Tax News & Views It's Raining Notices Roundup

February 10, 2022

IRS Suspends Sending Most Notices Due to Backlog and Errors - Isaac O'Bannon, CPA Practice Advisor:

The IRS has suspended the sending of more than a dozen additional letters, including the mailing of automated collection notices normally issued when a taxpayer owes additional tax, and the IRS has no record of a taxpayer filing a tax return.

These mailings include balance due notices and unfiled tax return notices. The IRS entered this filing season with several million original and amended returns filed by individuals and businesses that have not been processed due to challenges of the historic pandemic and is taking this step to help avoid confusion for taxpayers and tax professionals.

From the IRS announcement (IR-2022-31) (my emphasis):

Some taxpayers and tax professionals may still receive these notices during the next few weeks. Generally, there is no need to call or respond to the notice as the IRS continues to process prior year tax returns as quickly as possible.

However, if a taxpayer or tax professional believes a notice is accurate, they should act to rectify the situation for the well-being of the taxpayer. For example, the IRS cautions people with a balance due that interest and penalties can continue to accrue. In addition, IRS employees may in select circumstances issue notices to particular taxpayers to resolve specific compliance issues.

The IRS announcement has a complete list of the notices covered. 


IRS Temporarily Halts These 10 Scary Taxpayer Letters - Ashlea Ebeling, Forbes:

Savvy tax pros know that the IRS is woefully backlogged, and the best response is to wait it out. A California tax preparer who filed on paper with a check attached last April emailed me that he got a CP-80 notice last month. The IRS cashed the check, but hasn’t gotten to his return—10 months later. His plan: “IRS thinks I have overpaid; I can wait 6 months to see if they catch up on paper.” In the meantime, the IRS has updated its web site, Understanding Your CP80 Notice, to tell folks who are getting CP-80 Notices who have already filed their 2020 returns: “DO NOT refile.”

Nice sentiment, but many of these taxpayers aren't going to check the IRS website. They are going to see the scary letter and file another return, or yell at their preparer who obviously should have done something different.


Mail Backlog Forces IRS to Hit Pause on More Letters - Jonathan Curry, Tax Notes ($):

The February 9 announcement (IR-2022-31) comes as the IRS faces significant pressure from lawmakers and the tax return preparation community to pull back on some tax compliance functions until the agency can clear its mammoth mail backlog.

More such relief may be forthcoming, according to IRS Commissioner Charles Rettig. “Our efforts are not limited to suspension of these additional letters and the possibility of similar actions going forward,” he said in the release.


IRS suspends many of its automated notices - Michael Cohn, Accounting Today. "The IRS has been facing criticism from a coalition of tax professional groups, as well as members of Congress who have been hearing from their constituents. On Tuesday, lawmakers on the House Ways and Means Oversight Subcommittee convened a hearing to discuss concerns from National Taxpayer Advocate Erica Collins about the backlog of millions of unprocessed tax returns from last year amid IRS staffing shortages, as well as the flood of automated notices that have been generated by the IRS’s computer systems with little opportunity of contacting someone at the IRS for help with responding."

Updated Filing Instructions on Schedules K-2 and K-3 Create Angst - Kristen Parillo, Tax Notes ($):

Tax professionals are venting after learning from updated IRS instructions that partnerships might still have to file new international reporting schedules even if they have no foreign partners or activities.


The new schedules, which took effect for tax year 2021, apply to passthroughs and their partners and shareholders that have “items of international tax relevance.” Partnerships and S corporations are required to report partners’ or shareholders’ total distributive share of international items on Schedule K-2 and to report a partner’s or shareholder’s allocable share of those items on Schedule K-3.

The angst will spread beyond tax pros. Clients may not instantly understand why they have to pay for new foreign tax schedules for returns that have only U.S. activity, and why that will slow down return preparation.

Tax preparers take note: another change for 2021 tax season with Schedules K-2 and K-3 - National Association of Tax Professionals. "The new schedules will require significant changes in how partnerships and S corporations report their foreign business activities beginning with the 2021 tax year."


California Governor Signs Bill Restoring Business Tax Breaks, Modifying SALT Cap Workaround - Paul Jones, Tax Notes ($):

In 2020 Newsom and lawmakers, fearful that the pandemic would hurt state revenues, approved a temporary restriction of NOLs and business tax credits that barred businesses with more than $1 million in income from using NOLs in tax years 2020, 2021, and 2022. They also barred the use of business tax credits to offset more than $5 million of any business's annual tax liability for the same three years.

But the state’s budget situation has improved dramatically, and California now has a surplus that as of January was projected to be as high as $45.7 billion. Newsom included the early restoration of the use of NOLs and the full use of business tax credits for the 2022 tax year in his January budget proposal, and the provision was added to S.B. 113.

The bill extends California's optional entity tax to disregarded entities, such as single-member LLCs. Optional entity taxes allow taxpayers to get around the $10,000 cap on itemized deductions for state and local taxes for income from such entities.

Related: IRS Blesses Entity-level Tax Deduction used as SALT Cap Workaround.


IRS Updates FAQ on Research Credit Refund Changes - Mary Katherine Browne, Tax Notes ($):

The IRS announced the change in requirements for research credit refund claims alongside an October 15, 2021, chief counsel memorandum outlining the changes. According to IRS officials, the changes were spurred by the poor quality of claims the IRS was receiving, which was challenging and resource-intensive for the agency.

