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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.




IRS Issues Practice Unit on Section 965 Transition Tax

One of the most pressing audit issues for large taxpayers today centers on the Internal Revenue Code (Code) Section 965 transition tax. The Internal Revenue Service (IRS) has designated Code Section 965 as a campaign issue and is actively auditing taxpayers’ transition tax calculations and positions, along with other tax reform items. The stakes are high, particularly given the potential to pay this tax over a period of eight years.

On March 23, 2021, the IRS released a Practice Unit that provides an overview of the Code Section 965 transition tax with references to relevant resources. Unfortunately, unlike some other Practice Units, guidance is not provided as to the type of information revenue agents should be requesting from taxpayers.

Practice Point: Practice Units are presentation-type materials compiled by the IRS as a means for collaborating and sharing knowledge among IRS employees. They provide helpful guidance to revenue agents in the form of an overview of the law in a specific area, examination tips and guidance and references to relevant resources. Although the Code Section 965 transition tax Practice Unit does not provide insights into the types of questions and information that revenue agents may seek on audit, it is still useful for taxpayers to review to understand the IRS’s perspective in this area.




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.




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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Section 965 Statutes of Limitations for Partnerships

On May 26, 2020, the Internal Revenue Service (IRS) issued PMTA 2020-08 to provide guidance on the period of limitations for Internal Revenue Code (IRC) section 965, transition tax-related adjustments of partnerships. Typically, pursuant to IRC section 6501, the IRS has three years to assess a tax liability for a tax year. However, IRC section 6501(e)(1)(C) states that if the taxpayer omits from gross income an amount properly includible in income under IRC section 951(a), the tax may be assessed at any time within six years after the return was filed. Moreover, this special six-year limitation on assessment applies to the entire tax liability reportable on that return. Because special assessment and adjustment rules apply to partnerships, the IRS issued guidance on how the rules are applicable to certain partnerships and partners with section 965-related items.

For a deferred foreign income corporation’s (DFIC) last taxable year beginning before January 1, 2018, IRC section 965 imposes a one-time tax on a US shareholder’s pro rata share of the DFIC’s earnings and profits (E&P) otherwise deferred from US taxation. The IRS describes three steps for the calculation under IRC section 965: (1) IRC section 965(a) deems the DFIC to repatriate its untaxed E&P through a subpart F inclusion in the US shareholder’s gross income equal to the greater of its E&P as of two measurement dates in 2017; (2) IRC section 965(b) reduces the IRC section 965(a) inclusion by the E&P deficits of the US shareholder’s other foreign corporations; and (3) IRC section 965(c) provides for a deduction (based on the aggregate IRC section 965(a) inclusion amount and on cash positions) that has the effect of reducing the effective rate of US tax on the US shareholder’s IRC section 965(a) inclusion.

With respect to partnerships, in the guidance the IRS indicated that it can make three broad categories of adjustments that affect the computation of IRC section 965 amounts. Revisions could be made to the tax attributes and financial data underlying the computation of the IRC section 965(a) inclusion, the IRC section 965(c) deduction and foreign tax amounts. Such adjustments could affect the IRC section 965(a) inclusion amount and IRC section 965(c) deduction amount reportable by the partnership and affect the IRC section 965(a) inclusion and the IRC section 965(c) deduction reported by the partners. Accordingly, the IRS outlined how to apply the assessment and adjustment period rules apply when there are partners with IRC section 965-related items arising from partnerships subject to different procedures and audit regimes.

Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the IRS indicated it can make adjustments at any time provided the period for assessing tax attributable to the adjustments is open. The IRC section 965(a) inclusion amount and the IRC section 965(c) deduction amount reported by the partnership may be adjusted for the required reporting year if either: (1) the partner’s IRC section 6501 period of limitations on assessing tax attributable to adjustments to partnership items has not [...]

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IRS Targets Private Foundations That May Be Used by Wealthy Taxpayers in Tax Planning

​In remarks at the NYU Tax Controversy Forum on June 18, 2020, Internal Revenue Service (IRS) officials indicated that the agency is analyzing the use of private foundations for tax planning. Ms. Tamera Ripperda, who is the commissioner of the Tax Exempt and Government Entities (TEGE) Division and previously served as the industry director for the Global High Wealth in the Large Business and International (LB&I) Division, said the agency is focusing on cross-division collaborations to target high-income, high-wealth taxpayers.

The TEGE Division has trained more than 400 LB&I agents this year on the use of private foundations in tax planning for high-net-worth individuals. Additionally, the divisions are using data analytics to identify linkages between LB&I and TEGE cases. Commissioner Ripparda stated that TEGE has identified more than 1,000 private foundations “that have linkages or that are interwoven into these global high-wealth enterprises,” and the IRS will likely examine many of these entities.

Practice Point: Several years ago, the IRS launched its “Wealth Squad,” a team of agents trained in looking through entities and tax structures to focus on the overall strategy of ultra-wealthy taxpayer to reduce their tax incidence. (See this link for more information on that program.) The IRS’s examination of private foundations as a tool to reduce taxes for wealthy is the next chapter for the IRS to crack down on perceived abuse. It is clear that lawmakers and US Treasury officials are increasingly focused on perceived lax enforcement and low audit rates of high-income, high-wealth taxpayers. Taxpayers who use private foundations in their planning should begin working with their tax advisers now to review potential exposure and make sure they are prepared for an expected IRS audit.




