IRS Warns About ESOP Compliance Issues, IR-2023-144 As part of ensuring high income taxpayers pay what they owe, the IRS warned businesses and tax professionals to be alert to a range of compliance issues associated with Employee Stock Ownership ...
Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.
Internal Revenue Service Commissioner DanielWerfelis looking to build on the successes the agency has experienced with the firstyearof supplemental funding provided to the agency by theInflation Reduction Act.
"I look atyeartwothrough the lens of what do we need to do with the next filing season to build on the successes of the previous filing season,"Werfelsaid during an August 15 teleconference with press as he highlighted a couple of key objectives he has for the secondyearof supplemental funding.
"First of all, we had a really strong filing season,"he said."It could be stronger. We want to achieve the highest level of service we can achieve."
Among the improvements he wants to see are a further reduction in wait times on calls to the IRS; expanding the number of self-service options that taxpayers can engage in when they call so they don’t have to wait to be connected to an agency representatives; and getting more people to sign up for an online account with the agency, as well as improving the online account functionality.
"The idea would be from a service standpoint, the filing features should feel very different than the previousyear,"he said.
Werfelalso wants to see more expansion in the walk-in service centers, including hiring more workers to allow for more Saturday hours to help people who might not be able to get there during the week due to work, as well as utilizing more pop-up walk-in centers to help reach people in more remote areas of the United States.
On the enforcement side,Werfelwants to see the"anemic"audit rates of high-wealth individuals, large corporations and complex partnerships continue to rise.
"We started to see real meaningful results there,"he noted."I want to be able to report to the American people that we’re putting theInflation Reduction Actto work to create and drive a more equitable tax system that’s returning money to the government’s bottom line."
Werfelalso said the IRS will continue with reporting the"dirty dozen"tax scams and will continue to be looking at ways to help taxpayers avoid these scams as well as helping the victims of those scams. He highlighted the recent action of ending nearly all unannounced visits by IRS representatives to homes and businesses as a way that taxpayers are being protected.
"My hope is that in each successiveyear, we’re putting tools out there that taxpayers are leveraging and saying, ‘this is helpful,’ and are appreciative of the fact that the IRS is functioning better than it did in previousyears,"Werfelsaid.
Recapping The FirstYear
Much of the press call focused on highlighting the successes of the firstyear, withWerfelhighlighting that the agency provided better service, including providing assistance to more than 7 million taxpayers over the phone, an increase of 3 million over the previous tax filing season and increased face-to-face help to more than 500,000 people at the taxpayer assistance centers, a 30 percent increase.Werfelalso mentioned the use of call-back technology so taxpayers don’t have to wait on the phone on hold and can receive a call-back without losing their place in the queue to talk to an agency representative.
He reiterated gains in enforcement as well as improvements on the technology side such as highlighting the recent announcement of more forms being able to be filed electronically and improvements to document scanning of tax forms.
Another aspect of theInflation Reduction Actthat was highlighted during the law’soneyearanniversary was by Treasury Secretary Janet Yellen, who highlighted the green energy tax provisions at a recent speech in Las Vegas.
She noted a variety of ways the IRA is helping to spur investment in clean energy, including in buildings and in clean vehicles and is helping the nation meet international climate standards.
"The IRA is helping re-shape some of the production that is critical to our clean economy,"Yellen said, according to prepared remarks that were published on the Treasury Department website.
She also highlighted that earlier this summer,"Treasury also released proposed guidance that would make it easier for these tax credits to reach a broad range of institutions. We are implementing innovative tools that will enable states, cities, towns, and tax-exempt organizations – like schools and hospitals – to directly access these credits."
The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payrolltax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.
TheFinancial Crimes Enforcement Networkisseeinga"concerning"increase in state and federalpayrolltax evasionand workers’ compensation fraud in the U.S. residential and commercial real estateconstructionindustries.
"FinCENis committed to combating fraud by shedding light on how illicit actors within theconstructionindustry are using shell corporations and other tactics to commit workers’ compensation fraud and avoidpayrolltaxes,"FinCENActing Director Himamauli Das said in a statement.
