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Weekly IRS Roundup November 14 – November 18, 2022

by | Nov 21, 2022 | , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of November 14, 2022 – November 18, 2022.

November 14, 2022: The IRS released Internal Revenue Bulletin 2022-46, which highlights the following:

  • Announcement 2022-21: The Office of Professional Responsibility announced recent disciplinary sanctions involving lawyers, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents and appraisers.

November 14, 2022: The IRS released Notice 2022-59, which provides the adjusted applicable dollar amount to be multiplied by the average number of covered lives for purposes of calculating the fee imposed by Sections 4375 and 4376 for policy years and plan years that end on or after October 1, 2022, and before October 1, 2023. The amount is $3.00, up from $2.79.

November 14, 2022: The IRS released Tax Tip 2022-174, which provides an overview of the Taxpayer Bill of Rights (TBOR). We have previously posted about TBOR.

November 15, 2022: The IRS released Tax Tip 2022-175, reminding people that Giving Tuesday is coming up and is a good time to review whether their charitable donation is tax deductible. Giving Tuesday is the Tuesday after Thanksgiving.

November 15, 2022: The IRS reminded taxpayers that IRS Free File will be closed after November 17. IRS Free File allows people with incomes of $73,000 or less to file a return online for free using brand name software.

November 15, 2022: The IRS Advisory Council issued its 2022 Public Report, which includes recommendations for new and continuing issues in tax administration. The report emphasized the need for “consistent and multi-year funding for the IRS to achieve its goals of providing efficient, effective, modern service to the nation’s taxpayers.” The 146-page report details recommendations for 21 issues, including:

  • IRS business and information technology modernization
  • Reduction in electronic filing threshold for information return filers
  • Alignment of electronic signature requirements on withholding certificates
  • Accelerated issuance of IRS Form 6166, Certification of US Residency
  • Series 8038 Form Redesign and Updates
  • Business Master File Transcript Delivery Service

November 15, 2022: The IRS issued Revenue Rule 2022-22, which provides the applicable federal rates for federal income tax purposes for December 2022. The short-term federal interest rate will increase to 4.55%, the mid-term rate will rise to 4.27% and the long-term rate will rise to 4.34%.

November 16, 2022: The IRS released Revenue Procedure 2022-39, which obsoletes Revenue Procedure 94-69, 1994-2 C.B. 804, and sets out the procedures for eligible taxpayers to file an amended return in accordance with Section 1.6664-2(c)(4)(ii) of the regulations. This revenue procedure also sets out the procedures for eligible taxpayers to avoid the Sections 6662(b)(1) and 6662(b)(2) accuracy related penalties to the extent that the taxpayers report errors resulting in additional tax or adequately discloses the tax treatment of an [...]

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Weekly IRS Roundup September 6 – September 9, 2022

by | Sep 12, 2022 | ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 6, 2022 – September 9, 2022.

September 6, 2022: The IRS released Internal Revenue Bulletin 2022-36, which highlights the following:

  • Notice 2022-36: This guidance provides relief from certain failure to file penalties with respect to the 2019 and 2020 tax years. The IRS is refunding $1.2 billion in penalties for 1.6 million taxpayers, which will be waived, abated, refunded or credited. The relief is designed to help struggling taxpayers affected by the COVID-19 pandemic and to allow the IRS to focus resources on processing backlogged tax returns and taxpayer correspondence.
  • Notice 2022-35: This notice provides updates on the corporate bond monthly yield curve, the corresponding segment rates, the 24-month average corporate bond segment rates, the 25-year average segment rates and the 30-year Treasury securities interest rates.
  • Revenue Ruling 2022-17: This ruling provides the federal rates, adjusted federal rates, adjusted federal long-term rate and the long-term tax-exempt rate for September 2022.

