Newsletters

Running a business is easy as long as it's not yours.-John Jennings

Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.

Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.

"I look at yeartwo through the lens of what do we need to do with the next filing season to build on the successes of the previous filing season," Werfel said during an August 15 teleconference with press as he highlighted a couple of key objectives he has for the second year of supplemental funding.

"First of all, we had a really strong filing season," he said. "It could be stronger. We want to achieve the highest level of service we can achieve."

Among the improvements he wants to see are a further reduction in wait times on calls to the IRS; expanding the number of self-service options that taxpayers can engage in when they call so they don’t have to wait to be connected to an agency representatives; and getting more people to sign up for an online account with the agency, as well as improving the online account functionality.

"The idea would be from a service standpoint, the filing features should feel very different than the previous year," he said.

Werfel also wants to see more expansion in the walk-in service centers, including hiring more workers to allow for more Saturday hours to help people who might not be able to get there during the week due to work, as well as utilizing more pop-up walk-in centers to help reach people in more remote areas of the United States.

On the enforcement side, Werfel wants to see the "anemic" audit rates of high-wealth individuals, large corporations and complex partnerships continue to rise.

"We started to see real meaningful results there," he noted. "I want to be able to report to the American people that we’re putting the Inflation Reduction Act to work to create and drive a more equitable tax system that’s returning money to the government’s bottom line."

Werfel also said the IRS will continue with reporting the "dirty dozen" tax scams and will continue to be looking at ways to help taxpayers avoid these scams as well as helping the victims of those scams. He highlighted the recent action of ending nearly all unannounced visits by IRS representatives to homes and businesses as a way that taxpayers are being protected.

"My hope is that in each successive year, we’re putting tools out there that taxpayers are leveraging and saying, ‘this is helpful,’ and are appreciative of the fact that the IRS is functioning better than it did in previous years," Werfel said.

Recapping The First Year

Much of the press call focused on highlighting the successes of the first year, with Werfel highlighting that the agency provided better service, including providing assistance to more than 7 million taxpayers over the phone, an increase of 3 million over the previous tax filing season and increased face-to-face help to more than 500,000 people at the taxpayer assistance centers, a 30 percent increase. Werfel also mentioned the use of call-back technology so taxpayers don’t have to wait on the phone on hold and can receive a call-back without losing their place in the queue to talk to an agency representative.

He reiterated gains in enforcement as well as improvements on the technology side such as highlighting the recent announcement of more forms being able to be filed electronically and improvements to document scanning of tax forms.

Another aspect of the Inflation Reduction Act that was highlighted during the law’s one year anniversary was by Treasury Secretary Janet Yellen, who highlighted the green energy tax provisions at a recent speech in Las Vegas.

She noted a variety of ways the IRA is helping to spur investment in clean energy, including in buildings and in clean vehicles and is helping the nation meet international climate standards.

"The IRA is helping re-shape some of the production that is critical to our clean economy," Yellen said, according to prepared remarks that were published on the Treasury Department website.

She also highlighted that earlier this summer, "Treasury also released proposed guidance that would make it easier for these tax credits to reach a broad range of institutions. We are implementing innovative tools that will enable states, cities, towns, and tax-exempt organizations – like schools and hospitals – to directly access these credits."

By Gregory Twachtman, Washington News Editor

The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payroll tax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.

The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payroll tax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.

"FinCEN is committed to combating fraud by shedding light on how illicit actors within the construction industry are using shell corporations and other tactics to commit workers’ compensation fraud and avoid payroll taxes," FinCEN Acting Director Himamauli Das said in a statement.

The agency in a FinCEN Notice issued August 15, 2023, highlighted how companies evade payroll taxes. Step one has construction contractors writing checks payable to the shell corporation, which creates the façade that the shell company is performing construction projects. Step two sees the shell company operator deposit cash the checks at a check cashing facility or deposit them into a shell company bank account. Step three sees the shell company return the cash to the construction contractor, minus a fee, for renting the workers’ compensation insurance policy and conducting payroll-related transactions. The final step is the construction contractors using the cash to pay the workers without withholding appropriate payroll-related taxes or paying any workers’ compensation premiums.

