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2015 MSCPA Regional Forum Update- Practice and Procedure
October 16, 2015
IRS Updates Guide For Safeguarding Taxpayer Data
IRS Issues Final Regs On F Reorgs
Tax Court Finds Lender Failed To Rebut Presumption Of Identifiable Event; COD Not
Included In Income
No Aggregation Of Poker Tournament Multiple Buy-Ins, Chief Counsel Determines
IRS Delays Uniform Basis Reporting Requirements For Estate Tax Property Until Late
February 2016
D.C. Circuit Affirms Tax Court’s Jurisdiction Over IRS Determination Of Frivolous CDP
Hearing Requests
Budget Agreement Repeals TEFRA/ELP Partnership Audit Rules, ACA Automatic
Enrollment
IRS Offers FATCA Guidance to Withholding Trusts, Partnerships
IRS Delays Embedded-Loan Rules' Effective Date to 2017
IRS Starts Anti-Fraud Program Using Codes to Verify W-2s
Guidance on Valuation Discounts ‘Getting Closer
New CFC Loan Rules Seen as Too Broad, Tough on Companies
IRS Wants to Combine Timely Mailed, Timely Filed Collections
Transfer Pricing Practice Helps IRS With Section 482 Cases
IRS Corrects Rules on Disguised Payments for Services
IRS Answers New Questions On ACA Reporting for Employers
Penalty Relief Unlikely When Professionals File Court Petitions, Estate Tax Returns Late
IRS: Home-Based Business Filers Can Use Simpler Method for Claiming Tax Deduction
IRS Updates Guide For Safeguarding Taxpayer Data
Pub. 4557, Safeguarding Taxpayer Data – A Guide for Your Business
The IRS has posted an updated version of Publication 4557, Safeguarding Taxpayer Data - A
Guide for Your Business, on its website. The update, which replaces the 2008 issue of the guide,
is targeted to non-government businesses involved in the preparation and filing of returns.
Take Away. Authorized e-file providers must adhere to security, privacy and business standards
to protect tax information collected, processed and stored. Authorized e-file providers that own
or operate a web site through which taxpayer information is collected, transmitted, processed, or
stored, must register their uniform resource locator (URL).
Background
Safeguarding taxpayer data, the IRS explained, is a top priority for the agency. These safeguards
are intended to preserve the confidentiality and privacy of taxpayer data by restricting access and
disclosure and to protect the integrity of taxpayer data by preventing improper or unauthorized
modification or destruction. Similarly, non-governmental businesses, organizations and
individuals that handle taxpayer data to must understand and meet their responsibilities to
safeguard taxpayer information, the IRS cautioned.
Security controls
To safeguard taxpayer information, organizations must determine the appropriate security
controls for their environment based on the size, complexity, nature and scope of their activities,
the IRS explained. Security controls are the management, operational and technical safeguards
used to protect the confidentiality, integrity and availability of information.
Financial institutions as defined by Federal Tax Commission (FTC) include professional tax
preparers, data processors, their affiliates and service providers who are significantly engaged in
providing financial products or services. They must take certain steps to protect taxpayer
information. Other businesses, organizations and individuals handling taxpayer information, the
IRS recommended, should also follow these steps because they represent best practices for all.
Take responsibility or assign an individual or individuals to be responsible for
safeguards;
Assess the risks to taxpayer information, including operations, physical environment,
computer systems and employees, if applicable;
Make a list of all the locations where taxpayer information is kept;
Write a plan of how taxpayer information will be safeguarded;
Put appropriate safeguards in place;
Use only service providers that have policies in place to also maintain an adequate level
of information protection; and
Monitor, evaluate and adjust security programs as business or circumstances change.
•Comment
State governments provide best practice guidelines to safeguard consumer information, such as
personal tax data. The National Institute of Standards and Technology (NIST), the IRS
explained, also provides security guidelines and practices for federal agencies that
nongovernmental organizations may use.
Reference: TRC IRS: 66,360.
IRS Issues Final Regs On F Reorgs
T.D. 9739
The IRS has released final regs describing a corporate reorganization under Code Sec.
368(a)(1)(F) (an F reorg). The final regs also describe outbound F reorgs.
Take Away. An F reorg is generally a change in identity, form, or place of organization of one
corporation, however effected (a Mere Change). When a corporation changes its identity, form,
or place of incorporation, questions have arisen as to what other changes may occur, without
affecting the status of the Mere Change, the IRS explained.
Final regs
The final regs describe six F reorg requirements. The first requirement is that immediately after
the F reorg, all the stock of the Resulting Corporation must have been distributed (or deemed
distributed) in exchange for stock of the Transferor Corporation. Second, subject to certain
exceptions, the same person or persons must own all the stock of the Transferor Corporation at
the beginning of the F reorg and all of the stock of the Resulting Corporation at the end of the
reorg, in identical proportions.
•Comment
The Resulting Corporation may issue a de minimis amount of stock not in respect of stock of the
Transferor Corporation, to facilitate the organization or maintenance of the Resulting
Corporation.
The third requirement (limiting the assets and attributes of the Resulting Corporation
immediately before the transaction) and the fourth requirement (requiring the liquidation of the
Transferor Corporation) under the Final Regulations reflect the statutory mandate that an F reorg
involve only one corporation. The fifth requirement is that immediately after the F reorg, no
corporation other than the Resulting Corporation may hold property that was held by the
Transferor Corporation immediately before the reorg, if the other corporation would, as a result,
succeed to and take into account the items of the transferor corporation described in Code Sec.
381(c). Finally, the sixth requirement is that immediately after the F reorg, the Resulting
Corporation may not hold property acquired from a corporation other than the Transferor
Corporation if the Resulting Corporation would, as a result, succeed to and take into account the
items of such other corporation described in Code Sec. 381(c).
Outbound F reorgs
The final regs also address outbound F reorgs. This occurs where the Transferor Corporation is a
domestic corporation and the acquiring corporation is a foreign corporation.
•Comment
The final regs generally apply to transactions occurring on or after September 21, 2015.
References: FED ¶47,036; TRC CCORP: 39,100.
Tax Court Finds Lender Failed To Rebut Presumption Of Identifiable Event;
COD Not Included In Income
A taxpayer did not have to recognize discharge of indebtedness income as a result of defaulting
on her automobile loan, the Tax Court has found. The lender failed to rebut the presumption that
an identifiable event took place discharging the taxpayer’s debt in a year prior to the year in
dispute.
Background. In 1999, the taxpayer financed the purchase of an automobile. The taxpayer
subsequently defaulted on the loan. Five collection agencies worked the account without success.
In 2011, the lender reported that the outstanding balance was discharged by filing Form 1099-C
with the IRS. The taxpayer’s copy of Form 1099-C was returned to the lender as undeliverable,
address unknown. The taxpayer did not report any income from the discharge of the debt on her
2011 return.
