The Financial, Internet, And Elder Fraud Prevention Edition

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It’s been a big summer for financial fraud. And statistics suggest that it’s not going to get better—especially for seniors. Scams targeting individuals aged 60 and older—sometimes called elder fraud—caused over $3.4 billion in losses in 2023, up approximately 11% from the previous year.One of the things that I’ve noticed is that it can be easy to dismiss these instances of fraud as targeting easy money. But that’s not the case. Increasingly, scammers don’t expect to get a quick payday. Rather, they work at it, cultivating “friendships” and convincing potential victims that they need help. I’ve been on the receiving end of a few calls asking for advice—and reporting potential scams—this summer. You can read about one such scam here. (Spoiler alert: Unlike some of the others, this one ends happily. (☆) )

Speaking of fraud, the IRS has announced a second Employee Retention Credit (ERC) voluntary disclosure program (☆) for businesses that want to pay back the money they received after filing ERC claims in error. The second program is not as favorable as the first—you must pay back 85% of the credit—and will run through November 22, 2024. The second program only applies to tax periods in 2021—you can’t use this version of the voluntary disclosure program to repay ERC money from 2020.

The IRS continues to chase what it deems abuse of the ERC, announcing last week that over 460 criminal investigations have been initiated in connection with the claim. Their efforts appear to be paying off: last year, a preparer was indicted for allegedly filing over $124,000,000 in false ERC Claims. The staggering fraud has resulted in the IRS slowing down—and in some instances, stopping altogether—the processing of claims while they sort out those that are legitimate.

Crime may factor into taxes in other ways. The Earned Income Tax Credit (EITC) has provided financial relief to millions of low- and moderate-income working families. Recent research suggests that the program can also play a significant role in reducing crime rates. Specifically, a look at the effects of EITC disbursements on crime rates in major U.S. cities like Chicago, New York City, and Los Angeles found evidence of burglary and robbery rates decreasing significantly in the week of and three weeks following disbursements.

In other crime news, a Florida man pleaded guilty (☆) to evading nearly $2.4 million in taxes on income he earned from his business. According to court documents and statements, 76-year-old Roger Whitman generated millions of dollars from the sales of medical equipment but did not report and pay taxes on that income. When the IRS tried to collect, Whitman formed a trust where he directed his income and used the funds in the trust to pay personal expenses.

(Props to Enrolled Agent—and Florida resident—Adam Markowitz, who tweeted, “These stories never start with, “A North Dakota man…” do they?”)

Trusts shouldn’t get too much of a bad rap. Trusts—especially revocable living trusts—are often used to a good end in estate planning. However, one of the most pervasive misconceptions about revocable living trusts is that they provide asset protection (in reality, this is not the case while the creator of the revocable living trust is alive). Other legal tools and strategies may be able to make up for those shortcomings.

Recent recommendations from the Taxpayer Advocate Service (TAS) included improving services for international taxpayers. A major issue for those taxpayers has been large gifts—U.S. taxpayers receiving gifts over $100,000 from foreign individuals must report these gifts to the IRS, even though no tax is imposed on such gifts. Many taxpayers are unaware of this requirement until it’s too late, resulting in penalties that can be as much as 25% of the gift’s value. Recognizing the harshness of this penalty, the TAS recommended that the IRS adjust the $100,000 threshold for inflation. The IRS agreed, with new rules expected to be published by the end of 2024.

While I’m not expecting any big tax legislation through the end of the year, I’ll think we’ll see more guidance from IRS—especially as it applies to digital assets and ERC. I also expect the IRS to ramp up messaging about identity theft, fraud, and data security. Take steps to protect yourself—and those you care about. In the immortal words of Hill Street Blues’ Sergeant Phil Esterhaus, “Let’s be careful out there.”

Enjoy your weekend.