The notice also draws attention "a range of red flags to assist financial institutions in detecting, preventing, and reporting suspicions transactions associated with shell companies perpetrating payrolltax evasion and workers’ compensation fraud in the construction industry." Among the 11 red flags highlighted are:

• The customer is a new (i.e., less than two years old) small construction company specializing in one type of construction trade (e.g., framing, drywall, stucco, masonry, etc.) with minimal online presence and has indicators of being a shell company;
• Beneficial owners of the shell company have no known prior involvement with, or in, the construction industry, and the individual opening the account provides a non-U.S. passport as a form of identification;
• A customer receives weekly deposits in their account that exceed normal account activity from several construction contractors involved in multiple construction trades;
• Large volumes of checks for under $1,000 are drawn on the company’s bank account and made payable to separate individuals (i.e., the workers) which are subsequently negotiated for cash by the payee, and
• The company’s bank account has minimal to no tax- or payroll-related payments to the Internal Revenue Service, state and local tax authorities, or a third-party payroll company despite a large volume of deposits from client.

The statement did not provide any statistical data that reflect the rise in payroll tax evasion or workers’ compensation fraud, but said that every year, "state and federal tax authorities lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers."

The notice also reminds financial institutions’ obligations to file a suspicious activity report if a transaction could be conducted with the intent for fraud or tax evasion, and it provides instructions on how to file the SAR.

By Gregory Twachtman, Washington News Editor

NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.

NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.

The agency suspended automated collections notices in response to the backlog of unprocessed mail correspondence that resulted from the shutdowns due to the COVID-19 pandemic and have yet to resume sending notices out.

Collis said that the agency is developing a plan on how those collections notices will resume and she said it is an important piece of information that taxpayers with balances due need.

Speaking here August 9, 2023, at the IRS Nationwide Tax Forum event, Collins expressed concern that people are saying "hey, the IRS probably forgot about me because it’s been 18 months. And I am concerned that people do not realize that interest and the failure to pay [penalty] is kicking in."

And while she urged IRS to resume collections notices, she also cautioned that it needs to be done in a staggered fashion so that the agency, as well as tax professionals are not simultaneously inundated with calls about these notices all at once, potentially creating another backlog as the agency continues to clear backlog pandemic inventories.

"So what they’re trying to do is stagger them," Collins said. "Have then come out in different timeframes so that all of them don’t hit at the same time, … because if they turn the spigot on, how many phone calls are they going to get that next day? They won’t be able to handle that volume."

Collins said the agency is looking at how to prioritize which notices should be going out first as well as possibly changing the notices to make them more informative for taxpayers.

"So, stay tuned on that," he told attendees. "I don’t think it’ll be tomorrow, but I’m hoping that it’ll be months from now, not two years from now that we turn it back on."

Another area Collins expressed concerns about is the changing of the 1099-K threshold to $600. She said that her office has been in touch with "the Venmos of the world" to try to get them to put systems in place that will help their customers differentiate between personal transactions and business transactions to help ensure that 1099-Ks that will be issued because of the new threshold will accurate.

"I don’t know what’s going to happen between now and January, but the IRS, and our office as well, has been trying to work on this so it’s not as big a problem," she said. "But I am a little concerned because there’s going to be a lot of 1099 cases, potentially."

Collins also offered a "spoiler alert" that the online accounts for tax professionals "will become useful." She suggested it will not be the fully functioning portal she has been calling for, but there will be more functions added to it to make it a useful tool for tax practitioners.

"It will no longer be just a glorified Power of Attorney form, or the ability to file one,” she said. “It will actually have some usefulness. … Stay tuned."

By Gregory Twachtman, Washington News Editor

Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.

Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."

Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.

Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."

Taxpayers will still have the option of mailing in paper-based correspondence.

Yellen cited the supplemental funding provided by the Inflation Reduction Act to the IRS for giving the agency the ability to transition from "a paper-based agency" to a "digital-first agency."

"This ‘PaperlessProcessing’ initiative is the key that unlocks other customer service improvements," Yellen said. "It will enable taxpayers to see their documents, securely access their data, and save time and money. And it will allow other parts of the IRS to rely on these digital copies to provide faster refunds, reduce errors in tax processing, and delivery a more seamless and responsive customer service experience."

According to a fact sheet issued by the IRS, the agency estimates that "more than 94 percent of individual taxpayers will no longer ever need to send mail to the IRS," and will enable up to 152 million paper documents to be submitted digitally per year.

Additionally, taxpayers will be able to e-file 20 additional tax forms, enabling up to 4 million additional tax forms to be filed digitally each year, including amendments to Forms 940, 941, 941SSPR.

"At least 20 of the most used non-tax forms will be available in digital, mobile-friendly formats that make them easy for taxpayers to complete and submit," the fact sheet continues. "These forms will include a Request for Taxpayer Advocate Service Assistance, making it easier for taxpayers to get the help they need."

