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Courts Split on Supervisory Approval Requirement for Tax Penalties

Since Chai v. Commissioner, an opinion by the US Court of Appeals for the Second Circuit subsequently followed by the US Tax Court in several opinions, there has been a substantial number of cases litigating issues involving supervisory approval of federal civil tax penalties. Two recent additions to that list include decisions from the Ninth and Eleventh Circuits, where both Courts departed from the Tax Court’s analysis and ruling on the issue. The disagreement centers on when approval must occur. (Some of our prior discussions on this topic are linked below.)

LAIDLAW’S AND THE NINTH CIRCUIT

In Laidlaw’s Harley-Davidson Sales, Inc. v. Commissioner, the Ninth Circuit, reversing the Tax Court’s ruling, applied a textualist approach and held that approval is required only before the assessment of a tax penalty and not before the Internal Revenue Service (IRS) communicates a proposed penalty to the taxpayer. The Court reasoned that the “language of [Internal Revenue Code (Code) section 6571(b)] provides no reason to conclude that an ‘initial determination’ is transformed into ‘something more like a final determination’ simply because the revenue agent who made the initial determination subsequently mailed a letter to the taxpayer describing it.” While the Court was “troubled” by the manner in which the IRS communicated the potential imposition of the penalty, it explained that a court’s role is to “apply the law as it is written, not to devise alternative language.” In reaching its decision, the Ninth Circuit disagreed with the position developed by the Tax Court in recent years.

KRONER AND THE ELEVENTH CIRCUIT

In Kroner v. Commissioner, the Eleventh Circuit followed Laidlaw’s Harley Davidson Sales and similarly concluded that the IRS satisfies Code Section 6751(b) so long as a supervisor approves the penalty before it is assessed. The Court explained that this was the best reading of the statute because (1) it is more consistent with the meaning of the phrase “initial determination of such assessment,” (2) it reflects the absence of any express timing requirement in the statute, and (3) it is a workable reading in the light of the statute’s purpose. The Court suggested that the IRS may be wise “to have a supervisor approve proposed tax penalties at an early juncture…but the text of the statute does not impose an earlier deadline.”

The Eleventh Circuit was explicit in its departure from Chai and Tax Court precedent, stating that “the Chai court missed an important aspect of the statute’s purpose: it is not just about bargaining, it is also a check on the imposition of erroneous penalties.” The Court also explained that “appropriate penalties should be assessed and collected. Chai’s analysis of these competing interests leaned heavily on the former to the detriment of the latter when justifying its departure from the statutory text.”

Practice Point: It remains to be seen whether this issue will make its way to the Supreme Court of the United States given the apparent circuit split on the issue as [...]

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IRS Hints at Revenue Procedure 94-69 Update

At a recent Tax Executives Institute conference in New York, an Internal Revenue Service (IRS) spokesperson stated that guidance and a new final form will be issued when the IRS and the US Department of the Treasury replace the disclosure procedures laid out in Revenue Procedure 94-69 1994-2 C.B. 804. The updated guidance will define the scope of the required disclosures and detail how to create them.

As we previously discussed, the IRS published a new draft form (Form 15307, Post-Filing Disclosure for Specified Large Business Taxpayers) in February 2022 and requested comments on the new form. A significant amount of useful comments was received from taxpayers and tax professionals on Form 15307 and the IRS is in the process of finalizing the form based upon said comments, which will be released to aid in the implementation of the new guidance replacing Revenue Procedure 94-69. No timing was provided on when the new form and guidance will be issued.

Practice Point: We are happy to hear that the disclosure procedures in Revenue Procedure 94-69 is here to stay, albeit in some form or fashion. Numerous large business taxpayers rely on this mechanism to clean up errors made on the return without having to file a formal amended return.




Weekly IRS Roundup September 19 – September 23, 2022

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 19, 2022 – September 23, 2022.

September 19, 2022: The IRS updated information on the Work Opportunity Tax Credit (WOTC), including information on the pre-screening and certification process. The WOTC is available to employers who hire designated categories of workers facing significant barriers to employment. Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be completed by the job applicant and the employer on or before the day of the job offer to satisfy the pre-screen requirement.