September 6, 2022: The IRS reminded taxpayers who pay estimated taxes that the deadline to submit their third quarter payments is September 15, 2022. Taxpayers not subject to withholding may need to make quarterly estimated payments, including those who are self-employed, investors, or retirees or those with other income not subject to withholding, such as interest, dividends, capital gains, alimony, cryptocurrency and rental income.

September 6, 2022: The IRS released Tax Tip 2022-136, explaining common tricks and scams that lead to identity theft. The IRS also suggested a few steps to help protect data, which include:

  • Using multifactor authentication to protect client accounts
  • Allowing anti-virus software to update automatically
  • Using drive encryption and regularly backing up files to help stop theft and ransomware attacks.

September 7, 2022: The IRS is seeking comments on regulations that provide guidance on proving delivery for documents with a filing deadline, specifically in cases where there is no direct proof. The IRS is inviting comments on (1) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (2) the accuracy of the agency’s estimate of the burden of the collection of information; (3) ways to enhance the quality, utility and clarity of the information collected; (4) ways to minimize the burden of the collection of information on respondents; and (5) estimates of capital or start-up costs and costs of operation, maintenance and purchase of services to provide information. The comment window closes on November 7, 2022.

September 7, 2022: The IRS released Tax Tip 2022-137, highlighting the work opportunity tax credit for businesses looking to hire help. The credit encourages employers to hire workers certified as members of any of the 10 groups identified as facing barriers [...]

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IRS Releases Five-Year Strategic Plan with Emphasis on Enforcement

by and | Jul 26, 2022 | , ,

The Internal Revenue Service (IRS) released its five-year strategic plan (Strategic Plan) for 2022 – 2026, laying out four major goals:

  1. Service: Provide quality and accessible services to enhance the taxpayer experience
  2. Enforcement: Enforce the tax law fairly and efficiently to increase voluntary compliance and narrow the tax gap
  3. People: Foster an inclusive, diverse and well-equipped workforce and strengthen relationships with external partners
  4. Transformation: Transform IRS operations to become more resilient, agile and responsive to improve the taxpayer experience and narrow the tax gap.

In the portion of his opening message that addressed enforcement, IRS Commissioner Chuck Rettig focused on listed transactions, saying, “We also continued to make important progress in our compliance programs, with a particular focus on abusive tax shelters, including syndicated conservation easements and microcaptive insurance arrangements.”

The Strategic Plan vows an increased focus on noncompliant, high-income and high-wealth taxpayers, partnerships and large corporations, which the report asserts “make up a disproportionate share of the unpaid taxes.” The IRS intends to improve efforts to collect unpaid taxes with effective deterrence and enhanced enforcement capabilities. Employees will also have access to Enterprise Case Management, which will provide agents with the full history of a taxpayer, along with other tools to prevent and address noncompliance. The IRS also wants to reduce the burden on taxpayers by decreasing the time between filing returns and compliance issue resolution. Finally, the IRS plans to improve public confidence by promoting compliance through publicizing criminal prosecutions and civil enforcement efforts.

Additionally, the IRS points to increasing efforts to proactively identify fraud schemes. Its Office of Fraud Enforcement is creating a new Virtual Currency Learning Academy for all IRS personnel—from beginners to experts—with training focused on cryptocurrencies, blockchain tracing, anti-money laundering compliance and Altcoins.

While responsibilities and workloads at the IRS have been increasing, resources to combat criminal fraud and tax evasion have been decreasing. The IRS says it must continue updating necessary tax guidance for new investments, invest in analytical approaches to improve case selection and maintain institutional knowledge of how to combat avoidance activities.

The Strategic Plan indicates that the IRS continues to navigate challenges related to insufficient funding, decreasing workforce and hiring difficulties. In response, the IRS intends to expand electronic services with online accounts and digital filing capabilities. The IRS also plans to expand resources for international taxpayers, as well as implement a Multilingual Strategy with new publications in multiple languages. Other goals include increasing outreach with enhanced social media strategies and prioritizing security while safeguarding taxpayer data.

