF is a solid positive incentive for growing donor advised funds. Many mid-sized community foundations have one-third or one-half of their assets under management (AUM) in these DAFs managed by personal investment advisors.

The following ABA Section on Taxation recommended provisions are intended to create a safe harbor for those investment arrangements.

1. Fiduciary Relationship — The investment advisor must be a fiduciary with respect to the DAF custodian.
2. Investment Policies — The investment advisor must agree to follow the policies as established by the DAF or custodian.
3. Investment Advisor Direction — The advisor agrees that he or she will not take specific direction from a donor or donor advisor.
4. Right to Terminate — The sponsoring organization (not the donor or donor-advisor) retains the right to terminate the engagement of any investment advisor.
5. No Reduced Fees for Donor — The investment advisor agrees that the right to manage a DAF and receive fees will not result in reduced fees for the donor's other personal investments.
6. Investment Performance — The sponsoring organization must use comparability data and receive appropriate reports on investment performance. The investment advisor must also receive compensation that does not conflict with the provisions of Section 4958.

If the IRS does not accept these safe harbor provisions, the ABA Section on Taxation suggests final regulations should include a facts and circumstances standard to determine whether a personal investment advisor is viewed as providing services to the sponsoring organization, rather than to an individual DAF.

Editor's Note: This is a very helpful set of parameters. It enables the IRS to create an appropriate safe harbor. If the IRS does not take some action, the inability to permit a personal investment advisor to manage DAF funds will have a strong and substantial chilling effect on DAF contributions.

Applicable Federal Rate of 5.2% for April; 2024-14 IRB 1 (15 March 2024)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2024. The AFR under Sec. 7520 for the month of April is 5.2%. The rates for March of 5.0% or February of 4.8% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."