The agency in aFinCENNoticeissued August 15, 2023, highlighted how companies evadepayrolltaxes. Step one hasconstructioncontractors writing checks payable to the shell corporation, which creates the façade that the shell company is performingconstructionprojects. Step two sees the shell company operator deposit cash the checks at a check cashing facility or deposit them into a shell company bank account. Step three sees the shell company return the cash to theconstructioncontractor, minus a fee, for renting the workers’ compensation insurance policy and conductingpayroll-related transactions. The final step is theconstructioncontractors using the cash to pay the workers without withholding appropriatepayroll-related taxes or paying any workers’ compensation premiums.
The notice also draws attention"a range of red flags to assist financial institutions in detecting, preventing, and reporting suspicions transactions associated with shell companies perpetratingpayrolltax evasionand workers’ compensation fraud in theconstructionindustry."Among the 11 red flags highlighted are:
The customer is a new (i.e., less than two years old) smallconstructioncompany specializing in one type ofconstructiontrade (e.g., framing, drywall, stucco, masonry, etc.) with minimal online presence and has indicators of being a shell company;
Beneficial owners of the shell company have no known prior involvement with, or in, theconstructionindustry, and the individual opening the account provides a non-U.S. passport as a form of identification;
A customer receives weekly deposits in their account that exceed normal account activity from severalconstructioncontractors involved in multipleconstructiontrades;
Large volumes of checks for under $1,000 are drawn on the company’s bank account and made payable to separate individuals (i.e., the workers) which are subsequently negotiated for cash by the payee, and
The company’s bank account has minimal to no tax- orpayroll-related payments to the Internal Revenue Service, state and local tax authorities, or a third-partypayrollcompany despite a large volume of deposits from client.
The statement did not provide any statistical data that reflect the rise inpayrolltax evasionor workers’ compensation fraud, but said that every year,"state and federal tax authorities lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers."
The notice also reminds financial institutions’ obligations to file a suspicious activity report if a transaction could be conducted with the intent for fraud ortax evasion, and it provides instructions on how to file the SAR.
NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.
NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.
The agency suspended automatedcollectionsnoticesin response to the backlog of unprocessed mail correspondence that resulted from the shutdowns due to the COVID-19 pandemic and have yet toresumesendingnoticesout.
Collis said that the agency is developing a plan on how thosecollectionsnoticeswillresumeand she said it is an important piece of information that taxpayers with balances due need.
Speaking here August 9, 2023, at the IRS Nationwide Tax Forum event,Collinsexpressed concern that people are saying"hey, the IRS probably forgot about me because it’s been 18 months. And I am concerned that people do not realize that interest and the failure to pay [penalty] is kicking in."
And while she urged IRS toresumecollectionsnotices, she also cautioned that it needs to be done in a staggered fashion so that the agency, as well as tax professionals are not simultaneously inundated with calls about thesenoticesall at once, potentially creating another backlog as the agency continues to clear backlog pandemic inventories.
"So what they’re trying to do is stagger them,"Collinssaid."Have then come out in different timeframes so that all of them don’t hit at the same time, … because if they turn the spigot on, how many phone calls are they going to get that next day? They won’t be able to handle that volume."
Collinssaid the agency is looking at how to prioritize whichnoticesshould be going out first as well as possibly changing thenoticesto make them more informative for taxpayers.
"So, stay tuned on that,"he told attendees."I don’t think it’ll be tomorrow, but I’m hoping that it’ll be months from now, not two years from now that we turn it back on."
Another areaCollinsexpressed concerns about is the changing of the 1099-K threshold to $600. She said that her office has been in touch with"the Venmos of the world"to try to get them to put systems in place that will help their customers differentiate between personal transactions and business transactions to help ensure that 1099-Ks that will be issued because of the new threshold will accurate.
"I don’t know what’s going to happen between now and January, but the IRS, and our office as well, has been trying to work on this so it’s not as big a problem,"she said."But I am a little concerned because there’s going to be a lot of 1099 cases, potentially."
Collinsalso offered a"spoiler alert"that the online accounts for tax professionals"will become useful."She suggested it will not be the fully functioning portal she has been calling for, but there will be more functions added to it to make it a useful tool for tax practitioners.
"It will no longer be just a glorified Power of Attorney form, or the ability to file one,” she said. “It will actually have some usefulness. … Stay tuned."
Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.
Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."
Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to theInternal Revenue Service, the agency announced.
Additionally,"by Filing Season 2025, theIRSis committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023."It will also digitalize historical documents that are currently in storage at theIRS."
Taxpayers will still have the option of mailing in paper-based correspondence.
