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

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.




Late CDP Petitions May Still Be Entitled to Tax Court Review

In a unanimous decision in Boechler, P.C. v. Commissioner issued on April 21, 2022, the Supreme Court of the United States reversed the US Court of Appeals for the Eighth Circuit’s ruling (which affirmed the US Tax Court) and held that the 30-day time limit to file a petition with the Tax Court in a collection due process (CDP) case is a non-jurisdictional deadline subject to equitable tolling. The Supreme Court remanded the case to determine whether the taxpayer is entitled to equitable tolling.

The one-day-late showdown started in 2015, when the Internal Revenue Service (IRS) notified Boechler, P.C. (Boechler), a North Dakota law firm, of a tax discrepancy. Boechler did not respond, which triggered the assessment of an “intentional disregard” penalty along with a notice that the IRS intended to seize Boechler’s property to satisfy the penalty. Boechler requested a CDP hearing before the IRS Independent Office of Appeals (IRS Appeals), arguing that: (1) there was no discrepancy in its tax filings and (2) the penalty was excessive. IRS Appeals rejected these arguments and sustained the proposed levy. Boechler then had 30 days to file its Tax Court petition but missed the deadline by one day. The Tax Court dismissed the petition for lack of jurisdiction, holding that the 30-day filing deadline is jurisdictional and cannot be equitably tolled. The Eighth Circuit affirmed.

The Supreme Court granted certiorari. The US government argued that the deadline was jurisdictional and the Tax Court lacks the power to accept a tardy filing by applying the doctrine of equitable tolling. Boechler argued that equitable tolling applied, and the Tax Court had jurisdiction over its case. The Supreme Court, continuing a trend of distinguishing between claim processing rules and jurisdictional rules, agreed with Boechler.

Internal Revenue Code (Code) Section 6330(d)(1) states, “[t]he person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” The Supreme Court explained that a procedural requirement is treated as jurisdictional “only if Congress ‘clearly states’ that it is” Arbaugh v. Y & H Corp., 546 U. S. 500, 515 (2006), although US Congress need not “incant magic words.” Sebelius v. Auburn Regional Medical Center, 568 U. S. 145, 153 (2013).

The Supreme Court clarified that the question was whether the statutory language limits the Tax Court’s jurisdiction to petitions filed within that timeframe. That answer turned on the meaning of the phrase “such matters.” The first independent clause explains what a taxpayer may do, (“The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination.”) However, the phrase “such matters” does not clearly mandate the jurisdictional reading and lacks clear antecedent. In addition, the Supreme Court also explained that Code Section 6330(d)(1) lacked in comparable clarity as to other tax provisions enacted around the same time. Finally, the Supreme [...]

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An Update on Section 6751 Penalties

Tax penalties are always a hot topic here. The Internal Revenue Service (IRS) has a large arsenal when it comes to grounds for asserting penalties on income tax deficiencies, ranging from the common 20% penalty under Internal Revenue Code (Code) Section 6662(a) to higher penalties ranging from 40% (gross valuation or basis misstatements and economic substance) to 75% (fraud).

However, before the IRS can assert most penalties against taxpayers, it must comply with the procedural requirement in Code Section 6751(b): That the “initial determination” to assert the penalty be “personally approved (in writing) by the immediate supervisor of the individual making such determination.” As the US Court of Appeals for the Second Circuit explained in Chai v. Commissioner, US Congress imposed this requirement because it “believes that penalties should only be imposed where appropriate and not as a bargaining chip” and “[t]he statute was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.”

Over the past several years, there has been substantial litigation over the proper interpretation and application of Code Section 6751(b). The US Tax Court’s recent opinion in Oxbow Bend, LLC v. Commissioner is the latest development. In Oxbow Bend, the Tax Court rejected the taxpayer’s position that the “initial determination” was made on the date that the examining agent prepared a penalty lead sheet reflecting her recommendation to assert penalties and stated in a telephone conference with the taxpayer’s representative on that same day that penalties were being considered. Approximately three months later, the examining agent’s supervisor approved the penalty lead sheet, and the IRS issued a Notice of Final Partnership Administrative Adjustment asserting the penalties. The Tax Court, relying on its prior precedent, held that the word “determination”:

  1. “has an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality”
  2. “signifies a consequential moment of IRS action”
  3. is not a “mere suggestion, proposal, or initial informal mention of penalties”
  4. “will be embodied in a formal written communication that notifies the taxpayer of the decision to assert penalties.”