September 19, 2022: The IRS released Tax Tip 2022-143, reminding people that every taxpayer has the right to retain representation when they work with the IRS, including the right to seek assistance from the Low Income Taxpayer Clinic.

September 20, 2022: The IRS announced that it has selected eight new members for the Electronic Tax Administration Advisory Committee. The committee’s main goal is to promote paperless filing of tax and information returns. The following individuals have been appointed for three-year terms on the committee, starting in September:

  • Austin Emeagwai, CPA, Ph.D.; Collierville, Tennessee
  • Jerry Gaddis, EA, MBA; Winter Haven, Florida
  • Nikia Gainey; Orlando, Florida
  • Robert Gettemy;Marion, Iowa
  • Argi O’Leary; Voorheesville, New York
  • Hallie Parchman; Austin, Texas
  • RaeAnn Pilarski; Tucson, Arizona
  • Keith Richardson; Philadelphia, Pennsylvania

September 20, 2022: The IRS announced that Hurricane Fiona victims in Puerto Rico now have until February 15, 2023, to file various federal individual and business tax returns and make tax payments. The relief is available in all 78 Puerto Rican municipalities, which are designated by the Federal Emergency Management Agency.

September 20, 2022: The IRS released Notice 2022-40, which provides updates on the corporate bond monthly yield curve and corresponding spot segment rates and the 24-month average segment rates for September 2022. The notice also provides guidance as to interest rates on 30-year Treasury securities and the 30-year Treasury weighted average rates.

September 20, 2022: The IRS released Tax Tip 2022-144, recommending that people use caution when choosing a tax preparer since tax preparers have different levels of skill, education and expertise.

September 21, 2022: The IRS released Tax Tip 2022-145, describing the different types of authorizations for third-party representatives. The options include:

  • Power of Attorney: This allows someone to represent a taxpayer in tax matters before the IRS. The representative must be an individual authorized to practice before the IRS.
  • Tax Information Authorization: This allows a taxpayer to appoint anyone to review or receive a taxpayer’s confidential tax information for a specified type of tax for a specified period.
  • Third-Party Designee: This designates a person on a taxpayer’s tax form to discuss that specific tax return and year with the IRS.
  • Oral Disclosure: This authorizes the [...]

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IRS Official Provides Update on Large Partnership Compliance Audits

Almost 11 months ago, the Internal Revenue Service (IRS) released a memorandum regarding the implementation of the Large Partnership Compliance (LPC) Pilot Program, including the identification, selecting and delivery of large partnership tax returns, exam procedures and feedback. The goal of the LPC program is to identify the largest partnership cases and develop improved methods for identifying and assessing the compliance risks presented by these taxpayers. Large partnerships include those with more than $10 million in assets, and such partnerships are subject to data analytics and classification processes. Audits of these large partnerships are conducted by the Large Business & International (LB&I) division.

The LPC program was discussed at the recent Tax Executives Institute conference in New York. IRS officials noted that 50 large partnerships have been selected for the first round of audits, focusing on the 2019 tax year. The IRS currently is undecided as to whether LB&I plans to audit subsequent year returns for the selected partnerships, but likely will not subject such partnerships to a continuous audit process that is used for many large corporate taxpayers.

An interesting discussion took place at the conference related to whether IRS revenue agents will share with the selected partnerships the risk level assigned to their partnership return and which issues will be examined. (Risk assessment and identification of issues are generally included in audit plans for corporate taxpayers, although the level of risk may not necessarily be disclosed.) Currently, some agents are providing such information to selected partnerships but there is no consensus or standard practice at the audit level.

Practice Point: The IRS has made it well known that large partnerships are on their radar and there is a need to focus on these audits to ensure taxpayer compliance. In our experience, revenue agents tend to be more transparent in audits of large taxpayers when it comes to the issues under examination, but it would be a welcome development if the IRS announced at the outset of the audit more standard procedures for informing taxpayers of the risk levels assigned. As the LPC program continues, we are hopeful that the IRS will decide to share more data with the public. We expect an increase in audit activity as a result of additional funding received by the IRS, and it appears that the IRS will focus those efforts on large partnerships.




