Tax News & Views Processing, Penalties, and Pizza Roundup

February 9, 2022

Tax Pros Warily Eye Rettig’s Taxpayer Relief Promises - Jonathan Curry, Tax Notes ($):

IRS Commissioner Charles Rettig insisted in a February 7 letter to House Speaker Nancy Pelosi, D-Calif., that the IRS is doing all it can to mete out relief to taxpayers this filing season, but tax professionals aren’t so sure. 


However, during a February 8 webinar hosted by the Tax Practitioners United for Taxpayer Relief Coalition, tax professionals said the IRS has yet to inform them of any such changes, beyond modest relief like temporarily suspending CP-80 notices.


IRS Considering Penalty Relief, Rettig Says - David van den Berg, Law360 Tax Authority $):

Rettig's letter, which was sent to all congressional offices Monday, didn't provide further details on timing for possible penalty relief or which penalties the agency is considering for possible relief.


Rettig's comment to lawmakers follows calls from members of Congress and practitioners to ease the burden on taxpayers due to significant IRS backlogs and budget constraints. The American Institute of Certified Public Accountants, for example, has pushed for relief from tax underpayment and late payment penalties. 


IRS works to overcome processing backlog, automated notice problems - Michael Cohn, Accounting Today:

National Taxpayer Advocate Erin Collins testified before the House Ways and Means Oversight Subcommittee on Tuesday about the problems she is seeing this tax season. “During the past 18 months, the inventory backlog has continued to snowball,” she said. “We need to put the processing backlog behind us. We need to get the IRS out of the hole it currently finds itself in and get the IRS to a stable and healthy condition so it can perform its core mission.”


Collins suggested some ways to deal with the automated notices. “Suspend all automated collection notices until the IRS gets current in processing original and amended tax returns and taxpayer correspondence,” she wrote in her prepared testimony to the subcommittee, echoing recommendations from the coalition of tax pro groups. “Premature lien and levy notices have been issued to taxpayers in circumstances where tax returns or correspondence that show the taxpayers do not have liabilities have not yet been processed. That should not happen."


House Subcommittee Examines Turmoil in Current Tax Season - Jay Heflin, Eide Bailly:

Rep. Tom Rice (R-S.C.), the subcommittee’s ranking member, noted that technology might be a reason for the agency’s backlog. He noted that its computers rely on COBOL programing from the 1980’s, and few within the agency can fix it if it breaks down.

“The fact that we are at 1980’s technology is absurd,” he said.


IRS’s Struggles With Backlogs Draw Scrutiny From Lawmakers, Taxpayers - Richard Rubin, Wall Street Journal ($)

John Estes Jr., a retired railroad executive in Hood River, Ore., said he filed his 2020 tax return almost 11 months ago and is waiting for a refund that could be about $84,000 or $98,000. Mr. Estes said he had forgotten to include an estimated-tax payment on his original return and that there may have been confusion about how some withholding was reported.


Bryan Starnes, chief financial officer of ALG Senior, which manages about 150 assisted-living centers in the Southeast, is waiting for $37 million from the employee retention tax credit. That delay, he said, forced him to re-budget 12 times and suspend capital improvements to buildings.

Related: Benefit from the Employee Retention Credit 


IRS Backlog Crisis Fuels Division Over Funding at House Hearing - Benjamin Guggenheim and Jonathan Curry, Tax Notes ($). "Despite decrying the processing backlogs, staffing shortages, and technological challenges that plague the agency, Ways and Means Oversight Subcommittee ranking member Tom RiceR-S.C., insisted at the February 8 hearing that the IRS doesn’t need additional funding to resolve its problems. He noted that the agency began fiscal 2022 with $1.4 billion that it received from American Rescue Plan Act of 2021 (P.L. 117-2)."

IRS Needs More Workers, Taxpayer Advocate Tells Lawmakers - Stephen Cooper, Law360 Tax Authority ($):

The Internal Revenue Service should hire more workers and consultants, suspend automated collections notices and provide penalty relief until it catches up with its backlog of unprocessed tax returns, National Taxpayer Advocate Erin Collins told House lawmakers Tuesday.


The IRS should automate the paper process by scanning documents rather than using IRS personnel to manually key in numbers, she said. The IRS is not going to be able to hire enough new employees to address the backlog, Collins said, so the agency should use outside vendors to do the clerical work on paper returns.