Yellen cited the supplemental funding provided by the Inflation Reduction Act to theIRSfor giving the agency the ability to transition from"a paper-based agency"to a"digital-first agency."
"This ‘PaperlessProcessing’initiativeis the key that unlocks other customer service improvements,"Yellen said."It will enable taxpayers to see their documents, securely access their data, and save time and money. And it will allow other parts of theIRSto rely on these digital copies to provide faster refunds, reduce errors in taxprocessing, and delivery a more seamless and responsive customer service experience."
According to a fact sheet issued by theIRS, the agency estimates that"more than 94 percent of individual taxpayers will no longer ever need to send mail to theIRS,"and will enable up to 152 million paper documents to be submitted digitally per year.
Additionally, taxpayers will be able to e-file 20 additional tax forms, enabling up to 4 million additional tax forms to be filed digitally each year, including amendments to Forms 940, 941, 941SSPR.
"At least 20 of the most used non-tax forms will be available in digital, mobile-friendly formats that make them easy for taxpayers to complete and submit,"the fact sheet continues."These forms will include a Request for Taxpayer Advocate Service Assistance, making it easier for taxpayers to get the help they need."
The fact sheet also outlines some more targets for the 2025 filing season, including:
making an additional 150 of the most used non-tax forms available in digital, mobile-friendly formats;
digitallyprocessingall paper-filed tax and information returns;
processingat least half of paper-submitted correspondence, with all paper documents – correspondence, non-tax forms, and notice responses – to be processed digitally by Filing Season 2026; and
digitizing up to 1 billion historical documents.
"When combined with an improved data platform, digitization and data extraction will enable data scientists to implement advanced analytics and pattern recognition methods to pursue cases that can help address the tax [gap], including wealthy individuals and large corporations using complex structures to evade taxes they owe,"the fact sheet states.
An IRS Noticeprovides a transitionrule that generally allows taxpayers to claim the CodeSec. 25Cenergy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.
An IRSNoticeprovidesatransitionrulethat generally allows taxpayers to claim theCodeSec. 25Cenergy efficient home improvement creditforhome energy auditsconducted in 2023 even if the auditor is not certified. TheNoticealso describes regulations the IRS intends to propose for qualifiedhome energy audits.
Taxpayers may rely on theNoticeuntil the proposed regs are issued. The proposed regs are expected to apply to tax years ending after December 31, 2022 .
Energy Efficient Home Improvement CreditforHome Energy Audits
Theenergy efficient home improvement creditis generally equal to 30 percent of amounts paid or incurred for qualified energy efficiency improvements, residential energy property expenditures, andhome energy auditsplaced in service after 2022. The credit is generally limited to $1,200 per year, but different annual limits apply to particular types of expenses.
The annual credit forhome energy auditsis limited to $150 per year. For example, if a taxpayer pays $900 for ahome energy audit, the credit is limited to $150 rather than 30 percent of the expense ($300).
A qualifiedhome energy auditmust:
(1)
be for a dwelling unit in the United States that the taxpayer owns or uses as a principal residence;
(2)
be prepared by a home energy auditor that meets certification or otherrequirementsspecified by the IRS; and
(3)
include a written report that identifies the most significant and cost-effective energy efficiency improvements with respect to the home, and estimates the energy and cost savings with respect to each of those improvements.
TransitionRulefor 2023
Atransitionruleapplies tohome energy auditsconducted on or before December 31, 2023, during a tax year ending after December 31, 2022. An audit during thistransitionperiod may qualify for the credit even if it is not conducted by a certified home energy auditor. However, an audit conducted after December 31, 2023, will not qualify for the credit unless the auditor is certified.
Proposed Regs: Certified Home Energy Auditor
The proposed regs will define a "qualifiedhome energy audit" as an inspection conducted by or under the supervision of a qualified home energy auditor. The audit must be consistent with the Jobs Task Analysis led by the Department of Energy (DOE) and validated by the industry.
A qualified home energy auditor will have to be certified by a Qualified Certification Program at the time of the audit. DOE maintains a list of qualified certified programs on its website athttps://www.energy.gov/eere/buildings/25c-energy-efficient-home-improvement-credit. These are the only programs that may certify a qualified home energy auditor.
