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IRS Provides Guidance on Reliance of FAQs for Penalty Protection Purposes

On October 15, 2021, the Internal Revenue Service (IRS) issued a news release and fact sheet for IRS Frequently Asked Questions (FAQs), which are typically posted on the IRS’s website. The purpose of the fact sheet is to confirm and explain the extent to which FAQs can be relied upon for purposes of avoiding civil tax penalties. (For a primer on penalties and defenses, see our prior article in the Tax Executive.)

The Internal Revenue Code and Treasury Regulations, along with relevant case law, provide rules on what can (and cannot) be relied upon for penalty protection purposes. The most common penalty defenses are reasonable basis (sometimes coupled with a disclosure requirement), substantial authority and reasonable cause. Substantial authority is an objective standard, and Treasury Regulation § 1.6662-4(d)(3)(i) contains a laundry list of such authorities. Absent from this list are IRS FAQs. Reasonable basis has generally been viewed as an objective standard as well (at least outside the US Court of Appeals for the Eighth Circuit), and satisfaction of the substantial authority standard suffices for reasonable basis purposes. Reasonable cause is a subjective standard based on consideration of all the facts and circumstances, with the most important factor being the extent to which the taxpayer took steps to determine their proper tax liability.

For many years, taxpayers and practitioners have debated the value of IRS FAQs. On the one hand, they provide much needed guidance that can be helpful to taxpayers. On the other hand, FAQs are not published in the Internal Revenue Bulletin, are not treated as precedential or binding on the IRS and may be removed or changed by the IRS at any time (without any repository available to find prior versions of FAQs). The IRS relies heavily on FAQs to provide immediate guidance to taxpayers—sometimes in the form of substantive guidance—but has historically disclaimed any ability for taxpayers to rely on its FAQs or for IRS personnel to follow its FAQs. This has led to uncertainty in the tax community as to whether (and to what extent) taxpayers can and should follow IRS FAQs for both substantive positions and penalty protection purposes.

Prior to his return to private practice earlier this year, former IRS Chief Counsel Michael Desmond noted the need for better transparency and permanency around certain IRS FAQs. That transparency and permanency has finally arrived, although the weight of its value still remains uncertain. In the new release and fact sheet, the IRS announced as follows:

FAQs are a valuable alternative to guidance published in the Bulletin because they allow the IRS to more quickly communicate information to the public on topics of frequent inquiry and general applicability. FAQs typically provide responses to general inquiries rather than applying the law to taxpayer-specific facts and may not reflect various special rules or exceptions that could apply in any particular case. FAQs that have not been published in the Bulletin will not [...]

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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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Weekly IRS Roundup September 27 – October 1, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 27, 2021 – October 1, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

September 28, 2021: The IRS released a revenue procedure, adding Chile to the list of jurisdictions with which the United States has a relevant information exchange agreement in effect for reporting payments of deposit interest. The IRS also added two countries—the Dominican Republic and Singapore—to the list of jurisdictions with which the US Department of the Treasury (Treasury) and the IRS have determined it is appropriate to have an automatic exchange relationship with.

September 29, 2021: The IRS released draft instructions for supplemental income and loss (Schedule E of Form 1040) concerning the reporting of income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts and residual interests in real estate mortgage investment conduits (REMICs).

October 1, 2021: The Treasury and the IRS published corrections to final regulations (Treasury Decision 9922) that were published in the Federal Register on November 12, 2020. Treasury Decision 9922 provided guidance relating to the allocation and apportionment of deductions and creditable foreign taxes, the definition of financial services income, foreign tax redeterminations, availability of foreign tax credits under the transition tax, the application of the foreign tax credit limitation to consolidated groups, adjustments to hybrid deduction accounts to consider regarding certain inclusions in income by a US shareholder, conduit financing arrangements involving hybrid instruments and the treatment of certain payments under the global intangible low-taxed income provisions.

October 1, 2021: The Treasury and the IRS published a notice and request for comments concerning all forms used by tax-exempt organizations to determine that such organizations fulfill the operating conditions within the limitations of their tax exemption. The IRS provided a list of the relevant forms. Written comments are due on or before November 30, 2021.

