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IRS Hints at Revenue Procedure 94-69 Update

by and | Sep 27, 2022 | , , ,

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.



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IRS Official Provides Update on Large Partnership Compliance Audits

by and | Sep 23, 2022 | , ,

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.



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Special IRS Team Working to Identify Emerging “Abusive Transactions”

by and | Sep 7, 2022 | ,

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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IRS Appeals Retains Video Conference Option, Requests Public Input

by and | Aug 22, 2022 | , ,

In 2017, we posted about the IRS Independent Office of Appeals’ (IRS Appeals) implementation of a face-to-face virtual option for taxpayers. Now, IRS Appeals wants suggestions from tax professionals on how to improve and enhance the video conferencing platform.

IRS Appeals offers taxpayers conferences by telephone, video or in person. The COVID-19 pandemic triggered expanded interim guidance that required employees to conduct video conferences when requested by taxpayers. IRS Appeals plans to make updates to the Internal Revenue Manual, including guidelines for conducting video conferences and for using the video conference platform technology, Microsoft Teams.

In April 2022, IRS Appeals acknowledged its large backlog of cases and detailed a multipoint plan to reduce “significant inventory.” As we discussed previously in our post, the plan offered welcome developments, including additional resources, prioritization of docketed casework, faster initial contact with the taxpayer, streamlined case processing, resolution of cases without conferences that were triggered from pandemic miscommunication and reliance on oral statements to resolve cases rather than trials. Improvements to the video conferencing platform can only help to alleviate that backlog further.

Some of the common ideas expressed by taxpayers and tax professionals to date include:

  • The potential for improving the taxpayer experience as taxpayers may be better able to present their cases over video rather than on a phone conference.
  • The critical nature of the IRS Appeals employee’s role in making sure every participant is introduced and participants turn on their cameras.
  • How screensharing allows for a more comprehensive discussion of issues and potentially earlier resolution.
  • Keeping technical requirements to a minimum for taxpayers who find the video conference platform challenging while also ensuring other options (such as teleconferences and in-person conferences) remain available.

Generally, it is up to taxpayers or their representatives to decide how they will meet with IRS Appeals. According to a recent release, the type of conference chosen will not impact IRS Appeals’ substantive decision in a matter. Comments should be sent to AP.taxpayer.experience@irs.gov by November 16, 2022.

Practice Point: IRS Appeals remains one of the most effective ways for taxpayers to resolve disputes with the IRS. With video conferencing here to stay, tax practitioners with ideas for improvements should consider submitting them, as they may not be considered otherwise.

For our prior comments and posts on IRS Appeals, see the links below:



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It’s Official: President Biden Signs the Inflation Reduction Act into Law, IRS to Receive Increased Funding

by and | Aug 17, 2022 | , ,

On August 16, 2022, US President Joe Biden signed into law the Inflation Reduction Act of 2022 (Act). A press release from the White House touts the Act as one that will “lower the costs for families, combat the climate crisis, reduce the deficit, and finally ask for the largest corporations to pay their fair share.” The press release provides a numerical summary of the Act’s impact on the healthcare, clean energy and tax sectors.

As we previously discussed, the Act provides for a significant increase in funding for the Internal Revenue Service (IRS). IRS Commissioner Chuck Rettig shared the following written statement regarding the Act:

The signing of the historic reconciliation package marks a transformational moment for our agency—and an opportunity for the future of tax administration. The IRS has struggled for many years with insufficient resources to fulfill our important mission. During the next 10 years, these funds will help us in many areas, including adding critical resources to not just close the tax gap but meaningfully improve taxpayer service and technology. This will allow the IRS to provide services to taxpayers in the manner they expect and deserve. The act also includes a wide range of tax law changes that we will have to implement very quickly.

 

Given the scope of the bill, keep in mind these changes will not be immediate. It’s a 10-year plan, and it will take time to put these provisions into place. More details will be available in coming months.

 

We have a lot of hard work in front of us to deliver on the high expectations this historic funding will provide. But I have great confidence IRS employees are up to the task—and will deliver for Americans as they have countless times before in the history of our agency.

The Act also contains several new provisions relating to the corporate alternative minimum, a tax on stock buybacks, and tax credits for clean energy use and production. These provisions will require immediate guidance given that they are effective for taxable years beginning after December 31, 2022.