The fact sheet also outlines some more targets for the 2025 filing season, including:

• making an additional 150 of the most used non-tax forms available in digital, mobile-friendly formats;
• digitally processing all paper-filed tax and information returns;
• processing at least half of paper-submitted correspondence, with all paper documents – correspondence, non-tax forms, and notice responses – to be processed digitally by Filing Season 2026; and
• digitizing up to 1 billion historical documents.

"When combined with an improved data platform, digitization and data extraction will enable data scientists to implement advanced analytics and pattern recognition methods to pursue cases that can help address the tax [gap], including wealthy individuals and large corporations using complex structures to evade taxes they owe," the fact sheet states.

By Gregory Twachtman, Washington News Editor

An IRS Notice provides a transition rule that generally allows taxpayers to claim the Code Sec. 25C energy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.

An IRS Notice provides a transition rule that generally allows taxpayers to claim the Code Sec. 25C energy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.

Taxpayers may rely on the Notice until the proposed regs are issued. The proposed regs are expected to apply to tax years ending after December 31, 2022 .

Energy Efficient Home Improvement Credit for Home Energy Audits

The energy efficient home improvement credit is generally equal to 30 percent of amounts paid or incurred for qualified energy efficiency improvements, residential energy property expenditures, and home energy audits placed in service after 2022. The credit is generally limited to $1,200 per year, but different annual limits apply to particular types of expenses.

The annual credit for home energy audits is limited to $150 per year. For example, if a taxpayer pays $900 for a home energy audit, the credit is limited to $150 rather than 30 percent of the expense ($300).

A qualified home energy audit must:

Transition Rule for 2023

A transition rule applies to home energy audits conducted on or before December 31, 2023, during a tax year ending after December 31, 2022. An audit during this transition period may qualify for the credit even if it is not conducted by a certified home energy auditor. However, an audit conducted after December 31, 2023, will not qualify for the credit unless the auditor is certified.

Proposed Regs: Certified Home Energy Auditor

The proposed regs will define a "qualified home energy audit" as an inspection conducted by or under the supervision of a qualified home energy auditor. The audit must be consistent with the Jobs Task Analysis led by the Department of Energy (DOE) and validated by the industry.

A qualified home energy auditor will have to be certified by a Qualified Certification Program at the time of the audit. DOE maintains a list of qualified certified programs on its website at https://www.energy.gov/eere/buildings/25c-energy-efficient-home-improvement-credit. These are the only programs that may certify a qualified home energy auditor.

Proposed Regs: Written Report

Under the proposed regs, a qualified home energy audit must include a written report prepared and signed by the qualified home energy auditor. The report must include:

Proposed Regs: Substantiation

Finally, the proposed regs will require the taxpayer to substantiate the home energy audit expenditure by maintaining the certified home energy auditor’s signed written report as a tax record. The taxpayer must also comply with the instructions for Form 5695, Residential Energy Credits, or any successor form.

The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannounced visits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "For IRS employees, there were fears about their own personal safety on these visits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."

The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannounced visits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "For IRS employees, there were fears about their own personal safety on these visits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."

Unannounced visits will be replaced with scheduled visits. If the IRS needs to meet with a taxpayer, that taxpayer will receive an appointment letter, known as a 725-B letter, to schedule a time for a revenue officer to meet with the taxpayer."This will help taxpayers feel more prepared when it is time to meet," Werfel said."“Taxpayers whose cases are assigned to a revenue officer will now be able to schedule face-to-face meetings at a set place and time. They will have the necessary information and documents in hand to reach a resolution of their cases more quickly."

In addressing what the IRS will do if a taxpayer is not reachable by mail or is not responding to a meeting scheduling letter, Werfel stated that there are other actions that the agency can take to help drive compliance, such as imposing a lien or a levy, which can be done remotely. He also stressed that in past cases where revenue officers made unannounced visits, they were in situations where the revenue officer was attempting to collect a sizable debt with a median in these cases of $110,000."These homevisits were not occurring for small tax debt," Werfel said. "These are for big tax debts." Werfel outlined what he described as "rare instances" when unannounced visits will continue to occur, including service of a summons and subpoena as well as in the conduct of sensitive enforcement activities such as the seizure of assets."These activities are just a drop in the bucket compared to the number of visits that have taken place in the past," Werfel said, noting that there were a few hundred each year compared to the tens of thousands of other visits that occurred each year under the decades-old policy.

Werfel said that this policy will not impact activities conducted by the Criminal Investigations division, which operates under its own rules and protocols."Today’s decision is part of a broader plan that will help us work smarter and be more efficient," he said, noting this action is part of the larger IRS transformation effort taking place with the help of the supplemental funding provided by the Inflation Reduction Act.