Court’s analysis. The court acknowledged that the lender had engaged the services of five
collection agencies but found the evidence did not show what, if any, collection activities took
place. Significant collection activities, the court found, require more than routine mailings and
similar actions. As a result, the taxpayer did not have any discharge of indebtedness for 2011 and
no related income.
Clark, TC Memo. 2015-175; Dec. 60,398(M); TRC SALES: 12,154.20.
No Aggregation Of Poker Tournament Multiple Buy-Ins, Chief Counsel
Determines
FAA 20153601F
Multiple buy-ins in a poker tournament are not identical wagers, Chief Counsel has determined
in field attorney advice (FAA). Therefore, multiple buy-ins should not be aggregated for
purposes of Code Sec. 3402(q) withholding and reporting requirements.
Take Away. Payers must provide players with Form W-2G, Certain Gambling Winnings, which
is also filed with the IRS. The payer must issue the form based on the type of gambling, the
amount won and other factors. Income tax withholding is required at a flat rate of 25 percent of
more than $5,000 from wagering pools, among other types of gambling activities, if the winnings
are at least 300 times the wager.
Background
To participate in a poker tournament, players pay a buy-in amount. In exchange for the buy-in,
players receive tournament chips. Once a player bets all of his or her tournament chips, the
player is eliminated from game play. An eliminated player can re-enter during an alternate period
by purchasing an additional buy-in at the same price. The player who is the last one remaining in
the event with tournament chips wins the first place prize. Additionally, the top 10 percent of
players in each tournament field receive cash prizes.
•Comment
Each additional buy-in had the effect of increasing the wagering pool and potential prize
amounts.
Chief Counsel’s analysis
Chief Counsel first noted that the IRS determined in Rev. Proc. 2007-57 that poker tournament
sponsors must withhold and report on payments of more than $5,000 (after reducing the payment
by the amount of the wager) made to a winning payee in a tax year by filing an information
return. For purposes of Code Sec. 3402(q), winnings subject to withholding include proceeds of
more than $5,000 from a wager placed in a sweepstakes, wagering pool, or lottery. Poker
tournaments, Chief Counsel explained, are treated as a wagering pool. Chief Counsel further
noted that amounts paid with respect to identical wagers are treated as paid with respect to a
single wager for purposes of calculating the amount of proceeds from a wager.
Here, players in the tournament could buy-in to the tournament as many times as they wanted
after they lost their initial buy-in, as long as the tournament had not advanced past the alternate
period. Each time they purchased an additional buy-in, Chief Counsel observed that the
tournament advanced and the circumstances that must occur for players to win changed.
Therefore, the additional buy-ins were not identical wagers and should not be aggregated for the
purpose of determining whether the reporting and withholding thresholds have been met, Chief
Counsel concluded.
Reference: TRC PAYROLL: 3,404.
IRS Delays Uniform Basis Reporting Requirements For Estate Tax Property
Until Late February 2016
Notice 2015-57
The IRS has delayed new uniform basis reporting requirements for estate tax property until
February 29, 2016. The delay will give the IRS time to issue guidance so that executors,
beneficiaries, and others can comply with the new reporting requirements.
Take Away. Under the stepped-up basis rules of Code Sec. 1014, the basis of property acquired
from a decedent generally is the property’s fair market value, either at the date of death or six
months later (the alternate valuation date). However, beneficiaries who receive estate property
are not required to use the same value (and the same basis) reported by the estate. Because there
has been no consistency requirement, the recipient could claim that the property’s fair market
value (and the basis) were higher than the estate tax value. Recent legislation imposed a
consistency requirement, but left it to the IRS to prescribe reporting requirements and deadlines.
Background
Under Code Sec. 6018(a)(1), the executor of an estate must file an estate tax return where the
gross estate at the death of a citizen or resident exceeds the basic exclusion amount for the year
the individual died. Under Code Sec. 6018(b), an executor who cannot file a complete return
must include in the return a description of property of the estate and the name of every person
holding a legal or beneficial interest in it. Upon notice from the IRS, the beneficial shall file a
return regarding the property. Under Code Sec. 1014(a), the basis of property acquired from a
decedent or decedent’s estate is the fair market value of the property.
New basis requirement
The Administration’s 2016 budget proposals included a proposal to eliminate the inconsistency.
In the Surface Transportation Act of 2015 (signed into law by President Obama on July 31,
2015), Congress enacted Code Sec. 1014(f) and Code Sec. 6035 to impose the consistency
requirement.
•Comment- The consistency requirement only applies to property that was includible in the
gross estate and that increases estate tax liability.
Code Sec. 1014(f) requires that the basis of any property, as determined under Code Sec.
1014(a), shall not exceed the value determined for applying the estate tax. The value determined
for the estate tax is either the final value determined for the estate tax, or the value reported
under Code Sec. 6035. The final value is the value shown on the estate tax return and not
contested by the IRS; the value prescribed by the IRS and accepted by the taxpayer; or the value
determined by a court or agreement with the IRS.
New reporting requirements
Code Sec. 6035 requires executors that must file a return under Code Sec. 6018(a) or (b) to
provide a statement of the property’s value to the recipient and to the IRS. The executor must
furnish the statement to both the IRS and the recipient that identifies the value of the property
and provides any other information required by the IRS. The statement must be furnished by the
earlier of the date that is 30 days after the due date of the estate tax return (including extensions),
or that is 30 days after the return was filed. The statute authorizes the IRS to issue regulations to
implement Code Sec. 6035.
Notice 2015-57
The new law applies to property for which a federal estate tax return is filed after July 31, 2015.
For returns filed after July 31, 2015, the IRS delayed the requirement to file a statement under
Code Sec. 6035 until February 29, 2016, if the statement would have been due before that date.
The IRS instructed executors and other persons required to file or furnish a statement under Code
Sec. 6035 not to do so until it issues forms or other guidance to implement the reporting
requirements. The IRS indicated that it expects to issue additional guidance under Code Sec.
1014(f) and 6035 and asked for comments.
•Comment
The new law added penalties for inconsistent estate tax basis reporting and for failures to file
correct information returns and furnish correct statements.
References: FED ¶46,387; TRC SALES: 6,156.
D.C. Circuit Affirms Tax Court’s Jurisdiction Over IRS Determination Of
Frivolous CDP Hearing Requests
Ryskamp, CA-D.C., August 14, 2015
Affirming the Tax Court, the Court of Appeals for the District of Columbia has found that an
IRS determination of frivolousness falls within the category of determinations subject to judicial
review. Code Sec. 6330(g), a divided court held, allows the Tax Court to review if the IRS has
adequately identified why it deems a taxpayer’s request to be frivolous, and whether that
frivolousness assessment is facially plausible.
Take Away. The Tax Court’s scope of review is limited. Code Sec. 6330(g), however, precludes
the Tax Court from reaching the merits of a purportedly frivolous position, the court explained.
If the Tax Court sustains the IRS’s determination of frivolousness, no further review is required,
the court held.
