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Weekly IRS Roundup March 22 – March 26, 2021

Presented below is our summary of significant Internal Revenue Serve (IRS) guidance and relevant tax matters for the week of March 22, 2021 ­­– March 26, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

March 22, 2021: The IRS issued Notice 2021-22, providing guidance on various interest rates relevant to employee benefit plans.

March 22, 2021: The IRS issued a news release announcing that the next batch of Economic Impact Payments under the American Rescue Plan Act of 2021 (ARPA) would be issued to taxpayers this week.

March 24, 2021: The IRS issued a news release confirming, as previously announced, the disbursement of approximately 37 million Economic Impact Payments, bringing the total amount of disbursements under ARPA to approximately 127 million payments worth approximately $325 billion.

March 25, 2021: The IRS released Revenue Procedure 2021-19, providing guidance on median gross income figures, used by certain issuers of mortgage bonds and mortgage credit certificates.

March 25, 2021: The IRS issued a news release summarizing the proceedings from “The Challenge,” a meeting (held virtually this year) of the Joint Chiefs of Global Tax Enforcement (J5) regarding international coordination on tax crimes.

March 25, 2021: The IRS issued a news release noting the one-year anniversary of the Coronavirus Aid, Relief and Economic Security (CARES) Act and pledging the Criminal Investigation Division’s continued commitment to investigating COVID-19 fraud.

March 26, 2021: The IRS released Revenue Procedure 2021-17, providing guidance on average residence purchase prices, used by certain issuers of mortgage bonds and mortgage credit certificates.

March 26, 2021: The IRS released Revenue Procedure 2021-18, providing state and local governments in which an empowerment zone is located with an automatic procedure for extending the empowerment zone designation under section 1391(a).

March 26, 2021: The IRS issued Announcement 2021-5, announcing that the United States and Japan have entered into an arrangement regarding the implementation of the arbitration process provided for in the 2003 US-Japan tax treaty.

March 26, 2021: The IRS issued Announcement 2021-7, notifying taxpayers that amounts paid for personal protective equipment for the primary purpose of preventing the spread of COVID-19 are treated as deductible medical expenses under section 213.

March 26, 2021: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Le Chen in our Washington, DC, office for this week’s roundup.




Exxon Prevails in $200 Million Tax Penalty Case

On January 13, 2021, the US District Court for the Northern District of Texas ruled in favor of Exxon Mobil Corporation (“Exxon”) in its battle against the government over tax penalties. Exxon filed amended returns for its 2006-2009 tax years seeking a $1.35 billion tax refund based upon a change of character of certain transactions (from mineral leases to purchase transactions). The government disallowed the refund claims and imposed a $200 million penalty pursuant to Internal Revenue Code (IRC) section 6676. Exxon paid the penalty and filed suit for a refund.

We have written extensively concerning IRC section 6676, warning taxpayers of this potential landmine. See, e.g., Taxpayers Should Prepare for the Next Penalty Battleground” Roberson, Spencer and Walters, Law360 (May 21, 2019) and “Expect More Civil Tax Penalties—So, Now What?” Roberson and Spencer, Tax Executive (Sept. 27, 2019). To recap, IRC Section 6676 was enacted in 2007 in response to the high number of meritless refund claims being filed at the time. It imposes a 20% penalty to the extent that a claim for refund or credit with respect to income tax is made for an “excessive amount.” An “excessive amount” is defined as the difference between the amount of the claim for credit or refund sought and the amount that is actually allowable. For example, if the taxpayer claims a refund of $2 million and the Internal Revenue Service (IRS) allows only $1 million, the taxpayer can still be penalized $200,000.Significantly, IRC section 6676 does not require the IRS to show any fault or culpability on the part of the taxpayer—e.g., negligence, disregard of rules or regulations, etc. IRC section 6676(a) originally provided a “reasonable basis” defense (which is applicable to the Exxon case), but in 2015 Congress amended the statute and now requires a showing of “reasonable cause.” Neither the Code nor the regulations provide for any other defense to the IRC section 6676 penalty. Moreover, the penalty is immediately assessable, meaning taxpayers cannot fight the IRS in a pre-payment forum like the US Tax Court but must first pay the penalty and seek redress in a refund form.

In Exxon, the government argued that the court should overlay a subjective element on “reasonable basis,” as the US Circuit Court for the Eighth Circuit did in Wells Fargo & Co. v. United States, 957 F.3d 840 (8th Cir. 2020). Our prior coverage of this case can be found here. The Exxon court declined the invitation. Instead, the court explained IRC section 6676 “focuses on whether the claim had a reasonable basis, not on whether the taxpayer had a reasonable basis.” The court agreed with Exxon that its position in the refund claim that its transactions were purchases was reasonable based on the relevant authorities. It further found that the company had “colorable support for its legal contention that a change that affects whether, not when, an item comes into income is not [...]