Proposed Regs: Written Report
Under the proposed regs, a qualifiedhome energy auditmust include a written report prepared and signed by the qualified home energy auditor. The report must include:
(1)
the auditor’s name and employer identification number (EIN) or other relevant taxpayer identifying number;
(2)
an attestation that the auditor is certified by a qualified certification program; and
(3)
the name of the certification program.
Proposed Regs: Substantiation
Finally, the proposed regs will require the taxpayer to substantiate thehome energy auditexpenditure by maintaining the certified home energy auditor’s signed written report as a tax record. The taxpayer must also comply with the instructions for Form 5695, Residential Energy Credits, or any successor form.
The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannouncedvisits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "ForIRSemployees, there were fears about their own personal safety on thesevisits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."
TheInternal Revenue Servicewillend, except in very limited circumstances, the practice of makingunannouncedvisitsto taxpayers’homesand businesses."This change is effective immediately,"IRSCommissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as forIRSemployee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors,"Werfel said."ForIRSemployees, there were fears about their own personal safety on thesevisits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."
Unannouncedvisitswill be replaced with scheduledvisits. If theIRSneeds to meet with a taxpayer, that taxpayer will receive an appointment letter, known as a 725-B letter, to schedule a time for a revenue officer to meet with the taxpayer."This will help taxpayers feel more prepared when it is time to meet,"Werfel said."“Taxpayers whose cases are assigned to a revenue officer will now be able to schedule face-to-face meetings at a set place and time. They will have the necessary information and documents in hand to reach a resolution of their cases more quickly."
In addressing what theIRSwill do if a taxpayer is not reachable by mail or is not responding to a meeting scheduling letter, Werfel stated that there are other actions that the agency can take to help drive compliance, such as imposing a lien or a levy, which can be done remotely. He also stressed that in past cases where revenue officers madeunannouncedvisits, they were in situations where the revenue officer was attempting to collect a sizable debt with a median in these cases of $110,000."Thesehomevisitswere not occurring for small tax debt,"Werfel said."These are for big tax debts."Werfel outlined what he described as"rare instances"whenunannouncedvisitswill continue to occur, including service of a summons and subpoena as well as in the conduct of sensitive enforcement activities such as the seizure of assets."These activities are just a drop in the bucket compared to the number ofvisitsthat have taken place in the past,"Werfel said, noting that there were a few hundred each year compared to the tens of thousands of othervisitsthat occurred each year under the decades-old policy.
Werfel said that this policy will not impact activities conducted by the Criminal Investigations division, which operates under its own rules and protocols."Today’s decision is part of a broader plan that will help us work smarter and be more efficient,"he said, noting this action is part of the largerIRStransformation effort taking place with the help of the supplemental funding provided by the Inflation Reduction Act.
The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation
The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation
Scenario in the Ruling
Therevenue rulingpresents a scenario in which transactions in acryptocurrencythat is convertiblevirtual currencyare validated by a proof-of-stake consensus mechanism. A cash-method taxpayer validates a new block of transactions on thecryptocurrencyblockchain, receiving two units of thecryptocurrencyas validation rewards. Pursuant to thecryptocurrencyprotocol, during a brief period ending on Date 2, the taxpayer lacks the ability to sell, exchange, or otherwise dispose of any interest in the two units ofcryptocurrencyin any manner. On the following day (Date 3), the taxpayer has the ability to sell, exchange, or otherwise dispose of the twocryptocurrencyunits.
Analysis and Holding
Cryptocurrencythat is convertiblevirtual currencyis treated as property for Federal income tax purposes and general tax principles applicable to property transactions apply to transactions involvingcryptocurrency. For example, a taxpayer who receivescryptocurrencyas a payment for goods or services or who minescryptocurrencymust include the fair market value of thecryptocurrencyin the taxpayer's gross income in the tax year the taxpayer obtains dominion and control of thecryptocurrency.
In the scenario, two units ofcryptocurrencyrepresent the taxpayer's reward for staking units and validating transactions on the blockchain. On Date 3, the taxpayer has an accession to wealth as the taxpayer gains dominion and control through the taxpayer's ability, as of this date, to sell, exchange, or otherwise dispose of the two units ofcryptocurrencyreceived as validation rewards. Accordingly, the fair market value of the two units ofcryptocurrencyis included in taxpayer's gross income for the tax year that includes Date 3.
Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with taxprofessionals airing issues they have experienced and ongoing concerns they have.