The Strategic Plan also discusses the IRS’s aging workforce and above-average attrition rates. In response, the IRS intends to hire additional employees, enhance retention and implement a Comprehensive Training Strategy.

Finally, the IRS plans to make improvements to infrastructure, which includes reorganizing operations, upgrading and modernizing systems, accelerating cybersecurity modernization efforts from cyber threats and reducing the paper volume by using digital data more effectively.

Commissioner Rettig stated, “[w]orking toward these strategic goals with consistent multi-year funding will [...]

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Recent Tax Developments Concerning Staking Rewards

by , and | Feb 5, 2022 |

Stakers—taxpayers involved in proof of stake (PoS) validation of blockchain transactions—continue to operate in uncharted tax waters. PoS blockchains represent over half of the $1.68 trillion cryptocurrency market capitalization, with five of the top 10 PoS blockchains having a stake rate greater than 50%. Despite the remarkable growth of the PoS market in the last two years, there is no government guidance about the tax treatment of staking rewards.

In a closely followed case in the US District Court for the Middle District of Tennessee, Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn.), a taxpayer paid tax on staking rewards and sued for a refund. The question before the district court is whether the receipt of staking rewards generates taxable income at the date the rewards are received.

On February 3, 2022, it was reported that the Internal Revenue Service (IRS) offered to refund the taxpayer’s money for taxes paid on staking rewards. The taxpayer rejected the IRS’s offer to receive a definitive ruling that will be binding on the IRS.

In this article, we look at the issue before the district court and address the significance of the recent offer by the IRS to refund the taxpayer’s tax payment.

VIRTUAL CURRENCY STAKING

In PoS systems, stakers are chosen by combinations of random selection plus the amount of units making up their stake and/or the amount of time they agree to lock up the stakes in a specific digital wallet. Staked units support the blockchain operations by validating transactions on the blockchain and earning rewards. Unlike the mining activities of proof of work (PoW) blockchain miners, stakers validate new blocks by forging the next block on the blockchain without mathematical computations. Certain platforms participate in staking by pooling their customers’ tokens and sharing the staking rewards.

Although each blockchain protocol is different, PoS protocols require stakers to hold (for an agreed amount of time) and post a minimum number of units (stake) to participate in the validation process. Stakers receive, as staking rewards, a specified number of units. These reward units can redistribute ownership stakes away from computers (nodes) that do not put up a stake to those nodes that do put up stakes.

The IRS has addressed the tax treatment of PoW blockchain miners but has not addressed the tax treatment of staking rewards. This means that taxpayers must consider general tax principles that apply to property transactions and adopt a tax methodology they believe is supportable on audit, subject to judicial and administrative review.

Stakers take a wide range of positions with respect to the tax character and tax timing of staking rewards. For example, some stakers take the position that the receipt of staking rewards result in taxable income from the performance of services, while others assert that staking rewards are not taxable until they sell, exchange or otherwise dispose of the rewards. The policy considerations behind each of these positions vary as well, with the timing of taxation on staking rewards currently being litigated in Jarrett v. United [...]

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What You Need to Know About the Taxation of NFTs

by | Jan 18, 2022 |

Non-fungible tokens (NFTs) are today’s hottest digital assets. They are also completely ignored by the Internal Revenue Service—to date, at least—even in the agency’s pronouncement on the taxation of cryptocurrencies.

In this series of articles, we’ll start cracking the NFT code: what they are, how they are created, bought and sold, how they might be taxed by the IRS, and the use of NFTs for charitable contributions and fundraising purposes.

1. Introduction to NFTs – As today’s hottest digital assets, non-fungible tokens (NFTs) have taken the arts and investment worlds by storm. But what are they, exactly, and how are they to be treated for tax purposes? This article provides an overview of need-to-know information regarding these exciting—and potentially risky—assets. Read more.

