On November 7, 2023, the Internal Revenue Service (IRS) announced there will be major improvements for the 2024 filing season. Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel were pleased to announce the success of the Paperless Processing Initiative.
The IRS reached the initial Paperless Processing Initiative goal three months ahead of schedule. Taxpayers can now use the Document Upload Tool to respond to all notices. The IRS explained it has received 35,000 digital responses to notices with the updated tool.
A second goal is to enable at least 94% of individual taxpayers to respond to the IRS through the website instead of sending mail. The IRS website has various forms and information, including help on preventing identity theft and assistance in qualifying for credits and deductions. This new service will allow 125 million paper documents per year to be converted to digital form.
By the start of the filing season in 2024, the IRS promises to allow e-filing of at least 20 additional tax forms. This will include various business forms, such as IRS Forms 940 and 941.
There also will be important new updates to the "Where's My Refund?" tool. This has been the most popular customer service tool on IRS.gov
. Last year, over 54 million taxpayers produced 550 million hits on this tool.
The current tool provides a very basic message such as, "Your tax return is still being processed. A refund date will be provided when available. For more information about processing delays, please see our Refund Frequently Asked Questions."
The updated version will provide much more explanation. For example, it may state, "To protect you from identity theft, your tax return is currently being reviewed. To help us process your return more quickly, verify your identity and tax return information. If you recently received a letter from us, follow the instructions on the letter. Please have your tax return (Form 1040 series) available and read the website or letter before starting the verification process. If you already reviewed your identity and tax return information, you may check the status of your refund in two to three weeks."
The IRS also promised other improvements. It set a target for improved phone service to reach an 85% Level of Service next year. The average holding time target is five minutes or less. Over 95% of eligible taxpayers will be able to request a call back from the IRS. These improvements are designed to continue "to promote trust and satisfaction when taxpayers call the agency."
The IRS is continuing to make progress on Direct File. The pilot program for 2024 will be available in both English and Spanish. It is expected to be used by both low- and moderate-income taxpayers who take the standard deduction. The individuals may have W-2 wages, Social Security or Railroad Retirement benefits or interest income of less than $1,500. They will also be able to deduct educator expenses and student loan interest. More complex tax returns will need to wait for a future improved Direct File program.
The Direct File pilot will not include all state returns. However, there will be state returns for some taxpayers from Arizona, California, Massachusetts and New York. In addition, taxpayers in the nine states with no income tax will be able to use Direct File.
The IRS plan is to phase in Direct File over a number of years. This phased rollout enables the IRS to make certain that the taxpayers who use the program will receive quality service.
Conservation Easement Deduction Reduced from $14.2 Million to $1 Million
In Nathaniel A. Carter et al. v. Commissioner
; No. 23621-15; No. 23647-15; T.C. Memo. 2023-133 (2023), a partnership transferred a conservation easement to a qualified nonprofit, but retained the ability to build homes, docks and roads on the property. The Tax Court determined the conservation easement was valid based on a substantial compliance standard, but the taxpayer appraisal was not qualified. The claimed charitable deduction of $14,175,000 was reduced to the IRS appraised value of $1 million.
Dover Hall Plantation, LLC purchased over 5,000 acres in Glynn County, Georgia, in 2005. In 2009, Ralph Evans purchased a 50% interest in the partnership for just under $30 million.
A conservation biologist for the North American Land Trust (NALT) viewed the property and conducted various analyses to determine whether or not it qualified for a conservation easement. On December 27, 2011, the partnership conveyed a conservation easement on 500 acres of property. It preserved in perpetuity a relatively natural habitat for fish, wildlife or plants. The deed also retained the right to build 11 single family dwellings and 9 docks on an adjacent waterway. The development must have "no material adverse effect upon the Conservation Values" and must be approved by NALT.
NALT biologist Stephen Echols conducted several reviews of the property and determined that the assets fulfilled the conservation easement requirements. The partnership obtained an appraisal and reported a charitable deduction of $14,175,000. The IRS denied the deduction and litigation ensued.
The Tax Court initially sustained the IRS denial of the deduction because of defects in the deed. However, the Eleventh Circuit reversed and remanded to the Tax Court to determine the valuation. See Carter v. Commissioner, Nos. 20-12200, 20-12201, 2022 WL 4232170 (11th Cir. Sept. 14, 2022).
The taxpayers obtained a valuation from Martin Van Sant and Thomas Wingard. The appraisers were deemed qualified and used a "sales comparison approach." Based on their sales approach, they determined the value was approximately $9,000 per acre. The determination of the total value was $46,300,000. Based on their assumption that the easement would reduce the permissible number of docks and the number of residential units that could be developed, they summed two factors and determined that a 30% reduction in value was appropriate. However, at trial neither Van Sant or Wingard could explain how the 30% value was an appropriate measure to determine the value. They had merely averaged values of comparable properties in their appraisal. Based on their claimed valuation, the taxpayer valuation at the initial Tax Court trial was $10,300,000 for the conservation easement.
