Employers Be Forewarned and Forearmed: Recent IRS Announcements Require Action on ERTC Claims

Promoters and tax advisors have extensively marketed the Employee Retention Tax Credit (ERTC) as a way for employers to reclaim Federal Insurance Contributions Act payroll taxes paid during the first two years of COVID-19. The rules governing ERTC claims are complex and nuanced, however, resulting in increased scrutiny by the Internal Revenue Service (IRS). Asserting that many employers have improperly claimed these heavily marketed ERTC refunds, the IRS released two announcements, one on September 14, 2023, and the other on October 19, 2023, that address ERTC claims. In conjunction with these announcements, the IRS has already named fraudulent ERTC claims as number one on its “Dirty Dozen” list for 2023.

Specifically, the IRS will now target erroneous ERTC claims with penalties and interest. If a case is deemed fraudulent, the IRS will investigate and may impose civil and criminal penalties. The IRS has also suspended ERTC refund claims and provided a new withdrawal process for potentially fraudulent claims.

Weekly IRS Roundup October 30 – November 3, 2023

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 30, 2023 – November 3, 2023.

October 30, 2023: The IRS released Internal Revenue Bulletin 2023-44, which includes the following:

  • Proposed regulations that would update the rules governing the IRS’s sale of taxpayer property that was seized by levy.
  • Proposed regulations addressing so-called “Killer B” transactions. These transactions, at a high level, are structured to repatriate foreign subsidiary earnings through triangular reorganizations. The proposed regulations would formalize and modify guidance set forth in Notices 2014-32 and 2016-73.
  • Final regulations that provide rules for prohibitions on certain contributions to Type I and Type III supporting organizations, as well as rules for qualifying as functionally integrated and non-functionally integrated Type III supporting organizations.
  • Notice 2023-71, which extends all tax filing and payment deadlines from October 7, 2023, to October 7, 2024, for taxpayers affected by the recent terrorist attacks in Israel.

October 30, 2023: The IRS extended its policy for accepting digital signatures for certain tax forms until October 31, 2025. The IRS updated the Internal Revenue Manual to be consistent with this extension.

October 31, 2023: The IRS reminded taxpayers to remain vigilant against potential online threats and highlighted certain practices to help protect against cybersecurity attacks.

November 1, 2023: The IRS announced that clean vehicle sellers can now register for time-of-sale reporting and dealer advance payments for the clean vehicle credit using the new Energy Credits Online tool.

November 1, 2023: The IRS announced that the amount individuals can contribute to their 401(k) plans in 2024 has increased to $23,000, up from $22,500 in 2023. Notice 2023-75, which was released the same day, provides adjusted 2024 limitations on benefits and contributions under qualified retirement plans as under § 415(d).

November 2, 2023: The IRS rescheduled the hearing on proposed regulations regarding digital asset transactions from November 7, 2023, to November 13, 2023.

November 2, 2023: The IRS published Tax Tip 2023-119, which notes that individuals may now review 18 new Nationwide Tax Forums Online seminars.

November 3, 2023: The IRS reminded taxpayers to review their tax withholding obligations ahead of the upcoming tax filing season to avoid having a large refund or balance due.

November 3, 2023: The IRS issued proposed regulations that would add new requirements relating to the disclosure of information that group health plans and health insurance issuers must include subject to the No Surprises Act. The proposed regulations consider requiring plans and issuers to register via the Federal IDR portal. Comments must be received by January 2, 2024.

November 3, 2023: The IRS released its weekly list [...]

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Federal District Court Rules Codified Economic Substance Doctrine Vitiates Tax Transaction Benefits

On October 31, 2023, the US District Court for the District of Colorado, in Liberty Global, Inc. v. United States, applied the codified economic substance doctrine and held—on summary judgment—that Liberty Global, Inc. (LGI) must recognize $2.4 billion in taxable gain. At issue was a four-step transaction that took place in 2018, as a result of which LGI took the position that a dividends received deduction offset a $2.4 billion taxable gain based on a purported “mismatch” between (1) the rules for taxation of global intangible low-taxed income (GILTI) or subpart F income of a controlled foreign corporation (CFC) and (2) the qualification of an entity as a CFC.

In rejecting what it described as LGI’s “scheme” to “exploit” the apparent mismatch, the Court made three preliminary holdings. First, LGI argued that the prefatory clause in Internal Revenue Code (IRC) section 7701(o)—“[i]n the case of any transaction to which the economic substance doctrine is relevant”—requires courts to conduct a threshold analysis into whether the economic substance doctrine is “relevant” to the transaction at issue, and only then can courts consider whether the transaction has “economic substance.” The Court rejected this argument, stating that “there is no threshold ‘relevance’ inquiry that precedes the inquiry” into a transaction’s economic substance. Instead, “the doctrine’s relevance is coextensive with the statute’s test for economic substance.” Second, the Court held that the proper unit of analysis is “the transaction in aggregate” and did not analyze any step or phase in isolation, even if it could be said that the tax benefit at issue was “created” because of a particular step. And third, the Court denied LGI’s contention that its transaction falls under any exception to the economic substance doctrine. The Court determined that LGI’s transaction was not a “basic business transaction” and, although a series of transactions that constitute a corporate organization or reorganization might fall outside the economic substance doctrine, a series of transactions that merely includes a reorganization is not necessarily exempt.