Problems with the Internal Revenue Service’s handling of theEmployee Retention Tax Credittook center stage before a House committee hearing, withtaxprofessionalsairingissuesthey have experienced and ongoing concerns they have.
Testifying at a July 28, 2023,hearingof the House Ways and Means Subcommittee on Oversight, Larry Gray, partner at AGC CPA, said that as the pandemic started and he started to make educational YouTube videos to help other practitioners navigate thetaxlaw, he foundissueswith theERTC, including the growing industry ofERTCmills and the potential for fraud that comes with them.
He noted that many of these mills are simply taking their fee for providing essentially clerical assistance. However, Gray noted that in theseERTCmills, the agreements stated that"they don’t do audit,"but they might be able to help find someone of a business does get audited because of theERTCfiling. And unfortunately, as was discussed throughout the hearing, people are falling for theseERTCmills and putting their businesses at risk.
And Gray put the problems that have arisen squarely on the IRS.
"We are getting no guidance,"Gray said."There should have been anERTCimplementation team to coordinate from the top down. We need education. We need guidance."
To that end, the IRS didissuea legal advice memorandum on July 20, 2023, that shows the application of the statutory requirements of theERTCacross five different scenarios.
Gray also took a subtle dig at Congress, acknowledging in his testimony that part of theissuescould be related to an IRS that was"understaffed, and they were underfunded"when the COVID-19 pandemic began three years ago.
Roger Harris, President of accounting andtaxfirm Padgett Advisors, also highlightedissues, starting with the first which was"how we submitted claims to the IRS,"which was exclusively on paper at a time when no one was present to handle the processing of paper correspondence because of the pandemic, creating a significant backlog.
"And it’s still ongoing,"he continued, causing a"delay in getting the money out to the people who need it."
And with all the moving parts related to potential people who need to amend returns depending on how the business is structured, a mistake in any of these forms could be generating penalties and interest, a problem that is magnified when combined with Gray’s observation of the lack of available guidance to help taxpayers who are trying to do the right thing and collect money they are legitimately owed.
Ahead of the subcommittee hearing, the IRS announced in a July 26, 2023,statementthat it received more than 2.5 million claims since theERTCprogram began and it has"made substantial progress on these claims this year, with 99 percent of claims approximately three-months old as of mid-July."
However, throughout the hearing, witnesses and committee members questioned the integrity of that figure, noting that IRS has changed numbers on its website as to how many claims remain in the backlog. There also were question on how the figure itself is determined.
Harris also pointed out the problems theERTCmills are causing with his business and for othertaxprofessionalslooking to do the right thing by their clients.
"We have had clients that we have dealt with for many years who have trusted our advice,"Harris testified."But all of a sudden when someone is telling them, ‘Your advisor doesn’t know what they are doing, and if you listen to me, I can give you a half million dollars,’ it’s very hard for as the people who are working with these small businesses to win that argument, in many instances, just because of the sheer amount of money that is being dangled in front of them."
Harris continued:"And as we have heard, the IRS has no choice but to begin enforcement actions to try and correct this."
He said he is asking the IRS"for some help [with] a real-world solution to give us the ability to try to bring these people back into compliance. … [It] is going to take a concerted effort by our industry, thetaxpractitioner community, to help solve this problem,"especially when people may have already spent the money because they were unaware that the weren’t entitled to under theERTCprogram and fell for the fraud being perpetrated by theERTCmills. And that does not even account for the fees that were paid to theERTCmills that will never be recovered.
He did note that IRS Commissioner Daniel Werfel, at last week’s IRS-sponsoredtaxforum in Atlanta did asktaxpractitioners what they needed in regard to theERTC.
In its July 26 statement, the IRS offered a series of recommendations on how to avoidERTCscams. At thetaxforum, Werfel said that the"amount of misleading marketing around this credit is staggering, and it is creating an array of problems fortaxprofessionalsand the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved – except the promoters"of the misleadingERTCmarketing.
The IRS announced substantial progress in the ongoing effort related to the dubiousEmployee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.
TheIRSannounced substantialprogressin the ongoing effort related to thedubiousEmployee Retention Credit(ERC)claims. TheIRSsuccessfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to fileclaimsfor the credit until April 15, 2025.
"The further we get from the pandemic, we believe the percentage of legitimateclaimscoming in is declining,"IRSCommissioner Danny Werfel told attendees at theIRSNationwide Tax Forum in Atlanta."Instead, we continue to see more and more questionableclaimscoming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, theIRScontinues to intensify our compliance work in this area,"he added.
