Tax News & Views Taxpayer Experience Roundup

March 7, 2022

It’s Official: IRS Launches Taxpayer Experience Office – Jonathan Curry, Tax Notes ($). “A new office in the IRS’s vast bureaucracy aims to make taxpayers’ experience with the agency a little less miserable.”

The IRS formally announced on March 4 the launch of the Taxpayer Experience Office (TEO), headed by Chief Taxpayer Experience Officer Kenneth Corbin, who doubles as commissioner of the agency’s Wage and Investment Division. Corbin has held the chief taxpayer experience officer hat for over a year, but the office is only now being formally established and will begin hiring staff over the coming months, according to the IRS.

The goal of the TEO is to track industry trends and taxpayers’ expectations, develop best practices for taxpayer services, and 'promote a consistent voice and experience across all taxpayer segments by developing agency-wide taxpayer experience guidelines and expectations,' the IRS announcement stated.

IRS Debuts Taxpayer Experience Office to Improve Service – Bloomberg. “The IRS has established a Taxpayer Experience Office, according to a Friday news release."

The office, which will be adding staff in the coming months, will cover taxpayer transactions, compliance, and other program areas, according to the agency.”

‘As the IRS continues taking immediate steps this filing season including adding more employees to address the significant challenges facing a resource-constrained IRS, it’s critical that we work going forward to equip the IRS to be a 21st century resource for Americans,’ said IRS Commissioner Chuck Rettig. ‘The formal establishment of this office will help unify and expand efforts across the IRS to improve service to taxpayers.’

The office will also examine industry trends and best practices to develop agency-wide guidelines.

The IRS is trying to improve customer service as its workers struggle to find a stapler. Yikes. 

Decades of Neglect Leave I.R.S. in Tax Season ‘Chaos’ – Alan Rappeport, New York Times. “At the Internal Revenue Service’s sprawling Kansas City, Mo., processing center, teams of clerks earning $15 per hour work through the night, trying to help the agency clear a backlog of more than 20 million tax returns that are a year overdue.”

The conditions are subpar: Scanners sputter, forcing workers to enter data by hand, staplers are scarce and piles of tax documents overflow from carts.

‘The general theme for the time I’ve been there has been chaos,’ said Shawn Gunn, a clerk in the receipt and operations group at the I.R.S. who started working at the facility in Kansas City last June and is transitioning to become a tax examiner.


Regarding the hiring of 10,000 IRS workers, some are skeptical it will happen:

IRS aims to hire 10,000 workers to reduce crippling mail backlog – Aaron Lorenzo, Politico:

A recent effort to hire 5,000 new IRS employees has fallen flat so far, with less than 200 workers brought on board. The new plan ‘sounds like an extension of that plan and its logic,’ said Chad Hooper, president of the Professional Managers Association, a group that represents non-union personnel.

But he said he had no specific knowledge of the new plan and seemed skeptical about how easily it could be fulfilled, given the recent hiring misfire.

‘It’s unclear where the IRS believes these future employees are,’ Hooper said.


IRS Plots Wider Partnership Audits With Plan for Even More Hires – David Hood, Bloomberg ($). “The IRS is ramping up audits of partnerships and pass-through entities with a plan to significantly increase its staff, an IRS official said Friday.”

The agency plans on hiring additional partnership tax experts, as well as transfer pricing personnel, said Lauren Troderman, team manager for pass-through entities at the IRS, at a Federal Bar Association virtual panel. Troderman also said the unit plans on hiring again ‘later in the year’ contingent on the agency’s budget.

10 Red Flags That Could Trigger an IRS Tax Audit in 2022 – Lori Ioannou, Wall Street Journal ($):

To avoid a tax audit, the best thing you can do is file a return that is correct and complete, says Eric Smith, an IRS spokesman. When your return is right to start with, the chances that you’ll hear from the IRS go way down, he says. Filing electronically is also recommended since you can amend and fix any issues more quickly.

IRS Office Investigating Those Helping Tax Scheme Promoters - Aysha Bagchi, Bloomberg ($). “The IRS Office of Promoter Investigations is targeting not just tax scheme promoters but also facilitators such as appraisers, those who write opinions on schemes, and employees of promoters, said Lois Deitrich, who heads the office.”

‘Anyone who’s involved in that kind of a scheme and should know better, but they’re involved in the scheme to help the promotion of it, we’re taking a look at those,’ Deitrich said Friday at a tax law conference hosted by the Federal Bar Association.