IRS Appeals Will Not Consider Regulatory Invalidity and Subregulatory Procedural Invalidity Challenges

In Mayo Found. for Med. Educ. & Rsch. v. United States, 131 S.Ct. 704 (2011), the Supreme Court of the United States made clear that administrative law rules apply to tax guidance like they do to other federal agency guidance. Since Mayo, the Supreme Court and other courts have provided further guidance—both in the tax and non-tax contexts—regarding the proper analysis in determining the validity of, and deference to, regulatory guidance.

Over the past decade, the number of taxpayer challenges to guidance issued by the Internal Revenue Service (IRS), whether in the form of regulations or subregulatory guidance (i.e., revenue rulings, revenue procedures, notices and announcements), has increased significantly. These challenges have taken a variety of forms, such as regulatory invalidity under Chevron USA, Inc. v. NRDC, 467 U.S. 837 (1984) and procedural invalidity under the Administrative Procedure Act (APA). Some successful challenges to the validity of IRS guidance and the ability to challenge such guidance in a pre-enforcement context include CIC Servs., LLC v. IRS, 141 S.Ct. 1582 (2021); United States v. Home Concrete & Supply, LLC, 132 S.Ct. 1836 (2012); Mann Construction, Inc. v. Commissioner, 27 F. 4th 1138 (6th Cir. 2022); Good Fortune Shipping SA v. Commissioner, 897 F.3d 256 (2018) and Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. 2022). Many other challenges are pending both at the administrative level and in court.

The IRS and the US Department of the Treasury (Treasury) have noticed the increase in challenges to its published guidance. One important change is the more detailed discussions in preambles to final regulations regarding comments received and how the IRS views and incorporates said comments. This is a welcome development, although sometimes a tortuous one for taxpayers who must wade through hundreds of pages of preambles in some regulation packages. Another change, and the subject of this post, is the IRS’s views on how to deal with such challenges during the administrative process.

A federal tax controversy can involve three levels of review: Examination, Appeals and litigation. At the Examination stage, revenue agents and other IRS personnel develop the facts and determine whether an adjustment is warranted. Importantly, “hazards of litigation” are not considered at the Examination level, meaning, issues are viewed as binary—in favor of the IRS or the taxpayer—and not negotiated as a percentage of the item. However, at the Appeals level, the Appeals team weighs “hazards of litigation” to determine whether a case can be settled by the parties. Hazards of litigation are also considered at the litigation level.

Validly promulgated tax regulations are approved at the highest levels of the IRS, Treasury generally carry the force and effect of law and are binding on taxpayers and the IRS. Subregulatory guidance is also approved at senior levels of the IRS and the Treasury. At the Examination level, the IRS will not entertain challenges to the validity of [...]

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Weekly IRS Roundup September 12 – September 16, 2022

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 12, 2022 – September 16, 2022.

September 12, 2022: The IRS released Internal Revenue Bulletin 2022-37, which highlights the following:

  • Treasury Decision 9965: These regulations establish certain requirements regarding the implementation of protections against balance billing provided under the No Surprise Act.
  • Notice 2022-37: This guidance assists taxpayers in complying with the final regulations under Section 871(m). The US Department of the Treasury (Treasury) and the IRS intend to amend Section 871(m) regulations, which will delay the effective date of certain rules in the final regulations and extend the phase-in period provided in Notice 2020-2 for two years.

September 12, 2022: The IRS released COVID Tax Tip 2022-139, reminding taxpayers of recently issued Notice 2022-36, which provides penalty relief from certain failure to file penalties in taxable years 2019 and 2020. The relevant penalties 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.

September 12, 2022: The Treasury Inspector General for Tax Administration (TIGTA) released the Fiscal Year 2022 Statutory Review of Compliance With Notice of Federal Tax Lien Filing Due Process Procedures. TIGTA is required to determine annually whether lien notices issued by the IRS comply with the legal requirements set forth in the Internal Revenue Code. TIGTA recommended that the Director of Collection Policy for the Small Business/Self-Employed Division (1) reinforce Internal Revenue Manual (IRM) guidance to ensure that taxpayers’ representatives are notified of Notice of Federal Tax Lien filings and (2) correct an IRM reference on Written Communication to a Taxpayer’s Authorized Representative. The IRS agreed.

