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On February 3, 2026, the Internal Revenue Service (IRS) encouraged taxpayers to create an IRS Individual Online Account. The IRS Online Account is a helpful and convenient way to review your tax information. This account enables you to have secure access to your tax information. It also helps protect you against identity theft and fraud.
An Individual Online Account is available for anyone who verifies his or her identity. Your tax professional may also use an IRS Tax Pro Account to assist you in filing returns.
There are multiple benefits to setting up an IRS Individual Online Account.
In a field attorney advice (FAA 20260401f), the Internal Revenue Service (IRS) determined that the taxpayer’s “Charitable LLC” would be disregarded under the economic substance doctrine.
Based on the advice of a tax advisor who claimed they could earn income “in a tax-free environment," the taxpayers formed an LLC with voting and nonvoting interests. The nonvoting interests were then transferred to a public charity that was exempt under Section 501(c)(3). The public charity had been created by the tax advisor and the claimed purpose of the transfer of the nonvoting stock was to create a donor advised fund (DAF).
The taxpayers had full control of the LLC. They opened a brokerage account and had signatory authority that enabled management of assets. One taxpayer took a distribution from the account into a personal retirement account. Two subsequent distributions were later claimed to be loans. However, the loan documents were not created until after the loans had been made.
The IRS reviewed the structure and determined that the public charity created by the advisor was not a qualified exempt entity. The IRS issued Letter 3618 and proposed revocation of the nonprofit’s tax-exempt status. The IRS claimed that more than an insubstantial part of the nonprofit’s activities were not in furtherance of an exempt purpose.
In addition, taxpayers claimed a charitable deduction for the transfer of the nonvoting interests to the public charity. However, they continued to maintain complete control of the LLC and did not transfer any economic benefits to the LLC.
The principal purpose of the LLC appeared to be an effort to shield the taxpayers from tax on substantial short-term capital gains. The taxpayers claimed that most of those gains were allocated to the public charity and therefore not taxable.
The IRS noted that Section 7701(o) codifies the economic substance doctrine. The LLC had no business purpose and appeared to have no economic rights. The voting interests held by taxpayers controlled all of the LLC’s assets. Therefore, there was no demonstration of any charitable purpose or intent.
In addition, the nonprofit did not provide a contemporaneous written acknowledgment for the gift of nonvoting LLC interests as required under Section 170(f)(8)(A). A claimed deduction of over $500,000 requires attachment of a qualified appraisal to the tax return under Section 170(f)(11)(D). The taxpayer, however, did not attach a qualified appraisal to the return. Therefore, the IRS recognized the transaction lacked substantiation and economic substance and the charitable deduction was denied. Under an assignment of income theory, the taxpayers remained liable for the taxes on the LLC's income.
Editor's Note: This field attorney advice is a warning to all nonprofits that they should be cautious about participating in a transaction that could be deemed a tax shelter. This could place the exempt status of the nonprofit at risk.
In Mossy Flats Property LLC v. Commissioner; No. 11538-24; T.C. Memo. 2026-14, the Tax Court determined that a charitable deduction was properly denied, resulting in a deficiency and penalties totaling $25 million.
Mossy Flats (Mossy) is a Missouri LLC that is treated as a partnership. In October 2019, SRC Property Investors, LLC (SRC) contributed to Mossy over 206 acres of real property in Jefferson Davis Parish, Louisiana in exchange for a 1% membership interest. In December 2019, Mossy granted a conservation easement on approximately 201 acres to the Barn Group Land Trust, Inc.
Mossy claimed a charitable contribution deduction of $48,181,000 on Form 1065, U.S. Return of Partnership Income. IRS Revenue Agent Henry J. Macauley (RA Macauley) reviewed the transaction, disallowed the charitable deduction and assessed an underpayment of $17,826,970 and Sections 6662 and 6662A penalties of $7,104,148. The Notice of Final Partnership Adjustment (FPA) was issued in May 2024. Mossy petitioned the court and claimed the procedures for penalty approval had not been followed.
The IRS records showed that RA Macauley had over 100 entries in the Examining Officer’s Activity Record during 2021 through 2023. On April 2, 2023, Supervisory Revenue Agent Andrea Breece (SRA Breece) digitally affixed her signature to the Penalty Lead Sheet. SRA Breece’s title was "Team Manager - Group 1244."
Section 6751(b)(1) requires a penalty to be "personally approved (in writing) by the immediate supervisor of the individual making such determination." The taxpayer pointed out that RA Macauley had four managers during 2021 through 2023. In addition, taxpayer claimed that the declarations of RA Macauley and SRA Breece are self-serving and inadmissible.
The Tax Court noted that a group manager's signature on a penalty approval is sufficient under Section 6751(b)(1). In addition, IRS records are generally admissible as qualified business records. While the court understood that taxpayer claimed the declarations by the IRS revenue agent and supervisor are "selfserving," the general practice is to recognize the business records of the IRS. Because the IRS met the requirements for approval of the penalty by the supervisor, the partial summary judgment in favor of the IRS was approved. The deficiency and penalties of approximately $25 million were valid.
The IRS has announced the Applicable Federal Rate (AFR) for February of 2026. The AFR under Sec. 7520 for the month of February is 4.6%. The rates for January of 4.6% or December of 4.6% 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 2026, 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.”
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