2. Taxation of NFT Creators – NFTs offer artists, musicians, celebrities, influencers and other creators an opportunity to develop, market and control the future of many types of digital content that they produce. Less understood is how these assets will be categorized and taxed by the Internal Revenue Service. This article reviews how creators of NFTs will likely be treated by the IRS and what that means for them. Read more.

3. Taxation of the Purchase and Sale of NFTs – Given a lack of guidance on the tax treatment of non-fungible tokens (NFTs), taxpayers can be forgiven for experiencing a certain level of uncertainty with respect to how the Internal Revenue Service (IRS) will apply its tax rules to purchases and sales of these assets. IRS reasoning on other asset classes, however, sheds some light on this otherwise uncharted territory. This article reviews the various factors that are likely to play a role in determining the classification and treatment of NFT transactions for tax purposes. Read more.

4. NFTs and Charitable Fundraising: Navigating Tax Hurdles – As the creation of and transactions involving non-fungible tokens (NFTs) have increased dramatically, so has interest in using NFTs as donations to charitable organizations and for other charitable fundraising tools. Given the lack of guidance from the IRS on such gifts, donors and recipient charities face a number of tax uncertainties. This article examines the tax hurdles involved in using NFTs for charitable fundraising purposes and offers suggestions for compliance with recordkeeping and tax reporting requirements. Read more.

Andrea (Andie) Kramer is a recognized thought leader on tax related cryptocurrency matters. She was named the 2020 Go-To Thought Leader in Virtual Currency Tax by the National Law Review and a 2021 Readers’ Choice Top Author in cryptocurrency taxation by JD Supra for her article series on cryptocurrency tax.



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Finding John Doe, Part II: IRS Secures Another Victory to “Root Out” Virtual Currency Tax Noncompliance

by , , and | May 7, 2021 | ,

The Internal Revenue Service (IRS) has scored another significant victory in its rapidly increasing virtual currency tax enforcement efforts. On May 5, 2021, the US District Court for the Northern District of California entered an order authorizing the IRS to serve a John Doe summons on popular cryptocurrency exchange, Payward Ventures Inc. d/b/a Kraken (Kraken). Specifically, the court’s order grants the IRS permission to serve a John Doe summons on Kraken in order to obtain information on US taxpayers who conducted the equivalent of at least $20,000 in total transactions for each year from 2016 to 2020.

If the IRS follows its playbook from the Coinbase summons, its victory here and with the Poloniex summons (upheld by a court in Massachusetts a few weeks ago), will likely result in thousands of US taxpayers receiving a letter from the IRS regarding their virtual currency transactions. As noted in its response to the court, over the past few years the IRS has learned a great deal about analyzing these transactions and is in possession of information from foreign virtual currency exchanges it’s also analyzing. This victory, coupled with the IRS’ increased knowledge of virtual currency transactions, is a big step in its efforts to, as stated in the IRS’ court filing, “root out tax noncompliance.”

As we previously noted in “Finding John Doe: IRS Steps up Enforcement Efforts to Take the Anonymity Out of Virtual Currency,” the court ordered the government to submit a response explaining its need for the information requested in its summons to Kraken. The government’s response indicates that the IRS has made significant progress in its analysis of summoned data from other cryptocurrency exchanges, such as Coinbase, and its ability to follow leads in the cryptocurrency marketplace. The court’s order approving the summons significantly reinforces the strength of the IRS’ crypto pursuit. These efforts are not solely focused on identifying tax noncompliance at a single exchange like Kraken but to identify the conduct for individuals transacting in cryptocurrency with Kraken accounts who may have additional accounts at other exchanges.

In citing its need for additional information to the court, the IRS expressly stated that in its experience from processing the Coinbase summons information, it has learned that taxpayers will use aliases, false addresses, post office boxes, fictitious entity names or other means to disguise their true identity. Taxpayers who create and use false information are more likely to evade their taxes, the IRS argued. The summons approved by the court requires Kraken to produce extensive records and data regarding its accountholders. Among other things, the summons requires Kraken to produce the following for each US-based account with at least $20,000 in annual transactions:

  • Account registration records and user profile information, including name, date of birth, taxpayer ID number, physical address, email address and telephone number
  • History of any IP addresses used to access the account
  • Payment [...]