Thus, under the Tax Court’s analysis, an “initial determination” can only be made in a “written” document that is provided to the taxpayer.

Oxbow Bend is a memorandum opinion of the Tax Court and, therefore, is limited to its facts and technically not precedential, as we have discussed in the past. However, memorandum opinions are often cited by litigants, and the Tax Court does not disregard these types of opinions lightly. One has to wonder whether, under different facts where an examining agent makes an explicit oral statement to a taxpayer that penalties “will” be asserted, courts might reach a different result given Congress’s express intent that examining agents should not threaten penalties and use them as a bargaining chip for settlement purposes. Further, Code Section 6751(b) expressly requires that the supervisory approval be “in writing” but contains a written requirement for purposes of the [...]

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Sixth Circuit Sides with Taxpayer in APA Challenge to Reportable Transaction Regime

We previously posted about the US Supreme Court’s opinion in CIC Servs., LLC v. IRS, which allowed a pre-enforcement challenge to the Internal Revenue Service’s (IRS) “reportable transaction” regime. In that post, we noted the district court opinion in Mann Construction, Inc. v. United States, No. 1:20-cv-11307 (E.D. Mich. 2021), holding that an IRS Notice requiring disclosure of listed transactions was not subject to the Administrative Procedure Act’s (APA) notice-and-comment requirement, and identified unanswered questions and potential future disputes over IRS enforcement strategies.

The US Court of Appeals for the Sixth Circuit has now reversed the district court in Mann Construction, holding that the IRS’s process for issuing Notice 2007-83—which designates certain employee-benefit plans featuring cash-value life insurance policies as listed transactions—violated the APA. Specifically, the court found that Notice 2007-83 was a legislative rule under the APA because it had the force and effect of law. The Sixth Circuit relied on CIC Services, explaining that Notice 2007-83 “defines a set of transactions that taxpayers must report, and that duty did not arise from a statute or a notice-and-comment rule…failure to comply comes with the risk of penalties and criminal sanctions, all characteristics of legislative rules.” The court further found that Congress did not expressly exempt the IRS from the APA’s notice-and-comment requirements with respect to the reportable transaction regime. The Sixth Circuit explained that there was an absence of any express deviation from the APA’s notice-and-comment procedures, and “any exceptions to the sturdy protections established by the APA’s notice-and-comment requirements must come from Congress, not us and not the IRS.”

What now? Mann Construction is a heavy blow to the IRS’s reportable transaction regime, and similar APA attacks are underway against other Notices imposing non-statutory reporting obligations. One example is Notice 2017-10, which identifies certain syndicated conservation easement transactions as listed transactions subject to disclosure to the IRS.

Practice Point: In 2011, the Supreme Court announced in Mayo Found. for Med. Educ. & Rsch. v. United States, that “we are not inclined to carve out an approach to administrative review good for tax law only.” The last 10 years have seen numerous APA challenges in the tax world, some successful and others unsuccessful. CIC Services and Mann Construction are two important cases for taxpayers subject to non-statutory reporting obligations. Taxpayers and practitioners should carefully consider the impact of these cases in similar reporting situations in determining whether to initiate APA challenges.




IRS Chief Counsel Signals Increased Tax Enforcement

The Internal Revenue Service (IRS) Chief Counsel is the chief legal advisor to the Commissioner of Internal Revenue on all matters pertaining to the interpretation, administration and enforcement of the Internal Revenue Laws. In this regard, the IRS Office of Chief Counsel is responsible for litigating cases in the US Tax Court. Such cases can arise from examinations conducted by different divisions within the IRS, such as the Large Business & International (LB&I), Small Business/Self Employed (SB/SE), Tax Exempt & Government Entities (TE/GE) and Wage & Investment (W&I) Divisions.

On January 21, 2022, the IRS Office of Chief Counsel announced plans to hire up to 200 additional attorneys to assist with litigation efforts. The announcement specifically notes that new hires are necessary “to help the agency combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.” They will also help the IRS manage its increasing caseload as part of its multiyear effort to combat what it believes are abusive schemes and to ensure that the appropriate taxes and penalties are paid. The new hires will be located around the country and focus on audits of complex corporate and partnership issues.

