During tax filing season, fraudsters continue to deceive victims into believing they are Internal Revenue Service (IRS) agents. The IRS is concerned because phone, text, email, and in-person scams are taking place. The IRS emphasizes that it typically contacts taxpayers through a letter or written notice and generally does not initiate contact through phone calls, text messages or emails.

With a growing number of fraudsters and scammers looking for victims, it is important for individuals to be able to distinguish legitimate IRS staff from imposters. All taxpayers should understand basic ways to protect themselves from fraudulent text messages, emails, phone contacts or in-person visits.

1. Text Messages — The IRS does not send text messages to individuals with shortened links. Scammers will frequently send text messages that include a bogus link. If you receive an unexpected text, you should NOT click on links or open attachments.
2. Send a Screenshot — If you do receive a suspicious text message, you should send a screenshot of it as an attachment to [email protected]. For individuals with an iPhone, you can take a screenshot by clicking both the Volume Up and the Power button of your phone at the same time. The screenshot will appear as a thumbnail in the lower left corner of the screen. Click on the screenshot to edit, select Done at the top left and save it to your photos. You may then select the photo of the screenshot, click the lower left button to allow you to choose your email service and send an email to [email protected] with the screenshot.
3. Email Scams — The IRS does not ask for personal or financial information with an initial contact by email. The standard IRS contact will be through several letters by regular mail. Any suspicious emails should also be forwarded to [email protected]. For additional instructions, visit the "Report phishing and online scams" page on IRS.gov.
4. Individuals Who Owe Tax — If you owe tax to the IRS, you can expect to receive several letters prior to a phone call. The IRS may follow up the letters with a phone call if you have an overdue tax bill, a delinquent tax return or have failed to make an unemployment tax deposit. The IRS emphasizes it will not demand immediate payment by specific payment methods like debit cards or gift cards or ask for credit or debit card numbers over the phone. They will also not threaten you with arrest by the local police or demand tax payments without giving you an opportunity to appeal the claim. These strategies all indicate you are talking with a scammer.
5. IRS Agent In-Person Visits — Generally, IRS officers only make visits after you have received several notices by mail. The IRS Revenue Agent may make a visit for the purpose of education, investigation and appropriate enforcement steps. IRS auditors may also mail an initial appointment letter and generally will call and confirm the date prior to a scheduled audit appointment. If you have an in-person visit with an IRS representative, you should always ask for his or her credentials and HSPD-12 card, a government identification card that will display the agent’s photograph.
6. Resolving Tax Issues — On IRS.gov, there are several helpful sections that may assist taxpayers in creating payment plans. You can pay taxes through an Online Account with IRS Direct Pay or by using your debit or credit card. There are individuals who may qualify for a payment plan or an Offer in Compromise. The IRS again emphasizes it will not demand immediate payment, will not ask for credit or debit card numbers, will not threaten to have you arrested by local police and will always offer an opportunity to appeal. You may also be eligible to have an IRS Appeals Officer review your case prior to any further action.

Editor's Note: The fraudsters and scammers continue to become more sophisticated. Many of them build a relationship with the victim through multiple emails or phone calls prior to committing fraud. Individuals should be careful and request further verification if they have multiple contacts with someone who claims to be from the IRS.

Corporate Transparency Act Uncertainty

On December 5, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction that stopped the implementation of the Corporate Transparency Act (CTA) on January 1, 2025. The federal government appealed the injunction to the Fifth Circuit Court of Appeals. The appellate court declined to issue a stay, and the federal government appealed to the U.S. Supreme Court. The appeal was submitted to Justice Samuel Alito. On January 23, 2025, the Supreme Court granted the application for the stay.

There is also a second case arising out of Texas that is contesting the CTA. On January 7, 2025, in Samantha Smith et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336 (E.D. Tex.), the U.S. District Court for the Eastern District of Texas, Tyler Division, issued an order enjoining the government from enforcing the CTA. This blocked Financial Crimes Enforcement Network (FinCEN) regulations implementing CTA reporting.

On February 5, 2025, the Department of Justice, on behalf of the Department of the Treasury, filed a notice of appeal and requested a stay of the Smith injunction. If the Fifth Circuit issues a stay, FinCEN’s reporting rule will be in effect. If the stay is granted, “FinCEN intends to extend the reporting deadline for all reporting companies 30 days from the date the stay is granted.” FinCEN may also further delay reporting requirements for lower-risk entities such as U.S. small businesses.

Editor's Note: In the meantime, FinCEN is not enforcing the CTA requirements. Reporting companies are not currently required to file beneficial ownership information with FinCEN. However, reporting companies may voluntarily submit beneficial ownership information reports using FinCEN’s E-Filing system. For more information, go to fincen.gov/boi.