October 1, 2021: The Treasury and the IRS published a notice and request for comments concerning the burden associated with US income tax return forms for individual taxpayers. The request covers Form 1040 and affiliated return forms that are used by individuals to report their income subject to tax and compute their correct tax liability. Written comments are due on or before December 3, 2021.

October 1, 2021: The IRS published a news release reminding US citizens, resident aliens and any domestic legal entity that the extension deadline to file their annual Report of Foreign Bank and Financial Accounts (FBAR) is October 15, 2021.

October 1, 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 Robbie Alipour in our Chicago office for this week’s roundup.




Weekly IRS Roundup September 20 – 24, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 20 – 24, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

September 22, 2021: The US Department of the Treasury (Treasury) and the IRS published final regulations under IRC § 301. The regulations update existing regulations under IRC § 301 to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988, which changes provide that the amount of a distribution of property made by a corporation to its shareholder is the fair market value of the distributed property. The regulations affect shareholders that receive a distribution of property from a corporation.

September 22, 2021: The IRS introduced a new webpage that provides information to taxpayers whose large refunds are subject to further review by the Joint Committee on Taxation.

September 22, 2021: The IRS released instructions for Form 1065, U.S. Return of Partnership Income, to reflect the addition of Schedules K-2 and K-3. The new schedules assist partnerships in providing partners with the information necessary for the partners to complete their returns with respect to the international tax provisions of the IRC. The IRS also released related instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation, to reflect Schedules K-2 and K-3, which assist with reporting items of international tax relevance from the operation of an S corporation.

September 24, 2021: The Treasury Department and the IRS published final regulations under IRC under sections 250 and 951A addressing the calculation of qualified business asset investment for qualified improvement property under the alternative depreciation system. The regulations also deal with the transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by the Coronavirus Aid, Relief, and Economic Security Act. The final regulations affect United States shareholders of controlled foreign corporations, domestic corporations eligible for the section 250 deduction and taxpayers that claim credits or deductions for foreign income taxes.

September 24, 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 Robbie Alipour in our Chicago office for this week’s roundup.




Show Me the Money: IRS Introduces Webpage for Large Refunds Subject to JCT Review

When we previously wrote about the Joint Committee on Taxation’s (JCT) process for reviewing refund claims granted by the Internal Revenue Service (IRS), we explained that the IRS generally must submit proposed refunds in excess of $5 million for corporate taxpayers and $2 million for all other taxpayers to the JCT before any such refunds can be paid. However, getting through the JCT review process can be difficult and time-consuming in some situations—and sometimes taxpayers are left in the dark.

On September 22, 2021, the IRS announced the launch of its new webpage that provides information to taxpayers whose large refunds are subject to JCT review. Topics covered include general information about how a JCT review matter arises and how the IRS handles a JCT review case.

Practice Point: The IRS’s new webpage provides a helpful general overview of the JCT review process but does not provide any new information on it. A more detailed discussion of the JCT review process can be found in our prior post and in the JCT’s 2019 process overview.




Weekly IRS Roundup September 13 – 17, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 13, 2021 – September 17, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

September 13, 2021: The IRS issued a news release concerning resources available to help small businesses learn their employer tax responsibilities and to help their employees.

September 13, 2021: The IRS postponed various tax filing and payment deadlines for victims of Hurricane Ida in parts of Pennsylvania. Victims now have until January 3, 2022, to file various individual and business tax returns and make tax payments.

September 14, 2021: The US Department of the Treasury (Treasury) and the IRS published a notice and request for comments concerning the interest rates and appropriate foreign loss payment patterns for determining the qualified insurance income of certain controlled corporations under IRC § 954(f). Written comments should be received on or before November 15, 2021.

September 14, 2021: The IRS issued a news release reminding employers about a valuable tax credit available to them for hiring long-term unemployment recipients and other groups of workers facing significant employment barriers.

September 15, 2021: The Treasury and the IRS published a notice and request for comments concerning forms related to foreign account tax compliance act registration (FATCA), including Forms 8966, 8957, 8966-C, 8809-I and 8508-I. Written comments should be received on or before November 15, 2021.

September 16, 2021: The IRS issued a news release reminding taxpayers who asked for an extension to file their 2020 return that they should file on or before October 15, 2021, to avoid the penalty for filing late.