Practice Point: The IRS has its work cut out for it. It is critical that timely guidance be provided to taxpayers impacted by the Act’s new provisions to allow for proper planning and modeling. Additionally, the IRS needs to create and execute a plan to improve its technology and customer service.

Update as of August 18, 2022: US Secretary of the Treasury Janet Yellen has issued a memorandum to Commissioner Rettig, directing the IRS to produce, within six months, an operational plan detailing how the additional funding would be deployed over the next decade. Secretary Yellen specifically stated that she would like the IRS to work closely with Deputy Secretary of the Treasury Wally Adeyemo “to identify specific operational initiatives and associated timelines that will improve taxpayer service, modernize technology, and increase equity in our system of tax administration [...]

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Is the IRS Finally Receiving Increased Funding?

by and | Jul 28, 2022 | , ,

After months of back and forth, it appears that additional funding is on its way to the Internal Revenue Service (IRS). Senate Majority Leader Chuck Schumer (D-NY) released a statement yesterday on his agreement with Senator Joe Manchin (D-WV) on the FY2022 Budget Reconciliation legislation and plans to hold a vote in the US Senate next week. A summary of the Inflation Reduction Act of 2022 (Act) provides the following topline estimates:

Total Revenue Raised $739 billion 15% Corporate Minimum Tax $313 billion* Prescription Drug Pricing Reform $288 billion** IRS Tax Enforcement $124 billion** Carried Interest Loophole $14 billion* Total Investments $433 billion Energy Security and Climate Change $369 billion** Affordable Care Act Extension $64 billion** Total Deficit Reduction $300+ billion * = Joint Committee on Taxation Estimate ** = Congressional Budget Office Estimate

 

With respect to taxes, the summary states that the Act will “[m]ake the biggest corporations and ultra-wealthy pay their fair share” and “[t]here are no new taxes on families making $400,000 or less and no new taxes on small business – we are closing tax loopholes and enforcing the tax code.”

Section 10301 of the Act, entitled “Enhancement of Internal Revenue Service Resources,” provides the following appropriations:

  • IRS: $78,911,000,000
    • Taxpayer Services: $3,181,500,000
      • Provide taxpayer services, including pre-filing assistance and education; filing and account services; taxpayer advocacy services; and other services authorized by 5 U.S.C. 3109 (relating to employment of excerpts and consultants on a temporary or intermittent basis)
    • Enforcement: $45,637,400,000
      • Conduct tax enforcement activities to determine and collect owed taxes; provide legal and litigation support; conduct criminal investigations; provide digital asset monitoring and compliance activities; enforce criminal statutes related to violations of internal revenue laws and other financial crimes; purchase and hire passenger motor vehicles; and provide other services authorized by 3109
    • Operations Support: $25,326,400,000
      • Support taxpayer services and enforcement programs, including rent payments; facilities services; printing; postage; physical security; headquarters and other IRS-wide administrative activities; research and statistics of income; telecommunications; information technology development, enhancement, operations, maintenance and security; hire of passenger motor vehicles, operations of the IRS Oversight Board; and other services authorized by 3109
    • Business Systems Modernization: $4,750,700,000
      • Improve the business systems modernization program, including development of callback technology and other technology to provide a more personalized customer service experience but do not include the operation and maintenance of legacy systems.
    • Report on IRS-Run Free “Direct Efile” Tax Return System: $15,000,000
      • Deliver to US Congress (within nine months) a report on the cost of developing and running a free direct efile tax return system; taxpayer opinions, expectations and level of trust—based on surveys—for such a system; and opinions of an independent third party on the overall feasibility, approach, schedule, cost, organizational design and the IRS’s capacity to deliver such a system
    • Treasury Inspector General for Tax Administration (TIGTA): $403,000,000


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IRS Releases Five-Year Strategic Plan with Emphasis on Enforcement

by and | Jul 26, 2022 | , ,

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

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

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

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

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

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

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

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

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

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

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IRS Changes Position on Approval for Assertion of Codified Economic Substance Doctrine

by | Apr 29, 2022 | ,

In March 2010, Congress codified the economic substance doctrine in Internal Revenue Code (Code) Section 7701(o). The codification clarified that a conjunctive analysis applies in determining if the doctrine applies. The codified economic substance doctrine applies when a transaction does not have economic substance or lacks a business purpose. When the doctrine applies, a taxpayer is subject to a 20% strict liability penalty (40% in the case of undisclosed transactions) on any underpayment attributable to the disallowed tax benefit claimed.

