Thursday December 1, 2022
Federal Student Loan Relief Plan
This week, the President announced a plan to reduce the student loan balances of approximately 43 million individuals. White House discussions have been ongoing for several months and under the American Rescue Plan Act of 2021, this cancelled debt will not be taxable for federal purposes.
President Biden stated, "Both of these targeted actions are for families that need it the most: working and middle-class of people hit especially hard during the pandemic."
Debt forgiveness will be available to individuals with incomes under $125,000 and married couples filing jointly with incomes up to $250,000 per year. Federal student loan debt of $10,000 may be forgiven for qualified individuals. Those who received Pell Grants as an undergraduate may have up to $20,000 of debt forgiveness.
This debt relief will enable approximately 20 million individuals to completely eliminate their student loan debt. An estimated 43 million individuals will benefit from the program.
There were diverse opinions on whether this was the best use of federal funds. Senate Minority Leader Mitch McConnell (R-KY) stated, "The median American with student loans already has a significantly higher income than the median American overall. Experts who studied similar past proposals found that the overwhelming benefit of student loan socialism flows to higher-income Americans."
Professor Jason Furman of Harvard University was Chair of the Council of Economic Advisers under President Obama. He expressed concern that this new program could increase inflation, stating, "Pouring roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Most importantly, everyone else will pay for this either in the form of higher inflation or in higher taxes or lower benefits in the future."
The Penn Wharton Budget Model estimated costs for the programs at approximately $330 billion over 10 years, for borrowers receiving forgiveness of $10,000. About 70% of the debt forgiveness will benefit households in the top half of the income spectrum.
However, the Center for American Progress published a release and noted, "Targeted student debt cancellation of at least $10,000 will help millions of Americans better manage their budgets, build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility."
An estimated eight million student borrowers may receive automatic debt forgiveness. The Education Department estimates that a new application for the remaining tens of millions of student loan borrowers may be available by December 31. These remaining individuals must apply for the debt forgiveness.
There are other benefits to student borrowers in the Act. Debt repayment is paused until December 31, 2022. Student loan borrowers will need to start repayments in 2023. There is a new proposed rule to require the maximum debt payment amount to be reduced from 10% of income to 5% of income. Individuals earning below 225% of the federal poverty level will not be required to make payments. For some individuals, the government will also forgive the unpaid monthly interest.
Editor's Note: Your editor does not take a specific position on this debt relief program. This information and the range of viewpoints on the topic is offered as a service to our readers.
IRS announces COVID-19 Penalty Relief
In Notice 2022-36; 2022-36 IRB 1, the IRS announced a program of penalty relief for tax years 2019 and 2020. The penalty relief will generally apply for tax returns filed on or before September 30, 2022.
The penalty relief will apply under Sec. 6651(a)(1) for failure to file, Sec. 6038 for failure to furnish information on a controlled foreign corporation, Sec. 6038A(d) for failure to furnish information on a 25% foreign–owned entity, Sec. 6038C(c) for failure to furnish information on a foreign entity, Sec. 6039F(c) for failure to furnish information on gifts or bequests from foreign persons, Sec. 6677 for failure to file a return for a foreign trust, Sec. 6698(a)(1) for failure of a partnership to file, Sec. 6699(a)(1) for failure of a Subchapter S corporation to file and Sec. 6721(a)(2)(A) for failure to file an information return before a required filing date. The Notice recognizes that there may be "reasonable cause" exceptions to penalties.
This penalty relief is consistent with the March 13, 2020 declaration by the President designating the coronavirus as a national emergency. The Covid-19 pandemic has "had an unprecedented effect on the IRS's personnel and operations." As a result of the pandemic, the IRS has millions of backlogged tax returns and other tax forms.
Therefore, the Notice states, "The IRS will not impose the penalties listed in section 3.A.(1) through (4) of this Notice with respect to the specified tax returns for taxable years 2019 and 2020 that are filed on or before September 30, 2022."
The majority of the penalty relief provisions will apply to IRS Forms 1040, 1041, 1120, 1066 and 990-PF.
There are exceptions for the penalty relief. If a penalty is due to Sec. 6651(F) fraud or the taxpayer has completed an offer in compromise, the penalty relief will not apply.
The estimated penalty relief value will be approximately $1.2 billion. A substantial portion of this amount will automatically be issued as refunds to taxpayers.
With the challenges in meeting with clients and filing tax returns during the COVID-19 pandemic, many tax professionals had been hoping for relief. The relief has been approved by IRS Commissioner Charles Rettig who stated, "Penalty relief is a complex issue for the IRS to administer."
The tax preparer community welcomed the relief. Pandemic lockdowns were very stressful for the entire community and caused many of the penalties for delayed filings.
Representative Jan Lewis of the American Institute of CPAs was appreciative and stated, "I think most tax practitioners are going to say thank you. We are very grateful for this. This is what we have wanted."
CPA Pleads Guilty to Fraudulent Charitable Conservation Easement Deduction
On August 24, 2022, the Department of Justice (DOJ) announced that a Florida CPA pleaded guilty to one count for filing a false tax return for a donation of a conservation easement.
Randall Lenz was a Florida CPA and attorney. From 2015 through 2019, he sold interests in conservation easement transactions that were deemed abusive by the Federal Government. He received approximately $700,000 in commissions for the sale of the abusive tax shelters.
The tax shelters were promoted by Jack Fisher, who has been implicated by the DOJ in alleged abusive syndicated conservation easement transactions. In December 2021, brothers Stein and Corey Agee were also involved in similar conservation easement transactions and pleaded guilty.
The plea agreement by Lenz acknowledged that the claims by Fisher "seemed too good to be true." Fisher observed that the easements still had economic value. The agreement noted, "Nevertheless, despite multiple requests for information from Fisher about the progress on the development of residual properties and the prospective dates on which a return from those properties would be realized, Lenz received no substantive answers. Instead, Fisher only referenced the IRS statute of limitations."
In 2018, Lenz purchased a $25,000 unit and claimed $111,892 in charitable deductions. In 2019, he again purchased one unit and claimed a charitable deduction of $90,650.
He plead guilty to one count of filing a false tax return under Section 7206(1) for tax year 2019. Lenz also agreed to provide "truthful and complete information and testimony" at judicial proceedings involving other individuals.
Editor's Note: The IRS has been pursuing approximately 80 cases in which it claims syndicated conservation easement transactions reported excessive charitable deductions. The IRS and DOJ are now embarking on a new phase of this effort that involves criminal prosecutions.
Applicable Federal Rate of 3.6% for September -- Rev. Rul. 2022-17; 2022-36 IRB 1 (15 August 2022)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2022. The AFR under Section 7520 for the month of September is 3.6%. The rates for August of 3.8% or July of 3.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.
Published August 26, 2022
Benefits for 19 Million Taxpayers on Extension
Back-To-School Teacher Deduction
Helping Nonprofits Respond to Natural Disasters
Avoiding Scammers Who Claim They Are IRS Agents
Inflation Protection for Tax Benefits