By Gregory Twachtman, Washington News Editor

The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation

The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation

Scenario in the Ruling

The revenue ruling presents a scenario in which transactions in a cryptocurrency that is convertible virtual currency are validated by a proof-of-stake consensus mechanism. A cash-method taxpayer validates a new block of transactions on the cryptocurrency blockchain, receiving two units of the cryptocurrency as validation rewards. Pursuant to the cryptocurrency protocol, during a brief period ending on Date 2, the taxpayer lacks the ability to sell, exchange, or otherwise dispose of any interest in the two units of cryptocurrency in any manner. On the following day (Date 3), the taxpayer has the ability to sell, exchange, or otherwise dispose of the two cryptocurrency units.

Analysis and Holding

Cryptocurrency that is convertible virtual currency is treated as property for Federal income tax purposes and general tax principles applicable to property transactions apply to transactions involving cryptocurrency. For example, a taxpayer who receives cryptocurrency as a payment for goods or services or who mines cryptocurrency must include the fair market value of the cryptocurrency in the taxpayer's gross income in the tax year the taxpayer obtains dominion and control of the cryptocurrency.

In the scenario, two units of cryptocurrency represent the taxpayer's reward for staking units and validating transactions on the blockchain. On Date 3, the taxpayer has an accession to wealth as the taxpayer gains dominion and control through the taxpayer's ability, as of this date, to sell, exchange, or otherwise dispose of the two units of cryptocurrency received as validation rewards. Accordingly, the fair market value of the two units of cryptocurrency is included in taxpayer's gross income for the tax year that includes Date 3.

Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with tax professionals airing issues they have experienced and ongoing concerns they have.

Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with tax professionals airing issues they have experienced and ongoing concerns they have.

Testifying at a July 28, 2023, hearing of the House Ways and Means Subcommittee on Oversight, Larry Gray, partner at AGC CPA, said that as the pandemic started and he started to make educational YouTube videos to help other practitioners navigate the tax law, he found issues with the ERTC, including the growing industry of ERTC mills and the potential for fraud that comes with them.

He noted that many of these mills are simply taking their fee for providing essentially clerical assistance. However, Gray noted that in these ERTC mills, the agreements stated that"they don’t do audit," but they might be able to help find someone of a business does get audited because of the ERTC filing. And unfortunately, as was discussed throughout the hearing, people are falling for these ERTC mills and putting their businesses at risk.

And Gray put the problems that have arisen squarely on the IRS.

"We are getting no guidance," Gray said. "There should have been an ERTC implementation team to coordinate from the top down. We need education. We need guidance."

To that end, the IRS did issue a legal advice memorandum on July 20, 2023, that shows the application of the statutory requirements of the ERTC across five different scenarios.

Gray also took a subtle dig at Congress, acknowledging in his testimony that part of the issues could be related to an IRS that was "understaffed, and they were underfunded" when the COVID-19 pandemic began three years ago.

Roger Harris, President of accounting and tax firm Padgett Advisors, also highlighted issues, starting with the first which was "how we submitted claims to the IRS," which was exclusively on paper at a time when no one was present to handle the processing of paper correspondence because of the pandemic, creating a significant backlog.

"And it’s still ongoing," he continued, causing a "delay in getting the money out to the people who need it."

And with all the moving parts related to potential people who need to amend returns depending on how the business is structured, a mistake in any of these forms could be generating penalties and interest, a problem that is magnified when combined with Gray’s observation of the lack of available guidance to help taxpayers who are trying to do the right thing and collect money they are legitimately owed.

Ahead of the subcommittee hearing, the IRS announced in a July 26, 2023, statement that it received more than 2.5 million claims since the ERTC program began and it has "made substantial progress on these claims this year, with 99 percent of claims approximately three-months old as of mid-July."

However, throughout the hearing, witnesses and committee members questioned the integrity of that figure, noting that IRS has changed numbers on its website as to how many claims remain in the backlog. There also were question on how the figure itself is determined.

Harris also pointed out the problems the ERTC mills are causing with his business and for other tax professionals looking to do the right thing by their clients.

"We have had clients that we have dealt with for many years who have trusted our advice," Harris testified. "But all of a sudden when someone is telling them, ‘Your advisor doesn’t know what they are doing, and if you listen to me, I can give you a half million dollars,’ it’s very hard for as the people who are working with these small businesses to win that argument, in many instances, just because of the sheer amount of money that is being dangled in front of them."

Harris continued: "And as we have heard, the IRS has no choice but to begin enforcement actions to try and correct this."

