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Weekly IRS Roundup October 17 – October 21, 2022

by | Oct 24, 2022 | , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 17, 2022 – October 21, 2022.

October 17, 2022: The IRS released Internal Revenue Bulletin 2022-42, which highlights the following:

  • Notice 2022-45: This notice extends the deadline for amending an eligible retirement plan to reflect the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act). Both allow for special tax treatment with respect to a coronavirus-related distribution or a qualified disaster distribution.
  • Notice 2022-43: This notice provides guidance regarding the extension of the four-year replacement period for livestock sold because of the drought. The relief extends to 44 states, two US territories and two independent nations. It generally applies to capital gains realized on sales of livestock held for draft, dairy or breeding purposes.

October 17, 2022: The IRS announced its continued support to fight fraud targeting charities, businesses and individuals during Charity Fraud Awareness Week, which was October 17 to October 21. The IRS estimates that charities lose 5% of their revenue each year to fraud.

October 17, 2022: The IRS released Tax Tip 2022-158, reminding taxpayers to review their withholdings and estimated tax payments.

October 17, 2022: The IRS released Revenue Ruling 2022-20, providing various prescribed rates for federal income tax purposes for November 2022.

October 17, 2022: The IRS released Notice 2022-54, which provides guidance on the corporate bond monthly yield curve and corresponding spot segment rates and the 24-month average segment rates for October 2022. The notice also provides guidance as to interest rates on 30-year Treasury securities and 30-year Treasury weighted average rates.

October 17, 2022: The IRS reminded families that they may be eligible for the Child Tax Credit if they claim at least one child as their dependent. The IRS specifically urges grandparents, foster parents or people caring for siblings or other relatives to check whether they are eligible to receive the 2021 Child Tax Credit.

October 18, 2022: The IRS released Tax Tip 2022-159, suggesting that taxpayers with an outstanding tax bill consider making an Offer in Compromise. An Offer in Compromise is an option for taxpayers who cannot pay their full tax liabilities or in situations where paying the balance would create financial hardship.

October 18, 2022: The IRS announced the 2023 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. The Inflation Reduction Act of 2022 is extending certain tax breaks related to energy for the first time in 2023. The standard deduction for a married couple filing jointly and single and married taxpayers filing separately is also increasing. All of the 2023 adjustments can be found in
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IRS Releases 2023 Annual Inflation Adjustments

by , and | Oct 21, 2022 | ,

On October 18, 2022, the Internal Revenue Service (IRS) announced the annual inflation adjustments for 2023 related to more than 60 tax provisions, with some increasing, some maintaining and some new additions to the list. The tax adjustments generally apply to tax returns for the 2023 tax year that will be filed in 2024 (i.e., the adjustment will not apply to tax returns filed next year for the 2022 tax year). The highlights are summarized below, but you can find the complete list detailed in Revenue Procedure 2022-38.

2023 Marginal Income Tax Brackets

Tax Rate Single Taxpayers,
Income Greater Than: Married Couples Filing Jointly, Income Greater Than: 37% $578,125 $693,750 35% $231,250 $462,500 32% $182,100 $364,200 24% $95,375 $190,750 22% $44,725 $89,450 12% $11,000 $22,000 10% $11,000 or less $22,000 or less

 

2023 Standard Deduction

Married couples filing jointly $27,700 (increase of $1,800) Single taxpayers and married individuals filing separately $13,850 (increase of $900) Heads of households $20,800 (increase of $1,400)

 

Alternative Minimum Tax Exemption

  • Unmarried individuals: $81,300
  • Joint returns or surviving spouses: $126,500
  • Married individuals filing separately: $63,250
  • Estates and Trusts: $28,400

Earned Income Tax Credit

  • $3,995 for one qualifying child
  • $6,604 for two qualifying children
  • $7,430 for three or more qualifying children

Qualified Transportation Fringe Benefit

  • $300

Foreign Earned Income Exclusion

  • $120,000

Basic Exclusion Amount for Estates of Decedents

  • $12,920,000

Annual Exclusion for Gifts

  • $17,000

New for 2023: Energy-Efficient Commercial Building Deduction

  • The applicable dollar value used to determine the maximum allowance of the deduction is $0.54 (increased by $0.02), but not above $1.07, for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.
  • The applicable dollar value used to determine the increased deduction amount for certain property is $2.68 (increased by $0.11), but not above $5.36, for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.