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2020’s Key Tax Controversy Developments

In the face of the pandemic and all the challenges that came with 2020, tax controversy marched on. In this article, we explore several important cases, including one of the most closely watched Supreme Court cases, CIC Services LLC v. Internal Revenue Service, which raises important questions regarding the scope of the Anti-Injunction Act and impacts the ability of taxpayers to engage in preenforcement challenges to regulations.

We also look into the latest updates in the transfer pricing area, changes to the Compliance Assurance Process, what to expect during the audit of a campaign issue and more.

Read the full article.




Weekly IRS Roundup August 24 – August 28, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 24, 2020 – August 28, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

August 24 2020: The IRS published a memorandum concerning guidance to the field on the criteria that should be applied in considering if a request for designation for litigation should be made to the Office of Chief Counsel. The memorandum also provides interim guidance on the requirements of Section 1001 of the Taxpayer First Act (TFA) with respect to the limitation on designation of cases as not eligible for referral to the IRS Independent Office of Appeals.

August 25, 2020: The IRS published a Summer 2020 Statistics of Income Bulletin. The Summer 2020 Bulletin focuses individual income tax shares, 2017; foreign recipients of US income, calendar year 2017; effects of post-filing adjustments on Statistics of Income (SOI) estimates; and implementation of the Tax Cuts and Jobs Act.

August 25, 2020: The IRS published a practice unit focusing on the definition of foreign earned income for purposes of section 911.

August 26, 2020: The IRS published a notice and request for comments on Treasury Decision 8702 concerning certain transfers of domestic stock or securities by US persons to foreign corporations. The regulation relates to certain transfers of stock or securities of domestic corporations pursuant to the corporate organization, reorganization or liquidation provisions of the Internal Revenue Code (Code). Transfers of stock or securities by US persons in tax-free transactions are treated as taxable transactions when the acquirer is a foreign corporation, unless an exception applies under section 367(a). The regulation provides that no US person will qualify for an exception unless the US target company complies with certain reporting requirements. The comments should be received on or before October 26, 2020.

August 26, 2020: The IRS published a notice and request for comments on Treasury Decision 8612 concerning the availability of the gift and estate tax marital deduction when the donee spouse or the surviving spouse is not a US citizen. The regulation provides guidance to individuals or fiduciaries: (1) for making a qualified domestic trust election on the estate tax return of a decedent whose surviving spouse is not a US citizen in order that the estate may obtain the marital deduction; and (2) for filing the annual returns that such an election may require. The comments should be received on or before October 26, 2020.

August 27, 2020: The IRS published an announcement on the opening of the application period for the 2021 Compliance Assurance Process program. The application period runs September 1 to November 13, 2020. The IRS will inform applicants if they’re accepted into the program in February 2021.

August 28, 2020: The IRS published
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Skip Jail and Clean Up Your Tax Problems

If you have knowingly failed to report income or claimed deductions you know you are not entitled to, or just decided not to file your tax returns and pay the tax owed, you may be liable for civil penalties and even jail time for criminal tax evasion. Taxpayers with civil and criminal tax exposure may want to fix their past mistakes but are afraid of what will happen if they “come clean.” So, the majority of offenders keep offending year after year. But did you know there is an Internal Revenue Service (IRS) program that can help taxpayers get out of that “evasion” cycle, and clean up past tax issues, usually without criminal liability?

The IRS has a longstanding program through which taxpayers can make voluntary disclosures of tax underreporting and tax criminal evasion. Such disclosures may help taxpayers limit their criminal exposure, although disclosure does not automatically guarantee immunity from criminal prosecution.

The latest iteration of the voluntary disclosure program is known as the Voluntary Disclosure Practice (VDP). (Here is a link to the IRS’s VDP program description.) Under the terms of the program, a taxpayer must submit Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, which contains basic identifying and procedural information necessary to determine if the taxpayer is eligible to participate in the VDP program. The IRS uses this information to verify that the taxpayer is not already under criminal investigation, which is a bar to entering into the VDP program. Once the taxpayer has been “precleared,” the taxpayer must submit Part II of Form 14457, which seeks detailed information regarding the nature of the tax reporting failures and the associated unpaid tax liabilities. If the taxpayer is approved to participate in the VDP program, the taxpayer’s case is transferred to the appropriate IRS civil division for examination. Ultimately, the taxpayer must cooperate with the IRS to determine its correct tax liability and must make good faith arrangements to pay all unpaid liabilities, including interest and penalties. Typically, this will include the filing of corrected tax returns for six years; the payment of the correct tax and interest for those returns; and the payment of enhanced penalties for one tax year.