He said he is asking the IRS "for some help [with] a real-world solution to give us the ability to try to bring these people back into compliance. … [It] is going to take a concerted effort by our industry, the tax practitioner community, to help solve this problem," especially when people may have already spent the money because they were unaware that the weren’t entitled to under the ERTC program and fell for the fraud being perpetrated by the ERTC mills. And that does not even account for the fees that were paid to the ERTC mills that will never be recovered.

He did note that IRS Commissioner Daniel Werfel, at last week’s IRS-sponsored tax forum in Atlanta did ask tax practitioners what they needed in regard to the ERTC.

In its July 26 statement, the IRS offered a series of recommendations on how to avoid ERTC scams. At the tax forum, Werfel said that the "amount of misleading marketing around this credit is staggering, and it is creating an array of problems for taxprofessionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved – except the promoters" of the misleading ERTC marketing.

By Gregory Twachtman, Washington News Editor

The IRS announced substantial progress in the ongoing effort related to the dubious Employee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.

The IRS announced substantial progress in the ongoing effort related to the dubious Employee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.

"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," IRS Commissioner Danny Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. "Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area," he added.

Taxpayers should be wary of certain signs including (1) unsolicited calls or advertisements mentioning an easy application process; (2) statements that the promoter or company can determine ERC eligibility within minutes; and (3) large upfront fees to claim the credit. Eligible employers who need help claiming the credit should work with a trusted tax professional. Finally, taxpayers can report ERC abuse by submitting Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.

The Internal Revenue Service is looking for ways get its post-filing alternative dispute resolution programs greater exposure and use.

The agency recently issued a public call for comment on a variety of topics related to the use of ADR, including learning why taxpayers choose not to use ADR; issues that keep taxpayers from using ADR that should be changed to allow for inclusion; how best to improve ADR; how best to education about ADR; feedback on when ADR proved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existing ADR programs, including ideas for new programs.

The Internal Revenue Service is looking for ways get its post-filing alternative dispute resolution programs greater exposure and use.

The agency recently issued a public call for comment on a variety of topics related to the use of ADR, including learning why taxpayers choose not to use ADR; issues that keep taxpayers from using ADR that should be changed to allow for inclusion; how best to improve ADR; how best to education about ADR; feedback on when ADR proved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existing ADR programs, including ideas for new programs.

A list of specific issues the IRS has outlined can be found here, though comments submitted about the ADR should not necessarily be limited to the subject areas listed.

Indu Subbiah, supervisory appeals officer and acting senior advisor in the IRS Independent Office of Appeal, explained the genesis of this request for comment.

"We had a sense the ADR [programs] weren’t being used quite as robustly as we would have liked,” she said in an interview with Federal Tax Daily, adding that a recently issued U.S. Government Accountability Office report “really brought that to our attention."

According to the report, “IRS Could Better Manage Alternative Dispute Resolution Programs To Maximize Benefits,"IRS Could Better Manage Alternative Dispute Resolution Programs To Maximize Benefits," GAO found that while the agency offers six alternative dispute resolution programs,"IRS used ADR programs to resolve disputes in less than half of one percent of all cases reviews by its Independent Office of Appeals"from fiscal year 2013 to 2022. In this time period, the number of cases closed using ADR annually peaked in 2014 (429 cases closed) and then steadily declined during the review period, reaching a low point of 119 cases closed in 2022.

"Beyond these data on ADR usage, IRS does not have the data necessary to manage the ADR programs, such as data on taxpayer requests to use ADR; IRS’ acceptance or rejection of those requests; and the results from using ADR, including rate of resolution, time, and costs," the GAO report states. "Although IRS does not know definitively why ADR usage has declined, potential reasons include taxpayers do not perceive the benefits of using ADR, according to IRS officials"

The report continues: "IRS is missing opportunities to use several management practices for its ADR programs to help increase taxpayers’ willingness to use ADR as well as maximize the programs’ benefits. IRS does not have clear and measurable objectives for its ADR programs that contribute to achieving IRS’s strategic goals and objectives, such as its ability to resolve disputes over specific tax issues and reduce the investment of time and money to do so. IRS does not analyze data to assess whether ADR is achieving benefits. … IRS has not regularly monitored the taxpayer experience with ADR to address problems in real-time."

With these critical observations about the ADR programs being put forth by GAO, the Independent Office of Appeals is now proactively looking at what is going on to make the ADR programs work better for taxpayers and the agency, the first step being this request for comments.

"The whole point of ADR programs is so that taxpayers and the IRS can use ADR to resolve issues, potentially at a lower cost," Subbiah said. "I think everybody would agree that when the process works, the IRS and the taxpayer can avoid costly litigation."