Background
In 2011, the IRS informed the taxpayer that it intended to levy on his property to collect unpaid
taxes. The taxpayer requested a CDP hearing, which the IRS rejected. The IRS determined that
the taxpayer had presented only frivolous arguments for requesting a CDP hearing. The taxpayer
filed an amended request for a CDP hearing and the IRS again rejected it as frivolous. The
taxpayer next appealed to the Tax Court.
The Tax Court found that the IRS had sent the taxpayer a boilerplate letter that failed to explain
the agency’s reasons for denying his CDP hearing. This lack of explanation was an abuse of
discretion and the court awarded summary judgment to the taxpayer. The court also directed the
taxpayer to resubmit his arguments, which he did. Again, the IRS and the Tax Court rejected his
arguments and the taxpayer appealed to the D.C. Circuit.
Court’s analysis
The court first noted that taxpayers may contest the methods used by the IRS to collect overdue
taxes, including the imposition of a levy on a taxpayer’s property. After a CDP hearing, a
taxpayer may petition the Tax Court for review.
Generally, the Tax Code defines as frivolous any position that appears on the IRS’s published list
of frivolous positions or that otherwise reflects a desire to delay or impede the administration of
federal tax laws. The court found that the IRS’s roster of frivolous positions includes arguments
such as compliance with the internal revenue laws is voluntary or optional; the taxpayer’s
income is not taxable because he is a citizen exclusively of a state (and not a United States
citizen); only certain types of taxpayers are required to pay income taxes (such as federal
government employees or corporations); and federal income taxes are unconstitutional.
Code Sec. 6330(g), the court found, does not strip the courts of jurisdiction to review the narrow
question whether the IRS correctly determined that all of a taxpayer’s arguments are frivolous.
Code Sec. 6330 recognizes the Tax Court’s jurisdiction to review a "determination under this
section." A determination includes decisions under Code Sec. 6330(g) where the IRS concludes
that a taxpayer’s arguments are frivolous, the court held.
Dissent
The dissent would have found that Code Sec. 6330(g) stripped the Tax Court of jurisdiction over
determinations of frivolousness by the IRS. Code Sec. 6330(g), the dissent stated, is a "closed
door, not an invitation to come inside and engage in a little ‘gate-keeping’ review."
References: 2015-2 ustc ¶50,434; TRC IRS: 48,058.
Budget Agreement Repeals TEFRA/ELP Partnership Audit Rules, ACA
Automatic Enrollment
Legislation that eliminates the so-called TEFRA unified partnership audit rules (as first
introduced in the Tax Equity and Fiscal Responsibility Act of 1982), along with the electing
large partnership (ELP) rules, in favor of a more streamlined audit regime has been approved by
Congress and is on its way to the White House for President Obama's expected signature. Repeal
of the existing partnership audit rules is part of a two-year federal budget agreement intended to
avert the threat of a government default. The Bipartisan Budget Act of 2015 also repeals
automatic enrollment in certain employer-sponsored retirement plans under the Affordable Care
Act (ACA) and revises and expands some existing pension provisions, among other changes.
IMPACT.
TEFRA partnership repeal has been debated before, but this time its attractiveness as a revenue
raiser brought it to the forefront as lawmakers looked for ways to offset the budget bill, without
"increasing" taxes. Instead, TEFRA repeal is also being promoted as a compliance enhancement
that is a win-win for both the IRS and taxpayers.
The revenue offsets won quick approval in Congress as part of the overall package, with the
House voting 266 to 167 to approve the bill on October 28 and the Senate passing the bill by a
vote of 64 to 35 in the early morning hours of October 30. President Obama immediately issued
a statement applauding passage of the agreement.
IMPACT.
Partnerships have time to adjust, with the new streamlined partnership rules applicable to
returns filed for partnership tax years beginning after 2017. However, subject to certain
exceptions, partnerships may choose to apply the new regime to any partnership tax year
beginning after the date of enactment (when the President signs the budget bill). Other
provisions, including repeal of the ACA's automatic enrollment requirement for affected
employers, are effective on enactment.
Comment
Before TEFRA's introduction in 1982, partnership returns generally were audited as adjuncts to
the audits of partners' returns. Since the returns of the individual partners were separately
audited, any given partnership item could be subject to separate administrative procedures and
possibly inconsistent treatment. TEFRA introduced procedures where the partnership itself
would be audited and adjustments made at the partnership level would flow through to the
returns of the individual partners.
Those procedures worked when targeted partnerships had relatively few partners. Now, because
many partnerships subject to TEFRA have hundreds and even thousands of partners, both
compliance and auditing have become unwieldy to the point of being tremendously inefficient
and prone to missed deadlines and other compliance nightmares.
IMPACT.
Repeal of automatic enrollment is the second significant revision to the ACA in recent weeks.
Previously, Congress passed and President Obama signed the Protecting Affordable Coverage
for Employees (PACE) Act, which amended the Public Health Service Act to redefine small
employer as one with 50 or fewer employees for purposes of the small group health market. The
PACE Act gives states the option to expand the definition to include employers with up to 100
employees for purposes of the small group health market.
NEW PARTNERSHIP AUDIT RULES
The new partnership rules are intended to streamline partnership audits into a single set of rules
for auditing partnerships and their partners at the partnership level. Partnerships with 100 or
fewer qualifying partners would be permitted to opt out of the new rules, electing instead to be
subject to audits on the level of each individual partner.
Currently, there are three different regimes for auditing partnerships:
▪ Partnerships with more than 10 partners are audited under unified TEFRA procedures
that are then binding on the partners;
▪ Partnerships with 100 or more partners that elect to be treated as Electing Large
Partnerships (ELPs) are subject to a unified audit under which any adjustments are
generally reflected on the partners' current year return rather than on an amended prior-
year return; and
▪ Partnerships with 10 or fewer partners are audited as part of each partner's individual
audit.
Comment
If any partner is not an individual, C corporation or the estate of an individual, or if any partner
is a nonresident alien, the TEFRA unified procedure applies without regard for the number of
partners. However, TEFRA does not apply to a partnership that qualifies as a small partnership
(10 or fewer partners) unless the small partnership elects to apply those provisions.
Comment
Every TEFRA partnership must designate a tax matters partner to act as a liaison with the IRS
during an audit or in litigation.
Comment
Partnerships are among the fastest growing type of business entity. According to the IRS, the
number of partnerships has grown at an average annual rate of 3.9 percent since 2003.
Partnerships with 100 or more partners accounted for almost half (47.3 percent) of all partners
in 2012. For 2012, partnerships passed through $1,400.8 billion in total income minus total
deductions available for allocation to their partners. This amount represents a 43.4-percent
increase from 2011 when partnerships passed through $976.9 billion. The finance and insurance
sector also accounted for the largest portion of the growth in total assets, reporting an increase
of $802.5 billion (from $11,349.3 billion to $12,151.9 billion), followed by the real estate and
rental and leasing sector with an increase of $330.9 billion (from $4,621.90 billion to $4,952.8
billion).
"The Bipartisan Budget Act repeals the TEFRA and ELP rules and creates a streamlined
structure for auditing partnerships and their partners at the partnership level."
