As part of its ongoing awareness campaign, the Internal Revenue Service (IRS) Security Summit warns taxpayers and professional advisors to be aware of the latest email phishing scams. Because both tax advisors and individuals are active users of email, there is frequent opportunity for identity thieves to trick individuals into releasing confidential data.

The IRS previously noted that identity thieves have been relentless in exploiting and tricking taxpayers and tax professionals to disclose sensitive information. The IRS further noted that fighting back against phishing scams requires constant vigilance and urges tax professionals and taxpayers to take basic steps to protect their sensitive information.

There are several strategies that “bad actors”, or identity thieves, use to collect passwords, bank account numbers, credit card numbers or Social Security numbers.

1. Trusted Source— A bad actor will pose as a familiar person or an individual from a reputable organization. They will then claim that he or she is a long-lost friend, a colleague at a former employer, a bank, a credit card company or even the IRS.
2. Urgent Story— Another strategy is to write a story that pulls on your heartstrings and creates urgency. Some bad actors have written stories about friends or family members who have recently suffered from a disaster or are hospitalized and require immediate assistance. The story will also include a link to a document needed to provide help to that friend or family member.
3. Spear Phishing— A particularly successful strategy by the bad actor is to pose as a potential new client to a tax professional. To create a false sense of security, the individual exchanges four or five emails with the tax professional. After four or five emails, the guard of the tax professional is down, and the bad actor sends an email attachment that triggers the download of malware.

In these cases, the bad actor will attempt to have malware downloaded on to your computer through the click of links or opening of attachments. Then, the malware downloaded onto the computer of the individual or tax professional is designed to give the bad actor access to passwords. If the tax professional has client accounts with pending tax returns, the bad actor completes those returns and files them. However, the bank account information for the refund is changed to an account controlled by the bad actor.

Tax professionals have also been subject to ransomware attacks. With malware on the computer or network of the tax professional, the bad actor is able to encrypt all the business files. This is particularly effective because the tax returns will have due dates that need to be met. The bad actor then demands a cryptocurrency payment from the professional. If the ransom is paid, the bad actor may send a key to decrypt the files and allow the tax professional to meet the required tax deadlines.

The IRS urges all individuals with financial accounts to use two-factor authentication. Both individuals and tax professionals must have anti-virus software that is updated on a daily basis. Tax professionals should also encrypt the data and create daily backup files in order to easily recover files if their hard drives are encrypted.

Ordinary Income Limits Deduction to Basis

In Glade Creek Partners, LLC et al. v. Commissioner; No. 23-14039, the Eleventh Circuit affirmed a decision of the Tax Court finding a conservation easement by Glade Creek Partners, LLC (Glade) was determined to be inventory under Section 724(b).

The easement property was initially acquired in 2006 by International Land Consultants, Inc. Due to the impact of the 2008 economic recession, the property owners were not able to develop the property. The owners then organized Hawks Bluff Investment Group, Inc. (Hawks Bluff) to seek a financial solution. Hawks Bluff decided a conservation easement would be beneficial and transferred 1,313 acres of land to Glade. Glade subsequently donated a conservation easement to Atlantic Coast Conservancy.

Hawks Bluff indicated on its Subchapter S tax return that it was a real-estate dealer. The easement property was reported as "inventory." When the property was transferred to Glade, Hawks Bluff reported a decrease in inventory. However, Glade claimed a charitable deduction for the fair market value.

The Tax Court initially disallowed the deduction because the conservation easement purposes were not protected in perpetuity because the future proceeds formula was not compliant under Reg. 1.170A-14(g)(6)(ii). However, in 2021, this regulation was deemed invalid in a different matter, and the case was remanded to the Tax Court. The IRS conceded that the contribution may be a qualified easement deduction, but claimed the 1,313 acres were characterized as inventory rather than a capital asset.

Under Section 170(e), the charitable deduction for a gift of ordinary income property is reduced to basis. The deduction must be reduced by "the amount of gain which would not have been long-term capital gain…if the property contributed had been sold by the taxpayer at its fair market value." Because inventory is an ordinary income asset, the charitable deduction was substantially reduced.

