Internal Revenue Service

Following up on our prior posts here and here, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) have proposed to remove 298 regulations and amend 79 regulations. The Treasury’s and the IRS’s action is in response to Executive Order 13789 (April 21, 2017), which called on the Treasury and the IRS to identify and reduce tax regulatory burdens that impose undue financial burdens on US taxpayers or otherwise add undue complexity to federal tax laws.

The 298 regulations are proposed to be removed because they have no current or future applicability and, therefore, no longer provide useful guidance. However, the proposed removal is not intended to alter any non-regulatory guidance that cites or relies on these regulations. The regulations proposed to be removed fall into one of three categories:

  • Regulations interpreting provisions of the Internal Revenue Code (Code) that have been repealed;
  • Regulations interpreting Code provision that, while not repealed, have been significantly revised, and the existing regulations do not account for these statutory changes (note that to fall within this category, the statutory changes must have rendered the entire regulation inapplicable); and
  • Regulations that, by the terms of the relevant Code provisions or the regulations themselves, are no longer applicable (g., expired temporary regulations, certain transition rules)

The 79 regulations proposed to be amended are regulations that make reference to the 298 regulations proposed to be removed.

Before the proposed regulations removing and withdrawing regulations are adopted as final regulations, the Treasury and the IRS will give consideration to any written comments provided by the public. Comments must be received by May 14, 2018. A public hearing may be scheduled if requested in writing by any person that timely submits written comments.

Practice Point: Taxpayers and practitioners may want to review the list of regulations proposed to be removed to determine whether the regulations continue to serve a useful purpose and should be retained.

Tax reform is here to stay (at least for the foreseeable future). The Internal Revenue Service (IRS) may receive additional funds to implement the new tax law. With lowered tax rates, accelerated expensing and forced repatriation of foreign earnings comes an increased risk of an IRS audit. This brave new tax world has left so many questions that tax advisors’ phones have been ringing off the hooks! But as the end of the 2017 year and first quarter of 2018 dust settles, be mindful of the IRS audit to come. Continue Reading Expect Controversy in the Wake of Tax Reform

As we previously discussed, the US Department of the Treasury (Treasury) announced a plan in October 2017 to repeal more than 200 regulations. The plan appears is moving forward based on remarks by Acting Chief Counsel William M. Paul earlier this week at the New York State Bar Association Section meeting that the Internal Revenue Service will soon propose 200 – 300 tax regulations (including longstanding temporary and proposed regulations) for withdrawal as part of President Donald Trump’s 2017 executive order creating a Treasury Regulatory Reform Task Force. Practitioners will have the opportunity to comment before the regulations are withdrawn.

Practice Point: Comments from taxpayers and practitioners will be instrumental in ensuring that seemingly obsolete regulations do not still have effect in other areas or negatively impact tax reporting positions. We will continue to monitor Treasury’s plan and provide more information once the proposal is released.

On December 13, 2017, the US Tax Court (Tax Court) held that a family office was appropriately treated as a business, and permitted to deduct its expenses pursuant to Internal Revenue Code (Code) Section 162. In Lender Management LLC v. Commissioner, T.C. Memo. 2017-246, the Internal Revenue Service (IRS) argued that the taxpayer’s expenses should be properly claimed pursuant to Code Section 212 because the family office was not a business for federal income tax purposes, and instead its expenses were merely costs of its investment activities. Whether or not a family office is a business is important because deductions under Code Section 212 are substantially limited.

The taxpayer was the family office to the Lender’s Bagels fortune. It was owned by two Lender family trusts. In 2010 and 2011, the taxpayer reported net losses on its returns and reported net income in 2012 and 2013. The taxpayer provided direct management services to three limited liability companies (LLCs), each of which elected to be treated as a partnership. The owners of the LLCs were the children, grandchildren and great grandchildren of the founder.

Continue Reading Court Rules That a Family Office Is a Business!

The Internal Revenue Service (IRS) has posted the following regarding the impact of the government shutdown on IRS employees:

This message applies to all IRS employees.

Due to the lapse in federal appropriations, the Internal Revenue Service began an IRS-wide furlough January 20, 2018. All IRS employees with the exception of those notified and deemed “excepted” employees are furloughed. Those furloughed (or “non-excepted) are being placed in a non-pay and non-duty status until further notice. To achieve an orderly shutdown, all furloughed employees must contact their supervisors for procedures to account for government-issued equipment, personal effects requiring retrieval and to transition to furlough status. Employees are allotted up to four (4) hours for orderly shutdown activities.

For continuing information on the furlough, IRS employees are encouraged to monitor this page, news outlets, OPM.gov and the 24/7 Emergency Hotline — 866-743-5748. For TTY access (Federal Relay Service), call 800-877-8339.