300% Annual Appreciation Rate Rejected

In Green Valley Investors LLC et al. v. Commissioner; No. 17379-19; No. 17380-19; No. 17381-19; No. 17382-19; T.C. Memo. 2025-15, the Tax Court determined that the Internal Revenue Service (IRS) was in compliance with Section 6751(b) with regard to a partnership that claimed a 300% annual appreciation rate on their appraisal and was subject to penalties for gross valuation misstatement and substantial understatement.

The Green Valley case was subject to a stipulation by four partnerships (Big Hill Partners, LLC, Tick Creek Holdings, LLC, Vista Hill Investments, LLC, and Green Valley Investors, LLC) that Green Valley would be a test case to determine whether or not the gross valuation misstatement and substantial understatement of income tax penalties would be applicable.

Tax matters partner Bobby Branch had a ninth-grade education but was a developer of open pit mines for metamorphic gneiss rock used as construction aggregate. In 2011, Branch and his spouse Elizabeth paid approximately $2.2 million to acquire 607 acres of land in Chatham County, North Carolina.

The Branches obtained evaluations that indicated there was marketable crushed stone on the property. An appraisal by Martin H. Van Sant and Thomas F. Wingard indicated the land had a value of $22 million.

Branch created the four partnerships and conveyed approximately 141 acres to Green Valley. Green Valley sold syndicated partnerships to 30 investors and stated there could be a $22 million conservation easement charitable deduction.

Under the proposal, an investor with an adjusted gross income of $1.5 million who made a $100,000 investment would qualify for a potential reduction in federal and state taxes from $652,500 to $455,560. This equated to a net investment profit through tax savings of $196,940.

Green Valley obtained analyses from several geologists that projected the potential value of the aggregate and claimed a $22.6 million conservation easement charitable deduction. The property was transferred to Triangle Land Conservancy (TLC) on December 30, 2014. The Green Valley IRS Form 1065 reported the deduction and included IRS Form 8283, Noncash Charitable Contributions based on the Van Sant-Wingard appraisal. The other three partnerships also claimed approximately $22.6 million in charitable conservation easement deductions. The total reported deduction was approximately $90 million.

The IRS audited the four partnerships. Revenue Agent Joy Bradley obtained supervisory approval from Charles Phillip for the denial of the deductions and assessment of penalties. The IRS documents were subsequently updated and signed again by Mr. Phillip. Penalties under Section 6662(c), (d), (e) and (h) were assessed against all four partnerships.

An initial ruling from the Tax Court determined the deductions were not qualified under Reg.1.170A-14(g)(6) because the deed did not comply with the required extinguishment provisions. The issue in this case was whether the penalties would be applicable. At trial, the Tax Court judge heard testimony from a dozen expert valuation witnesses for both the taxpayer and the IRS.

The Tax Court noted vacant land may be valued through a comparable sale or a discounted cash flow method. Taxpayer appraiser Meister determined the property could sell 500,000 tons of aggregate per year. IRS appraiser Martin Messmer indicated there was abundant competition and a significant cost barrier to market entry.

The Tax Court reviewed detailed testimony from the expert witnesses and determined comparable sales were the “most reliable method of valuation." While the income approach can be used in some cases, the IRS appraiser stated that taxpayer appraiser Meister made mathematical errors. With the math corrections, the Meister discounted cash flow present value was reduced to near zero.

Therefore, the Tax Court stated, "we ultimately determine the record is insufficient to conclude that the proposed development of this property as a quarry mine is both financially feasible and maximally productive."

While the Tax Court rejected the IRS valuation of $4,800 per acre and determined the appropriate valuation would be $11,016 per acre, this still was significantly less than the claimed $160,000 per acre valuation. Therefore, the updated deduction value was approximately $1.4 million while the claimed value was $22.6 million.

The taxpayer also claimed that the IRS had not complied with Section 6751(b) that requires appropriate supervisory approval of the penalties. While the Fourth Circuit Court of Appeals had not specifically outlined the timing and requirements for penalties, the Tax Court stated the IRS had obtained timely supervisor approval for the penalties. Because there was a gross valuation misstatement, there was no reasonable cause defense to that 40% penalty. Substantial misstatements occur when the “value of the property claimed on a return is 150% or more of the correct amount.”

The IRS also assessed a 20% accuracy-related penalty under Section 6662(c). This applies to the “lower tranche” of the underpayment. Because the taxpayer did not demonstrate that his ninth-grade education was a material factor in the valuation and Tax Court found the 300% annual appreciation from $2,500 per acre to $160,000 per acre in three years was “difficult to accept” the accuracy-related penalty was valid.

Applicable Federal Rate of 5.4% for February: Rev. Rul. 2025-5; 2025-7 IRB 1 (16 January 2024)

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.”