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As the tax filing season moves into high gear, the Internal Revenue Service (IRS) reminded taxpayers that a qualified tax preparer can help avoid identity theft, and financial harm. While most tax preparers are qualified and can be trusted, some individuals engage in fraud and identity theft, taking advantage of taxpayers.
Over half of Americans use a professional tax preparer. The IRS provides a Directory of Federal Tax Return Preparers with credentials and select qualifications on IRS.gov. Here are some key tips that will help you select a qualified and reputable tax preparer.
The IRS also cautions taxpayers to be careful of "red flags." If any of these red flags are present, you should consider finding a different tax preparer.
If you are involved with a tax preparer who has one or more of these red flags, you can report the tax preparer to the IRS. Use IRS Form 14157, Complaint: Tax Return Preparer on IRS.gov.
In a legal memorandum, the Internal Revenue Service (IRS) stated a series of private foundation loans to businesses founded and controlled by the foundation’s managers, constituted indirect self-dealing (ILM 202504014).
The donor couple were the managers of Private Foundation (Foundation). They also founded two companies and made a series of loans from Private Foundation to Company 1 and Company 2. Company 1 was subsequently acquired by an unrelated individual. Company 2 was later entirely owned by the two spouses.
Spouse 1 is Foundation Manager 1 and Spouse 2 is Foundation Manager 2. Company 1 received loans over multiple years from Foundation. It paid interest quarterly during most years and had a substantial principal balance in year 15. Company 2 did not make interest payments on the loans in five of the applicable years. A substantial portion of Private Foundation assets were loaned to Company 2.
Because Company 2 received loans from Foundation and did not make interest payments, Company 2 stated that it was going to transfer the notes to public charities. However, while the Foundation Year 13 Form 990-PF claimed the notes were transferred, this transfer was never completed. Foundation conceded that the failure to transfer Company 2 notes constituted an act of self-dealing under Section 4941(d)(1)(B).
The primary issue is whether the unsecured loans by Private Foundation to the companies founded and controlled by Foundation Manager 1 and Foundation Manager 2 constituted an impermissible private benefit or indirect self-dealing. The ILM stated, "When an exempt organization serves as a private source of credit for its founder, that organization serves private rather than public interests." Because Foundation Manager 1 made substantial loans to Company 1 and Company 2, there was a private benefit issue.
The second issue was self-dealing. Section 4941(a)(1) states there is an act of self-dealing if there is a benefit to a Section 4946 disqualified person. Section 4946(a)(1)(C) states that an owner of more than 20% of the voting power of a corporation is a disqualified person, unless under subsection (E), there is another person with the majority of the voting power, and the ownership interest is more than 35%.
While Company 1 was subsequently sold to a third party and Foundation Manager 1 owned less than 35% of the voting stock, Section 4941(d)(1)(B) discusses indirect self-dealing. The loans by Foundation Manager 1 to Company 1 and Company 2 involved the use of private foundation assets for a disqualified person and therefore "constituted indirect acts of self-dealing under Section 4941(d)(1)(E).”
The ILM noted the loans and disqualified person benefit were not subject to the incidental exception to self-dealing. These were substantial loans over multiple years on terms "unduly favorable to the business entities." Therefore, the loans did constitute indirect self-dealing. While the Company 2 loans were claimed to be transferred to a public charity, this did not happen.
Finally, the loans on favorable terms were an investment under Reg. 53.4944-1(a)(2)(iii). These investments were not consistent with the duty to "exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of making the investment." Because the investment failed the "ordinary business care and prudence" standard and the foundation manager had a serious conflict of interest by also owning 100% of Company 2, the loans were Section 4944 jeopardizing investments.
Editor's Note: This private foundation transaction is an example of repeated and substantial misuse of foundation assets. Professional advisors with private foundation clients should exercise care and caution to avoid the misuse of private foundation assets. Private foundations are entirely appropriate for many donors. However, the assets are normally invested in public securities to avoid self-dealing and conflict of interest problems.
George Kalil owned the Kalil Bottling Company (Kalil Bottling). The company had a contract with Dr. Pepper Snapple Group for bottling various products. Keurig Green Mountain acquired Dr. Pepper Snapple Group on July 10, 2018. Kalil passed away in 2019.
The Kalil estate valued his 42.5% interest in Kalil Bottling at $16.1 million. This was based on an appraisal by Lewis Olds of Lewis Olds, PLLC. The appraisal determined that discounts were applicable: 15% lack of control and 35% lack of marketability. The estate asset value of $29.1 million was therefore reduced to $16.1 million.
The IRS audited the estate and claimed that the 42.5% interest was valued at $68.7 million. The IRS issued a deficiency of $21 million and a gross misstatement valuation penalty under Section 6662(h) for $8.42 million.
The estate filed a Tax Court petition on November 22, 2023, and contested the IRS valuation and deficiency. It claimed it had an appropriate appraisal, and the IRS deficiency and gross valuation penalty were not valid.
The IRS responded that the estate had improperly changed the 42.5% interest to a valuation based on a 20% interest, without any support for that change in the percentage of ownership.
On January 24, 2025, the IRS and the estate filed a stipulated decision with Tax Court Chief Judge Kathleen Kerrigan. The estate and IRS determined the tax bill would be reduced from $21 million to $3.85 million. The gross valuation penalty was not assessed.
The IRS has announced the Applicable Federal Rate (AFR) for February of 2025. The AFR under Sec. 7520 for the month of February is 5.4%. The rates for January of 5.2% and December 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”
Home Energy Credits Available in 2025