September 12, 2022: TIGTA released its report entitled, Reliance on Self-Certifications Resulted in Federal Agencies Awarding Contracts and Grants to Entities With Delinquent Federal Taxes; However, the IRS Is Making Progress on Establishing the Federal Contractor Tax Check System. TIGTA performed this audit because in Calendar Years 2015 and 2016, federal contracts were awarded to thousands of contractors with unpaid taxes that were most likely delinquent. Between October 2018 and December 2019, the federal government awarded 2.1 million federal contracts to more than 83,000 awardees. More than 3,000 contractors that received contracts owned $621.8 million in delinquent federal taxes, and 938 grantees received $22.7 billion in federal grants while owning $269.2 million in delinquent federal taxes.

September 12, 2022: The IRS issued minor corrections to Treasury Decision 9964, originally published August 16, 2022. The regulations define guidance for states regarding the process by which they may obtain or inspect certain returns and return information for the purpose of administering state laws governing certain tax-exempt organizations and their activities.

September [...]

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Weekly IRS Roundup September 6 – September 9, 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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Special IRS Team Working to Identify Emerging “Abusive Transactions”

Earlier this year, the Internal Revenue Service (IRS) announced the creation of a new Joint Strategic Emerging Issues Team (JSEIT). The new initiative, announced at the New York University School of Professional Studies Tax Controversy Forum in June, brings together different agency divisions and organizations to identify and address emerging tax compliance issues. Various divisions, such as the Small Business/Self Employed (SB/SE), Large Business & International (LB&I), Tax Exempt/Government Entities (TE/GE) and Criminal Investigation divisions, will work together to bring each division’s expertise and specialties into one place to quickly address new issues that are brought to the IRS’s attention.

The goal of JSEIT is to help taxpayers with compliance issues and message them about which transactions work or do not work from a compliance perspective. The purpose of JSEIT is to act as a communication vehicle to identify areas that should be looked at in more detail by the various IRS divisions. In this vein, JSEIT seeks to provide messaging to taxpayers on emerging issues so that they are informed early on as to how the IRS views a particular transaction. JSEIT is not focused on transactions the IRS has already deemed abusive (e.g., certain syndicated conservations easements and micro-captive insurance transactions) but seeks to identify developing issues and alert the public to those issues.

JSEIT has not yet identified any specific emerging issues or transactions that it is investigating. Rather, it receives input from various sources, such as the public and IRS personnel, as to emerging issues to keep an eye on. One example of input from the public is a June 28, 2022, letter from a retired certified public accountant discussing “multinational profit-shifting structures” and Internal Revenue Code Section 482 and the application of effectively connecting income taxation.

JSEIT also looks to social media and ideas that are posted on the internet. This is consistent with the actions of LB&I examination teams, which frequently look to US Securities and Exchange Commission filings and LinkedIn profits and posts to gain background information on corporate taxpayers and their operations.

The IRS Office of Chief Counsel is also involved in JSEIT. Chief Counsel attorneys sometimes hear about a new transaction from a tax practitioner or an examination team and can bring that to JSEIT so that it is aware of the new transaction. This allows Chief Counsel attorneys to be involved early on and to provide guidance to examination teams as to what transactions it believes are compliant and which are not. For example, Chief Counsel attorneys can tell revenue agents what to look for in an emerging issue and what information to request from the taxpayer to gain a better understanding of the transaction.

As we recently discussed, the IRS is set to receive significant funding that will be deployed to improve taxpayer service and enhance tax compliance. JSEIT may benefit from this increased funding and be able to identify more issues on which to focus and the most effective [...]

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Weekly IRS Roundup August 29 – September 2, 2022

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 29, 2022 – September 2, 2022.

August 29, 2022: The IRS released Internal Revenue Bulletin 2022-35, which highlights the following:

  • Revenue Ruling 2022-15: This revenue ruling provides interest rates for tax overpayments and underpayments for the fourth quarter, starting October 1, 2022. The new rates are as follows:
    • Individuals: 6% per year, compounded daily, for both overpayments and underpayments
    • Corporations: 5% for overpayments; 6% for underpayments
    • Corporate overpayments for the portion exceeding $10,000:5%
    • Large corporate underpayments: 8%
  • Revenue Ruling 2022-16: This revenue ruling provides the average annual effective interest rates on new loans under the Farm Credit System and also contains a list of the states within each Farm Credit System Bank territory.
  • Treasury Decision 9964: The IRS released final regulations, providing guidance to states wanting to inspect certain return information for the purpose of administering state laws related to tax-exempt organizations. The final regulations reflect changes to the Internal Revenue Code made by the Pension Protection Act of 2006.