September 16, 2021: The IRS published a practice unit concerning the limitation of exchange gain or loss on payment or disposition of debt instrument.

September 16, 2021: The Treasury and the IRS published a notice and request for comments on Revenue Procedure 99-17 that prescribes the time and manner for dealers in commodities and traders in securities or commodities to elect to use the mark-to-market method of accounting under IRC § 475(e) or IRC § 475(f). Written comments should be received on or before November 15, 2021.

September 16, 2021: The Treasury and the IRS published a notice and request for comments on Revenue Procedure 2003-33, which provides qualifying taxpayers with an extension of time—pursuant to Treasury Regulations Section 301.9100-3—to file an election described in IRC § 338(a) or IRC § 338(h)(10) to treat the purchase of a corporation’s stock as an asset acquisition. Written comments should be received on or before November 15, 2021.

September 17, 2021: The Treasury and the IRS published a notice and request for comments on forms used by business entity taxpayers, including Forms 1065, 1066, 1120, 1120-C, 1120-F, 1120-H, 1120-ND, 1120-S, [...]

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Weekly IRS Roundup September 6 – September 10, 2021

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

September 7, 2021: The US Department of the Treasury and the IRS issued Notice 2021-53, which provides guidance to employers on reporting the amount of qualified sick and family leave wages paid to employees in 2021 on Form W-2.

September 7, 2021: The IRS announced that the deadline for third quarter estimated tax payments is September 15, 2021.

September 8, 2021: The IRS postponed various tax filing and payment deadlines for victims of Hurricane Ida in parts of New York and New Jersey. Victims now have until January 3, 2022, to file various individual and business tax returns and make tax payments for deadlines that occurred starting on September 1, 2021.

September 9, 2021: The IRS postponed various tax filing and payment deadlines for victims of Hurricane Ida in parts of Mississippi. Victims now have until November 1, 2021, to file various individual and business tax returns and make tax payments that were originally due October 15, 2021.

September 10, 2021: The IRS announced that the cost of home testing for COVID-19 is an eligible medical expense that can be paid or reimbursed under health flexible spending arrangements, health savings accounts, health reimbursement arrangements or Archer medical savings accounts.

September 10, 2021: The IRS issued temporary regulations authorizing the assessment of any erroneous refund of employment tax credits paid under Internal Revenue Code § 3131, 3132 and 3134.

September 10, 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 Emily Mussio in our Chicago office for this week’s roundup.




IRS Acknowledges Limitations on Use of Outside Contractors in Audits

Several years ago, it came to light that the Internal Revenue Service (IRS) had hired a law firm to assist with transfer pricing matters in an ongoing audit of a large corporate taxpayer. Contemporaneous with that hiring, the IRS issued temporary regulations providing that third-party contractors “may receive books, papers, records, or other data summoned by the IRS and take testimony of a person who the IRS has summoned as a witness to provide testimony under oath” and “clarifying that contractors are permitted to participate fully in a summons interview.” We previously discussed this highly controversial position here.

Congress seemingly disapproved of the IRS practice of outsourcing legal and audit services to private law firms. In 2019, it enacted Internal Revenue Code (Code) Section 7602(f) as part of the Taxpayer First Act. That provision prohibits the IRS from hiring outside contractors for purposes other than providing “expert evaluation and assistance” and specifically prohibits non-IRS employees from questioning witnesses under oath. However, no definition was provided as to the meaning “expert evaluation and assistance.”

The IRS recently finalized regulations (applicable to summonses served on after August 6, 2020) providing taxpayer-favorable guidance on the meaning of “expert evaluation and assistance.” Under the final regulations, the IRS may not engage outside legal counsel unless the attorney is hired by the IRS for expertise in (A) foreign, state or local law, (B) non-tax substantive law that is relevant to an issue in the examination, or (C) knowledge, skills or abilities other than providing legal services as an attorney (such as a translator). In addition, the final regulations prohibit IRS contractors from asking a witness (or his or her representative) to clarify an objection or assertion of privilege, as well as from asking questions to witnesses generally, when the witness is under oath.