Comment
The ELP rules were put in place to make audits of large partnerships and any subsequent
adjustments less burdensome on both the partnership and the IRS. Adjustments made at the
partnership level flow through to the partners for the year in which the adjustment takes effect,
rather than the audit year. Prior-year returns of partners would generally be unaffected. The
ELP rules, however, appear to be underutilized. The IRS reported that just 103 partnerships
elected to file Form 1065-B, U.S. Return of Income for Electing Large Partnerships, in 2012, a
decrease from 105 in 2011.
Streamlined Audit Structure
The Bipartisan Budget Agreement repeals the TEFRA and ELP rules and creates a streamlined
structure for auditing partnerships and their partners at the partnership level. Generally, the IRS
would examine the partnership's items of income, gain, loss, deduction, credit and partners'
distributive shares for a particular year of the partnership (the so-called "reviewed year"). Any
adjustments would be taken into account by the partnership, not the individual partners, in the
year that the audit or any judicial review is completed (the so-called "adjustment year") and
would be collected from the partnership.
IMPACT.
Unlike prior proposals, the Bipartisan Budget Act does not subject partners to joint and several
liability for any liability determined at the partnership level.
A Congressional Summary of the new provision explains that partnerships "would have the
option of demonstrating that the adjustment would be lower if it were based on certain partner-
level information from the reviewed year, rather than imputed amounts determined solely on the
partnership's information in such year." A partnership would also have the option of initiating an
adjustment for a reviewed year, such as when it believes additional payment is due or an
overpayment was made, with the adjustment taken into account in the adjustment year.
IMPACT.
The IRS will now need to develop regulations to reflect repeal of the TEFRA and ELP rules.
Lawmakers provided for a delayed effective date. The Bipartisan Budget Act applies to returns
filed for partnership tax years beginning after 2017. The delayed effective date also may provide
an opportunity for stakeholders to amend the new partnership rules. The provisions were
essentially taken from H.R. 2821, sponsored by Rep. James Renacci, (R-Ohio), who had planned
to hold several additional hearings on refine the bill before any floor action. Among the
additional tweaks suggested by certain parties have been application of the rules for multi-tiered
partnerships and consideration of foreign and tax-exempt partners, as well as changes in
partnership allocations and membership from year to year.
Comment
President Obama previously proposed to overhaul the TEFRA and ELP rules and replace them
with "simplified partnership procedures." President Obama called the existing TEFRA and ELP
rules "inefficient and more complex than those applicable to other large entities." President
Obama and other proponents of repealing TEFRA have often linked proposals to overhaul the
taxation of private equity firms with TEFRA repeal. The budget agreement enacts the TEFRA
repeal but to what extent the repeal will impact private equity firms remains to be seen.
Opt-out. Partnerships with 100 or fewer qualifying partners may opt out of the new audit regime.
Partnerships that opt-out will be audited under the general rules applicable to individual
taxpayers. The opt-out is available provided that each partner is an individual, C corporation,
foreign entity that would be a C corporation under U.S. law, an S corporation, or the estate of a
deceased partner.
Comment
Repeal is treated as a revenue raiser based on the assumption of increased compliance activities
by the IRS, bringing in $9.3 billion in net revenues over the next 10 years. In FY 2012, the IRS
audit coverage rate for large partnerships was 0.8 percent. In comparison, the audit coverage
rate for large C corporations was 27.1 percent.
SELECTED REVENUE RAISERS IN THE BIPARTISAN BUDGET ACT OF
2015*
Partnership Audits and Adjustments: $9.324 billion
Funding Stabilization Extension: $6.534 billion
Partnership Interests Created by Gift: $1.894 billion
Source: Joint Committee on Taxation
* Over 10 years
PARTNERSHIP INTERESTS CREATED BY GIFT
The Bipartisan Budget Act clarifies that Congress did not intend for the family partnership rules
to provide an alternative test for whether a person is a partner in a partnership. The determination
of whether the owner of a capital interest is a partner would be made under the generally
applicable rules defining a partnership and a partner. Further, the agreement clarifies that a
person is treated as a partner in a partnership in which capital is a material income-producing
factor whether the interest was obtained by purchase or gift and regardless of whether the interest
was acquired from a family member.
IMPACT.
The Joint Committee on Taxation estimates that this "clarification" will bring in $1.9 billion over
the next 10 years.
IRS Delays Embedded-Loan Rules' Effective Date to 2017
BNA Snapshot
Development: IRS delays effective date for rules affecting notional principal contracts with
nonperiodic payments.
Takeaway: Rules give broker-dealers more time to implement computer systems.
By Laura Davison
The IRS has announced a new, much later, effective date for temporary regulations that treat
notional principal contracts with nonperiodic payments as loans and on-market swaps: Jan. 1,
2017, or six months after publication of final regulations, whichever is later.
The Oct. 9 amendments in the Federal Register correct T.D. 9719, temporary and final rules
issued in May, that address the so-called embedded-loan rule and eliminate the exception for
notional principal contracts with insignificant nonperiodic payments. The prior effective date
was Nov. 4 of this year.
Internal Revenue Service officials said in September that the effective date would be delayed
based on comments that six months was insufficient to get systems in place to implement the
new rule.
“The delayed effective date is good news for broker-dealers and other swap participants,” Nathan
Tasso, counsel at Shearman & Sterling LLP, told Bloomberg BNA in an e-mail. “The delay until
six months after the final regulations are issued will allow the government time to consider the
many practical questions raised by the regulations and to give practitioners and market
participants time to prepare once regulations are finalized.”
More Comments, Please
IRS officials have said that most of the comments the agency has received addressed the
effective date, so the agency is still seeking more comments to “fine-tune” the regulations.
All NPCs with nonperiodic payments must be treated as two separate transactions consisting of
one or more loans and an on-market level payment swap under §446 unless a specific exception
applies, the May regulations said. To qualify for the exception, the margin or collateral posted
and collected must be paid in cash or the term of the contract must be less than one year.
“Hopefully, the final regulations will reinstate the significance test or create a different test for
excluding small payments to make these rules less daunting for broker-dealers,” Tasso said.
Taxpayers have also requested a de minimis exception in the finalized regulations, which IRS
officials have said they are considering.
“A de minimis exception would also help taxpayers cope with the burden of accounting for
embedded loans,” Kevin Keyes, a managing director at KPMG LLP, said, “particularly where
the nonperiodic payment is small and any benefit of loan treatment is outweighed by the added
complexity.”
To contact the reporter on this story: Laura Davison in Washington at [email protected]
To contact the editor responsible for this story: Brett Ferguson at [email protected]
IRS Offers FATCA Guidance to Withholding Trusts, Partnerships
The IRS offered two-pronged guidance on the effective dates of agreements for entities that
apply on or after April 1 to be withholding foreign partnerships or withholding foreign trusts
under the Foreign Account Compliance Act.
