How To Protect Yourself From Identity Thieves
Published August 15, 2025
The Internal Revenue Service (IRS) and Security Summit partners published a guide this week on identity theft protection. The IRS and Security Summit recommends multifactor authentication and Identity Protection PINs. The IRS offers taxpayers the ability to create an IRS Online Account and a Tax Pro account for tax professionals.
- Multifactor Authentication — Your primary protection involves multifactor authentication for accessing an account. The Federal Trade Commission (FTC) requires tax professionals to use multifactor authentication to protect their clients. The multifactor authentication may be a code number sent to your cell phone or a similar authentication factor sent to your email address. In addition to multifactor authentication, you should always protect your username and password to all accounts. Multifactor authentication enhances security, as it reduces the ability of identity thieves to use phishing or social engineering to steal passwords or personal information. Many organizations now offer an option for you to select a code sent to your phone or an email address. This places the user in control of multifactor authentication.
- Identity Protection (IP) PIN — An IP PIN is a six-digit number. For most taxpayers, it is voluntary but strongly recommended. You should protect your IP PIN and reveal it only to a trusted tax preparer. The IRS reminds taxpayers that they will not call, email or text a request an IP PIN. If you receive a call, email or text request for your IP PIN, it is likely a fraudulent request. The IP PIN is valid for one calendar year. You may obtain it on the IRS website by visiting the "Get an IP PIN” webpage. If you are a victim of identity theft, the IRS will automatically issue an IP PIN to you each year.
- IRS Online Account — The IRS encourages taxpayers to establish an IRS Online Account. Your online account provides access to your tax information. It also reduces the ability of fraudsters to create a false account and claim your identity. Your account also enables you to share information with your trusted tax professional.
- Tax Professional Account — The IRS allows tax professionals to create an account to manage their client authorizations. With the account and permission from the client, the tax professional may send requests to a taxpayer's IRS Online Account. It also enables the tax preparer to obtain authorized information from clients.
The Security Summit conducts a summer series annually to educate taxpayers and tax professionals. Nationwide Tax Forums for tax professionals will be held in five cities this year. Information on the Tax Forums is available on IRS.gov.
SALT Charitable Deduction "Workaround" Fails
In State of New Jersey et al. v. Scott Bessent et al.; No. 24-1499-cv(L) (2nd Cir. 2025), the Second Circuit affirmed a District Court decision that upheld the interpretation of regulations to Section 170 relating to reductions in a charitable deduction if there is a quid pro quo benefit from a state and local tax (SALT) credit.
In 2019, the Internal Revenue Service (IRS) published a "Final Rule" under Reg. 1.170A-1(h)(3)(i). The Final Rule stated a charitable deduction under Section 170 would be reduced “by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer’s payment or transfer."
New Jersey, New York, Connecticut and the Village of Scarsdale filed suit and claimed that the Final Rule was void because it was "arbitrary and capricious under the Administrative Procedure Act." The District Court in that proceeding determined that the regulation in the Final Rule was valid.
In 2017, Congress limited the tax deduction for state and local taxes (SALT) to $10,000 (the limit for tax years 2025 to 2029 has been changed by OBBBA to $40,000 for most taxpayers). Because certain states and localities had many high-income individuals who were now limited to $10,000 in SALT deduction, they created state charitable funds as a “workaround.” High-income individuals could make a gift to the state charitable fund and receive 85% to 95% tax credits. These high-income individuals would deduct the full amount of their contributions under Section 170.
However, the Final Rule limited the deduction to the excess over the taxpayer’s payment to the state charitable fund. An example is an unmarried taxpayer in New York who owes $200,000 in state tax. Taxpayer might give $200,000 to the New York charitable fund and receive an 85% tax credit of $170,000. Taxpayer’s remaining state tax liability would be $30,000. The individual would then claim a $200,000 charitable deduction on his or her IRS Form 1040. This would save $74,000 in federal tax if they are at the top bracket. In essence, taxpayer has been able to deduct $170,000 rather than the SALT limit of $10,000.
The Final Rule was designed to invalidate the SALT workaround plan. The Final Rule reduced the federal deduction dollar-for-dollar for a credit that is greater than 15%. This 15% de minimis exception allowed many previously existing state credits to be available to taxpayers with no impact on their federal tax return.
The Second Circuit noted there is a history of allowing charitable deductions. Because the states involved might suffer actual loss of revenue, they were granted standing to appeal. The states claimed under Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024) the IRS had exceeded its authority and therefore the Final Rule was not valid.
Charitable deductions are permitted under Section 170(a). The deductions are qualified for a gift to a state or political subdivision if "the contribution or gift is made for exclusively public purposes." The "exclusively public purposes" provision has led to a "quid pro quo" principle. A charitable deduction is not fully deductible if the donor receives substantial benefit in return for the gift. The deduction in that case is for the difference between the payment and the market value of the benefit received.