Congress acknowledged that the codified economic substance doctrine should be applied sparingly, and the Joint Committee on Taxation, in a report issued prior to the enactment of the doctrine, provided detailed guidance on when the doctrine should apply. The Internal Revenue Service (IRS) issued guidance shortly after the codification acknowledging these points. The IRS also put in place detailed procedures for examiners to follow in determining whether to assert the codified economic substance doctrine.

One of the procedures put in place was the approval by the Director, Field Operation before the codified economic substance doctrine could be formally asserted. An approval request was to be made after consultation with the revenue agent’s manager and local counsel. Additionally, taxpayers were to be provided “the opportunity to explain their position.”

On April 22, 2022, the IRS’s Large Business & International (LB&I) Division issued a memorandum—LB&I-04-0422-0014—to all LB&I and Small Business/Self Employed examination employees (Updated Guidance). The Updated Guidance removes the requirement to obtain executive approval before asserting the codified economic substance doctrine. The Updated Guidance states that this change aligns penalties for lack of economic substance with other assessable penalties which do not require executive approval. However, the changes do not remove the supervisory approval requirement under Code Section 6751.

In connection with the Updated Guidance, revisions are being made to the relevant provisions of the Internal Revenue Manual (IRM). The IRM revisions eliminate some of the considerations previously set forth in the four-step process that revenue agents were required to undertake in determining whether the doctrine should be applied.

Practice Points: Although the Updated Guidance has no impact on the substance of the codified economic substance doctrine itself, the change is disappointing news. As a result of the relaxed rules for the doctrine’s assertion, taxpayers can reasonably assume that the doctrine may more frequently be asserted on audit. Thus, it is now even more important to properly document transactions to demonstrate they have sufficient economic substance and a business purpose.



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An Update on Section 6751 Penalties

by and | Mar 23, 2022 | , , , , ,

Tax penalties are always a hot topic here. The Internal Revenue Service (IRS) has a large arsenal when it comes to grounds for asserting penalties on income tax deficiencies, ranging from the common 20% penalty under Internal Revenue Code (Code) Section 6662(a) to higher penalties ranging from 40% (gross valuation or basis misstatements and economic substance) to 75% (fraud).

However, before the IRS can assert most penalties against taxpayers, it must comply with the procedural requirement in Code Section 6751(b): That the “initial determination” to assert the penalty be “personally approved (in writing) by the immediate supervisor of the individual making such determination.” As the US Court of Appeals for the Second Circuit explained in Chai v. Commissioner, US Congress imposed this requirement because it “believes that penalties should only be imposed where appropriate and not as a bargaining chip” and “[t]he statute was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.”

Over the past several years, there has been substantial litigation over the proper interpretation and application of Code Section 6751(b). The US Tax Court’s recent opinion in Oxbow Bend, LLC v. Commissioner is the latest development. In Oxbow Bend, the Tax Court rejected the taxpayer’s position that the “initial determination” was made on the date that the examining agent prepared a penalty lead sheet reflecting her recommendation to assert penalties and stated in a telephone conference with the taxpayer’s representative on that same day that penalties were being considered. Approximately three months later, the examining agent’s supervisor approved the penalty lead sheet, and the IRS issued a Notice of Final Partnership Administrative Adjustment asserting the penalties. The Tax Court, relying on its prior precedent, held that the word “determination”:

  1. “has an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality”
  2. “signifies a consequential moment of IRS action”
  3. is not a “mere suggestion, proposal, or initial informal mention of penalties”
  4. “will be embodied in a formal written communication that notifies the taxpayer of the decision to assert penalties.”

Thus, under the Tax Court’s analysis, an “initial determination” can only be made in a “written” document that is provided to the taxpayer.

Oxbow Bend is a memorandum opinion of the Tax Court and, therefore, is limited to its facts and technically not precedential, as we have discussed in the past. However, memorandum opinions are often cited by litigants, and the Tax Court does not disregard these types of opinions lightly. One has to wonder whether, under different facts where an examining agent makes an explicit oral statement to a taxpayer that penalties “will” be asserted, courts might reach a different result given Congress’s express intent that examining agents should not threaten penalties and use them as a bargaining chip for settlement purposes. Further, Code Section 6751(b) expressly requires that the supervisory approval be “in writing” but contains a written requirement for purposes of the [...]

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