In IR-2020-115, the Internal Revenue Service cautioned taxpayers to be on guard against tax fraud and other financial schemes. The COVID-19 crisis has opened a new door for fraudsters and scammers, who are creating strategies to victimize taxpayers.
IRS Commissioner Chuck Rettig stated, "Criminals seize every opportunity to exploit bad situations, and this pandemic is no exception. The IRS is fully focused on protecting Americans while delivering Economic Impact Payments in record time. The pursuit of those who participate in COVID–19 related scams, intentionally abusing the programs intended to help millions of Americans during these uncertain times, will long remain a significant priority of both the IRS and IRS-CI."
There are a variety of new scams and schemes, such as:
- Fake At-Home Test Kits – A scammer may offer fraudulent kits, vaccines, pills or other treatments for COVID-19. Other scams promise medical supplies through fake shops, websites and social media accounts. After receiving the funds, no supplies are delivered.
- Fake Organizations – Some scammers create fake charities that claim to be helping COVID-19 victims. Others claim to offer the chance to invest in a company that is working on a vaccine, developing new drugs or offering other services for COVID-19 victims to generate donations.
- Phishing Schemes – These phishing schemes may involve emails, letters, texts or links to bogus websites. If you respond to an email or text and click on the link, the scammers will attempt to obtain your passwords and personal information to steal from your financial accounts.
Don Fort, Chief of the IRS Criminal Investigation Division, stated, "Criminals try to take advantage of our most vulnerable times and our most vulnerable populations. But because we have seen many of these criminals and schemes before, we know how to find them and we know how to expose them."
If you believe that you are a victim of a scam, you can report it to the National Center for Disaster Fraud Hotline at 1-866-720-5721. You also could submit a web complaint form or report to the Treasury Inspector General for Tax Administration at Tips.TIGTA.gov
Employee Leave Gifts Permitted for COVID–19 Nonprofits
In Notice 2020–46; 2020–27 IRB 1, the IRS published guidance for business entities that provide leave–based donation programs.
A number of business organizations have responded to the President's declaration of America as a national disaster zone under the Coronavirus Disease 2019 (COVID–19) Act. In response to the designation of the entire nation as a federal disaster zone, many companies created a leave–based donation program.
If an employer has created this program, an employee can forgo vacation, sick or personal leave time. The cash value of the vacation, sick or personal leave time may then be transferred by the employer to a Section 170(c) organization for relief of Coronavirus victims.
The favorable provision of the Notice is that the payments by the employer are deductible, but there is no taxable income to the employee. The requirements for employers are that payments are "(1) made to the Section 170(c) organizations for the relief of victims of the COVID-19 pandemic in the affected geographic areas; and (2) paid to the section 170(c) organizations before January 1, 2021." The cash value of the payments are not included in the Form W–2 of the employees.
David L. Thompson of the National Council of Nonprofits was pleased with the IRS Notice. He stated, "Employees who are working want to give back to the nonprofits serving their communities during this crisis. The only thing that would discourage their employers from turning accrued paid leave into cash donated to charitable organizations might have been the IRS. Today's Notice puts the IRS clearly on the side of compassion, good sense, and community–based solutions."
Suzanne Friday is a representative of the Council on Foundations. She suggested there could be more flexibility to the leave-donation rule. Friday noted, "This is helpful, but we would prefer to see a more expansive rule that encourages giving beyond January 1, 2021, and to 170(c) organizations that are not only helping victims of the pandemic but providing other essential services as well. The country is experiencing multiple crises right now, and any new tax benefits for charitable giving should be applied equally across the board."
PPP Loan Forgiveness
On June 10, 2020, Treasury Secretary Stephen Mnuchin testified before the Senate Small Business and Entrepreneurship Committee. Responding to a question about forgiveness of PPP Loans, Mnuchin stated, "I think the majority of this money is going to be forgiven in the next few months, and that is our intent."
Senator John Kennedy (R–LA) urged Mnuchin to be generous in the forgiveness effort. He stated that the Department of Treasury should "articulate to the business people who are out there, the federal government is not looking to . . . catch the banks or businesses that took this money in a minor mistake, so the [forgivable PPP loans] can be turned into loans that are not forgiven."
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Small Business Administration approved 4.5 million PPP Loans for small business entities. The PPP Loan total amount is in excess of $500 billion. The average loan is now $112,000.
Sen. Marco Rubio (R-FL) chairs the Small Business and Entrepreneurship Committee. He noted that the typical borrower for the PPP Loan employs about 10 staff. With $500 billion in PPP Loans, Rubio stated, "We'll know when the forgiveness [requests start] to come in, but this is equal to 50 million jobs."
The Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was signed by the President on June 5, 2020. PPPFA significantly enhances the ability of businesses to obtain forgiveness for PPP Loans. After PPPFA was signed, Mnuchin stated, "This bill will provide businesses with more time and flexibility to keep their employees on the payroll and insure their continued operations. As we safely reopen our country, we look forward to getting the American people back to work as quickly as possible."
The Flexibility Act expands multiple provisions for PPP Loans. The loan forgiveness period is extended from 8 weeks to 24 weeks. The requirement that 75% must be allocated to payroll is reduced to 60%. There is a safe harbor if the business was unable to rehire employees prior to June 30, 2020. Those employees may now be rehired by December 31, 2020. If part of the loan is not forgiven, the maturity is extended from two years to five years. The new rules continue to state that June 30, 2020 is the last date for approval of a PPP Loan. The SBA still has approximately $130 billion available for loans.
Members of Congress also have advocated quick forgiveness. Sen. Jean Shaheen (D–NH), noted there were 22,000 small–business loans in New Hampshire. She stated that many of these businesses are "running out of money and preparing to apply for forgiveness." Shaheen explains that if they do not receive forgiveness soon, the tourist and hospitality businesses are in serious trouble.
Senator John Cornyn (R-TX) continues to advocate passing a bill that will make the PPP Loans deductible. In Notice 2020–32, 2020–21 IRB 837, Treasury Secretary Steven Mnuchin and the IRS stated that expenses covered by PPP Loans would not be deductible.
Senator Cornyn hopes to pass a bill that makes these expenses deductible even if covered by PPP Loans. Rebeca Romero Rainey is President and CEO of the Independent Community Bankers of America (ICBA). She sent a letter to Sec. Mnuchin and asked for specific provisions to be included in the new forgiveness bill.
Rainey stated, "Congress intended the PPP to be essentially a grant program to help small businesses retain workers. For all loans with an original balance of $1 million or less, ICBA recommends a presumption of compliance based on the borrower's certification that the funds were used in accordance with the terms of the program."
She also encouraged Congress to pass the tax forgiveness provision. Rainey continued, "It was the intention of Congress to allow PPP borrowers who obtain forgiveness to continue to deduct payroll and other ordinary business expenses. Denying this deduction effectively reduces the value of forgiven amounts and undermines the true potential of the Program."
Applicable Federal Rate of 0.6% for June -- Rev. Rul. 2020-12; 2020-24 IRB 1 (15 May 2020)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2020. The AFR under Section 7520 for the month of June is 0.6%. The rates for May of 0.8% or April of 1.2% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.