Items Not Changing

  • Personal exemption for the 2023 tax year remains at zero
  • No limit on itemized deductions (same as 2022, 2021, 2020, 2019 and 2018)

Practice Point: The above adjustments are a welcome development for taxpayers in the wake of inflation. However, it is important to note that any tax relief will not be immediate as the adjustments are for the 2023 tax year and will be reflected on tax returns filed in 2024.



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IRS Releases Memorandum Regarding Advance Payments of Section 367(d) Inclusions

by , , and | Oct 19, 2022 |

On September 23, 2022, the Internal Revenue Service (IRS) released a memorandum (AM 2022-003) concluding that taxpayers cannot make advance payments of section 367(d) inclusions except in the limited situation in which the US transferor receives boot in connection with the initial transfer of intangible property (IP) to a foreign corporation. The memorandum is relevant to any taxpayers who made, or are considering making, advance payments of section 367(d) amounts. In our view, the memorandum (which does not have precedential value) is not persuasive, and both its reasoning and its conclusion are inconsistent with prior IRS guidance and analogous long-standing case law.

OVERVIEW OF SECTION 367(d) AND NOTICE 2012-39

Section 367(d) generally provides that when a US person (USP) transfers IP to a foreign corporation in an otherwise tax-free exchange under sections 351 or 361, the US transferor is treated as having sold the IP in exchange for contingent payments and receiving amounts which would have been received annually in the form of such payments. The amounts included in the US transferor’s income (i.e., the section 367(d) inclusions) are treated as ordinary income and royalties for purposes of determining the source and foreign tax credit limitation category. See sections 865(d)(1)(B) (source); 367(d)(2)(C) (foreign tax credit limitation category). See also section 904(d)(3)(A); Reg. §1.904-5(b) (look-through rules).

In Notice 2012-39, the IRS treated boot received in an outbound section 367(d) transaction as an advance payment of the section 367(d) inclusion. In the Notice, the IRS described a situation in which a US Parent (USP) owns a US company (UST) with a basis and value of $100, and UST owns IP with a basis of $0 and a value of $100. Pursuant to an “all-cash D” reorganization, UST transferred IP with a value equal to $100 to a controlled foreign corporation (CFC) owned by USP in exchange for $100 and then UST distributed the cash to its USP in liquidation. As described in the Notice, UST would report the $100 received from CFC as tax free under section 361, and USP would report no dividend income or gain from receiving the $100 cash under the “gain within boot” rule in section 356(a)(1) (because there was no built-in gain in the stock of UST). According to the Notice, taxpayers would take the position that “the transactions have resulted in a repatriation in excess of $100x ($100x at the time of the reorganization and then through repayment of the receivable in the amount of USP’s income inclusions over time) while only recognizing income in the amount of the inclusions over time.” Thus, USP could receive, for example, $200 of cash ($100 from the initial transfer and $100 over time related to the section 367(d) inclusions) but only include $100 in income (over time on the section 367(d) inclusions).

To address what the IRS and the US Department of the Treasury perceived to be an inappropriate repatriation of cash, the Notice provided that in such a situation, the $100 received by UST in the initial outbound [...]

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Weekly IRS Roundup October 10 – October 14, 2022

by | Oct 17, 2022 | , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 10, 2022 – October 14, 2022. 

October 11, 2022: The IRS released Internal Revenue Bulletin 2022-41, which highlights the following:

  • Notice 2022-42: This notice announces that the IRS and the US Department of the Treasury (Treasury) intend to amend the regulations under Section 901 with respect to the application of the noncompulsory payment regulations to certain amended Puerto Rico tax decrees.
  • Notice 2022-44: This notice provides annual awareness of the 2022-2023 special per diem rates for taxpayers to use when substantiating the amount of business expenses incurred while traveling away from home. The guidance addresses (1) the special transportation industry meal and incidental expenses rates, (2) the rate for the incidental expenses only deduction and (3) the rates and list of high-cost localities for purposes of the high-low substantiation method.
  • Revenue Procedure 2022-19: This revenue procedure provides guidance to allow S corporations and their shareholders to resolve frequently encountered issues with certainty and without requesting a private letter ruling issued by the IRS.