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Finding John Doe: IRS Steps up Enforcement Efforts to Take the Anonymity Out of Virtual Currency

by | Apr 21, 2021 | , , ,

The Internal Revenue Service (IRS) is stepping up its virtual currency enforcement, and taxpayers who have engaged in a cryptocurrency transaction should immediately assess any potential tax implications as the IRS has recently issued two John Doe summonses to popular exchanges. These are the first it has issued in about three years, sending a very clear signal that the IRS is ready to tackle what it believes to be a continuing noncompliance. A US Federal District Court in Massachusetts upheld the summons issued to Circle Internet Financial Inc., including the popular cryptocurrency exchange Poloniex, while a US Federal Court for the Northern District of California required the government to submit a response explaining its need for the information requested in its summons to Kraken. (See: In re Tax Liability of John Does, No. 21-cv-2201, ECF No. 8 (N.D. Cal. Mar. 31, 2021)).

Filed on April 14, 2021, the government’s response provided numerous examples of how the data received in the Coinbase summons required additional requests in order for the exchange to locate actual taxpayers. The response argued that the need for multiple follow-ups defeated the purpose of the summons. It also described how information in Kraken’s possession, such as accountholder telephone numbers and email addresses, will facilitate the IRS’s ability to utilize relevant cryptocurrency platform data in its possession that was received from other sources relating to foreign-based cryptocurrency exchanges. Noting the potential for abuse by an accountholder, the response provided an example of an individual falsifying their identity as the basis for its need for complete account history in order to catch these issues. In addition, the response stated, “[m]atching the IP addresses for Kraken users to IP addresses and other data points in the IRS’s information will allow the IRS to link substantive account information from multiple sources for a single individual taxpayer and make a more accurate initial determination of whether that individual is in compliance with the internal revenue laws.”

It remains to be seen how the court will react to the government’s response. What is clear, though, from the response and the accompanying affidavit is that the IRS has made significant progress in its analysis of this data and its ability to follow leads. As a result, now is the time for individuals involved in these transactions to consult a tax professional to determine if they have any tax liability or potential exposure, including criminal exposure. After the Coinbase summons, the IRS issued 10,000 letters to taxpayers regarding virtual currency transactions. In the wake of these summonses, and potentially others, it is only a matter of time before the IRS reaches out to thousands of other taxpayers.

It is also clear that the enforcement arm of the IRS is working very closely with its counterparts around the world. The need for email addresses and phone numbers mentioned above to use foreign data certainly drives this point home. Even more so, as a precursor of things to [...]

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Weekly IRS Roundup October 21 – 25, 2019

by | Oct 29, 2019 | ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 21 – 25, 2019.

October 21, 2019: The IRS issued a news release in which it announced the launch of its second annual International Charity Fraud Awareness Week. The IRS joined an international coalition to raise awareness and share practices to help charities and other not-for-profit organizations avoid fraud and stop financial crime. The campaign features an online hub where counter-fraud experts can share webinars, help sheets and case studies.

October 22, 2019: The IRS provided procedures to Chief Counsel attorneys for working and coordinating cases with issues involving virtual currency, including digital assets, digital currency, crypto-assets, and cryptocurrency. Issues that involve virtual currency that are not addressed by Notice 2014-21 or other public guidance, and that involve novel issues or issues likely to attract national attention are required to be coordinated with the National Office.

 October 23, 2019: The IRS released a fact sheet in which it explained that certain tax treatments and employment tax rules can apply to family members working in the family business. The fact sheet stated that if spouses carry on a business together and share in its profits and losses, they may be partners whether or not they have a formal partnership agreement. It further explained how spouses can make a qualified joint venture election if they wish to avoid partnership status.