There are subjective benefits that do not affect a deduction. These may include "a sense of pride at having advanced a worthwhile cause, cachet in his community, or admission at the pearly gates."
However, a "measurable, specific return" for a donor is considered quid pro quo. In Scheidelman v. Comm'r, 682 F.3d 189, 199 (2d Cir. 2012), the taxpayer had donated a façade conservation easement. There was an additional requested cash gift of $9,275 to the nonprofit to accompany the easement donation. The IRS and Tax Court disallowed the deduction. However, the Second Circuit determined the $9,275 was deductible. The question is not whether the donor had pure charitable intent, but rather whether there was a specific, measurable quid pro quo. In the Scheidelman case, the donor’s benefit elsewhere did not affect the charitable deduction.
Under the Final Rule, the intent of the donor is not relevant. The question is whether the donor received a specific, measurable benefit. The Appellants made several arguments that the quid pro quo issue was not relevant. They noted that the Final Rule permitted charitable contribution deductions for gifts to state entities and arbitrarily set a 15% limit. However, the Second Circuit noted that these decisions by Congress were within its statutory authority.
Finally, the Appellants claimed the Final Rule was arbitrary and capricious. However, the Final Rule was within the permissible power of the IRS to interpret Section 170. Therefore, the SALT workarounds were not valid and the charitable deductions for the state tax credit that do not conform to the Final Rule are properly reduced as quid pro quo.
Will Endowment Tax Impact Student Aid?
The Tax Policy Center of the Urban Institute & Brookings Institution published an article this week on the increased endowment tax passed under the One Big Beautiful Bill Act (OBBBA).
Private colleges and universities have historically been exempt under Section 501(c)(3). They are exempt as public charities because they serve a public purpose in educating students. However, colleges and universities may pay unrelated business income tax if they are involved in activities not connected to their exempt purpose.
The definition of "public good” is somewhat flexible. Colleges and universities are generally exempt because they educate students, produce research, promote inquiry and contribute to communities.
Historically, there have been limited taxes on nonprofits. Private foundations have been subject to an excise tax of 1.39% on net investment income (NII). Several senators and members of Congress have proposed application of some of the private foundation rules to colleges and universities. One of the proposals included a mandate of a minimum 5% payout requirement for endowments, similar to the private foundation rules. A justification for the exemption from private foundation rules is that it enables the government to separate itself from the charitable entity.
Charitable gifts to colleges and universities are generally considered to be an appropriate tax expenditure. However, endowments for large colleges and universities have become quite substantial. In 2021, there were over 2,600 four-year colleges and universities. Collectively, they held around $700 billion in endowment assets with 13 of the largest universities accounting for half of the total assets and the top four universities holding one-fourth of the endowment assets.
Colleges and universities maintain endowments to subsidize their charitable purpose. Some of the large endowments are in the tens of billions of dollars. However, the more appropriate number to consider is the endowment per student. Some large universities have a majority of graduate students over undergraduate students. Institutions with large numbers of graduate students, medical schools, extensive research facilities or similar programs are more expensive to run because their cost per student is higher.
Another relevant measure is the share of the budget that comes from endowment earnings. In theory, if the endowment was 20 times larger than the budget and the endowment paid a distribution of 5%, the endowment would cover the entire budget. In practice, most large universities have an endowment that is five to twelve times the annual budget. Many large universities can cover one-third of the annual budget with endowment income.
The 2017 Tax Cuts and Jobs Act created a 1.4% tax on the NII of some private colleges and universities. This raised approximately $380 million in 2023 from 56 universities.
OBBBA includes a tiered excise endowment tax. The rate is 1.4% for colleges and universities with $500,000 to $750,000 of endowment per student, 4% for endowments of $750,000 to $2,000,000 per student and 8% for institutions with endowments over $2,000,000 per student. Colleges are subject to tax if they have 3,000 or more full-time equivalent students.
One factor for the excise tax is the lack of gradation. If the college or university reaches the next threshold, the full tax is applicable. There have been various proposals by senators and representatives during the past decade to pass endowment excise taxes. The various proposed rates have been from 1.4% to as high as 35%.
The effect of the excise tax on some private universities may reach $200,000,000 or more per year. What will the response be for organizations subject to the tax? Will this tax impact the institution and the students? The 2008 stock market crash led to reduced spending on financial aid for students. Institutions may pursue new efforts to raise additional endowment funds to cover the tax. Large universities have been quite successful with major capital campaigns to increase endowments. If history does repeat itself, institutions may have to also increase tuition and fees to raise more funds.
Editor's Note: Large colleges and universities subject to the tax are now addressing several important questions. This is a substantial tax that may impact students at these institutions.
Applicable Federal Rate of 4.8% for August: Rev. Rul. 2025-14; 2025-32 IRB 1 (15 July 2025)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2025. The AFR under Sec. 7520 for the month of August is 4.8%. The rates for July of 5.0% or June 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.”