August 29, 2022: The IRS announced that September is National Preparedness Month and urges everyone to develop or update their emergency plans, especially with hurricane season approaching and the ongoing threat of wildfires.

August 29, 2022: The IRS released Tax Tip 2022-132, highlighting the Security Summit’s summer series, Protect Your Client; Protect Yourself. Professionals from the IRS, state tax agencies and others in the tax industry joined forces for a five-week series focused on the fundamentals of data and information security.

August 30, 2022: The IRS released Tax Tip 2022-133, clarifying taxpayer obligations during a Chapter 13 bankruptcy.

August 31, 2022: The IRS announced that Edward Killen will become division commissioner of its Tax-Exempt and Government Entities (TE/GE) division, effective September 30, 2022. The current TE/GE Commissioner, Sunita Lough, is retiring. Chief Privacy Officer Robert Choi will replace Killen as deputy commissioner of TE/GE.

August 31, 2022: The IRS released COVID Tax Tip-134, reminding parents of refunds and tax credits they may be missing if they do not normally file a tax return.

August 31, 2022: The IRS asked for comments on Form 7205, which is used to claim deductions for energy-efficient commercial buildings. The IRS wants to standardize the procedures for claiming the deduction and invites comments by October 31, 2022.

September 1, 2022: The IRS released Tax Tip 2022-135, providing suggestions to tax professionals on ways to protect clients from identity theft.

September 2, 2022: The IRS issued a statement acknowledging that it released confidential information from Form 990-Ts, which should not have been made public. Form 990-T is a business tax return used by tax-exempt entities to report and pay income [...]

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IRS Announces Progress on Processing Tax Returns

The phrase “it’s in the mail” is sometimes an excuse for one’s delinquency in filing tax returns. However, that is not necessarily the case for taxpayers who have submitted their individual tax returns during the COVID-19 pandemic. The impact of the pandemic on the Internal Revenue Service’s (IRS) ability to open mail and process returns has been well-documented. In March 2022, the IRS announced that it was hiring more than 5,000 positions in its service processing centers in three states.

On August 29, 2022, the IRS provided an update on the status of its return processing efforts. The update provides, in part:

The IRS is opening mail within normal timeframes and all paper and electronic individual returns received prior to January 2022 have been processed if the return had no errors or did not require further review.

 

As of August 19, 2022, we had 8.7 million unprocessed individual returns received in calendar year 2022. These include tax year 2021 returns and late filed tax year 2020 and prior returns. Of these, 1.7 million returns require error correction or other special handling, and 7 million are paper returns waiting to be reviewed and processed. This work does not typically require us to correspond with taxpayers but does require special handling by an IRS employee so, in these instances, it is taking the IRS more than 21 days to issue any related refund and in some cases this work could take more than 120 days. If a correction is made to any Recovery Rebate Credit, Child Tax Credit, Earned Income Tax Credit or Additional Child Tax Credit claimed on the return, the IRS will send taxpayers an explanation. Taxpayers are encouraged to continue to check Tax Season Refund Frequently Asked Questions.

Further information is provided, including how long taxpayers may have to wait and what actions they can take (i.e., checking Where’s My Refund? or viewing their account).

Practice Point: The IRS is making headway in processing returns and, with increased funding on the horizon, it appears that things may be getting back to normal—at least back to pre-pandemic levels of productivity. However, taxpayers should always take the appropriate steps to ensure that their returns are timely filed and that they have proof of when and what was filed with the IRS. This includes making copies of paper filed returns, using IRS-approved mail delivery services such as the US Postal Service and certain private delivery services and retaining electronic receipts for electronically filed returns. Because processing times for mailed returns are still slow, taxpayers should consider the potential advantages to filing timely but in paper through the mail for purposes of the period of limitations on assessment of additional tax in Internal Revenue Code Section 6501.




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