In general, the Internal Revenue Service said Oct. 7, entities that apply on or after April 1 and are
approved will have agreements with an effective date of Jan. 1 of the next calendar year.
The IRS also offered guidance to entities that apply on or after April 1 but don't receive any
reportable amounts between Jan. 1 of the year of application and the date the agency approves
their agreements. Those pacts will be effective the date the partnerships or trusts are issued
employer identification numbers, the IRS said, as long as they get a Global Intermediary
Identification Number within 90 days of the approval.
FATCA requires foreign financial institutions to report U.S.-owned accounts to the IRS or face,
in some cases, a 30% withholding tax on their U.S. source income.
For More Information
The FATCA guidance is at http://www.irs.gov/Businesses/Corporations/Frequently-Asked-
Questions-FAQs-FATCA--Compliance-Legal.
For a discussion of the FATCA withholding and reporting requirements in the Tax Management
Portfolios, see 6565 T.M., FATCA — Information Reporting and Withholding Under Chapter 4,
and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting
Requirements and FATCA .
© 2015 Tax Management Inc., a Bloomberg BNA Company
IRS Starts Anti-Fraud Program Using Codes to Verify W-2s
By Michael Trimarchi
A pilot program to add a verification code to employee copies of Forms W-2, Wage and Tax
Statement, was started by the IRS for tax year 2015 in a bid to combat fraud and identity theft, an
IRS official said.
A limited number of payroll service providers will participate in the program to test the
capability of verifying W-2 data, Scott Mezistrano, an Internal Revenue Service representative
for industry stakeholder engagement and outreach, said Oct. 1. The service providers would
select employer clients to join the project, he said during a monthly payroll industry
teleconference.
“We're looking to see if this code would be useful in evaluating the integrity of the W-2 data that
taxpayers submit when they e-file their 1040s,” he said, adding that the code wouldn't be used on
W-2s filed with paper Forms 1040, U.S. Individual Income Tax Return.
If the program is successful, W-2s could possibly change to include a verification code field no
earlier than for tax year 2017, Mezistrano said.
The IRS will provide payroll processors with an algorithm to generate a unique code of 16
alphanumeric characters, separated into groups of four that would be separated by hyphens,
Mezistrano said. Data from the W-2 will be included in the code, he said.
Verification Codes
The code would appear on Copy B of Form W-2 that is filed with an employee's federal tax
return and Copy C, which is for the employee's records.
The W-2 wouldn't include a new box during the pilot, Mezistrano said. The information would
be added by the service provider on the substitute forms that are distributed to the employer and
employees. Service providers were encouraged to include information about the code in
instructions to employees on the reverse side of the W-2.
An omitted verification code or an incorrect verification code wouldn't delay acceptance or the
processing of a return or the issuing of a refund during the pilot, Mezistrano said. Codes wouldn't
appear on W-2s that are sent to the Social Security Administration or to any state or local
revenue departments, he said.
The IRS payroll teleconference also included information about Affordable Care Act reporting
requirements related to the final 2015 versions of Form 1095-C, Employer-Provided Health
Insurance Offer and Coverage, and Form 1095-B, Health Coverage, and instructions that were
released Sept. 16.
ACA Filing Guidance
Shortly after the forms were released, the IRS published Notice 2015-68 , which offered a range
of guidance for what needs to be included in meeting §6055 minimum essential coverage
reporting requirements, said Donna Crisalli, senior level counsel at the IRS.
A Social Security number still is needed for Forms 1095 reporting, even though dates of birth for
covered dependents and spouses currently are acceptable, Crisalli said. Employers still should
make solicitations of those covered for the actual Social Security number, according to time
frames outlined in the notice.
The IRS plans to match names and dates of birth if Social Security numbers are not provided,
said Martin Pippins, director for customer service and stakeholder relations of the IRS's ACA
office.
The guidance clarified the need to report when employees have supplemental coverage through a
health reimbursement arrangement and also have other coverage, Crisalli said. The notice also
said:
• employer tax identification numbers may be truncated on statements furnished to
individual taxpayers;
• statements sent to expatriates regarding expatriate health plans can be delivered
electronically with an opt-out by the taxpayer; and
• under certain circumstances, health insurance issuers would be required to report on
Form 1095-B the coverage in catastrophic health insurance plans enrolled in through an
health-care exchange.
Specific issues related to filling out the ACA forms included the ability to keep blank line 15 of
Part II of the 1095-C form if code 1A is used for line 14, Pippins said.
For 2015 reporting purposes, accuracy-related penalties wouldn't be applied to employers that
could show a good-faith effort was made to accurately file, Pippins said.
To contact the reporter on this story: Michael Trimarchi in Washington at [email protected]
To contact the editor responsible for this story: Mike Baer in Washington at [email protected]
© 2015 Tax Management Inc., a Bloomberg BNA Company
Guidance on Valuation Discounts ‘Getting Closer
BNA Snapshot
Development: Guidance on valuation discounts under §2704 is key goal, Treasury official says.
Other Priorities: Guidance on valuation statements, savings accounts for the disabled, closely
held businesses and material participation.
By Alison Bennett
The government is “getting closer” on guidance on valuation discounts under §2704, but it is too
soon to say when the rules might come out, a Treasury Department official said.
Catherine V. Hughes, an estate and gift tax attorney-adviser in Treasury's Office of Tax Policy,
said Sept. 18 that the government is working hard on the rules, which are expected to address
restrictions on valuation discounts.
Practitioners have expressed concern that forthcoming guidance may significantly reduce the
availability of the discounts for family-controlled entities.
However, she said, “I cannot estimate when they will be out.”
Valuation Statements Guidance
The Internal Revenue Service and Treasury are also hard at work on implementing provisions
under the recently enacted highway bill that call for the use of statements of valuation in estate
tax work, Hughes said at the American Bar Association Section of Taxation meeting in Chicago.
Hughes said forms and instructions to help taxpayers comply with the law have been sent to the
Office of Management and Budget for approval and could be available as soon as the first or
second week of January 2016.
While “we're working on the regs as fast as we can,” Hughes said, the forms and instructions will
be out before the regulations in this area.
She said the legislation came as “a surprise to the IRS,” and the agency must develop a new
computer system to make the new provision work.
Accounts for Disabled Taxpayers
The government also is working to implement a new provision under the federal Achieving a
Better Life Experience (ABLE) Act that allows disabled taxpayers to open accounts under new
§529A and save money tax-free, Hughes said. IRS guidance is expected by early 2016.
Hughes said Treasury and the IRS are working on regulations on material participation under
§469 but she isn't sure when they might be out. “They're a heavy lift,” she said. “We're working
hard.”
The rules are expected to define, in some way, what constitutes material participation for estates
and trusts in which a fiduciary, such as a trustee, engages in a trade or business on behalf of an
estate or trust. The main question is whether the fiduciary's involvement in the business will be
considered material participation and therefore active, rather than passive, under §469.
One guidance project that may be out “sooner rather than later,” Hughes said, addresses closely
held businesses under §6166. “The government expects to issue comprehensive proposed
regulations,” she said.