Additionally, there are a significant number of cases before the Tax Court that involve conservation easements and micro-captive insurance arrangements. The IRS’s attack on the donation of conservation easements is well known in the tax world. To date, the IRS has largely been successful in these cases based on non-valuation arguments that easement deeds do not comply with the applicable regulations. However, in the recent Hewitt v. Commissioner case, the US Court of Appeals for the Eleventh Circuit dealt a significant blow when it held that the IRS’s interpretation of Treas. Reg. § 1.170A-14(g)(6)(ii) was arbitrary and capricious and violated the Administrative Procedure Act because the US Department of the Treasury failed to respond to significant comments submitted during the notice-and-comment process. Many conservation easements are within the Eleventh Circuit’s jurisdiction and other appellate courts are expected to weigh in soon, which could result in the IRS and taxpayers proceeding to trial on valuation issues. Valuation issues are inherently fact intensive and will require the IRS to utilize substantial resources to litigate.

Practice Point: Much has been written about the trend of decreased enforcement by the IRS over the past several years, owing in part to decreased or stagnant funding from US Congress. Tax litigation, particularly in fact intensive cases involving valuation issues and transactions the IRS (but not necessarily the courts) deemed abusive, requires the expenditure of substantial resources by the IRS. The IRS has signaled that it is ready to reverse the trend. All IRS tax controversies start with the examination of the taxpayer’s positions on the return. We have seen an increase in IRS audit activity in the last year or so, especially with medium-sized businesses and high-net-worth individuals. The Chief Counsel is assembling his “army” to litigate positions developed during the examination. It’s a good time for taxpayers [...]

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Weekly IRS Roundup December 6 – December 10, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 6, 2021 – December 10, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

December 6, 2021: The IRS published updated guidance on requesting estate tax closing letters and transcript request procedures.

December 6, 2021: The US Treasury Inspector General for Tax Administration (TIGTA) released a semiannual report to US Congress, summarizing the accomplishments of the TIGTA from April 1, 2021, through September 30, 2021. The TIGTA’s Office of Audit completed 52 audits, and its Office of Investigations completed 1,430 investigations. Its combined audit and investigative efforts resulted in the recovery, protection and identification of monetary benefits totaling more than $9 billion.

December 6, 2021: The IRS issued guidance for employers regarding the retroactive termination of the Employee Retention Credit. The Infrastructure Investment and Jobs Act, which was enacted on November 15, 2021, amended the law so that the Employee Retention Credit applies only to wages paid before October 1, 2021 (unless the employer is a recovery startup business).

December 7, 2021: The IRS published a news release encouraging taxpayers to take important actions this month to help them file their federal tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. A special page, updated and available on IRS.gov, outlines the steps taxpayers can take now to make tax filing easier next year.

December 7, 2021: The IRS published frequently asked questions (FAQs), providing guidance on what certain pass-through businesses should do in the absence of updated forms for the 2021 tax year. The tax year 2021 forms, to which Schedules K-2 and K-3 must be attached, have not yet been finalized. The FAQs address questions concerning whether Schedules K-2 and K-3 must be attached to tax year 2020 forms for partnerships or S corporations with 2021 short tax years or, in the case of Form 8865, filers of Form 8865 with 2021 short tax years.

December 7, 2021: The IRS published a memorandum providing interim guidance for in-person conference procedures. The guidance provides that the IRS Independent Office of Appeals (IRS Appeals) will use its best efforts to schedule the in-person conference at a location that is reasonably convenient for both the taxpayer and the IRS Appeals. This guidance does not modify any temporary procedures in place due to COVID-19.

December 8, 2021: The IRS released guidance for IRS Appeals employees working Tax-Exempt/Government Entities (TE/GE)-sourced cases. For TE/GE-sourced cases in which a taxpayer or representative raises a new issue, provides new information or advances a new theory or an alternative legal argument to the IRS Appeals, the IRS Appeals employee is required to follow the instructions provided by the IRS.

December 10, 2021: The [...]

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IRS Provides Guidance to LB&I Examiners on Requesting Participation in Appeals Conferences

We recently covered the Appeals Team Case Leader Conferencing Initiative: Summary of Findings and Next Steps (Appeals Summary) in relation to the participation of Large Business & International (LB&I) exam teams and Internal Revenue Service (IRS) Chief Counsel attorneys in conferences before the IRS Independent Office of Appeals (IRS Appeals). As discussed, the Appeals Summary concluded that IRS Appeals would be given discretion to invite exam teams and Chief Counsel attorneys to attend IRS Appeals conferences in the future. In determining whether such discretion should be exercised in a case, the Appeals Summary states that both the taxpayers’ and the exam teams’s views should be solicited and considered.

