In IR-2024-283, the Internal Revenue Service (IRS) reminded taxpayers to be cautious about fraudsters during the holiday season.

October is National Cybersecurity Awareness Month. During this season, the IRS and Security Summit partners focus on protecting individuals from identity theft and fraud.

The holidays are a season of celebration. Millions of Americans shop online and browse on social media. However, fraudsters delight in knowing many individuals do not understand the best practices for online security. The holiday season can be an open door for swindlers who are "eager to swipe people's personal information” and use it for identity theft.

Security Summit members urge everyone to be vigilant and encourage parents to teach children and teens how to recognize and avoid online scams. Many children and teens have smartphones and spend time every day texting friends and using social media.

The IRS and the Security Summit Members offer specific tips for both individuals and their families. These tips are helpful and essential to protect yourself against fraudsters and scanmmers.

1. Learn to Recognize Scams — Fraudsters frequently claim they are from your bank or the IRS. You should recognize that scammers can trick your caller-ID to show the call is coming from your bank or the IRS. The IRS does not use email or social media to discuss your personal tax issues. If you receive a text or phishing email that looks suspicious, do not click on any attachments. You can forward phishing emails to [email protected].
2. Protect Personal Information (PI) — A fraudster will ask carefully-crafted questions that are designed to encourage you to disclose personal information. He or she may offer information initially to build a relationship with you. However, at some point, the fraudster will ask for your birthdate, address, age or financial information. He or she may also encourage you to log in to your bank account and disclose information from your bank account or your Social Security Number. You should be cautious and not share information. If you are contacted by phone, you should hang up and then call your financial institution or the IRS.
3. Update Passwords — Many individuals have 10 to 80 different online accounts. Nearly all major businesses ask you to create an account to track your online orders. It is important to maintain and update your passwords for these financial and business accounts. A good password contains a combination of capital letters, lower case letters, numbers and special characters. To help you keep track of multiple accounts with different passwords, it is convenient to use a password manager. The password managers on your smartphone, tablet or computer have high levels of encryption to store your passwords. You simply need to remember one master password for your password manager account. You must be very careful not to write down or disclose your master password.
4. Two-Factor Authentication — You should create extra security for all your financial accounts. These financial organizations offer two-factor authentication. You enter a password to log in to the account and then a text is sent to your phone with a six-digit number. After you enter both the password and the number, you will be able to access your account. While no security is perfect, two-factor authentication is a significant increase in security and should be used for your financial accounts.
5. Update Computer Software — Many hacking attempts succeed because the fraudster finds a "hole" in your computer or phone software. It is generally possible with most operating systems to enable automatic updates. Your computer and phone software will usually be updated once or twice a week by the main vendor. These updates are necessary because there are always new potential security risks with the complex software on your computer or your phone.
6. Avoid Public Wi-Fi — Many restaurants and commercial organizations allow access to public Wi-Fi. This public Wi-Fi may be used if you are simply browsing the internet, and your device has updated antivirus software. However, you should never log in to any personal accounts, especially your financial accounts, on public Wi-Fi. With your financial accounts, you should use a virtual private network (VPN) for access or password-protected Wi-Fi in your home or place of business.

Member Benefit Healthcare Organization Not Exempt

In Memorial Hermann Accountable Care Organization v. Commissioner; No. 23-60608 (5th Cir. 2024), the Fifth Circuit determined a health care organization was not a qualified exempt nonprofit.

Memorial Hermann Accountable Care Organization (MHACO) is a healthcare organization in Texas. It is an "accountable care organization" (ACO) that participates in the Medicare Shared Savings Program (MSSP). An ACO coordinates benefits for Medicare recipients. If it produces Medicare cost-savings, it is eligible to share in those savings.

Only 10% of MHACO patients are part of MSSP, 9% are covered by Medicare Advantage Plans and 81% are covered by employer-sponsored health plans. In 2014, there was no revenue from MSSP, but 87% of the revenue in 2015 was from the program. In total, approximately 65% of MHACO’s revenue is generated by MSSP activity.