October 24, 2019: The IRS released two issue snapshots on self-dealing of Private Foundations involving the sale or exchange of property and on self-dealing of Private Foundations involving the lending of money or another extension of credit.

October 25, 2019: The IRS issued final regulations providing guidance on new information reporting obligations under section 6050Y related to reportable policy sales of life insurance contracts and payments of reportable death benefits. No reporting is required under section 6050Y for reportable policy sales made and reportable death benefits paid after December 31, 2017, and before January 1, 2019. The final regulations also provide guidance on the amount of death benefits excluded from gross income under section 101 following a reportable policy sale.  The final regulations affect parties involved in certain life insurance contract transactions, including reportable policy sales, transfers of life insurance contracts to foreign persons, and payments of reportable death benefits. The final regulations are scheduled to be published in the Federal Register on October 31, 2019.

October 25, 2019: 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 and Jenni Saperstein in our Chicago office for this week’s roundup.



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Weekly IRS Roundup October 7 – October 11, 2019

by | Oct 14, 2019 | ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 7 – October 11, 2019.

October 7, 2019: The IRS announced that taxpayers who requested the six-month filing extension should complete their tax returns and file on or before the October 15 deadline.

October 8, 2019: The Treasury and the IRS released the 2019–2020 Priority Guidance Plan that sets forth guidance priorities. This plan prioritizes implementation of the Tax Cuts and Jobs Act, Pub. L. 115-97, 131 Stat. 2054 and of the Taxpayer First Act, Pub. L. 116-25, 133 Stat. 981, enacted on July 1, 2019. In addition, the 2019–2020 Priority Guidance Plan reflects the deregulatory policies and reforms described in Section 1 of Executive Order 13789 (April 21, 2017; 82 FR 19317) and Executive Order 13777 (February 24, 2017; 82 FR 12285).

October 9, 2019: The Treasury and the IRS published a correction to a notice of proposed rulemaking (REG-104870-18) that was published in the Federal Register on September 9, 2019. The proposed regulations cover the timing of an income inclusion under section 451 and reflect changes made by the Tax Cuts and Jobs Act.

October 9, 2019: The Treasury and the IRS published a notice of public hearing on proposed regulations, which cross-references temporary regulations under section 245A that limit the dividends received deduction available for certain dividends received from current or former controlled foreign corporations. The public hearing is being held on Friday, November 22, 2019. The IRS must receive outlines of the topics to be discussed at the public hearing by Monday, November 11, 2019.

October 9, 2019: The Treasury and the IRS issued proposed regulations that provide guidance on the tax consequences of the transition to the use of reference rates other than interbank offered rates (IBORs) in debt instruments and non-debt contracts. The proposed regulations address the possibility that an alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace an IBOR to which the terms of the debt instrument or other contract refers with a new reference rate could result in the realization of income, deduction, gain, or loss for federal income tax purposes or could result in other tax consequences. The proposed regulations will affect parties to debt instruments and other contracts that reference an IBOR.

October 9, 2019:  The IRS issued guidance on the taxation of cryptocurrencies by releasing Rev. Proc. 2019-24 and Frequently Asked Questions on Virtual Currency Transactions. For a more detailed discussion of this guidance, see our post here. 

October 10, 2019: The IRS published draft instructions for Form 1040 and the new Form 1040-SR available to taxpayers age 65 and older.

October 11, 2019: The IRS published its nonacquiescence with GreenTeam Materials Recovery Facility PN v. Commissioner, T.C. Memo 2017-122 and, generally, indicated it will not follow the decision in disposing of cases involving other [...]

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International News II 2018 | International Tax

by | Sep 12, 2018 |

McDermott Will & Emery recently published Issue 2, 2018 of International News, which covers a range of legal developments of interest to those operating internationally.

This issue focuses on the new rules for noncorporate US shareholders in relation to GILTI, the nuances of cryptocurrencies and the tax treatment of such, and highlights the most recent news regarding health care private equity investments in India.

Read full issue.



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