Taxpayers should be wary of certain signs including (1) unsolicited calls or advertisements mentioning an easy application process; (2) statements that the promoter or company can determineERCeligibility within minutes; and (3) large upfront fees toclaimthe credit. Eligible employers who need help claiming the credit should work with atrusted tax professional. Finally, taxpayers can reportERCabuse by submittingForm 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to theIRSLead Development Center in the Office of Promoter Investigations.
TheInternal Revenue Serviceis looking for ways get its post-filing alternative dispute resolution programsgreaterexposure and use.
The agency recently issued a public call for comment on a variety of topics related to the use ofADR, including learning why taxpayers choose not to useADR; issues that keep taxpayers from usingADRthat should be changed to allow for inclusion; how best to improveADR; how best to education aboutADR; feedback on whenADRproved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existingADRprograms, including ideas for new programs.
TheInternal Revenue Serviceis looking for ways get its post-filing alternative dispute resolution programsgreaterexposure and use.
The agency recently issued a public call for comment on a variety of topics related to the use ofADR, including learning why taxpayers choose not to useADR; issues that keep taxpayers from usingADRthat should be changed to allow for inclusion; how best to improveADR; how best to education aboutADR; feedback on whenADRproved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existingADRprograms, including ideas for new programs.
A list of specific issues theIRShas outlined can be foundhere, though comments submitted about theADRshould not necessarily be limited to the subject areas listed.
Indu Subbiah, supervisory appeals officer and acting senior advisor in theIRSIndependent Office of Appeal, explained the genesis of this request for comment.
"We had a sense theADR[programs] weren’t being used quite as robustly as we would have liked,” she said in an interview with Federal Tax Daily, adding that a recently issued U.S. Government Accountability Office report “really brought that to our attention."
According to thereport, “IRSCould Better Manage Alternative Dispute Resolution Programs To Maximize Benefits,"IRSCould Better Manage Alternative Dispute Resolution Programs To Maximize Benefits,"GAO found that while the agency offers six alternative dispute resolution programs,"IRSusedADRprograms to resolve disputes in less than half of one percent of all cases reviews by its Independent Office of Appeals"from fiscal year 2013 to 2022. In this time period, the number of cases closed usingADRannually peaked in 2014 (429 cases closed) and then steadily declined during the review period, reaching a low point of 119 cases closed in 2022.
"Beyond these data onADRusage,IRSdoes not have the data necessary to manage theADRprograms, such as data on taxpayer requests to useADR;IRS’ acceptance or rejection of those requests; and the results from usingADR, including rate of resolution, time, and costs,"the GAO report states."AlthoughIRSdoes not know definitively whyADRusage has declined, potential reasons include taxpayers do not perceive the benefits of usingADR, according toIRSofficials"
The report continues:"IRSis missing opportunities to use several management practices for itsADRprograms to help increase taxpayers’ willingness to useADRas well as maximize the programs’ benefits.IRSdoes not have clear and measurable objectives for itsADRprograms that contribute to achievingIRS’s strategic goals and objectives, such as its ability to resolve disputes over specific tax issues and reduce the investment of time and money to do so.IRSdoes not analyze data to assess whetherADRis achieving benefits. …IRShas not regularly monitored the taxpayer experience withADRto address problems in real-time."
With these critical observations about theADRprograms being put forth by GAO, the Independent Office of Appeals is now proactively looking at what is going on to make theADRprograms work better for taxpayers and the agency, the first step being this request for comments.
"The whole point ofADRprograms is so that taxpayers and theIRScan useADRto resolve issues, potentially at a lower cost,"Subbiah said."I think everybody would agree that when the process works, theIRSand the taxpayer can avoid costly litigation."
"The question for us is how can we is how can we even improve the ability to resolve a case with Appeals, and to me, it’s maybe can we resolve those cases sooner,"Andrew Keyso, chief of theIRSOffice of Independent Appeals, said during the interview.
"I think this is a good time to reconsider how we do alternative dispute resolution and mediation because of the"supplemental funding the agency received as part of the Inflation Reduction Act, Keyso said, noting that there are more resources to apply to appeals officers and mediators.
Keyso said that one of the ways the Office of Appeals measures success ofADR"based on how many people are coming in to useADRand those numbers are fairly small. So I think we’d like to see those numbers increase."