Analyzing Wyden’s Subchapter K Reform – Lee Shepard, Tax Notes ($):

Last September Senate Finance Committee Chair Ron Wyden, D-Ore., proposed an extensive discussion draft of partnership reforms that would compel partners to share partnership items based on capital interests and to allocate partnership debt according to partnership profits. Wyden’s revenue estimate for the proposed changes was $172 billion over a decade, indicating that partnership planners would cease some practices.

IRS Attorney: Disguised Sale Statute Is Self-Executing – Tax Notes ($). “The statutory rules on disguised sales of partnership interests are clearly self-executing, an IRS attorney said while discussing the partnership reform draft released by Senate Finance Committee Chair Ron Wyden, D-Ore.”

Speaking March 4 at a Federal Bar Association virtual tax law conference, Robert Crnkovich of the IRS Office of Associate Chief Counsel (Passthroughs and Special Industries) weighed in on Wyden’s September 2021 discussion draft, which would make sweeping changes to the tax rules governing partnerships and passthrough entities.

One proposal would end a long-standing debate by clarifying that section 707(a)(2)(B) is self-executing, meaning that it doesn’t need implementing regulations to apply.


Grandma’s Selfie Chaos Shows Government Fraud Fix Still Elusive - Courtney Rozen, Bloomberg ($). “Last spring, my 79-year-old grandma in Ohio—and her flip phone—met the government’s online security system.”

To redirect her Social Security check to a new bank account, she needed to pass through, a cybersecurity company that has become a digital gatekeeper for federal services and has used selfies to verify Americans are who they say they are.

Mom took out her iPhone, snapped a photo of Grandma, and uploaded it to the company’s website before the timer expired. She and my aunt repeated this several times—and still couldn’t log in to the website, which required a photo as a biometric pass code.

My overwhelmed Grandma nearly lost her temper after telling a Social Security customer service representative—for the third time—that she couldn’t unlock the selfie portal.

Facial Recognition Follow-Up: Transparent Modernization for the IRS – Marie Sapirie, Tax Notes ($):

The IRS’s decisions on facial recognition went awry in three places. First, the IRS’s choice was overbroad: It appears to have selected an option that collected more personal information than was necessary. That the facial recognition piece of the new online identity verification process was withdrawn just over six months after it was launched suggests that other alternatives were available to satisfactorily authenticate a taxpayer’s identity.

Second, the IRS’s decision-making suggests that administrative convenience, and in particular efficiency concerns, prevailed over other critical, countervailing considerations — namely, protecting individual privacy interests. In the technological race to address the perennial threat of fraud, the IRS appears to have inadequately considered the full implications of its actions.

And third, there’s a qualitative difference between a demand on the IRS’s website to enter a password and some personally identifying information (PII) for access, and a demand to take a selfie that will be algorithmically evaluated and stored. The IRS failed to appreciate that difference as it moved ahead last year with the testing and implementation phase of its secure access digital identity (SADI) initiative.


Easing Telehealth High Deductible Rule Needs Change in Statute – Sara Hansard, Bloomberg ($). “The IRS needs clearance from lawmakers in order to give employers and health plans leeway to allow telehealth plans to cover treatment before patients meet annual deductibles, two officials said Friday.”

An emergency Covid-19 policy expired Dec. 31 that enabled people with high-deductible plans and health savings accounts to get telehealth coverage without first having to meet annual deductibles. Employers say the policy should be extended.

‘It’s a statutory provision, and I don’t know that we really have the authority to extend it otherwise,’ Kevin Knopf, senior technician reviewer of the health and welfare branch of the IRS’s office of the associate chief counsel, said at the Federal Bar Association’s annual tax law conference.

Rachel Leiser Levy, associate chief counsel of the IRS office of chief counsel, agreed. ‘I think it would require a statutory change.’


Treasury Aims to Issue Previously Taxed Income Rules by Year-End - Michael Rapoport, Bloomberg ($). “The Treasury Department is hoping to deliver proposed regulations on previously taxed income by the end of this year, a Treasury official said Friday.”

The rules on previously taxed earnings and profits, or PTEP, ‘are being very —I’ll emphasize the word —very actively worked on right now,’ said Brenda Zent, associate international tax counsel for Treasury, speaking at a Federal Bar Association conference. Treasury is ‘hoping and striving to get those to you in 2022,’ she said.