To contact the reporter on this story: Alison Bennett in Chicago at [email protected]
To contact the editor responsible for this story: Brett Ferguson at [email protected]
New CFC Loan Rules Seen as Too Broad, Tough on Companies
BNA Snapshot
Development: Proposed IRS rules would make it tougher for CFCs to avoid U.S. tax by making
loans to foreign partnerships.
Reaction: Practitioners worry that rules may be overly broad, tough on taxpayers.
By Alison Bennett
Taxpayers could have a tough time under new proposed rules intended to make it harder for
controlled foreign corporations to use loans to foreign partnerships as a way to avoid income
inclusions under §956, practitioners said.
Issued Sept. 1 along with temporary rules to shut down specific transactions, the proposed rules
are “overbroad,” Matthew Chen, a practitioner in the International Tax Services Team at
PricewaterhouseCoopers LLP, said Sept. 9.
Under the regulations ( REG-155164-09 ), in the context of loans, the obligation of a foreign
partnership is viewed as an obligation of its partners. “As a result, if a CFC made a loan to a
foreign partnership with only U.S. partners, the loan would be treated as an investment in U.S.
property,” Amanda Varma, an associate with Steptoe & Johnson LLP, said Sept. 10.
Aggregate Approach
The proposed rules generally treat a foreign partnership as an aggregate for the purposes of §956.
That code section determines the amount a U.S. shareholder of a CFC must include in gross
income with regard to the CFC.
Practitioners said this approach has a wide reach and would sweep in a broad range of
transactions. They contrasted this to the final and temporary regulations ( T.D. 9733), effective
immediately, which are intended to specifically shut down transactions where distributions have
been made. Those rules require that the distribution wouldn't have been made “but for” the
funding of the partnership, for §956 to apply.
Speaking to Bloomberg BNA in a joint interview with Chen Sept. 9, Elizabeth Amoni said by
contrast, the proposed rules apply to “any loan to a partnership,” without the limited scope of the
final and temporary regulations. Amoni also is with PwC's International Tax Services Practice.
She noted that the rules clarify what interest in a partnership means.
Focus on Partnerships
In general, according to Paul Schmidt, firmwide chair of BakerHostetler's Tax Group, “the rules
revolve around the notion that if you have a loan from a CFC to a U.S. person, that creates a
§956 inclusion. If you interpose a partnership in the middle of that, notwithstanding that the
foreign partnership may be owned by a U.S. person, it's still treated as foreign.” Schmidt is the
leader of BakerHostetler's international tax practice team.
“The rules make it clear that a partnership could create an abusive transaction if it allows the
cash to come back into the U.S.,” he said.
Two Rules a Surprise
Practitioners generally said they had been expecting the guidance, but one questioned the
necessity of two rules.
“I don't think there was a big surprise that they issued these rules,” Seth Green, a principal in
KPMG LLP's International Tax group, said Sept. 9. “It was a surprise, however, that they issued
two rules, one based on whether the partnership used a distribution, and one that applied even
where no distribution had occurred. I think with a little more work they could have written one,
more comprehensive rule.”
He said with the issuance of two rules, “There's a lot of machinery going on. The proposed rules
are closer to general principles. The temporary regulations are more in the nature of stop-gap
anti-abuse rules.”
Anti-Abuse Rule Expanded
Several practitioners said the temporary rules take a tougher approach to stopping abuse sooner.
In a joint interview with Schmidt Sept. 8, John Bates, a partner on BakerHostetler's international
tax practice team, said those rules “have the immediate effect of expanding the anti-abuse rule
under §956. This arguably gives Treasury a means to challenge transactions perceived as abusive
right away.”
Steptoe's Varma said the rule is now self-executing, meaning the IRS doesn't need to use its
discretion to apply it. Another change, she said, is that the rule for the first time applies to
partnerships, where in the past the §956 rule only applied to transactions involving foreign
corporations controlled by a CFC
A third change, she said, is that the rule applies to funding by any means, not just through capital
contributions or debt.
Rents and Royalties
Some practitioners pointed to language on an exception to active rents or royalties derived in the
active conduct or a trade or business as an example of the wide approach of the rules. In issuing
the rules, the IRS said the CFC itself must actively conduct the business that generates the rents
or royalties to qualify for the exception, using its own officers or staff. However, the agency
allowed CFCs to operate in one or multiple jurisdictions to get the benefit.
PwC's Chen said taxpayers should look carefully at language dealing with cost-sharing
payments. These payments made by a CFC won't cause that CFC's officers and employees to be
treated as undertaking the activities of the participant to which the payment is made.
These payments “are not active leasing expenses or active licensing expenses for purposes of
determining whether an organization is ‘substantial,’” the IRS said. “I think taxpayers that have
historically relied on cost sharing to meet the active development test should read these rules
carefully,” Chen said.
Marketplace Changes?
Attorneys took varied approaches on how the rules might affect the marketplace.
PwC's Amoni said there might not be a huge impact since not many of these deals have actually
been done. KPMG's Green said although not a big number has been done, the guidance is still
going to be a roadblock for any more of these structures.
“I'm not sure that there are a huge number of transactions that have closed,” Green said. “I don't
know that it's tremendously common in the marketplace. But it's not something that's never been
done. By and large this is something that's going to close down these transactions. Most of the
games that people want to play will go away. People can probably figure out what the rules mean
and live with them.”
To contact the reporter on this story: Alison Bennett in Washington at [email protected]
To contact the editor responsible for this story: Brett Ferguson at [email protected]
IRS Wants to Combine Timely Mailed, Timely Filed Collections
The IRS seeks public comment on combining the information collections for final rules and a
revenue procedure that address when timely mailed returns or other documents should be treated
as timely filed.
Combining the reporting requirements for T.D. 9543 and Rev. Proc. 97-19 may help avoid
possible misunderstanding, the Internal Revenue Service said in a Sept. 2 Federal Register
notice. At present, different approval numbers are used for the separate reporting of the burden
on T.D. 9543 and Rev. Proc. 97-19, which may be misleading, it said.
The IRS issued the final rules under §7502 to establish prima facie evidence of delivery of
documents with filing deadlines prescribed by internal revenue laws when there i;s no direct
proof of actual delivery.
Rev. Proc. 97-19 outlines the criteria used to determine if a private delivery service qualifies as a
designated Private Delivery Service under §7502, the IRS said in the notice.
Additional Comment Sought
In other Sept. 2 Federal Register notices, the Internal Revenue Service seeks comment on:
• final regulations ( T.D. 9048) on guidance under §1502 on redetermining the basis of a
stock of a subsidiary member of a consolidated member prior to transfers of stock and
deconsolidation of a subsidiary member;
• final rules ( T.D. 9054) as amended by T.D. 9618 on disclosure of returns and return
information to designee of taxpayer;
• Notice 2009-41 , providing interim guidance on the credit for residential energy-
efficient property under §25D;
• Form 944-SS, Employer's ANNUAL Federal Tax Return (American Samoa, Guam, the
Northern Mariana Islands, and the U.S. Virgin Islands; and Form 944-PR, Planilla para
la Declaracion Federal ANUAL del Patrono;
• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation, and Schedule
P (Form 1120-FSC), Transfer Price or Commission;
• Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations; and
• Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign
Persons of U.S. Real Property Interests.