Practice Point: The final regulations provide helpful guidance to taxpayers regarding the role that outside contractors can play in IRS audits and provide a much-needed deterrent on the IRS’s outsourcing of audits to private law firms. However, taxpayer who believe that the IRS is using outside counsel may want to request in writing a list of all third parties that the IRS contacts during the course of the examination.




IRS Releases Fact Sheet on Acceptable Electronic Signatures

The Internal Revenue Service (IRS) released a fact sheet, providing guidance on acceptable methods for taxpayers to electronically or digitally sign certain paper forms that they cannot file electronically. In order to provide taxpayers with greater flexibility during the COVID-19 pandemic, the IRS previously announced taxpayers may use digital signatures for certain forms through the end of 2021. The newly released fact sheet is the first guidance as to what constitutes an acceptable electronic signature.

The fact sheet notes that the IRS is balancing the flexibility of electronic signatures with security and fraud protections. Electronic signatures accepted by the IRS include:

  • A name typed on a signature block
  • A scanned or digitized image of a handwritten signature that is attached to an electronic record
  • A handwritten signature input onto an electronic signature pad
  • A handwritten signature, mark or command input on a display screen with a stylus device
  • A signature created by a third-party software

Additionally, the IRS will accept images of electronic signatures provided the image is a file type supported by Microsoft Office, such as .jpg, .pdf and .tiff.

The fact sheet provides a list of paper-filed forms—which cannot be e-filed—where a taxpayer may use an electronic signature:

  • Form 11-C, Occupational Tax and Registration Return for Wagering;
  • Form 637, Application for Registration (For Certain Excise Tax Activities);
  • Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
  • Form 706-A, U.S. Additional Estate Tax Return;
  • Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;
  • Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;
  • Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;
  • Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;
  • Form 706 Schedule R-1, Generation Skipping Transfer Tax;
  • Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
  • Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
  • Form 730, Monthly Tax Return for Wagers;
  • Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
  • Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
  • Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;
  • Form 1120-H, U.S. Income Tax Return for Homeowners Associations;
  • Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return;
  • Form 1120-L, U.S. Life Insurance Company Income Tax Return;
  • Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
  • Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
  • Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
  • Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;
  • Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);
  • Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;
  • Form 1128, Application to Adopt, Change or Retain a Tax Year;
  • Form 2678, Employer/Payer Appointment of Agent;
  • Form 3115, Application for Change in Accounting Method;
  • Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;
  • Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;
  • Form 4421, Declaration – [...]

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Weekly IRS Roundup August 30 – September 3, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 30, 2021 – September 3, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

August 30, 2021: With September being National Preparedness Month, the IRS reminded everyone to develop an emergency preparedness plan—especially with the height of hurricane season approaching and the ongoing wildfires. To prepare, taxpayers should secure and duplicate essential tax and financial documents.

August 31, 2021: The IRS postponed various tax filing and payment deadlines for victims of Hurricane Ida. Affected individuals and businesses will have until January 3, 2022, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until January 3, 2022, to file. However, tax payments related to 2020 tax returns that were due on May 17, 2021, are not eligible for this relief. This extension also applies to quarterly estimated income tax payments due on September 15, 2021.

September 1, 2021: The IRS issued a practice unit on general principles for foreign tax credits, specifically addressing foreign tax credits as changed by the Tax Cuts and Jobs Act of 2017.

September 2, 2021: The IRS issued final regulations, modifying previous regulations relating to IRS administrative proceedings, to reflect limitations that are required by the enactment of the Taxpayer First Act of 2019. The regulations implement new rules regarding the persons who may be provided books, papers, records or other data obtained pursuant to Internal Revenue Code Section 7602 for the sole purpose of providing expert evaluation and assistance to the IRS. The regulations adopt further limitations on the type of non-governmental attorneys to whom any books, papers, records or other data may be provided. Under the final regulations, IRS contractors are prohibited from asking substantive questions of a summoned witness under oath or asking a summoned person’s representative to clarify an objection or assertion of privilege.

September 3, 2021: The IRS issued Revenue Procedure 2021-40, announcing that it will not issue private letter rulings or determination letters on whether certain transactions are considered an act of self-dealing under Internal Revenue Code Section 4941.

September 3, 2021: The IRS issued Notice 2021-52, providing travel per diem rates for 2021 – 2022.

September 3, 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 Emily Mussio in our Chicago office for this week’s roundup.




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