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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IRS Guidance Signals More Stringent Scrutiny on Transfer Pricing Documentation

On April 14, 2020, the Internal Revenue Service (IRS) issued informal guidance in the form of frequently asked questions (the “FAQs”), urging taxpayers to strengthen their transfer pricing documentation required under Internal Revenue Code (IRC) section 6662(e) and Treasury Regulations § 1.6662-6. IRC section 6662 provides several types of accuracy-related penalties on underpayments of taxes. Pursuant to IRC section 6662(e)(1)(B)(ii), a net adjustment penalty could apply to an intercompany transaction when the net IRC section 482 transfer pricing adjustment exceeds the applicable threshold amount. Taxpayers, however, may avoid a net adjustment penalty by maintaining transfer pricing documentation in accordance with IRC section 6662(e)(3)(B) and Treasury Regulation § 1.6662-6. The IRS indicates that without robust documentation, intercompany transactions may be subject to extensive examination process.

The FAQs provide guidelines for preparing high-quality documentation that could increase the chance of early deselection of transfer pricing issues, thereby substantially facilitating the examination process. First, industry and company analysis sections of the report should be clear and provide context for related party transactions. For example, the report should explain economic downturns or other unforeseen special business circumstances that affect the transfer pricing results. The analysis should also address any differences in risks or functions between the tested party and the comparable companies. Second, functional analysis narratives should be robust and link facts to analysis, and risk analysis should be consistent with intercompany agreements. Finally, detailed analysis should be provided to support (i) the best method selection (as well as the rejection of specified methods, if applicable); (ii) the profit-level-indicator conclusion; (iii) the satisfaction of the comparability criteria enumerated in the regulations and (iv) proposed adjustments to the application of a specified method, if selected. Taxpayers are encouraged to conduct a “self-assessment” of the potential indicators of transfer pricing non-compliance to strengthen their transfer pricing documentation reports.

The FAQs also identify some of the most helpful features in a transfer pricing report.  These features include (i) a full explanation of the data used in the transfer pricing analysis; (ii) descriptions of the general business risks of the transaction and detailed descriptions of how these risks are allocated among the controlled participants to the transaction based on the intercompany policies/agreements and (iii) detailed explanations of how profits are allocated among all parties, especially where a party is allocated profits that are disproportionate to its relative contributions. High-quality transfer pricing documentation may also include useful features such as reports of a functional and risk analysis for each transaction, an analysis of special business circumstances that may have affected profitability, descriptions of challenges of the analysis and any user-friendly features such as a summary of information.

These guidelines are consistent with  recent IRS efforts to encourage taxpayers to improve the quality of transfer pricing documentation, and suggest that the IRS may apply a higher standard in future examination when reviewing the documentation.

Practice Point: The IRS is signaling that there are some persistent deficiencies in taxpayers’ contemporaneous transfer pricing documentation. It may be a good idea to [...]

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No IDR Enforcement During COVID-19

Yesterday, the Internal Revenue Service (IRS) announced in a memorandum to all Large Business & International (LB&I) division employees that it was suspending the normal Information Document Request (IDR) procedures. The letter suspends enforcement until July 15, 2020; however, LB&I managers will have the discretion to continue with the IDR enforcement process when in their judgment the interests of tax administration warrant (e.g., cases with short statutes, listed transactions or fraud development). The memorandum, however, does not tell examining agents to stop issuing IDRs or working on their cases as the suspension relates only to enforcement of IDRs.

Practice Point: The suspension of the IDR enforcement procedures is welcome news to taxpayers with ongoing audits. With tax professionals displaced in their homes while mandatory self-isolation continues, meeting IDR deadlines has been challenging. We suggest, however, that taxpayers try to continue to work on their responses to IDRs the best they can so that when the world goes back to normal, responding to IDRs will not be high on the list of things to be done.




Weekly IRS Roundup February 10 – 14, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of February 10 – 14, 2020.

February 10, 2020:  The IRS issued a revenue ruling providing guidance regarding how to determine the adjusted basis life of insurance contracts under IRC section 1011 and 1012 given the recent amendments to IRC section 1016(a), which the Tax Cuts and Jobs Act amended to provide that in determining the basis of a life insurance contract or an annuity contract, no adjustment is made for mortality, expense, or other reasonable charges incurred under the contract. The IRS updated Revenue Ruling 2009-13 and 2009-14 to reflect these changes.

February 10, 2020:  The Joint Committee on Taxation released a report addressing domestic corporations’ federal tax receipts and tax liabilities. The report summarized the present law and accounting rules regarding corporate taxation, specifically addressing behavioral responses relating to recent tax changes, including the acceleration of deductions, deferral of income, and treatment of NOLs and NOL carryovers. The House Committee on Ways and Means discussed the report in a public hearing on February 11, 2020.

February 10, 2020:  The Treasury published a notice of a current list of countries that require or may require participation in, or cooperation with, an international boycott within the meaning of IRC section 999(b)(3). The countries include Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.

February 11, 2020:  The Joint Committee on Taxation released a report addressing an amendment that would provide for additional reporting by certain investors with respect to certain specified medical care providers. Under the proposal, reporting persons are required to file annual information returns with respect to certain specified medical care providers in which the reporting person holds an interest. The House Committee on Ways and Means discussed the report in a public hearing on February 12, 2020.

February 13, 2020:  The IRS published proposed regulations that provide guidance for employers concerning the amount of federal income tax to withhold from employee’s wages, implementing recent changes due to the Tax Cuts and Jobs Act and the redesigned 2020 Form W-4 and related IRS publications. In a related news release, the IRS stated that employees who have a Form W-4 on file with their employer from years prior to 2020 generally will continue to have their withholding determined based on that form.

February 14, 2020:  The IRS released final regulations to correct final regulations contained in T.D. 9891, which was published on January 23, 2020, and provided guidance applicable to transfers of appreciated property by US persons to partnerships with foreign partners related to the transferor. The regulations are scheduled to be published in the Federal Register on February 18, 2020.

February 14, 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 Jenni Saperstein in our Chicago office for this week’s roundup.

 




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