The IRS said comments should address: whether the collection of information has practical
utility; the accuracy of the IRS's estimates of the paperwork burden on taxpayers; ways to
enhance the quality, utility, and clarity of the information to be collected; ways to minimize the
burden of the collection of information on respondents, including through the use of automated
collection techniques or other forms of information technology; and estimates of capital or start-
up costs and costs of operation
IRS Corrects Rules on Disguised Payments for Services
The IRS has issued technical corrections to rules on management fee waivers and disguised fees.
The corrections, released Aug. 18, apply to proposed regulations ( REG-115452-14 ) that cover
circumstances in which arrangements will be treated as disguised payments under §707(a).
Among the changes, the IRS added a ZIP code to a Washington, D.C., mailing address provided
for hand-delivered comments, and made a grammatical change to a provision involving a “non-
partner.”
The correction notice was published in the Aug. 19 Federal Register.
Transfer Pricing Practice Helps IRS With Section 482 Cases
BNA Snapshot
Development: Ex-IRS official says LB&I's Transfer Pricing Practice has strengthened agency's
hand in some cases.
Takeaway: TPP has been more aggressive about using tools such as designated summonses,
designating cases for litigation.
By Dolores W. Gregory
The Internal Revenue Service changed the ground game for §482 audits when it launched the
Transfer Pricing Practice three years ago, a former IRS official said.
Established as a specialty examination function within the Large Business & International
Division, the TPP was intended to reverse the IRS's losing streak in transfer pricing litigation,
said Thomas Ralph, a former territory manager with the TPP. Ralph, who was based in Denver,
left the IRS in mid-May to join EY LLP.
Speaking on a May 27 webcast sponsored by EY, Ralph described an exam function that became
more agile and more aggressive under the reorganization that created LB&I.
“I think the TPP has made a significant impact in terms of individual cases,” Ralph said. Among
the changes it wrought was to take bolder moves.
“The IRS has tools it had not been using,” he said. “A designated summons had not been used in
about a generation. You have to go back to about 1991” to find a case in which such a summons
was issued.
According to IRS documents, the statute of limitations on assessment is suspended when a court
action is filed to enforce or quash a designated summons. The IRS effectively extended the audit
of Microsoft Corp.'s cost sharing arrangements in that way.
The TPP also began to designate cases for litigation, Ralph said. “That was something the IRS
was reluctant to do, especially with transfer pricing cases,” he said.
Amazon.com Inc.'s transfer pricing dispute was one of those designated cases, according to court
documents.
Outside Experts
In addition, the TPP focused on better use of outside experts, Ralph said.
“Historically the [IRS] would have a transfer pricing case and go to an outside economist and
hire him. What we tried to do was make some changes and identify that it was not just
economists that a transfer pricing case needs, but someone with industry expertise.”
Among those experts is an outside litigation firm, Quinn Emanuel Urquhart & Sullivan LLP,
hired to assist with the Microsoft audit—a case that reportedly could generate income
adjustments of as much as $38.6 billion.
The IRS has come under fire for that contract and for hastily adopted temporary regulation—
Reg. §301.7602-1T(b)(3)—that allows the IRS to involve a contractor in questioning witnesses.
Most recently, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) weighed in, with a
letter questioning the legality of the regulation.
Ralph didn't comment on specific cases, but focused on the general trends facing the TPP.
‘Misalignment of Resources.'
He said the IRS has suffered from a “misalignment of resources” over the years—with 80% of
the resources on the domestic side of the exam function and 20% on the international side.
“The issues are the reverse of that,” he said, with domestic cases accounting for about 20% of the
revenue at stake and international cases accounting for the lion's share.
This misalignment has been an ongoing problem that the IRS has struggled to address, but it has
become especially acute in the face of ongoing budget constraints.
Ralph noted that before he left the IRS, there had been “some talk” of reorganizing the
examination function.
“What I hear people talking about is looking at the work force and having a pool of examiners or
auditors who can be nimble and move to issues that become current,” he said. “So that if an issue
pops up, they can deploy the resources quickly.”
Specialty Practice Units
Part of that plan involves establishing specialty practice units, like the TPP, to assist in various
audits, he said. But Ralph cautioned that to his knowledge, nothing had been decided on that
front.
“But I think that is probably the direction things will go,” he said.
Because of budget constraints, Ralph said, the IRS has a limited capacity to hire from outside the
government. For that reason, some of the open leadership positions—such as the director of
Transfer Pricing Operations, which is currently being served in an acting capacity by David
Varley—probably will be filled from within the IRS, he said.
“Hopefully they will be filled quickly,” Ralph said. Waiting too long to hire a permanent
replacement can have an adverse impact on case selection and decision making, he said.
Nevertheless, Ralph expressed optimism about the future of the TPP. Despite early “growing
pains,” he said, “I think it has changed the lay of the land as far as transfer pricing audits go.”
Along with the question of how the IRS fills open leadership positions within LB&I, “also key
will be any changes that are made to the organizational structure and where the TPP ends up,”
Ralph said. “I think it will continue to exist. The question is in what form in relation to the rest of
the organization—and what authority they have in those cases.”
To contact the reporter on this story: Dolores W. Gregory in Washington at [email protected]
To contact the editor responsible for this story: Molly Moses at [email protected]
IRS Answers New Questions On ACA Reporting for Employers
Large employers that didn't have full-time employees in any month of a year aren't required to
report to the IRS for that year whether they offered employees health-care coverage that meets
minimum value and affordability standards, the IRS said.
However, an applicable large employer under the Affordable Care Act—or one with at least 50
full-time employees and/or full-time equivalents—with no full-time employees must still file
Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage
Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and
Coverage, if it sponsors a self-insured health plan in which any employee or employee's spouse
or dependent has enrolled.
The Internal Revenue Service provided the information in a May 19 update of its Web page with
questions and answers on reporting offers of health insurance coverage.
The IRS also emphasized that an applicable large employer that did have a full-time employee in
any month of the year must report under §6056 for that year.
Who Must Report?
The update added several questions on which employers are required to report to the IRS on its
health-care coverage.
The IRS said that a large employer is required to report with respect to a full-time employee that
wasn't offered coverage during the year.
“For each of its full-time employees,” the applicable large employer “is required to file Form
1095-C with the IRS and furnish a copy of Form 1095-C to the employee, regardless of whether
or not health coverage was or was not offered to the employee.”
Therefore, the IRS said, even if a large employer doesn't offer coverage to any of its full-timers,
“it must file returns with the IRS and furnish statements to each of its full-time employees to
report information specifying that coverage was not offered.”