In a November 8, 2021, memorandum (LB&I Memorandum), the Acting Assistance Deputy Compliance Integration for the LB&I Division Theodore D. Setzer provided guidance to LB&I employees on requesting participation. The LB&I Memorandum reflects the LB&I Divisons’s view that participation in certain IRS Appeals conferences is important for fostering effective tax administration and assisting IRS Appeals in resolving tax controversy on a basis which is fair and impartial to taxpayers and the government. Thus, LB&I employees “should continue to request to be invited where LB&I participation would help improve understanding of factual and legal differences in a case.” The LB&I Memorandum directs LB&I employees to consider the following nonexclusive list of factors before making a request to attend an IRS Appeals conference:

  • The case is factually complex;
  • History has shown lack of meeting of the minds regarding the underlying facts or legal positions;
  • The taxpayer’s characterization of LB&I’s position in the formal written protest is not accurately stated and participation by both the taxpayer and LB&I at the Appeals conference will assist Appeals in both bridging the lack of understanding and better understanding the case;
  • The taxpayer has presented multiple legal arguments or authorities that it relies on to support its position;
  • The case involves outside experts or expert opinions;
  • The case involves an issue of importance to tax administration, such as a case of first impression; one involving the interpretation of a new statute or regulation when there are no reported opinions or when published guidance is pending or where precedent is otherwise absent or conflicting; one affecting large numbers of taxpayers or an industry; or one falling within an operating division’s major strategic goal;
  • The case involves an issue in which the Government seeks to distinguish a position set forth in published guidance;
  • The case involves an issue coordinated under strategic compliance/coordination initiative such as LB&I campaigns or
  • A tax shelter case involving a “Listed Transaction” or substantially similar transaction within the meaning of Treas. Reg. 1.6001-4(b)(2), or a “Transaction of Interest” under Treas. Reg. 1.6011-4(b)(6).

The LB&I Memorandum states that a participation request must be made in one of two ways. The first is by indicating the request on Form 4665, Report Transmittal. According to Internal Revenue Manual Section 4.10.8.12.6 (03-25-2021), Form 4665 is used to [...]

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Weekly IRS Roundup October 4 – October 8, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 4, 2021 – October 8, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

October 4, 2021: The IRS released a practice unit, providing tax law and audit steps for reviewing a reseller’s uniform capitalization cost computations under section 263A. The practice unit focuses on the simplified production method and does not cover the final section 263A Treasury Regulations that were effective November 20, 2018.

October 4, 2021: The IRS published a news release, announcing 18 self-study seminars available online through the IRS Nationwide Tax Forums. The seminars cover topics such as the gig economy and virtual currency.

October 4, 2021: The IRS published instructions for Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) concerning:

  • Guidance under section 1446(f) (withholding on partnership interest dispositions)
  • New lines 6a and 6b (addressing foreign tax ID number (FTIN) matters)
  • Tax treaty benefits claims (requiring representations)
  • Section 6050Y reporting (covering life insurance contracts and reportable death benefits)
  • Electronic signatures (updated to reflect new guidance)

October 5, 2021: The IRS published a news release, announcing that Free File remains available through October 15 for taxpayers who still need to file their 2020 tax returns. Free File is the IRS’s public-private partnership with tax preparation software industry leaders to provide their brand name products for free.

October 5, 2021: The IRS released a memorandum, expanding the criteria for collection due process cases that qualify for a rapid response appeals process under IRM 8.22.6.2 and related subsections.

October 5, 2021: The IRS released a memorandum concerning interim guidance regarding the IRS Independent Office of Appeals’ steps and procedures for its nationwide pilot program: The Appeals Electronic Case Files Initiative for Large Business & International (LB&I) report generation software (RGS) examination cases. This guidance is applicable to LB&I RGS International Individual Compliance cases only and excludes other large cases such as Tax Equity and Fiscal Responsibility Act of 1982 cases, Bipartisan Budget Act of 2015 cases and Syndicated Conservation Easement cases.