We’ll update this page as new information becomes available.

As a reminder, the Employee Assistance Program is available for all IRS employees and their immediate family members at any time, day or night, by calling 800-977-7631 (TDD: 800-697-0353). This no-cost counseling service could help address stress and other issues you and your family may face.

According to its website, the US Tax Court remains open for business today and will continue normal operations for as long as funding permits. Trial sessions scheduled for this week will proceed as scheduled.

Discussions are underway in Congress to reopen the government, but even if an agreement is reached, additional funding may be required in the coming weeks to avoid another shutdown.

Practice Point: Taxpayers and advisors with active matters before the IRS should be aware that it may be difficult, if not impossible, to interact with IRS employees during the shutdown. The shutdown may push back timelines related to the conduct of examinations and matters in litigation.

On January 3, 2018, Chief Judge Marvel of the US Tax Court (Tax Court) announced that Senior Judge Robert A. Wherry, Jr. fully retired as of January 1, 2018, and would no longer be recalled for judicial service.

Judge Wherry was appointed on April 23, 2003, by President George W. Bush. In 2014, Judge Wherry took senior status and continued to try cases. By statute, the Tax Court is composed of 19 presidentially appointed judges. Judges are appointed for a term of 15 years and after an appointed term has expired, or they reach a specified age, may serve as a “senior judge” if recalled by the Tax Court. The Tax Court also has several special trial judges, who generally preside over small tax cases. Continue Reading Senior Tax Court Judge Robert A. Wherry, Jr. Retires

Happy New Year to all our readers! To start off the New Year, the Internal Revenue Service (IRS) has released two pieces of guidance on international tax issues which are noteworthy. Each is briefly discussed below.

The first piece of guidance is Notice 2018-7, which announces the IRS’s intent to issue regulations for determining amounts included in gross income by a United States shareholder under Internal Revenue Code (Code) Section 951(a)(1) by reason of Code Section 965. The IRS has requested comments on the Notice and has indicated that it expects to issue additional guidance under Code Section 965.

The second piece of guidance is a Practice Unit on the substantial contribution test for the controlled manufacturing exception under the Code Section 954 regulations. This Practice Unit discusses the substantial contribution test and provides insight into the IRS’s approach in analyzing this issue in examinations of taxpayers. We previously posted about the purpose of Practice Units here, but to briefly recap this type of guidance is intended as job aids and training materials for IRS employees. A complete list of Practice Units can be found here.

As taxpayers are (or should be) aware, federal income tax returns must be timely filed to avoid potential penalties under Internal Revenue Code (Code) Section 6651. Historically, this meant mailing a tax return and, for returns filed close to the due date, ensuring that the “timely mailed, timely filed rule” applies (see here for our recent post on the “mailbox rule”). In recent years, there has been a push to electronically file tax returns with the Internal Revenue Service (IRS). However, for one reason or another, the potential exists that an e-filed return may be rejected. Continue Reading E-Filing: Comments Provided to IRS Regarding Transmission Failures

We have written several times about penalty defenses, including substantial authority, issues of first impression and tax reporting disclosures. Additionally, we previously covered  the 2016 case of Graev v. Commissioner, where a divided US Tax Court (Tax Court) held that supervisory approval was not necessary before determining a penalty in a deficiency proceeding because the statutory language of Internal Revenue Code (Code) Section 6751(b)(1) couched such approval in terms of a proposed penalty assessment. For those not well-versed in procedural tax lingo, an “assessment” is merely the formal recording of a tax liability in the records of the Internal Revenue Service (IRS). In cases subject to the deficiency procedures—i.e., where taxpayers have a right to contest the IRS’s position in the Tax Court—no assessment can be made until after the Tax Court’s decision is final. Continue Reading IRS Required to Obtain Supervisory Approval to Assert Penalties

The tax bar is abuzz with the talk of tax reform. Clients are in modeling purgatory, trying to calculate its effects and plan for the future. Public accounting firms are suggesting how to accelerate deductions in 2017 to take advantage of the massive tax rate decline in 2018. Now more than ever, there are substantial economic incentives to accelerate deductions in 2017 and defer income until 2018. Yes, it’s beginning to look a lot like Christmas and the end to what bodes to be a historic year for federal tax!

Not to be a Grinch, but consider the following as you prepare for year end. If you attempt to accelerate any deductions, make sure to have a complete, “audit-ready” file if the Internal Revenue Service (IRS) decides to test your position. Consider how you will protect against the assertion of any penalties; typically, your ticket to get of out penalty “prison” is to maintain proper substantiation and to establish a reasonable cause defense. An opinion of counsel is one method to meet your burden of establishing that defense. It is always better to be proactive and anticipate an IRS audit than to be reactive and try to compile the proper documentation after-the-fact.