TAX CONTROVERSY 360

Weekly IRS Roundup June 20 – June 24, 2022

By McDermott Will & Emery on Jun 29, 2022
Posted In IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 20, 2022 – June 24, 2022. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

June 20, 2022: The IRS announced that it’s on track to complete the processing of originally filed Form 1040s that were received in 2021 this week and that business paper returns also filed in 2021 will follow shortly thereafter. According to the announcement:

“IRS employees have been working tirelessly to process these tax returns as quickly as possible and help people who are waiting on refunds or resolution of an account issue,” said IRS Commissioner Chuck Rettig. “Completing the individual returns filed last year with no errors is a major milestone, but there is still work to do. We remain focused on doing everything possible to expedite processing of these tax returns, and we continue to add more people to this effort as our hiring efforts continue this summer.”

Rettig emphasized that adding sustained funding increases for the IRS will help the agency add more employees to process tax returns and answer phones as well as help improve technology and ensure fair enforcement of the tax laws.

“Taxpayers and tax professionals deserve the absolute highest-quality service from the nation’s tax system,” Rettig said. “Long-term and consistent funding for the agency is critical to ensuring the IRS is prepared for future tax seasons. It’s also critical for the IRS to be ready to answer the call for the nation during the next crisis, just as the agency did delivering three rounds of historic stimulus payments and advance Child Tax Credit payments during the pandemic.”

June 22, 2022: National Taxpayer Advocate Erin Collins released her statutorily mandated midyear report to US Congress. A highlight of the report is that concerns over continuing delays in the processing of paper-filed tax returns and the impact on taxpayer refunds are brought to light. The IRS issued a subsequent news release discussing the report.

June 23, 2022: The IRS advised taxpayers that more tax forms can now be amended electronically (with more enhancements planned for the future).

June 24, 2022: The IRS announced that it has issued frequently asked questions (FAQs) regarding the reinstated Superfund chemical excise tax. The FAQs detail what the tax is, how it is computed and who may be liable for the tax.

June 24, 2022: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Weekly IRS Roundup May 31 – June 3, 2022

By McDermott Will & Emery on Jun 7, 2022
Posted In IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 31, 2022 – June 3, 2022. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 31, 2022: The IRS issued a press release, reminding taxpayers living and working outside the United States that their 2021 federal income tax return is due on June 15, 2022. The deadline applies to both US citizens and resident aliens abroad, including those with dual citizenship. The press release also contains other information to assist said taxpayers with their filings.

June 1, 2022: The IRS issued the first part of its “Dirty Dozen” tax scams for 2022, focusing on the following items:

Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain. In this transaction, appreciated property is transferred to a CRAT. Taxpayers improperly claim the transfer of the appreciated assets to the CRAT, which in and of itself gives those assets a step-up in basis to fair market value as if they had been sold to the trust. The CRAT then sells the property but does not recognize gain because of the claimed step-up in basis. Next, the CRAT uses the proceeds to purchase a single premium immediate annuity (SPIA). The beneficiary reports, as income, only a small portion of the annuity received from the SPIA. Through a misapplication of the law relating to CRATs, the beneficiary treats the remaining payment as an excluded portion representing a return of investment for which no tax is due. Taxpayers seek to achieve this inaccurate result by misapplying the rules under sections 72 and 664.
Maltese (or Other Foreign) Pension Arrangements Misusing Treaty. In these transactions, US citizens or US residents attempt to avoid US tax by making contributions to certain foreign individual retirement arrangements in Malta (or possibly other foreign countries). In these transactions, the individual typically lacks a local connection, and local law allows contributions in a form other than cash or does not limit the amount of contributions by reference to income earned from employment or self-employment activities. By improperly asserting that the foreign arrangement is a “pension fund” for US tax treaty purposes, the US taxpayer misconstrues the relevant treaty to improperly claim an exemption from US income tax on earnings in, and distributions from, the foreign arrangement.
Puerto Rican and Other Foreign Captive Insurance. In these transactions, US owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the US owner has a financial interest. The US-based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation. The characteristics of the purported insurance arrangements typically include one or more of the following: implausible risks covered, non-arm’s length pricing and lack of [...]