"The question for us is how can we is how can we even improve the ability to resolve a case with Appeals, and to me, it’s maybe can we resolve those cases sooner," Andrew Keyso, chief of the IRS Office of Independent Appeals, said during the interview.

"I think this is a good time to reconsider how we do alternative dispute resolution and mediation because of the" supplemental funding the agency received as part of the Inflation Reduction Act, Keyso said, noting that there are more resources to apply to appeals officers and mediators.

Keyso said that one of the ways the Office of Appeals measures success of ADR "based on how many people are coming in to use ADR and those numbers are fairly small. So I think we’d like to see those numbers increase."

One thing that the IRS will be looking for in the questions is the need for education as a potential way to increase the use of ADR. In fact, one of the questions the agency asked is directly focused on education.

"One of the questions we really focused on was education," Subbiah said, noting that they are looking for stakeholders to "tell us [and] to help us understand whether it is [lack of] education [on ADR and its benefits] or is it something else. I think it will be very telling and very interesting to us to really get at the heart of why it isn’t being used."

Elizabeth Askey, deputy chief of the Office of Independent Appeals, noted, anecdotally, that larger businesses and wealthier taxpayers seem to be a lot more aware of the various tools at their disposal, including ADR. However, the Office also is hearing situations where there is a reluctance on the part of compliance officers to use ADR tools.

Keyso added that while larger businesses and wealthier taxpayers might be more aware of ADR, there needs to be more education for smaller businesses and lower income taxpayers, in addition to education across the IRS itself.

"So, in those cases, it may be a matter of us getting to the root of why some compliance personnel are less inclined to go this route than others," Askey said during the interview. "It’s not just the education of taxpayers and their practitioners, but of our own compliance personnel."

Keyso stressed that this effort was broad, not only in the scope of which taxpayers and practitioners might need education about the availability and use of ADR, but also within the agency. And he remains optimistic that this effort to request commentary from the public will help that.

"We’re optimistic that the public will come in and tell us why we don’t make use of more ADR. We don’t find it productive, for instance, or we can’t get the agency to cooperate," he said. And with the additional IRA funding in hand, the agency can respond and look to see how ADR can be restructured to make it more useful for everyone to help get more issues resolved in a more timely and cost-efficient manner.

"I hope that mindset is shared across the agency," Keyso said."I think it is and is becoming more so in the effort to help resolve cases quickly." He noted there will always be cases where resolution needs a more traditional path, but when this process is complete, there will be a greater recognition where ADR can be and is used.

IRS is asking the public to submit its comments on the ADR programs by August 25, 2023, via email at ap.adr.programs@irs.gov.

By Gregory Twachtman, Washington News Editor

National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stop automatically assessing penalties related to international information returns.

National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stop automatically assessing penalties related to international information returns.

In an August 22, 2023, blog post, she also called on the agency to "provide taxpayers due process by affording them the opportunity to administratively present their reasonable cause defense and request FTA [first time abatement] and consideration by the Independent Office of Appeals prior to any assessment."

The blog post noted that relief was needed because there is "a misconception that IIRpenalties affect primarily bad-faith, wealthy taxpayers who are experiencing consequences of their own making."

However, that is not the case. Collins wrote that the automatic penalty regime "disproportionately affects individuals and businesses of more moderate resources, and is by no means just a rich person’s problem. Wealthy individuals and large businesses tend to have knowledgeable and well-informed representation and as a result have fewer foot faults. Immigrants, small businesses, and low-income individuals may not be as well-informed about IIRpenalties and may not have return preparers with the same technical expertise on international penalties."

NTA noted that from 2018-2021, 71 percent of the penalties were assessed to taxpayers with incomes of $400,000 or less, with an average penalty to these people being more than $40,000.

One example of how penalties can be triggered is when an immigrant who is a U.S. citizen starts a small business and includes family members who live abroad. This arrangement could trigger the need for an IIR and if it is not filed, the taxpayer could be automatically assessed penalties, which are defined in Internal Revenue Code Sec. 6038 and 6038A. The blog goes through a number of other scenarios which would require an IIR and penalties for failure to do so.

However, when "taxpayers voluntarily correct their failure to file, this good-faith action can sometimes have the unexpected effect of causing the IRS to automatically assess the penalty,"the blog states. "If the IRS does not administratively abate the penalty, taxpayers will need to pay the penalty in full before challenging by filing suit refund in the United States District Court or the United States Court of Federal Appeals."

Collins continues to advocate for legislative changes that would allow for changes in due process that would allow for cases to be heard in court before any penalties are paid, as well as providing a more "efficient and equitable regime governing the initial imposition of IIRpenalties and the mechanisms by which they can be challenged by taxpayers while also protecting their rights."