One thing that theIRSwill be looking for in the questions is the need for education as a potential way to increase the use ofADR. In fact, one of the questions the agency asked is directly focused on education.
"One of the questions we really focused on was education,"Subbiah said, noting that they are looking for stakeholders to"tell us [and] to help us understand whether it is [lack of] education [onADRand its benefits] or is it something else. I think it will be very telling and very interesting to us to really get at the heart of why it isn’t being used."
Elizabeth Askey, deputy chief of the Office of Independent Appeals, noted, anecdotally, that larger businesses and wealthier taxpayers seem to be a lot more aware of the various tools at their disposal, includingADR. However, the Office also is hearing situations where there is a reluctance on the part of compliance officers to useADRtools.
Keyso added that while larger businesses and wealthier taxpayers might be more aware ofADR, there needs to be more education for smaller businesses and lower income taxpayers, in addition to education across theIRSitself.
"So, in those cases, it may be a matter of us getting to the root of why some compliance personnel are less inclined to go this route than others,"Askey said during the interview."It’s not just the education of taxpayers and their practitioners, but of our own compliance personnel."
Keyso stressed that this effort was broad, not only in the scope of which taxpayers and practitioners might need education about the availability and use ofADR, but also within the agency. And he remains optimistic that this effort to request commentary from the public will help that.
"We’re optimistic that the public will come in and tell us why we don’t make use of moreADR. We don’t find it productive, for instance, or we can’t get the agency to cooperate,"he said. And with the additional IRA funding in hand, the agency can respond and look to see howADRcan be restructured to make it more useful for everyone to help get more issues resolved in a more timely and cost-efficient manner.
"I hope that mindset is shared across the agency,"Keyso said."I think it is and is becoming more so in the effort to help resolve cases quickly."He noted there will always be cases where resolution needs a more traditional path, but when this process is complete, there will be agreaterrecognition whereADRcan be and is used.
IRSis asking the public to submit its comments on theADRprograms by August 25, 2023, via email atap.adr.programs@irs.gov.
National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stopautomaticallyassessingpenalties related to international information returns.
National Taxpayer Advocate Erin Collins is reiterating hercallfor the Internal Revenue Service tostopautomaticallyassessingpenaltiesrelated to international information returns.
In an August 22, 2023,blog post, she also called on the agency to"provide taxpayers due process by affording them the opportunity to administratively present their reasonable cause defense and request FTA [first time abatement] and consideration by the Independent Office of Appeals prior to any assessment."
The blog post noted that relief was needed because there is"a misconception thatIIRpenaltiesaffect primarily bad-faith, wealthy taxpayers who are experiencing consequences of their own making."
However, that is not the case. Collins wrote that the automaticpenaltyregime"disproportionately affects individuals and businesses of more moderate resources, and is by no means just a rich person’s problem. Wealthy individuals and large businesses tend to have knowledgeable and well-informed representation and as a result have fewer foot faults. Immigrants, small businesses, and low-income individuals may not be as well-informed aboutIIRpenaltiesand may not have return preparers with the same technical expertise on internationalpenalties."
NTAnoted that from 2018-2021, 71 percent of thepenaltieswere assessed to taxpayers with incomes of $400,000 or less, with an averagepenaltyto these people being more than $40,000.
One example of howpenaltiescan be triggered is when an immigrant who is a U.S. citizen starts a small business and includes family members who live abroad. This arrangement could trigger the need for anIIRand if it is not filed, the taxpayer could beautomaticallyassessedpenalties, which are defined in Internal RevenueCode Sec. 6038and6038A. The blog goes through a number of other scenarios which would require anIIRandpenaltiesfor failure to do so.
However, when"taxpayers voluntarily correct their failure to file, this good-faith action can sometimes have the unexpected effect of causing the IRS toautomaticallyassess thepenalty,"the blog states."If the IRS does not administratively abate thepenalty, taxpayers will need to pay thepenaltyin full before challenging by filing suit refund in the United States District Court or the United States Court of Federal Appeals."
Collins continues to advocate for legislative changes that would allow for changes in due process that would allow for cases to be heard in court before anypenaltiesare paid, as well as providing a more"efficient and equitable regime governing the initial imposition ofIIRpenaltiesand the mechanisms by which they can be challenged by taxpayers while also protecting their rights."