The current version of Form 14457 was released in April 2020. On July 14, 2020, Carolyn A. Schenck, the National Fraud Counsel for the IRS Fraud Enforcement Program, stated that the IRS is planning to issue additional instructions for Form 14457 to provide further guidance on the mechanics of the VDP. Conforming additions will be made to the Internal Revenue Manual.

Practice Point: The risk of criminal prosecution for tax offenses is increasing due to significant improvements in IRS enforcement strategies. IRS commissioner Charles Rettig was formerly in private practice defending taxpayers and has implemented significant changes in IRS programs and leadership. There is an unprecedented degree of coordination among the enforcement divisions and emphasis on preventing tax fraud, with Eric Hylton, previous deputy [...]

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Tax Court Holds That Form 870-AD Is Not a Binding Settlement Agreement

A recent US Tax Court Memorandum Opinion held that a settlement agreement embodied in Internal Revenue Service (IRS) Form 870-AD does not preclude the IRS from reopening an audit and issuing a notice of deficiency.

In Howe v. Commissioner, T.C. Memo 2020-78, the Tax Court held that equitable estoppel did not bind the Commissioner to an agreement in Form 870-AD. Only settlements that comply with Internal Revenue Code (IRC) sections 7121 and 7122 are binding on both the taxpayer and government, and an IRS Form 870-AD does not comply with those provisions. Further, the Court held that equitable estoppel did not bar the IRS from asserting a larger deficiency against the taxpayer because, even if true, the alleged failures to follow internal IRS procedures would not rise to the level of affirmative misconduct.

An IRS revenue agent initially began an audit of the 2008 tax return for the taxpayer, who was CEO and majority shareholder of a healthcare company, in 2011. At the conclusion of the audit, the revenue agent issued a Notice of Proposed Adjustment (NOPA) and IRS Form 886-A. The taxpayer responded to the NOPA by filing a protest letter at the IRS Appeals Office. In settlement of the issue during the IRS Appeals Office review, the taxpayer and the IRS appeals officer (on behalf of the IRS) signed a Form 870-AD that reduced the asserted tax deficiency and eliminated the IRC section 6662 accuracy-related penalty. The IRS Appeals Officer filed an IRS Appeals Case Memorandum (ACM) summarizing the facts and legal arguments.

In response to the ACM, the revenue agent who conducted the audit, in consultation with her supervisor and local IRS counsel, internally filed a Dissent for Appeals Decision. The Dissent for Appeals Decision sought to reopen the case against the taxpayer on the grounds that the taxpayer made material factual misrepresentations during the IRS Appeals process. The IRS Appeals Director approved reopening the case, and the IRS issued a Notice of Deficiency.

The taxpayer sought review in the Tax Court on the grounds that the IRS improperly reopened the case and that the settlement represented in Form 870-AD equitably estopped the Commissioner from issuing the Notice of Deficiency. The Tax Court rejected the taxpayer’s argument. Following its holding in Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974), the Tax Court will only look behind a Notice of Deficiency when there is “substantial evidence of unconstitutional conduct on the Commissioner’s part and the integrity of our judicial process would be impugned if we were to let the Commissioner benefit from such conduct.” (Howe, at *12.) The Tax Court found there was no substantial evidence of unconstitutional conduct by the IRS.

Further, there is a heightened standard for applying equitable estoppel against the IRS. In addition to the traditional detrimental reliance elements, asserting equitable estoppel claims against the government requires a showing that: “(1) the government engaged in affirmative misconduct going beyond mere negligence; (2) the government’s wrongful acts will cause a serious [...]

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Tax Court Holds IRS Chief Counsel Attorneys May Make Initial Penalty Determination

In general, section 6751 requires that a supervisor give written approval before penalties can be asserted against a taxpayer. In Koh v. Commissioner, T.C. Memo. 2020-77, authored by the US Tax Court’s (Tax Court) most recent addition—Judge Travis Greaves—the Tax Court affirmed that an attorney from Internal Revenue Service (IRS) Chief Counsel may be authorized to assert such penalties in an answer to a Tax Court petition.