By Gregory Twachtman, Washington News Editor

The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The guidance is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2020, for travel away from home on or after October 1, 2020. For computing the amount allowable as a deduction for travel away from home, the guidance is effective for M&IEs or for incidental expenses only paid or incurred on or after October 1, 2020.

Transportation Industry Rates
The special M&IE rates for taxpayers in the transportation industry are:

• $66 for any locality of travel in the continental United States (CONUS), and
• $71 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the per diem rates in lieu of the rates described in Notice 2019-55 (the per diem substantiation method) are:

• $292 for travel to any high-cost locality, and
• $198 for travel to any other locality within CONUS.

The amount of these rates that is treated as paid for meals, and the per diem rates in lieu of the rates described in Notice 2019-55 (the M&IE only substantiation method), are:

• $71 for travel to any high-cost locality, and
• $60 for travel to any other locality within CONUS

The guidance provides a list of localities that have a federal per diem rate of $245 or more, and are high-cost localities for a specified portion of the calendar year. The list differs from the high-cost locality list in Notice 2019-55:

• Added to the list: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; Virginia Beach, Virginia.
• Localities that have changed the portion of the year in which they are high-cost localities: Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina.
• Removed from the list: Midland/Odessa, Texas; Pecos, Texas.

The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

Also, until September 22, 2020, individuals eligible to take coronavirus-related withdrawals may be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA. For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.

To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

• the individual is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);
• the individual’s spouse or dependent is diagnosed with COVID-19 by such a test; or
• the individual, their spouse, or a member of the individual’s household experiences adverse financial consequences from: (1) being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or (2) closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.

Taxpayers can learn more about these provisions in IRS Notice 2020-50, I.R.B. 2020-28, 35. The IRS has also posted FAQs that provide additional information.

The much-anticipated regulations (REG-136118-15) implementing the new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) have finally been released. The BBA regime replaces the current TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures beginning for 2018 tax year audits, with an earlier "opt-in" for electing partnerships. Originally issued on January 19, 2017 but delayed by a January 20, 2017 White House regulatory freeze, these re-proposed regulations carry with them much of the same criticism leveled against them back in January, as well as several modifications. Most importantly, their reach will impact virtually all partnerships.

The much-anticipated regulations (REG-136118-15) implementing the new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) have finally been released. The BBA regime replaces the current TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures beginning for 2018 tax year audits, with an earlier "opt-in" for electing partnerships. Originally issued on January 19, 2017 but delayed by a January 20, 2017 White House regulatory freeze, these re-proposed regulations carry with them much of the same criticism leveled against them back in January, as well as several modifications. Most importantly, their reach will impact virtually all partnerships.

Scope

Under the proposed regulations, to which Congress left many details to be filled in, the new audit regime covers any adjustment to items of income, gain, loss, deduction, or credit of a partnership and any partner’s distributive share of those adjusted items. Further, any income tax resulting from an adjustment to items under the centralized partnership audit regime is assessed and collected at the partnership level. The applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to any such item or share is also determined at the partnership level.

Immediate Impact

Although perhaps streamlined and eventually destined to simplify partnership audits for the IRS, the new centralized audit regime may prove more complicated in several respects for many partnerships. Of immediate concern for most partnerships, whether benefiting or not, is how to reflect this new centralized audit regime within partnership agreements, especially when some of the procedural issues within the new regime are yet to be ironed out.

Issues for many partnerships that have either been generated or heightened by the new regulations include:

• Selecting a method of satisfying an imputed underpayment;
• Designation of a partnership representative;
• Allocating economic responsibility for an imputed underpayment among partners including situations in which partners’ interests change between a reviewed year and the adjustment year; and
• Indemnifications between partnerships and partnership representatives, as well as among current partners and those who were partners during the tax year under audit.

Election out

Starting for tax year 2018, virtually all partnerships will be subject to the new partnership audit regime …unless an “election out” option is affirmatively elected. Only an eligible partnership may elect out of the centralized partnership audit regime. A partnership is an eligible partnership if it has 100 or fewer partners during the year and, if at all times during the tax year, all partners are eligible partners. A special rule applies to partnerships that have S corporation partners.

Consistent returns

A partner’s treatment of each item of income, gain, loss, deduction, or credit attributable to a partnership must be consistent with the treatment of those items on the partnership return, including treatment with respect to the amount, timing, and characterization of those items. Under the new rules, the IRS may assess and collect any underpayment of tax that results from adjusting a partner’s inconsistently reported item to conform that item with the treatment on the partnership return as if the resulting underpayment of tax were on account of a mathematical or clerical error appearing on the partner’s return. A partner may not request an abatement of that assessment.