MHACO claimed exempt status under Section 501(c)(4) as an organization "not organized for profit but operated exclusively for the promotion of social welfare." The IRS determined it was not qualified as an exempt organization because it was “not organized and operated for the purposes of promoting the social welfare and providing a community benefit." The Tax Court concluded the IRS determination was correct because MHACO activities "primarily benefit its commercial payor and healthcare provider participants, rather than the public, and therefore constitute a substantial nonexempt purpose.”

MHACO appealed and claimed the Tax Court applied the wrong legal standard, that the Tax Court review was beyond the appropriate scope and the non-MSSP activities of MHACO were permissible for an exempt nonprofit.

MHACO claimed the correct standard should be a "primary purpose" test, while the IRS in Tax Court used the "substantial nonexempt purpose" test.

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 283 (1945), the Supreme Court determined the operated exclusively language must be used to develop the "substantial nonexempt purpose" test. The Fifth Circuit noted, "It makes little sense to treat the same phrase differently in two neighboring paragraphs of the same statute." Because the substantial nonexempt purpose test is used for Section 501(c)(3) organizations, it similarly must apply to Section 501(c)(4) entities. Therefore, if there is a single substantial non-exempt purpose, it destroys exempt status. The Tax Court was correct to decide the "operated exclusively" standard that included the "substantial nonexempt purpose" test.

Second, the Fifth Circuit determined the Tax Court was empowered to review whether there was a substantial non-exempt purpose. Finally, the Tax Court correctly ruled the MHACO benefit was primarily to members. There were some general helpful effects for the public, but the primary MHACO activities benefited insured members. Therefore, the denial of tax-exempt status was appropriate.

Editor's Note: This is a good discussion of the requirement for nonprofits to operate exclusively for charitable purposes and to not have a substantial nonexempt purpose. The other helpful discussion is to explore the requirement for a benefit to the public. There are many cases in which benefits accrued to a limited group and exempt status were denied because the group was too small and primarily helped only specific members.

Election Creates Tax Bill Uncertainty

As the November election nears, there is great uncertainty about whether Congress will be able to pass a tax bill before the end of the year.

Congress, which has not been in session while members are campaigning for reelection, will return on November 12. However, there are many important bills that must be passed in a very limited time after their return.

The key issue will be to reach a budget resolution. Congress must either pass new budgets or agree on a continuing resolution to move those discussions into the next year. With hurricanes Helene and Milton in the South, there will be many members interested in a disaster relief bill. The National Defense Authorization Act will be a priority. Finally, the farm bill must either be redrafted or extended again.

Since it is expected that there will be a major tax bill in 2025 to address the hundreds of Tax Cuts and Jobs Act (TCJA) provisions that sunsets in 2026, there is less interest in a tax bill this year.

The House recently passed a disaster bill to assist individuals harmed by hurricanes Helene and Milton as well as a bill for a tax agreement with Taiwan. The Senate has not yet acted on either bill, each of which was jointly created by Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Chair Jason Smith (R-MO). That bipartisan bill passed the House but has been deadlocked in the Senate.

Given this uncertainty, there is less probability of creating an end-of-year tax package. Ways and Means Committee Member Blake Moore (R-UT) stated, "You are not going to see a big tax end-of-year package, given what we are dealing with for the expiration of TCJA coming up."

With the expiration of TCJA and the uncertainty of election results, Sen. Mike Rounds (R-SD) stated, "I think tax extenders are for discussion next year, because we know how critical they are."

Editor's Note: The election creates significant uncertainty. Both parties are reluctant to act until they know who will be in control of the Senate and the House in 2025. It is quite common for there to be several House elections that are very close and require a recount. Because the control of the House may change depending upon the outcome of those close elections, it could be December before the parties know who is going to control the House in 2025. Given this uncertainty, it is unlikely there will be major tax legislation this year.

Applicable Federal Rate of 4.4% for November: Rev. Rul. 2024-24; 2024-45 IRB 1 (15 October 2024)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2024. The AFR under Sec. 7520 for the month of November is 4.4%. The rates for October of 4.4% or September of 4.8% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% 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.”