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Judge Kathleen Kerrigan Begins Term as Tax Court’s Chief Judge

By Andrew R. Roberson and Kevin Spencer on Jun 3, 2022
Posted In Court Procedure Matters, Trial Courts

On June 1, 2022, Judge Kathleen Kerrigan began her two-year term as Chief Judge of the US Tax Court. Her election as Chief Judge was announced earlier this year and covered on the blog here. Chief Judge Kerrigan replaces Judge Maurice B. Foley, who served as Chief Judge from June 1, 2018, through May 31, 2022.

Weekly IRS Roundup May 23 – May 27, 2022

By McDermott Will & Emery on May 31, 2022
Posted In IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 23, 2022 – May 27, 2022. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 25, 2022: The IRS issued a press release revising frequently asked questions concerning the 2021 Earned Income Tax Credit to educate eligible taxpayers on how to properly claim the credit on their 2021 tax return.

May 25, 2022: The IRS announced that it has enhanced its “Where’s My Refund?” online tool, which introduces a new feature that allows taxpayers to check the status of the current tax year and the two prior years.

May 26, 2022: The IRS issued a press release, announcing the issuance of its Fiscal Year 2021 Data Book, which describes its activities from October 1, 2020, to September 30, 2021. The Data Book is published annually and contains statistical tables and organization information relating to data on collecting revenue, issuing refunds, enforcing the law, assisting taxpayers and the budget and workforce.

May 26, 2022: The IRS issued a memorandum to Employee Plan employees and Exempt Organizations/Government Entities Employees, stating that video meetings via secure IRS-approved platforms will continue to be allowed on a going forward basis.

May 27, 2022: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

IRS Appeals Acknowledges Massive Backlog of Cases, Shares Plan to Catch Up

By Andrew R. Roberson and Kevin Spencer on May 24, 2022
Posted In IRS Appeals, IRS Guidance, Settlements

In a memorandum dated April 19, 2022, the Internal Revenue Service’s (IRS) Independent Office of Appeals (IRS Appeals) acknowledged that it has a large backlog of cases that is slowing down the process of resolving cases with taxpayers. In the memorandum, IRS Appeals details its multipoint plan to get back on track. Apparently, there is a “significant inventory” of cases docketed in the US Tax Court that have been referred back to IRS Appeals. To solve this problem, IRS Appeals is:

Dedicating additional resources to work these cases
Prioritizing docketed casework
Making faster initial contact with the taxpayer or their representative by telephone shortly after the case is filed in the Tax Court
Applying streamlined case processing, such as specific dollar settlements, expedited tax computation requests and the use of Form 5402, Appeals Settlement Memorandum, to document settlements
Resolving cases without an IRS Appeals conference for matters that result from pandemic miscommunication rather than actual tax disputes
Obviating an actual trial to develop the facts and instead relying on oral statements to resolve cases more efficiently.

All of the above measures are welcome developments. Timely first contact with taxpayers and streamlined case processing should result in faster settlements and closure of matters while reducing interest expenses for taxpayers with deficiencies. Acknowledging that the controversy stems from a pandemic miscommunication (e.g., the IRS not processing or responding to taxpayer submissions before issuing a notice of deficiency) should eliminate unnecessary conferences and promote the dismissal of matters that never should have ended up before the Tax Court.

The acceptance of oral statements should also help resolve matters faster. In many situations, the documents necessary to substantiate a position may not be available or there may not be any documents in the first instance, so the only way to prove a factual point is through oral testimony. IRS Appeals should also consider declarations or affidavits signed under penalties of perjury as an appropriate means for substantiating facts to resolve cases more efficiently. Indeed, the use of such written statements is commonplace in litigation when parties seek summary adjudication.

We have discussed IRS Appeals numerous times on this blog. It remains one of the best forums to resolve tax disputes with the IRS and avoid court, meaning a substantial slow down at IRS Appeals is a real problem for taxpayers who cannot come to an agreement with an IRS examination team.

Practice Point: We applaud the IRS’s attempt to break the bottleneck at IRS Appeals. The measures that IRS Appeals is employing seem reasonable and appropriate and most of them should be employed even after IRS Appeals becomes updated on its caseload. In the meantime, if you have a case that will go to IRS Appeals, consider trying to expedite your appeal by requesting the 30-day letter as soon as it becomes clear you will be having an unagreed-case.