New LB&I Campaign Focuses on Partnership Loss Limitation Rules - Kristen Parillo, Tax Notes ($):

The initiative, posted February 8 on the IRS website, appears to be aimed at reminding taxpayers of the tax code restrictions for reporting flow-through losses from partnerships.

The campaign focuses on section 704(d), which states that a partner’s distributive share of partnership loss will be allowed only to the extent of the partner’s adjusted basis in his partnership interest — that is, his outside basis — at the end of the partnership year in which the loss occurred.

This is likely an IRS effort to follow up on changes in partnership return reporting starting in 2019, when partnerships were first required to report "tax basis" capital account information for partners. Tax basis capital accounts aren't identical to "tax basis" in a partnership interest. Unlike tax-basis capital accounts, tax basis in partnership interests includes partner shares of partner liabilities, which are reported separately on partnership K-1s.

Until the requirement for K-1s to also include tax-basis capital accounts, there was no easy way for the IRS to detect whether a partner might be deducting excessive losses. The ability to combine tax-basis capital information with the already-disclosed liability shares makes it possible to automate identification of potentially-excessive deductions. 


Virginia Lawmakers Advance Bills to Update IRC Conformity - Benjamin Valdez, Tax Notes. "Virginia lawmakers have advanced legislation to update the state’s conformity to the IRC but nixed a provision that would have increased the deduction for Paycheck Protection Program loan expenses for 2020."

Wyden Probe Highlights Lack Of Data On Opportunity Zones - Joshua Rosenberg, Law360 Tax Authority ($). "The opportunity zone program has attracted criticism that investors have enjoyed its generous tax benefits while funding luxury real estate developments and other projects that are inconsistent with the program's stated objectives of stimulating job growth and investment in low-income communities."


3 medical tax breaks prompted by COVID-19 - Kay Bell, Don't Mess With Taxes. "Last year, in Announcement 2021-7, the Internal Revenue Service announced that the costs of personal protective equipment, aka PPE, purchased for the primary purpose of preventing the spread of coronavirus are deductible medical expenses."

SALT Cap Workaround: Pass-Through Entity Tax Update, Part II - Baker Botts, LLP (Bloomberg). "As discussed in Part I of this article, at least 22 states have adopted a pass-through entity tax—or PTET—election for small business owner taxpayers seeking to avoid the $10,000 federal deduction limit for state and local taxes. Most state PTET elections follow the standard workaround formula for the SALT cap, which was introduced under the 2017 Tax Cuts and Jobs Act. Under the formula, a small business may elect to pay tax at the entity level, and a corresponding credit is allowed at the partner, member, or shareholder level. But important differences between the state programs can spur planning pitfalls for taxpayers."

Why Your Tax Professional Isn’t Returning Your Calls - Amber Gray-Fenner, Forbes. "Most clients grossly underestimate the sheer volume of client calls and e-mails tax professionals receive during filing season."

How to manage sales tax when drop shipping - Sarah Craig, TaxJar. "Here’s how an item is typically drop shipped. A customer buys a product from a company, but the company isn’t in possession of the product. To fulfill that retail sale, the company buys the product from a third-party vendor who delivers the product to the end customer."

Related: Identifying your sales tax risks.


Five Reasons Why States Should Proceed with Caution Despite Soaring Revenues - Lucy Dadayan, TaxVox. "With revenues soaring, many states are enacting big tax cuts. However, this year’s large surpluses can quickly turn to shortfalls in the wake of permanent tax cuts."


New Orleans City Judge Indicted for Filing False Returns - U.S. Department of Justice (name omitted):

According to the indictment, from 2013 to 2016 Taxpayer, a judge of the Second City Court in the Parish of Orleans, Louisiana, allegedly officiated hundreds of marriage ceremonies each year but did not report on her federal tax returns the entire income earned from presiding over those ceremonies. Taxpayer allegedly earned between $80 and $100, paid to her in cash, for each marriage she officiated at the courthouse. She allegedly charged higher officiant fees for marriages conducted outside normal business hours, outside the courthouse, or on Valentine’s Day. Taxpayer allegedly did not report all of these officiant fees on her 2013 through 2016 federal tax returns. On her 2013 and 2014 tax returns, Taxpayer also allegedly did not report the income she received in those tax years for providing outside legal work before becoming a judge.

The moral? It may be good luck to tip the person presiding at your wedding. It's bad luck for Marrying Sam to not report the income. Even if there is no 1099. 


It's not just for breakfast anymore. Today is National Pizza Day!

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