IRS appraiser Zac Ryan determined the value based on comparable properties. He reviewed four different comparables and valued the property at $3,000 per acre. The taxpayers contested his comparables because the four properties were in adverse financial circumstances. However, the court determined that his valuation of $1 million was appropriate and the Van Sant and Wingard inability to explain the 30% reduction in value was fatal to the taxpayer appraisal.
A conservation easement is qualified under Section 170(h)(1) if it is a restriction granted in perpetuity. There also must be documentation sufficient to establish the condition of the property at the time of the gift. See Reg. 1.170A14(g)(5)(i). Taxpayers did not meet a strict compliance standard for the required documentation because there was a unilateral representation by the partnership to NALT. Nevertheless, the court determined that the rule for compliance was "directory" and not mandatory. Therefore, the reviews by NALT biologist Echols were sufficient to meet the substantial compliance standard.
The deed also reserved the right to build 11 homes and 9 docks. The IRS claimed that this would "diminish" the easement value and destroy the conservation purpose. The Tax Court analyzed the home and dock construction and concluded that the development rights would have minimal impact on the easement. Therefore, the easement was still qualified.
The primary issue before the court was valuation. The Van Sant and Wingard valuation was deemed deficient. They were unable at trial to explain the rationale for their 30% adjustment. They simply added in a 9.7% reduction for the number of potential units and a 20% reduction for the number of potential docks. This was not deemed to be a sufficient explanation for their claimed 30% reduction in value. Alternatively, while the comparables were questioned by the taxpayer, IRS appraiser Ryan was deemed to have made a credible report. He had a clear record of the comparables and made adjustments to the valuation.
The taxpayers noted that Mr. Evans purchased a 50% interest in the partnership for $30 million, thereby suggesting that the property value was far in excess of the approximately $15 million number advocated by IRS appraiser Ryan. However, the court noted that 32 months had passed since the purchase of 50% of the partnership by Evans and the date of the easement deed. Therefore, the valuation was not deemed sufficiently close in time to have merit. The court noted that this payment by Mr. Evans "might indicate that Mr. Ryan undervalued the easement to some extent." However, because the taxpayers' appraisal was not deemed valid, the Tax Court accepted IRS appraiser Ryan's determination that the value was $1 million. Since the $1 million valuation was far below the $14.175 million claimed deduction, the Section 6662 (c)(1)(A) 40% gross valuation misstatement applied.
In many valuation cases the Tax Court will complete an independent analysis and arrive at an intermediate number. In this case, the Court decided to rely on the IRS appraiser, even though it admitted this was likely to be quite low and may not fully reflect the correct value.
2024 Tax Tables, Exemptions and Deductions
In Rev. Proc. 2023-34; 2023-48 IRB 1
(9 Nov 2023), the IRS published tax tables, exemptions and deduction limits for 2024. Even though inflation was reduced for the mid-2022 to mid-2023 base period, there are substantial increases in many tax provisions.
The standard deduction will be $29,200 for couples filing jointly and $14,600 for single persons. The head of household standard deduction increases to $21,900. All three standard deductions were nearly doubled for 2018 and later years by the Tax Cuts and Jobs Act (TCJA).
Each taxpayer must calculate both regular and alternative minimum tax (AMT) amounts. The tax payable is the higher of the two numbers. The 2024 AMT exemptions are $133,300 for married couples and $85,700 for single individuals. The AMT exemption is phased out for married couples with income over $1,218,700 or for single individuals with incomes over $609,350. The 28% AMT tax rate applies to excess AMT income over $232,600.
Cafeteria plans are available for medical reimbursement of qualified expenses. The flexible spending account (FSA) plan limit for 2024 is $3,200.
Charities are permitted to transfer token gift premiums to donors who make gifts above a specific level. In 2024, a donor who makes a gift over $66.00 may receive a premium with the logo or other identification of the nonprofit and a value of $13.20 or less. Donors who make larger gifts may receive a premium up to 2% of the value of the gift, with a limit of $132.
The estate tax basic exclusion amount increases from $12.92 million to $13.61 million. A couple in 2024 may have an estate of $27.22 million with no transfer tax.
Special use agricultural land under Sec. 2032A may qualify for $1.39 million of reduced value. If an estate qualifies for installment payment of the estate tax under Sec. 6166, the 2% interest amount is levied on $1.85 million.
Finally, the annual gift exclusion increases to $18,000. This is a per donor-per donee exclusion. An individual or couple with a large family may make substantial tax-free transfers each year through annual gift exclusions.
Applicable Federal Rate of 5.6% for November -- Rev. Rul. 2023-20; 2023-45 IRB 1 (15 October 2023)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2023. The AFR under Sec. 7520 for the month of November is 5.6%. The rates for October of 5.4% or September of 5.0% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% 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."