Partnership representative

The new regulations require a partnership to designate a partnership representative, as well as provide rules describing the eligibility requirements for a partnership representative, the designation of the partnership representative, and the representative’s authority. Actions by the partnership representative bind all the partners as far as the IRS is concerned. Indemnification agreements among partners may ameliorate some, but not all, of the liability triggered by this rule.

Imputed underpayment, alternatives and "push-outs"

Generally, if a partnership adjustment results in an imputed underpayment, the partnership must pay the imputed underpayment in the adjustment year. The partnership may request modification with respect to an imputed underpayment only under the procedures described in the new rules.

In multi-tiered partnership arrangements, the new rules provide that a partnership may elect to "push out" adjustments to its reviewed year partners. If a partnership makes a valid election, the partnership is no longer liable for the imputed underpayment. Rather, the reviewed year partners of the partnership are liable for tax, penalties, additions to tax, and additional amounts plus interest, after taking into account their share of the partnership adjustments determined in the final partnership adjustment (FPA). The new regulations provide rules for making the election, the requirements for partners to file statements with the IRS and furnish statements to reviewed year partners, and the computation of tax resulting from taking adjustments into account.

Retiring, disappearing partners

Partnership agreements that reflect the new partnership audit regime must especially consider the problems that may be created by partners that have withdrawn, and partnerships that have since dissolved, between the tax year being audited and the year in which a deficiency involving that tax year is to be resolved. Collection of prior-year taxes due from a former partner, especially as time lapses, becomes more difficult as a practical matter unless specific remedies are set forth in the partnership agreement. The partnership agreement might specify that if any partner withdraws and disposes of their interest, they must keep the partnership advised of their contact information until released by the partnership in writing.

If you have any questions about how your partnership may be impacted by these new rules, please feel free to call our office.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Nontax considerations

State law and nontax considerations are an important consideration in choosing the form of the business and may play a decisive role. A general partner of a partnership has unlimited liability for the debts of the business. This can be modified by using a limited partnership (LP), which must have at least one general partner and at least one limited partner. The general partner still have unlimited liability, but a limited partner's liability is limited to its contribution to the partnership. A corporation has limited liability; shareholders generally are not responsible for the liabilities of the corporation beyond their contributions to the entity.

Federal tax considerations

At the same time, it is crucial to consider federal tax requirements and consequences when choosing the form of business entity. A primary federal tax consideration is avoiding a double layer of tax on business income. This can be accomplished by operating as a passthrough entity, such as a partnership or S corporation. Income is not taxed at the entity level. It passes through to partners and shareholders and is taxed at their rates.

In contrast, C corporations are taxable entities. Furthermore, when a C corporation pays a dividend to its shareholders, this generally is taxable to the shareholder. It must be noted that income of a passthrough entity is allocable and taxable to its owners, whether or not the income is actually distributed to the partner or shareholder. Dividends are not taxed unless there is an actual distribution.

While a partnership is organized under state law, an S corporation is a creature of the federal tax system. The S corporation is a regular corporation for state law purposes.

Advantages of partnerships

Unlike an S corporation shareholder, anyone or any entity can be a partner. S corporations are limited to 100 shareholders; only certain individuals, estates and trusts are eligible to be shareholders. C corporations and nonresident aliens cannot be shareholders of an S corporation.

S corporations are limited to a single class of stock; income and losses must be allocated on the same basis to each shareholder. Having only one class of stock may affect the corporation's ability to raise capital. A partnership can have different classes of partners and has more flexibility for allocating income and losses to different types of partners.

Partnership liabilities can increase a partner's basis in the partnership, offsetting distributions of cash and reducing their taxation. The increased basis allowed partners to use losses generated by the partnership. Liabilities of an S corporation do not create stock basis; separate bases in stock and debt must be calculated. This lack of basis may limit the use of losses generated by the S corporation.

Contributions of appreciated property by a partner to the partnership generally are not taxable, even if the partner is not part of a group controlling the partnership. Contributions by a shareholder to a corporation are tax-free only if the shareholders are part of a group controlling 80 percent of the corporation after the contribution. However, a partnership must follow special allocation rules for handling built-in gain on contributed property, whereas S corporations do not have special allocation rules in this circumstance.

Conclusion

In general, a partnership offers more flexibility than an S corporation in the treatment of taxes. However, S corporation shareholders do have limited legal liability, while general partners are not insulated from the partnership's debts and liabilities.