Minimum Essential Coverage
The IRS also addressed a question as to whether an employer that isn't considered an applicable
large employer is required to file under §6056 if the employer sponsors a self-insured health plan
that provides minimum essential coverage.
The IRS said such an employer isn't subject to §6056 reporting requirements, but that it would
have to report on minimum essential coverage under §6055. It said such an employer will
generally meet those requirements by filing Forms 1094-B, Transmittal of Health Coverage
Information Returns, and 1095-B, Health Coverage.
The update also added answers on several other issues, among them reporting on qualifying
offers and through the 98% offer method and furnishing employees who are leaving the company
with a Form 1095-C.
Penalty Relief Unlikely When Professionals File Court Petitions, Estate Tax
Returns Late
BNA Snapshot
Development: Relying on tax professionals may not protect against delinquency penalties for
late filing of estate tax returns or petitions to Tax Court, IRS official says.
Takeaway: Taxpayers need to be aware of deadlines and make sure appropriate documents are
filed.
By Alison Bennett
Reliance on tax professionals frequently won't protect taxpayers against delinquency penalties if
estate tax returns or U.S. Tax Court petitions are filed late, an Internal Revenue Service attorney
said.
For example, taxpayers aren't likely to get relief from the penalty if their practitioner misses the
90-day deadline to petition the Tax Court once the taxpayer gets a notice of deficiency, Monica
Koch, associate area counsel with the Small Business/Self Employed Division, said March 20.
Speaking at a tax penalty conference sponsored by the Practising Law Institute, Koch said she is
getting “a lot of late-filed petitions” in cases where taxpayers have relied on practitioners to file.
Relief generally won't be available in these cases, she said.
The IRS attorney said she is also seeing “a rash” of cases where taxpayers are filing their Tax
Court petitions with the IRS—a strategy that is risky at best. Even though the IRS will do its best
to get the petition to the court as quickly as possible, that petition still might miss the 90-day
deadline and penalty relief likely won't be granted in these cases, she said.
Estate Tax Delinquency
Koch said the IRS also isn't likely to grant relief from delinquency penalties in many cases where
an estate executor relied on a tax professional to file a return and the professional didn't file on
time.
This is “a classic case that I see in delinquency-related penalties,” Koch said. Even if the
executor is doing everything right, the IRS often won't see late filing by a tax professional as
“reasonable cause” for the delay, she said.
Koch said that this won't be the outcome in every case, but frequently, reliance on a professional
alone won't be enough to get penalty relief, particularly in cases where the taxpayer knew the
return needed to be filed and taxes paid.
Online Filing Rejections
Bryan C. Skarlatos, a partner at Kostelanetz & Fink LLP in New York, said one issue that is
likely to come into wider focus for the delinquency penalty going forward is cases in which
taxpayers file online with the help of a tax practitioner and those returns are rejected.
“Is it really the taxpayer's fault if they rely on somebody to file for them electronically and it gets
kicked back?” Skarlatos said. “We've gotten relief in several cases, but not without a big, big, big
fight. I think you'll see this bubbling up in the Tax Court.” He said this issue may need additional
law to develop in the courts.
On a broader scope, the Kostelanetz practitioner said the IRS has changed its approach to
penalties and is assessing more of them. For example, according to IRS data, the number of
accuracy-related penalties imposed by the agency jumped from 58,366 in 2005 to 731,696 in
2013.
‘Fight Back.'
Skarlatos said IRS agents are being given instructions to consider, develop and impose penalties,
and the IRS is getting better at using the penalty tools it has been given by Congress. However,
he said, “These penalties can and should be contested. You should fight back. And the way you
fight back is to request abatement.”
Both Skarlatos and panelist Barbara T. Kaplan, a shareholder of Greenberg Traurig LLP and
chair of its New York tax practice, addressed issues on the accuracy-related penalty.
Kaplan said these penalties are intended to be applied based on standards of conduct, and the IRS
will look at questions of “have you done enough, have you evaluated the authorities sufficiently,
have you looked at the right authorities?”
For example, both she and Skarlatos said, substantial understatements will result in an automatic
penalty unless the taxpayer can show that there is “substantial authority” for the position taken
on the tax return. Specifically, the taxpayer needs to be able to demonstrate that the weight of
authority in favor of the position is greater than the weight of authority not in favor of the
position.
Disclosure Is Key
Both practitioners said disclosure is an important element in the IRS's determination of penalties.
Skarlatos said it may be important to attach a Form 8275, Disclosure Statement, to the tax return.
According to an IRS description, taxpayers and tax return preparers use this form to tell the IRS
about items or positions that aren't otherwise adequately disclosed on a tax return to avoid certain
penalties.
Skarlatos said filing a Form 8275 doesn't automatically trigger an audit, as some taxpayers fear,
but shows the IRS that taxpayers are willing to disclose if they aren't sure about the positions
they are taking. If a return is otherwise selected for audit, a Form 8275 will point the IRS to
issues agents may want to look at, but taxpayers should still file one in most cases, he said.
“Convince your clients that if they're not sure about a position on their tax return, they should
file an 8275 and disclose,” he said.
To contact the reporter on this story: Alison Bennett in Washington at [email protected]
To contact the editor responsible for this story: Cheryl Saenz at [email protected]
IRS: Home-Based Business Filers Can Use Simpler Method for Claiming Tax
Deduction
Taxpayers with home-based businesses can choose a simplified method for claiming the
deduction for business use of a home, the IRS said.
The optional deduction, which the Internal Revenue Service introduced in 2013, is aimed at
reducing the paperwork burden for small businesses, the IRS said in a March 12 news release (
IR-2015-47 ).
The deduction is capped at $1,500, based on $5 per square foot for up to 300 square feet.
Such businesses normally must fill out the 43-line Form 8829, Expenses for Business Use of
Your Home, which often requires complex calculations of expenses, depreciation and carryovers
of unused deductions, the IRS said. The simplified method requires only a short worksheet in the
tax instructions and entry of the result on a tax return.
Those who use the simplified method can't depreciate the portion of the home used in a trade or
business, but can claim allowable mortgage interest, real estate taxes and casualty losses on the
home as itemized deductions on Schedule A. The deductions don't have to be allocated between
personal and business use, as required under the regular method.
The news release is the seventh in a series of 10 tips called the Tax Time Guide.
More Website Visits
In a separate March 12 news release ( IR-2015-46 ), the IRS said its website has been visited
10% more this year than at the same time in 2014. As of March 6, the IRS said taxpayers have
turned to IRS.gov nearly 200 million times.
Also as of March 6, the IRS said it had received 66.7 million individual income tax returns—a
0.7% decline from a year earlier. Statistics show that electronic filing receipts by tax
professionals were down 4%, while self-prepared e-filing receipts were up 5.6%.
Direct-deposit refunds amounted to nearly $151.6 billion, the IRS said, up 3.6%. The average
refund was $3,112, which is 2% more than a year earlier.
© 2015 Tax Management Inc., a Bloomberg BNA Company