Some tax professionals have criticized the IRS for what they consider its informal implementation of the changes, calling the agency’s decision to announce changes by publishing field attorney advice a concerning precedent. The American Bar Association Section of Taxation, the American Institute of CPAs, and the National Association of Manufacturers have sent the IRS letters requesting that it delay implementation and issue proposed regulations on the changes, allowing for formal dialogue between the agency and taxpayers.

One more thing that will slow down return preparation this year.

Link: Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions.


Tracking down 2020 — yes, two-year-old — missing EIPs - Kay Bell, Don't Mess With Taxes. "This filing season is supposed to focus on 2021 tax returns, but some folks still are struggling with Internal Revenue Service issues from years ago. Specifically, some individuals are trying to track down COVID-19 economic impact payments (EIPs) the IRS says it issued two years ago."

As IRS Changes Course on Selfie Technology, What Comes Next? - Kelly Phillips Erb, Bloomberg. "This week, the IRS confirmed that it would stop requiring taxpayers to use facial-recognition software to access online services. The announcement followed a firestorm of criticism about’s registration process and related fraud complaints."

Former Foster Youth and Homeless Youth May Be Eligible to Claim the Earned Income Tax Credit - NTA Blog. "The new ARPA provision will assist youth who have 'aged out' of the foster care system, i.e., those who have reached the maximum age at which a state will support them, such as 18, and have not been reunited with their families or placed in a permanent home. When foster youth “age out” of the system, they are legally emancipated and are no longer eligible to receive state assistance with housing, food, and medical care under the foster care system."

2021 Changes in Child Tax Credit Can Complicate 2021 Tax Returns - Wolters Kluwer Tax & Accounting. "Because of these changes to the credit, all worksheets for figuring the 2021 child credit have been moved from the Form 1040 instructions, and are now included in the instructions for a substantially revamped Schedule 8812." 


Follow On Cases After Criminal Tax Convictions--Daugerdas and Larson - Jack Townsend, Federal Tax Crimes. "The shelter involved in this case was not one he promoted to others but one devised to help the related promoters of the schemes defer the inclusion of some of the substantial income from the transactions through an ESOP... The Court held that he did not have a substantial risk of forfeiture and sustained the I.R.S. inclusion in income rather than deferring. The only interesting thing is the following 'At trial respondent conceded the fraud penalty for all years at issue.'"

Former IRS Attorney Loses Appeal in Tax Evasion Case - Parker Tax Pro Library. "The Ninth Circuit held that, where an individual filed an individual federal income tax return which did not report any income from his sale of property, and then several years later filed a partnership return on which gain from the sale of that property was underreported, the six-year statute of limitations for evasion of assessment of taxes under Code Sec. 7201 ran from the filing of the partnership return, which was the last affirmative act of evasion. The court also clarified that language in earlier Ninth Circuit decisions about the statute of limitations running from the "last act necessary to complete the offense" did not exclude any other later evasive acts from restarting the limitations period under Code Sec. 6531(2)."


From Tax Promise to Policy: Biden’s First Year in Office - David Stewart and Jonathan Curry, Tax Notes Opinions. "That global minimum tax could take effect as early as next year. It would be embarrassing on the international stage if the U.S., which has helped lead and spearhead these negotiations, can't even hold up its end of the bargain. In addition, it would also be a nightmare for businesses that try to comply with a mismatched domestic and international tax regime. Even though I don't hear President Biden talking about it very much, I definitely think that that's something that his administration really wants to see in this package."

Large Spread in Tax Treatment of Sports Betting Operators - Ulrik Boesen, Tax Policy Blog. "Since 2018, 30 states and the District and Columbia have legalized and imposed taxes on sports betting. States that have yet to legalize, but which may do so, should pay attention to the impact of tax design in states that already have legal and taxed sports betting—specifically tax base design. Most recently, online sports betting went live in New York with a whopping 51 percent tax rate on gross gaming revenue."

State Tax Cuts Can Be a Post-Pandemic Success Story—If They Fit the Moment - Richard Auxier, TaxVox. "The how is critical. As I explain in a new report, income tax rate cuts and refundable tax credits provide different benefits to different people. In general, tax rate cuts overwhelmingly benefit high-income (and mostly white) households, while state earned income tax credits (EITCs) target tax relief at mostly low-income households with children—particularly Black and Latino households."


Billion-Year-Old Black Diamond Sells for $4.3 Million - Michael Wright, Wall Street Journal ($). "The world’s largest cut diamond, believed to be at least one billion years old, has sold for $4.3 million to an unidentified buyer who opted to pay with cryptocurrency, London-based auction house Sotheby’s said."

If the buyers are U.S. persons, they may have a tax bill already, as they will be considered to have sold one asset - the cryptocurrency - to buy another. 

Related: New Tax Guidance Issued on Cryptocurrency Transactions. 


Tax Court Sends $6.3M Easement Dispute To Trial - Theresa Schliep, Law360 Tax Authority ($):

Hickory Equestrian LLC will have to make a case at trial that it reasonably relied on the advice of attorneys and accountants in preparing its tax filing that omitted the property's cost or adjusted basis as required for claiming a conservation easement deduction, the Tax Court said in an order Tuesday.

The court rejected the pass-through's arguments that it substantially complied with its reporting obligations even if it didn't strictly comply with them, but found it's unclear if the entity's purported reliance on professional help in preparing the return entitles it to the reasonable cause defense under Internal Revenue Code Section 170(f)(11)(A)(ii)(II).

It would take a bold professional to feel good about reporting that a partial interest in land bought for $112,000 was worth $6.7 million nine years later. But even if it were just an astute investment, filling out Form 8283 incorrectly is all that it takes to cut a $6.7 million charitable deduction to zero.


It could rain. So today is National Umbrella Day!

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