May I Have My Paycheck in Bitcoin?: Crypto Payments Explained - Paige Smith, Bloomberg ($). “More and more often, employers are fielding a question that would have been unheard of even five years ago: ‘Can you pay me in Bitcoin?’":

The Fair Labor Standards Act, a 1938 statute, dictates how workers in the U.S. receive wages. Currently, workers must be paid in American currency, which is rooted in the statute’s origins, according to Lisa Schreter, a Littler Mendelson P.C. shareholder, and dates back to when employers paid their workers in script that could only be used, for example, at company stores.

So, legally, the payment of wages in crypto is not recognized at this time. Wages must be paid in cash or a negotiable instrument payable at par—like a check.

The fact that cryptocurrencies can be converted to cash won’t address that underlying concern, Schreter said.

IRS Crypto Enforcement Success Wave Keeps Breaking – Nathan Richman, Tax Notes ($). “The IRS has gone from seizing hundreds of thousands of dollars' worth of cryptocurrency to setting successive records with seizures in the billions of dollars in just a couple of years, according to an IRS official.”

In fiscal 2019 the IRS seized $700,000 worth of cryptocurrency, but that number jumped to more than $100 million the next year and has been in the billions for the past two years, Jarod J. Koopman of the IRS Criminal Investigation division said March 4.


Congress Should Do More Than Block Tax-Exempt Bonds For Pro Sports Stadiums – Howard Gleckman, Tax Policy Center. “Virginia’s efforts to subsidize a stadium and mixed-use commercial development for Dan Snyder and his Washington Commanders NFL football team would be a foolish waste of taxpayer money. But an attempt by three Democratic Members of Congress to block the funding scheme is misguided and short-sighted. The bill, introduced by Representatives Jackie Speier (D-CA), Earl Blumenauer (D-OR), and Don Beyer (D-VA) would end the tax-exempt status of bonds used to finance professional sports stadiums.”

That’s fine as far as it goes. But rather than aiming only at pro sports (and really at  Snyder), Congress should completely rethink private activity bonds. Should they be reserved only for public infrastructure, such as roads, bridges, and public schools? What about non-profit hospitals? Should Congress impose meaningful caps on the annual issuance of these bonds? Why should state and local governments use taxpayer money to subsidize any well-connected businesses to the detriment of competitors that don’t have the clout to get cut-rate bond financing?


IRS Advises Checking Website for Status of EO Applications – Fred Stokeld, Tax Notes ($). “Organizations that have applied for tax-exempt status and are wondering when they’ll receive a reply from the IRS should check the agency’s website to learn the status of their applications, according to an IRS official.”

Despite reports that some applicants haven’t received timely determination letters or development letters from the IRS, the agency isn’t aware of any delays in mailing the documents, said Robert Malone, director of exempt organizations and government entities in the IRS Tax-Exempt and Government Entities Division.


Yellen Plugs for Biden Agenda to Beat Sluggish Long-Term Growth – Christopher Anstey and Olivia Rockeman, Bloomberg ($). “Treasury Secretary Janet Yellen touted the benefits of the Biden administration’s social-investment proposals as a means of overcoming what’s projected to be a return to subdued economic growth after the current rapid pandemic recovery.”

‘Forecasters uniformly agree that growth over the next several decades will be sluggish, limited by slow productivity growth and an aging population that restricts growth in labor supply,’ Yellen said in remarks prepared for delivery to the Stanford Institute for Economic Policy Research on Friday.


The Metaverse Is Real, and Yes, There Will Be State Taxes There – Michael Bologna, Bloomberg ($). “Anybody planning to live large chunks of their lives tax free as sexy avatars with flowing hair in virtual worlds populated with hipsters, mercenaries, and superheroes got a rude wake-up call this week.”

Second Life, the online role-playing game that permits millions of users to pursue better virtual lives than the hum-drum realities they generally inhabit, announced its digital wonderland will be subject to tax for the first time since its founding in 2003. In a statement to U.S. subscribers, Second Life said beginning March 31, state and local sales taxes will be imposed on subscriptions and certain in-game activities.


Maryland Digital Tax Suit Belongs in State Court, Judge Says - Perry Cooper, Bloomberg ($). “Maryland’s first-of-its-kind state levy on digital advertising is a tax that must be challenged in state court, a federal trial court ruled.”

The federal Tax Injunction Act bars U.S. district courts from hearing state tax disputes before the issues pass first through state courts. Because the Digital Ad Tax Act charge is a tax, four trade associations challenging it must make their statutory and constitutional arguments in state court first, Judge Lydia Kay Griggsby of the U.S. District Court for the District of Maryland ruled Friday.