October 11, 2022: The IRS issued Notice 2022-41, which expands the application of permitted change-in-status rules for health coverage under a Section 125 cafeteria plan. This guidance addresses when a plan participant may want to revoke the employee’s election under the cafeteria plan for family coverage under a group health plan (other than a flexible spending arrangement) in order to allow one or more family members to enroll in a Qualified Health Plan through a Health Insurance Exchange in the individual market.

October 11, 2022: The IRS announced that seminars from the 2022 IRS Nationwide Tax Forum are now available online. The platform offers 18 self-study seminars, including ones on the following topics:

  • IRS Commissioner Chuck Rettig’s Keynote Address
  • Tax Law Changes for Tax Year 2022 – in English and Spanish
  • Professional Responsibility Obligations (Ethics) – in English and Spanish
  • Tax Treatment of Digital Assets
  • Tax-Exempt Organizations Update
  • Emerging Cyber Crimes – in English and Spanish

October 11, 2022: The IRS announced that it is expanding dyed diesel penalty relief in response to Hurricane Ian. The IRS will not impose a penalty when dyed diesel fuel with a sulfur content that does not exceed 15 parts-per-million is sold for use or used on highways in the state of Florida. The relief began on September 28, 2022, and lasts through October 19, 2022. The penalty relief previously only applied to emergency vehicles.

October 11, 2022: The IRS issued a statement related to uncertain tax positions (UTP) reporting. Draft changes to the Schedule UTP and the UTP instructions are available at Draft Task Forms. The draft changes are intended to improve the form’s usefulness by incorporating additional relevant examples and [...]

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IRS to Update Schedule UTP to Require Additional Transparency

by and | Oct 14, 2022 | ,

On October 11, 2022, the Internal Revenue Service (IRS) announced draft changes to Schedule UTP, Uncertain Tax Position Return Statement, and Form 1120, Instructions for Schedule UTP, for the 2022 tax year (processing year 2023). Since the 2010 tax year, Schedule UTP has been used by certain corporations to report uncertain tax positions. Corporations filing Forms 1120, 1120-F, 1120-L or 1120-PC are required to file Schedule UTP if their total assets equal or exceed the applicable asset threshold for the tax year and if the corporation records a liability for unrecognized tax benefits for a US federal income tax position in audited financial statements.

The changes to the form include a new field for the incremental dollar amount of the uncertain tax positions taken. Also, for tax positions reported on Schedule UTP, rather than filing Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, new columns will identify the rulings or regulation sections that are contrary to positions taken on the tax return. (Proper disclosure on Schedule UTP may allow taxpayers to avoid certain penalties). Finally, the instructions incorporate more relevant examples and provide enhanced guidance on what constitutes an adequate disclosure for the concise description. Comments can be submitted to the IRS regarding the draft changes.

Practice Point: The IRS is continuing its effort of having corporations self-identify uncertain tax positions (although there remain questions on how the IRS actually uses the information disclosed on a Schedule UTP). Requiring the identification of specific IRS guidance that is contrary to the taxpayer’s position is noteworthy given the IRS’s recent position that challenges to regulations will not be resolved at the examination or IRS Appeals levels. Corporations subject to the Schedule UTP reporting requirement will need to review their past practices and ensure that future Schedule UTP filings comply with the draft changes once finalized.



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IRS Appeals Revises Initial Contact Letter

by and | Oct 5, 2022 | ,

The Internal Revenue Service Independent Office of Appeals (IRS Appeals) is the administrative forum for taxpayers to attempt to resolve tax disputes prior to litigation. Subject to certain exceptions, taxpayers can file a protest and have their dispute heard by IRS Appeals after adjustments are proposed at the examination level. Almost all disputes are resolved at the IRS Appeals level.