The Court then applied the economic substance doctrine. LGI conceded that steps one through three “did not change, in a meaningful way, LGI’s economic position,” so the Court considered whether the steps had a substantial, non-tax purpose. LGI asserted that the transaction was “in furtherance” of Belgian corporate law requirements, but the Court found LGI had failed to indicate how the transaction facilitated such compliance. Moreover, an action may be “in furtherance” of some end without being a “substantial purpose” of the action, as IRC Section 7701(o) requires. Even if an isolated step provided substantial, non-tax benefits for LGI, that does not suggest the existence of a non-tax purpose for “the entire scheme.” Thus, the Court held that “the only substantial purpose of the transaction was tax evasion.”

The Court concluded that steps one through three of the transaction must be disregarded under federal law, resulting in $2.4 billion of taxable gain on LGI’s sale of its subsidiary during step four without such gain being converted to a dividend and [...]

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Weekly IRS Roundup October 23 – October 27, 2023

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 23, 2023 – October 27, 2023.

October 23, 2023: The IRS is recruiting volunteers for the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. VITA and TCE participants prepare millions of tax returns each year for low- to moderate-income taxpayers at no cost. No experience is necessary to volunteer. Volunteers will have the option to participate both in-person and via virtual sites. To learn more about becoming a VITA or TCE volunteer, visit IRS Tax Volunteers.

October 23, 2023: The IRS warned taxpayers to be wary of criminals falsely posing as legitimate charities to solicit donations. Donors can use the Tax-Exempt Organization Search tool on IRS.gov to find or verify legitimate charities.

October 23, 2023: The IRS released Internal Revenue Bulletin 2023-43, which includes the following:

  • Final regulations and proposed regulations that reduce the user fee to apply for or renew a preparer tax identification number (PTIN) from $21 to $11 (plus an amount payable directly to a third-party contractor).
  • Revenue Procedure 2023-28 provides guidelines for the development, printing and approval of 2023 substitute tax forms.
  • Proposed regulations that would provide guidance on §§ 30D(g) and 25E(f), including guidance involving:
    • Elections to transfer new and previously owned clean vehicle credits
    • Dealer qualifications for becoming an eligible entity that can receive advance payments of new and previously owned clean vehicle credits
    • Credit recapture.
  • Revenue Procedure 2023-33 sets forth the procedures for transferring new and previously owned clean vehicle credits from a taxpayer to an eligible entity under §§ 30D(g) and 25E(f), including procedures for dealer registration with the IRS, procedures for the suspension and revocation of said registration and the establishment of an advance payments program to registered dealers. This revenue procedure also provides guidance on the submission of seller reports and reports by qualified manufacturers.

October 24, 2023: The IRS reminded tax return preparers to renew their PTINs ahead of the upcoming tax filing season. Information to begin the online renewal process can be accessed here. Failure to have and to use a valid PTIN may result in penalties.

October 25, 2023: The IRS published Tax Tip 2023-118, which notes that tax professionals can use Tax Pro Accounts to send powers of attorney and tax information authorization requests directly to a client’s individual IRS Online Account.

October 25, 2023: The deadline to comment on proposed regulations involving information reporting, backup withholding and the determination of amount realized and basis for digital assets sales was extended from October 30, 2023, to November 13, 2023.

October 26, 2023: The IRS encouraged employers to electronically [...]

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Court Rules Taxpayer Can Offset Foreign Tax Credits With NIIT Liability Under Tax Treaty

In 2013, the net investment income tax (NIIT) found in Internal Revenue Code (IRC) Section 1411 went into effect. Since then, United States taxpayers residing outside of the US have lived with uncertainty as to whether the taxes they pay in their local country can be used as a tax credit to offset the NIIT. A recent court decision held that certain tax treaties may allow for US foreign tax credits (FTCs) to be applicable, allowing eligible taxpayers to seek refunds for potentially up to 10 years of paid NIIT.

On October 23, 2023, in Christensen v. United States, the US Court of Federal Claims ruled that two US citizens residing in France were permitted, under a tax treaty between the US and France, to use FTCs arising from French income tax liability to offset NIIT liability. Christensen is the first case to hold that, although FTCs cannot be used to offset NIIT liability under US domestic law, this restriction can be overridden by a US-France tax treaty provision, which is replicated in many US tax treaties, that provides broader FTC coverage for US citizens residing abroad.

The taxpayers in Christensen were married US citizens residing in France. The taxpayers earned income that was subject to both French income tax and (by virtue of their US citizenship) US federal income tax, including the NIIT. On their US federal income tax return, the taxpayers netted the FTCs arising from their French income tax liability against their NIIT liability, relying on Articles 24(2)(a) and 24(2)(b) of the US-France tax treaty for support.

Article 24(2)(a) of the treaty is a general provision that provides that the US shall grant its citizens a credit against US federal income tax for French income taxes paid “[i]n accordance with the provisions and subject to the limitations of the law of the United States.” In Christensen, the Court of Federal Claims noted that the NIIT was a tax imposed by IRC Chapter 2A and that the FTC provisions in IRC Section 901 et seq. restricted FTCs from offsetting US federal income tax liability arising under IRC Chapter 1. Therefore, the Court held that Article 24(2)(a) did not permit the taxpayers to use FTCs to offset NIIT liability because granting FTCs under Article 24(2)(a) was “subject to the limitations of the law of the United States,” including the limitation that FTCs could not offset liability incurred pursuant to Chapter 2A. This holding was consistent with holdings in two other recent cases that also addressed the interaction of FTCs and NIIT: Toulouse v. Commissioner, 157 T.C. 49 (2021), and Kim v. United States, 2023 WL 3213547 (C.D. Cal. Mar. 28, 2023).

However, Article 24(2)(b) of the treaty contains a special provision applicable to US citizens residing in France. This provision generally provides that, when applying the “three bites” rule for determining the order in which US and French FTCs are applied with respect to such persons, the US shall grant such persons a credit against US [...]

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