Kelly Phillips Erb (Senior Writer, Tax)

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Taxes From A To Z: L Is For Like-Kind Exchanges

With real estate prices up—and liquidity down—for many taxpayers, there’s increasingly an interest in like-kind exchanges. Like-kind exchanges are exactly as they sound—they allow you to exchange real property for other property of the same type or “like-kind” without immediately recognizing a tax gain or loss. The technique, which is allowable under section 1031 of the Tax Code, allows you to defer tax on the gain if you meet all of the requirements:

• The property to be exchanged must have been held for productive use in a trade or business or for investment. Personal residences or vacation homes for personal use won’t qualify. Also, the exchange of real property held primarily for sale does not qualify as a like-kind exchange.
• Like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. Exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify as tax-deferred like-kind exchanges.
• The properties must be similar. Generally, that means it needs to be of the same nature, character, or class (real estate to real estate, for example).
• The exchange does not have to be exclusively for like-kind property. It can include like-kind property and other assets. However, to the extent that you receive property that doesn’t qualify as like-kind, you must recognize taxable gain on that property (you can have gain and deferral in the same year). You can’t recognize a loss.
• The property to be exchanged must be clearly identified within 45 days from the date you sell the original property, and the deal must be completed no later than 180 days after the earlier of the original sale or the due date of the income tax return for the tax year in which the original property was sold.

Some tricky rules and restrictions apply, especially when it comes to basis. Remember, you’re deferring gain so you’ll need to keep track of your basis in the replacement property after the exchange. The basis will be adjusted by any gain you might have realized, as well as any cash or other non like-kind property exchanged for the property. When you sell the replacement property, you will realize the original gain plus any additional gain on the replacement property.

Statistics

With hurricane season still going strong, the Federal Emergency Management Agency (FEMA) says its disaster fund has run out of money (☆). FEMA uses Disaster Relief Fund (DRF) money to direct, coordinate, manage, and fund eligible response and recovery efforts associated with major disasters and emergencies that overwhelm state resources.

When the DRF is insufficient, as it is now, FEMA will prioritize lifesaving and life-sustaining activities using Immediate Needs Funding (INF). During INF, FEMA will pause all new obligations related to public assistance, such as reimbursement for disaster activity that has already been completed and permanent work, as well as hazard mitigation, that are not essential for lifesaving and life-sustaining activities.

Since the beginning of fiscal year 2024, FEMA has projected that DRF balances would not be enough to meet requirements and has asked for more money. However, However, Congress hasn’t acted on their request.

Questions

This week, a reader asked:

I have an S corp that was established more than 20 years ago and I file taxes on it every year. I recently started a new business venture that is an LLC.

Because I have an established business, I would like for my S corp to own my LLC and pass through any money made to my S corp. Is this possible?

Business owners love limited liability companies (LLCs) because they are flexible. LLCs are governed by state law, so the rules can vary from state to state, but most states do not restrict ownership. LLC members may include individuals, corporations, other LLCs, and foreign entities. And—there is no maximum number of members, which means it can run the gamut from single-member LLCs (SMLLCs) to extremely large LLCs.

S corps are much more restrictive. They are corporations that have made an election to be treated as a pass-through. They can have no more than 100 shareholders and those shareholders may not be non-U.S. citizens or residents. And S corps cannot be owned by corporations, LLCs, partnerships, and most trusts (exceptions exist related to estate planning).

So, importantly for your question, an S corp can own an LLC, but the reverse is not true: an LLC would typically not be able to own an S corp (an exception can exist for an SMLLC which is disregarded for federal income tax purposes).

As you can tell, the rules can be tricky. I always recommend working with a tax or legal professional.

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A Deeper Dive

The South Carolina Supreme Court has ruled (☆) that an existing sales tax statute “unconstitutionally discriminates against interstate commerce in violation of the dormant Commerce Clause.” S.C. law provides a sales tax exemption for the sale of durable medical equipment (DME), which is paid for directly by Medicaid or Medicare funds, but only when the seller’s principal place of business is located in South Carolina (the DME exemption). That exemption, the court found, favored in-state sellers over those out-of-state—a distinction that isn’t allowed.

(If you feel like you’ve heard about the dormant Commerce Clause recently, you’re not wrong—it’s the same clause cited in a Philadelphia wage tax case (☆) that the U.S. Supreme Court Justices have invited the Solicitor General of the United States to weigh in on.)