Section 724 states that an inventory asset contributed by a partner to the partnership will retain its ordinary income status for five years after the date of contribution. Because the property was contributed to Glade, a partnership, by partner Hawks Bluff and was characterized as inventory, it is subject to the ordinary income rules under Sections 724(b) and 170(e).

Glade claimed that Sections 170(e) and 724(b) do not apply to the deduction and that the easement property was a capital asset. Glade did not raise the claim that Section 170(e) and Section 724(b) did not apply to the property in the Tax Court. The Eleventh Circuit determined it would not be a miscarriage of justice to deny the right of Glade to raise the issue on appeal. Glade "has known since the beginning of this litigation that Section 170(e) and Section 724(b) were implicated." Therefore, Glade forfeited the right to raise the issue on appeal.

Secondly, Glade claimed the Tax Court did not apply correctly a seven-factor test to determine whether property was a capital asset or an ordinary income item. The Eleventh Circuit noted the seven factors are not exclusive or independent, but "form part of a situation which in the individual case must be considered in its entirety." While the Tax Court evaluation of the multiple factors may not have been comprehensive, Hawks Bluff ‘s reporting of the asset as ordinary on its tax return is probative. Therefore, the Tax Court determination was affirmed.

Penalties Assessed for Conservation Easement

In Ivey Branch Holdings LLC et al. v. Commissioner; No. 19189-19; T.C. Memo. 2025-63, a charitable deduction of $24.4 million was denied. The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) that disallowed the deduction and assessed penalties under Sections 6662 and 6662A. The partnership contested the penalties on the ground that the revenue agent was not in compliance with the Section 6751(b) requirement that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination."

Revenue Agent (RA) Maxim Naporko of the Large Business & International Division, under the supervision of Supervisory RA Karen Carreiro, recommended penalties against Ivey Branch Holdings, LLC (Ivey Branch) in May of 2019. This determination was set forth on IRS Form 886-A, Explanation of Items. On May 13, 2019, the penalty lead sheet was also sent to Tax Equity and Fiscal Responsibility Act (TEFRA) Coordinator Susan Brown for her review. She emailed RA Naporko and indicated that she approved the documents. There also was a discussion with Senior Counsel James Fee who approved the FPAA. On August 9, 2019, RA Naporko again recommended Section 6662 and 6662A penalties. His team manager and supervisor Karen Carreiro digitally signed the penalty lead sheet on August 12, 2019. On August 20, 2019, the IRS issued an FPAA that disallowed the approximate $24.4 million charitable deduction for the conservation easement and assessed penalties.

Section 6751(b)’s basic requirement is that a penalty must be initially determined by the revenue agent and then approved in writing by his or her immediate supervisor. The Eleventh Circuit has determined that the assessment occurs when the IRS formally records the tax debt. It is required that the supervisor approve the initial determination of the penalty prior to the assessment.

Here, the penalty was determined on August 9, and Supervisor Carreiro digitally signed it on August 12. The FPAA was issued on August 20, 2019. Under the requirements of Section 6751(b)(1), Ms. Carreiro timely approved the penalties in writing.

The taxpayer claims that the contact by RA Naporko with TEFRA Supervisor Brown was a technical error because she made the "initial determination." In addition, it was claimed that the involvement of Senior Counsel James Fee also constituted an initial determination.

However, when Ms. Brown and Mr. Fee were involved, RA Naporko had already written recommended penalties on the lead sheet. Therefore, neither Ms. Brown nor Mr. Fee made the initial determination of penalties. The written record indicates that RA Naporko made the initial determination and Supervisor Carreiro was the "immediate supervisor" for the Ivey Branch audit. Therefore, when she affixed her electronic signature on August 12, 2019, there was compliance with the statute.

While the taxpayer claimed that Carreiro was not the "immediate supervisor," the involvement of Ms. Brown or Mr. Fee did not change the fact that she was RA Naporko’s supervisor. Therefore, the IRS did comply with Section 6751(b)(1), and the penalty is applicable.

Applicable Federal Rate of 5.0% for June: Rev. Rul. 2025-12; 2025-23 IRB 1 (15 May 2025)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2025. The AFR under Sec. 7520 for the month of June is 5.0%. The rates for May of 5.0% or April 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.”