TAX CONTROVERSY 360

Upcoming Webinar: Defeating IRS Penalties

by Edward L. Froelich, Shawn O’Brien and Michael J. Scarduzio | Feb 25, 2025 | Court Procedure Matters, IRS Audits

The IRS has an extensive set of penalties that it can impose on both corporate and individual taxpayers, and recent audit trends indicate a growing tendency to apply multiple penalties. Join McDermott’s Tax Controversy & Litigation Group on March 5, 2025, for a webinar that will dive into the penalties the IRS may pursue and the strategies you can use to defend against them. Gain key insights into both the substantive and procedural aspects of IRS penalties, along with critical steps to safeguard your interests.

Discuss topics will include:
• Strategies for seeking abatement of IRS penalties and available defenses
• Preserving the attorney-client privilege during penalty cases
• Emerging trends in litigating penalty cases
• Understanding the IRS’s enforcement efforts relating to partnerships

Click here for details and to register.

IRS Roundup February 10 – 14, 2025

by Evan Walters, Samuel F. Hamer, Edward L. Froelich and Michael J. Scarduzio | Feb 25, 2025 | IRS Guidance, Tax Reform

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of February 10, 2025 – February 14, 2025.

TAX-CONTROVERSY-RELATED DEVELOPMENTS

The previous IRS Roundup provided general coverage of the proposed Taxpayer Assistance and Service (TAS) Act. This post highlights Section 310 of the TAS Act, which would give the US Tax Court authority to hear general refund suits similar to those currently heard in the US district courts and the US Court of Federal Claims.

Historically, taxpayers could only contest their tax liability by first paying the tax and then suing for a refund in a district court or the Court of Federal Claims. The Board of Tax Appeals (BTA), the forerunner to the Tax Court, was created in 1924 to give taxpayers a prepayment forum in which to dispute their tax liability. The BTA was initially proposed to have general refund suit jurisdiction, but Congress limited its jurisdiction to cases brought in response to a notice of deficiency. Several proposals have been made over the years to expand the jurisdiction of the BTA and (now) the Tax Court to include general refund suits, which they would share with the district courts and the Court of Federal Claims. Recent support for this approach has come from National Taxpayer Advocates Nina Olson and Erin Collins. As one commentator noted, the proposed expansion to the Tax Court’s jurisdiction has the potential to improve access to justice for taxpayers and reduce the burden on district courts and the Court of Federal Claims.

IRS GUIDANCE

February 12, 2025: The IRS issued Revenue Procedure 2015-16, which provides depreciation deduction limitations for “passenger automobiles” (including trucks and vans) placed in service during 2025 and income inclusion amounts for lessees of such vehicles. The revenue procedure also includes two tables detailing depreciation limits based on whether the Internal Revenue Code (Code) § 168(k) additional first-year depreciation deduction applies. Additionally, the revenue procedure outlines the inflation adjustment calculation for these limits and provides a table for determining income inclusions for leased passenger automobiles. The tables reflect the automobile price inflation adjustments required by Code § 280F(d)(7).

February 12, 2025: The IRS released Notice 2025-14, which provides guidance on the corporate bond monthly yield curve, spot segment rates under Code § 417(e)(3), and 24-month average segment rates under Code § 430(h)(2). The notice also provides guidance as to the interest rate on 30-year Treasury securities under Code § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code § 431(c)(6)(E)(ii)(I).

February 13, 2025: The IRS issued Revenue Procedure 2025-15, which provides discount factors for the 2024 accident year for insurance companies to use when computing discounted unpaid losses under Code § 846 and discounted estimated salvage recoverable under Code § 832. The revenue procedure includes tables with discount factors for various lines of business (both short- and long-tail) and addresses the use of [...]

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IRS Roundup January 20 – 31, 2025

by Evan Walters, Samuel F. Hamer, Edward L. Froelich and Michael J. Scarduzio | Feb 13, 2025 | Court Procedure Matters, IRS Appeals, IRS Guidance, Tax Reform, Tax Refunds

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the weeks of January 20, 2025 – January 24, 2025, and January 27, 2025 – January 31, 2025.

TAX-CONTROVERSY-RELATED DEVELOPMENTS

January 22, 2025: The IRS reminded taxpayers that they have rights – outlined in the Taxpayer Bill of Rights – any time they interact with the IRS. These rights cover a wide range of topics and issues and lay out what taxpayers can expect when interacting with the IRS. Taxpayers should also know that the Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects their rights for free. TAS can help if assistance is needed to resolve an IRS problem, if a problem is causing financial difficulty, or if an IRS system or procedure isn’t working as it should.

January 24, 2025: Alarm Concepts Inc. filed a class action lawsuit against the IRS and Booz Allen Hamilton Inc. after being notified that its tax data was stolen and leaked by Charles Littlejohn, a Booz Allen employee contracted to work at the IRS. Littlejohn pled guilty in October 2023 to unlawfully disclosing confidential tax returns and return information between 2018 and 2020. The breach appears to have affected tens of thousands of taxpayers.

The lawsuit alleges that the IRS failed to implement adequate cybersecurity measures despite repeated warnings, and that Booz Allen neglected to protect the data. The stolen information includes sensitive details from Forms 1099 and Schedule K-1. The lawsuit highlights ongoing risks of identity theft and fraud for the affected taxpayers.