Across the country, a lawsuit in California (Shah v. Skillz Inc.) involving a startup company’s stock options resulted in a win for the plaintiff (a fired employee). As part of the ruling, the court found that stock options are not wages under the California Labor Code. The court also noted that restricted stock would be considered wages because, unlike options, they have an “ascertainable value.”

Tax Filings And Deadlines

📅 September 16, 2024. Third quarter estimated payments due for individuals and corporations.

📅 September 16, 2024. Due date for 2023 calendar year partnership returns (Forms 1065) and S corporations (Forms 1120-S) filed on extension.

📅 February 3, 2025. Due date for individuals and businesses affected by Hurricanes Beryl and Debby—more info here (☆) and here. (☆)

Tax Conferences And Events

📅 August 22, 2024, at 2 p.m. ET. In The Know With RPO: An Update From The Return Preparer Office. An overview of the Enrolled Agent Program, PTIN compliance, Annual Filing Season Program requirements, and data security responsibilities and protections. Earn up to 1 CE credit (Federal Tax). Live webinar. Free, registration required.

📅 August-September, 2024. IRS has announced the continuing education (CE) agenda for the 2024 Nationwide Tax Forum. Attendees can earn up to 19 CE credits over three days by attending one of the forums in Dallas (August 20-22), or San Diego (September 10-12). Registration required.

📅 September 18-19, 2024. National Association of Tax Professionals (NATP) Tax Forum. Caesars Palace, Las Vegas, Nevada. Registration required.

📅 September 23-27, 2024. ABA Section of Taxation Virtual 2024 Fall Tax Meeting. Registration required.

📅 October 22-24, 2024. NATP Tax Season Updates. Virtual. Registration required.

Trivia

After the United Kingdom, which country tops the list by number for total fraud complaints reported to the FBI’s Internet Crime Complaint Center (IC3)?

A. Brazil

B. Canada

C. India

D. Nigeria

Find the answer at the bottom of this newsletter.

Positions And Guidance

The IRS has published its August 12, 2024, edition of the Internal Revenue Bulletin. (I.R.B. 2024-33)

The ABA Section of Taxation has submitted comments to the IRS on Notice 2024-38 and Rev. Proc. 2024-24 with respect to private letter rulings regarding certain matters pertaining to section 355. Section 355 provides that if certain requirements are met, a corporation may distribute stock and securities in a controlled corporation without causing the distributees to recognize gain or loss.

The IRS has released Rev. Proc. 2024-32, which sets forth the procedure by which the sponsor of a defined benefit plan subject to the funding requirements of section 430 may request approval from the IRS for using plan-specific substitute mortality tables.

The IRS has updated Pub 5708, Creating a Written Information Security Plan for your Tax & Accounting Practice. The Written Information Security Plan, or WISP, is a 28-page template designed to help tax pros, particularly smaller practices, protect against continuing threats from identity thieves and data breaches.

Noteworthy

Avalara, Inc., a provider of tax compliance automation software for businesses of all sizes, announced the results of a new survey providing visibility into the tax, financial and accounting situations of an estimated 86,999 small businesses. Survey responses revealed that continuing economic headwinds could create challenges for small businesses in the next 12–18 months.

Law firm Goodwin announced that Mary O’Carroll joined the firm as Chief Operating Officer (COO). As COO, O’Carroll will oversee Goodwin’s global operations team of more than 1,000 business professionals globally. Before the move, she served as the Chief Community Officer at Ironclad, Inc., and spent 13 years as the Director of Legal Operations, Technology and Strategy at Google.

TaxBit, a provider of digital asset accounting and tax solutions, has launched an enterprise-grade pricing feature within the TaxBit Accounting Suite. TaxBit’s Principal Market Analysis (PMA) support tool enhances accuracy, reduces manual efforts, and ensures compliance with evolving accounting standards, including the recent FASB ASU 2023-08 guidance.

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In Case You Missed It

Here’s what readers clicked through most often last week:

You can find the entire newsletter here.

Trivia Answer

The answer is (B) Canada.

In its annual report for 2023, IC3 identified Canada as the top source of complaints (after the U.K.).

Rounding out the list? In order: India, Nigeria, France, Australia, Germany, Philippines, Brazil, and South Africa.

Unexpected, eh?

Feedback

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