In Koh, the IRS sent the taxpayer a notice of deficiency that included a determination related to penalties under section 6662(j). The taxpayer filed a petition with the Tax Court contesting the IRS’s determination. In its answer, the IRS Chief Counsel attorney asserted that the taxpayer was liable for accuracy-related penalties under section 6662(b)(1) or (2), in the alternative to the section 6662(j) penalties assessed in the original deficiency notice.

The taxpayer sought partial judgment on the pleadings on the grounds that IRS Chief Counsel attorneys are not authorized to assert penalties in the answer. Under section 6751(b)(1), a penalty may not be assessed unless the “the initial determination of such assessment” was “personally approved (in writing) by the immediate supervisor of the individual making such determination.”

The Tax Court reasoned that as the IRS’s representative, the Chief Counsel attorney (or a delegate) may assert additional penalties in an answer to a Tax Court petition. Moreover, the Tax Court ruled that Chief Counsel attorneys had authority to assert penalties in an answer in Roth v. Commissioner, T.C. Memo. 2017-248, aff’d, 922 F.3d 1126 (10th Cir. 2019). That opinion was based on numerous cases holding that the IRS may assert penalties in an answer. However, Roth pre-dated the Tax Court’s opinion in Clay v. Commissioner, 152 T.C. 223 (2019), which cited US Court of Appeals for the Second Circuit authority for the proposition that “written approval is required no later than the issuance of the notice of deficiency rather than the assessment of the tax.”

Practice Point: Taxpayers continue to face risk from penalties being asserted for the first time in an answer in a Tax Court Proceeding. We believe that there is a strong likelihood that Koh will be appealed to the US Court of Appeals for the Third Circuit. We will continue to follow new developments related to penalties and the supervisory approval requirement.




Weekly IRS Roundup May 18 – May 22, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 18 – May 22, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 18, 2020:  The U.S. Tax Court announced that comments to the proposed amendments to the Rules of its Practice and Procedure should be emailed to Stephanie A. Servoss, Clerk of the Court, at Rules@ustaxcourt.gov. The Tax Court has not received mail since March 19, 2020.

May 18, 2020:  The IRS added approximately 3,500 phone operators to answer Economic Impact Payment (EIP) questions.

May 19, 2020:  The Large Business & International (LB&I) released information regarding the Swiss Bank Program Campaign. The program allows Swiss financial institutions to provide information on the U.S. persons with beneficial ownership of foreign financial accounts. The campaign will address noncompliance of such taxpayers.

May 20, 2020:  The IRS announced that Andy Keyso has been selected to serve as the Chief of the IRS Independent Office of Appeals, the IRS announced. For more information on Mr. Keyso and IRS Appeals, see our write-up here.

May 21, 2020:  The IRS announced that the 2020 IRS Nationwide Tax Forums will be held virtually in 2020 with a series of live-streamed webinars beginning this July. The 2020 Nationwide Tax Forums will begin on July 21 and continue through August 20.

May 22, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.




Andy Keyso To Head IRS Appeals

On May 20, 2020, the Internal Revenue Service (IRS) announced that Andy Keyso has been named Chief of the IRS Independent Office of Appeals. He replaces Donna Hansberry, who retired in December 2019.

Mr. Keyso is a long time veteran of the IRS, with more than 25 years of service. During his career, he has held numerous positions within the IRS, including serving as the IRS Chief of Staff, 18 years in various positions in the IRS Office of Chief Counsel, including as Associate Chief Counsel of the Income Tax and Accounting Division. Mr. Keyso also served as Special Counsel to the Chief Counsel and as an attorney in the Procedure and Administration Division. Before coming to Washington, DC, Mr. Keyso worked in the field as a revenue agent in the former Newark, New Jersey District, where he later served as a technical advisor to the Chief, Examination Division. Since July 2017, Mr. Keyso has been the Deputy Chief of Appeals and acting Appeals Chief.

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IRS Appeals Large Case Pilot Program Ends

More than three years ago, the Internal Revenue Service (IRS) revised the Internal Revenue Manual to provide IRS Appeals Division (Appeals) with discretion to invite representatives from the IRS Examination Division (Exam) and IRS Office of Chief Counsel (Counsel) to the Appeals conference. The IRS also started a three-year initiative for taxpayers under the Large Business & International (LB&I) Division with cases assigned to Appeals Team Case Leaders (ATCLs). Under the initiative, LB&I personnel from Exam and Counsel were invited to the non-settlement portion of the taxpayer’s Appeals conference to test whether the participation of both parties would assist Appeals in narrowing and resolving complex factual and legal differences.

The IRS announced that the initiative ended on May 1, 2020. The IRS has invited comments from the public about the initiative and its effectiveness. Such comments should be submitted by August 31, 2020.

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