The lawsuit asserts that Alarm Concepts and class members are entitled to statutory damages of $1,000 for each unauthorized inspection or disclosure, as well as punitive damages because the disclosures were willful or the result of gross negligence.

January 30, 2025: The US Senate Committee on Finance released a bipartisan discussion draft of legislation aimed at improving IRS procedures and administration. The proposed bill, named the Taxpayer Assistance Service Act (TAS Act), seeks to enhance the taxpayer experience by facilitating better communication with the IRS, streamlining tax compliance and dispute processes, and ensuring timely expert assistance. Key provisions include improving “math error” notices, expanding US Tax Court jurisdiction, simplifying foreign bank account report compliance, and expanding access to the IRS Independent Office of Appeals. The draft also aims to expand the independence of the National Taxpayer Advocate (NTA) from the IRS and strengthen the IRS whistleblower program while protecting the confidentiality of taxpayer information.

The proposed bill reflects nonpartisan recommendations and seeks to address challenges faced by taxpayers within the current tax system. Proponents of the proposed bill include the current NTA Erin Collins and the long-serving former NTA Nina Olson. Olson described the TAS Act as a “sweeping piece of legislation that promises to improve federal tax administration and increase taxpayer protections.”

TAX RETURN FILING SEASON DEVELOPMENTS

January [...]

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IRS Roundup January 13 – 17, 2025

by Evan Walters, Samuel F. Hamer, Edward L. Froelich and Michael J. Scarduzio | Feb 4, 2025 | Alternative Dispute Resolution, IRS Appeals, IRS Guidance, Tax Reform
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of January 13, 2025 – January 17, 2025.

TAX CONTROVERSY-RELATED DEVELOPMENTS

January 15, 2025: The US Department of the Treasury (Treasury) and the IRS published final regulations, providing guidance on the resolution of federal tax controversies by the IRS Independent Office of Appeals (IRS Appeals). These final regulations are applicable to requests for IRS Appeals consideration made on or after February 14, 2025.

The Taxpayer First Act of 2019 (TFA) codified IRS Appeals and prescribed that its consideration should be “generally available to all taxpayers” who wished to resolve their federal tax controversies. Proposed regulations published on September 13, 2022, identified 24 exceptions to the term “federal tax controversy.” These exceptions preclude IRS Appeals from considering taxpayer challenges to the constitutionality of statutes and the validity of regulations, as well as the procedural validity of notices and revenue procedures. During the comment period for the proposed regulations, the exceptions regarding statutory/regulatory challenges were the focus of most public comments by far. However, the exceptions were left almost entirely unchanged in the final version of the regulations.

Practice Point: Because the TFA prescribes that IRS Appeals consideration should be “generally available to all taxpayers,” we expect judicial challenges to the validity of the final regulations on Administrative Procedure Act and substantive grounds. In the interim taxpayers should continue asserting their arguments challenging the validity of deficient guidance on constitutional or other grounds.

Relatedly, the IRS issued Announcement 2025-6, which describes three pilot initiatives that will test changes to existing Alternative Dispute Resolution programs. These programs are designed to help taxpayers resolve tax disputes earlier and more efficiently. The pilots focus on Fast Track Settlement, a program that allows IRS Appeals to mediate disputes between a taxpayer and the IRS while the case is still within the jurisdiction of the examination function, and Post-Appeals Mediation, a program in which a mediator helps foster a settlement between IRS Appeals and the taxpayer.

CLEAN ENERGY-RELATED DEVELOPMENTS

January 14, 2025: The Treasury and the IRS published final regulations regarding the clean electricity production credit under Internal Revenue Code (Code) Section 45Y and the clean electricity investment credit under Code Section 48E, established by the Inflation Reduction Act of 2022 (IRA). These final regulations provide rules for determining greenhouse gas emissions rates resulting from the production of electricity, petitioning for provisional emissions rates, and determining eligibility for these credits in various circumstances. The final regulations affect all taxpayers who claim the clean electricity production credit with respect to a qualified facility or the clean electricity investment credit with respect to a qualified facility or energy storage technology, as applicable, that is placed in service after 2024.

January 15, 2025: The IRS issued Notice 2025-9, which provides a safe harbor for the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year [...]

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DOJ Announces Largest Employee Retention Credit Fraud Indictment

by Michael J. Scarduzio, Samuel F. Hamer and Edward L. Froelich | Jan 28, 2025 | Uncategorized
On January 22, 2025, the US Department of Justice (DOJ) announced the indictment of seven individuals in the largest Employee Retention Credit (ERC) fraud scheme to date. According to the indictment, the defendants filed more than 8,000 refund claims for ERCs and Sick and Family Leave Credits (SFLCs), totaling more than $600 million.

The ERC and SFLC programs were designed to help businesses retain employees on the payroll during the COVID-19 pandemic. Prosecutors allege that the defendants exploited these programs by submitting fraudulent claims on behalf of ineligible businesses, inflating employee numbers, and misrepresenting wages. DOJ asserted that the defendants concealed their involvement by not identifying themselves as preparers on the returns, using virtual private networks and through other means.

Practice Point: DOJ’s announcement makes clear that ERC fraud remains an enforcement priority for 2025. Taxpayers and tax professionals should prepare now to defend their ERC claims, including by compiling and maintaining substantiation to support each claim, and be ready to take immediate steps should they receive an IRS audit notice, a request for documentation or information, or are otherwise contacted by the government.

Read more here.

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