After a protest is submitted challenging the proposed adjustments, IRS Appeals will contact the taxpayer. This is accomplished through an initial contact letter, which provides general information on what to expect at IRS Appeals.

On October 4, 2022, IRS Appeals informed taxpayers that it is revising the initial contact letter in an effort to improve how taxpayers interact and communicate with it. The two revisions are:

  1. Clarifying that taxpayers and their representatives can choose whether they meet with IRS Appeals (e., by telephone, video or in-person) and that taxpayers and IRS Appeals can work together via mail or secure electronic messaging to resolve disputes.
  1. Providing the name and phone number of the IRS Appeals Officer’s manager to ensure that an appeal stays on track if additional help is needed.

IRS Appeals also indicated that it welcomes comments on the revisions, which can be submitted to ap.taxpayer.experience@irs.gov by December 2, 2022.

Practice Point: As we have discussed in the past, IRS Appeals plays a vital role in the resolution of tax controversy matters without the time, expense and uncertainty of litigation. The initial contact letter revisions should be helpful by allowing taxpayers to choose the manner in which they would like to interact with IRS Appeals and ensuring that cases progress through the process without unnecessary delays. In a typical case, we recommend an “in-person” conference with IRS Appeals, if practicable.



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Weekly IRS Roundup September 26 – September 30, 2022

by | Oct 3, 2022 | , , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 26, 2022 – September 30, 2022.

September 26, 2022: The IRS released Internal Revenue Bulletin 2022-39, which highlights the following:

  • REG-125693-19: These proposed regulations clarify issues that do not meet the definition of a federal tax controversy, exceptions to consideration by the IRS Office of Appeals (IRS Appeals), and procedural and timing requirements that must be met before IRS Appeals will consider an issue. The proposed regulations also provide the requirements a taxpayer must meet to receive the notice described in Internal Revenue Code (Code) Section 7803(e)(5) when the taxpayer requests consideration by IRS Appeals and the request is denied. More coverage of this issue can be found here.
  • Notice 2022-38: This notice publishes the inflation adjustment factor for the carbon oxide sequestration credit under § 45Q for calendar year 2022. This notice also informs taxpayers that 2022 will be the final calendar year for which they may claim a credit under Code Section 45Q(a)(1) and (2) for qualified carbon oxide that is captured by carbon capture equipment originally placed in service at a qualified facility before the date of enactment of the Bipartisan Budget Act of 2018.

September 26, 2022: The IRS issued Notice 2022-44, providing annual notice of the 2022 to 2023 special per diem rates for taxpayers to use when substantiating the amount of business expenses incurred while traveling away from home. Specifically, the notice addresses (1) the special transportation industry meal and incidental expenses rates, (2) the rate for the incidental expenses only deduction and (3) the rates and list of high-cost localities for purposes of the high-low substantiation method.

September 26, 2022: The IRS released Notice 2022-45, extending the deadline for amending an eligible retirement plan to reflect the Coronavirus Aid, Relief, and Economic Security Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. Both allow for special tax treatment with respect to a coronavirus-related distribution or a qualified disaster distribution.

September 26, 2022: The IRS released Tax Tip 2022-147, highlighting five resources people can find on IRS.gov. These resources are:

  1. Taxpayer Bill of Rights
  2. How to apply for 501(c)3 status
  3. IRS tax volunteer opportunities
  4. Latest tax scams
  5. Interactive Tax Assistant

September 27, 2022: The IRS released Tax Tip 2022-148, providing the steps for becoming an IRS-authorized e-file provider.

September 27, 2022: The IRS announced that victims of storms and flooding in Alaska, which started on September 15, now have until February 15, 2023, to file various federal individual and business tax returns and make tax payments. The relief is available to anyone in an area designated by the Federal Emergency Management Agency [...]

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Weekly IRS Roundup September 19 – September 23, 2022

by | Sep 26, 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 Appeals Will Not Consider Regulatory Invalidity and Subregulatory Procedural Invalidity Challenges

by and | Sep 21, 2022 | , , , , ,

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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