October 5, 2021: The IRS released a memorandum updating procedures where an organization requests a change in a section 501 subsection during the application process by submitting one application form to replace a different application form. The procedures are effective 30 days after issuance of the memorandum and supersedes those in TEGE-07-0421-0010 (April 29, 2021).

October 7, 2021: The IRS published a program letter indicating that, in Fiscal Year 2022, Tax Exempt (TE)/Government Entities (GE) commissioners expect to invest in new resources to expand outreach to the exempt sector as well as increase their enforcement staff.

October 8, 2021: The IRS released its weekly list of written [...]

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The Results are in: IRS Appeals Retains Discretion to Continue to Allow Exam Teams and Chief Counsel to Attend Conferences

The IRS Independent Office of Appeals (IRS Appeals, Appeals) has seen many changes over the past several years. One of the more controversial and publicized change related to the 2017 pilot program to test whether inviting Large Business & International (LB&I) exam teams and Chief Counsel attorneys to engage with taxpayers and their representatives at the IRS Appeals conference would improve Appeals’ ability to work large, complex cases. The pilot program technically applied only to IRS Appeals’ largest and most complex cases, however, the IRS also revised the Internal Revenue Manual to provide IRS Appeals with discretion to invite exam teams and Chief Counsel attorneys to any conference. The pilot program ended on May 1, 2020, and the IRS has been gathering feedback and data from multiple sources (both within and outside the IRS) to determine the effectiveness of the program.

The results are in, as reflected in the recently released Appeals Team Case Leader Conferencing Initiative: Summary of Findings and Next Steps (IRS Appeals Summary). Generally, IRS Appeals Officers found that the exam team’s participation improved their understanding of the dispute and helped them identify, narrow and resolve factual and legal differences between the parties before engaging in settlement negotiations with taxpayers. On the other hand, some taxpayers expressed concerns over the presence of exam teams and Chief Counsel attorneys because they found it hindered the ability to resolve cases without litigation and required more concrete ground rules before the start of the conference.

The IRS Appeals Summary concluded that the process was generally helpful and that IRS Appeals would be given discretion to invite exam teams and Chief Counsel attorneys to attend the IRS Appeals conference in the future. In exercising such discretion, the Appeals Officer must consider several factors and solicit and consider both the taxpayers’ and the exam team’s views as to whether joint participation would be helpful.

Practice Point: Our experiences with the exam team and Chief Counsel attorneys attending the IRS Appeals conference has been mixed. Similar to concerns raised by other taxpayers, we have seen certain IRS personnel repeatedly interrupt the taxpayer during the presentation of their case and offer the exam team’s views of an acceptable settlement. However, we have also seen situations where the IRS Appeals Officer has been able to hold IRS personnel accountable by questioning factual and legal positions. In any event, exam team participation is here to stay and LB&I taxpayers and their representatives need to be aware of the new ground rules in this area.

Prior coverage of changes within the IRS Appeals can be accessed below.




Biden Spending Proposal Calls for 10% IRS Budget Increase

The Biden Administration has requested a $1.2 billion increase in funding for the Internal Revenue Service (IRS) as part of its proposal for Fiscal Year 2022 (FY 2022) discretionary funding released in a letter from Office of Management and Budget Acting Director Shalanda Young on April 9, 2021. The additional funding would bring the IRS FY 2022 budget to $13.2 billion, which represents a 10.4% increase over the 2021 enacted budget.

The additional funding would be used to increase IRS enforcement, especially for oversight of high-income individuals and corporate tax returns to ensure compliance with existing tax laws. The discretionary request also seeks an additional $417 million to fund a multiyear tax enforcement initiative aimed at increasing tax compliance and revenues. In total, the discretionary request would increase resources for tax enforcement by nearly $1 billion. Other funds appropriated to the IRS would be used for development and improvement of online tools and better telephone and in-person customer service for taxpayers.

Apart from IRS spending, the discretionary spending proposal includes $191 million for the US Department of the Treasury’s Financial Crimes Enforcement Network to create a database that tracks the ownership and control of certain companies and organizations.

The discretionary spending proposal is intended as a starting point for congressional appropriators and will be followed by the president’s full budget proposal—including tax changes and pay-fors—later in the spring.

Practice Point: We believe that the US Congress is likely to appropriate additional funds for tax enforcement in the FY 2022 budget. Taxpayers should begin preparing for additional IRS audits and scrutiny of return positions. Such preparation may include examining prior tax return positions and ensuring they have audit-ready files.




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