Texas Has Standing In Pandemic Aid Tax Cut Limit, Court Says – Laura Mahoney, Bloomberg ($). “Texas, Mississippi, and Louisiana can proceed with their lawsuit challenging the U.S. Treasury’s limit on using pandemic relief funds to cut state taxes, a federal trial court judge said Friday.”

The ruling in the states’ favor marks the fourth federal court loss for the federal government over restrictions on pandemic relief spending. U.S. District Court Judge Matthew J. Kacsmaryk said the states have standing to sue because the ambiguity of the American Rescue Plan Act’s tax mandate forces them to choose between losing billions of dollars in federal funds or compromising their taxing authority.

‘The alleged injuries cited by plaintiffs—specifically an unconstitutional condition forcing states to decide whether to choose ‘funding’ or ‘state sovereignty'—began as soon as ARPA was enacted,’ the judge said.


REITs Owe $11.7 Million in Transfer Tax, California Court Says - Perry Cooper, Bloomberg ($). “Two real estate investment trusts failed to convince a California appeals court that they are entitled to a refund of $11.7 million they paid in transfer tax due to a merger involving their parent company.”

Before the merger, CIM Urban REIT 211 Main Street (SF) LP and CIM Urban REIT Properties II LP directly owned two San Francisco properties. After the merger, they still directly owned the properties but the ownership of their parent company—that indirectly owned the property—changed. The California Court of Appeal, First Appellate District, ruled Thursday that the merger created a change in ownership that triggered the city’s transfer tax.

‘The Court of Appeal’s decision confirms that the voters of San Francisco have the power to choose how the city taxes real property transactions within its borders, and that large corporate entities cannot use complicated ownership structures to avoid paying their fair share of taxes,’ San Francisco City Attorney David Chiu said in an emailed statement.


California’s E-Commerce Tax Expansion Vexes Small Online Sellers – Laura Mahoney and Michael Bologna, Bloomberg ($). “California’s recent decision to scoop tens of thousands of out-of-state online businesses onto its income tax rolls will likely spur other states to do the same, but not without courtroom battles over the state’s legal rationale.”

Guidance from the state’s Franchise Tax Board mirrors an August 2021 statement from the Multistate Tax Commission reinterpreting a federal law that has largely shielded out-of-state retailers from state income taxes for more than 60 years.

The new interpretation, which applies retroactively, removes some of the protections for sellers that weave online support services into their e-commerce models. The guidance is expected to impact legions of sellers that previously had no income tax obligations in California. Compliance could prove challenging for the estimated 2.5 million online merchants operating in the U.S., particularly small- and medium-sized sellers.


Kentucky House Approves Personal Income Tax Phase-Out – Michael Bologna, Bloomberg ($). “Kentucky would phase out its 5% personal income tax and replace some of the lost revenue with an expansion of the sales tax base under a bill that won wide support Friday in the state House of Representatives.”

The House approved the bill (H.B. 8) by a vote of 67-23, signaling a potential sea change in state tax policy. Now headed to the Senate, the bill cuts the income tax rate to 4% on Jan. 1, 2023, and creates a phased process for further cuts after certain revenue targets are exceeded. The rate, for instance, would drop to 3.5% if revenue for the prior year exceed $14.5 billion. The income tax would eventually be eliminated after revenue exceeds $21.5 billion. H.B. 8 specifies, however, that the rate couldn’t be cut more than 1% in a calendar year.


Wisconsin High Court Tosses Challenge to Local Sales Tax – Michael Bologna, Bloomberg ($). “Brown County, Wis., is free to collect a 0.5% local sales and use tax after the state Supreme Court on Friday rejected assertions from a libertarian group that revenue collected from the tax must be used to reduce property tax levies.”

In a 5-2 ruling, Wisconsin’s high court affirmed a circuit court ruling that tossed a lawsuit brought by the Brown County Taxpayers Association with assistance from the Wisconsin Institute for Law and Liberty, a Milwaukee-based libertarian legal advocacy group. The majority ruled Brown County’s tax ordinance was consistent with state law and rejected the association’s assertion that the county was only authorized to administer the levy if it functioned as a ‘dollar-for-dollar offset to the property tax.’


IRS Says Treasury to Consider Clarifying Foreign Tax Credit Regs - Michael Rapoport, Bloomberg ($). “The IRS and the Treasury Department are listening to the concerns that many taxpayers have about implementing new foreign tax credit regulations, and will consider clarifying some matters, an IRS attorney said Friday.”

The IRS and Treasury are ‘very interested’ in hearing from taxpayers about specific issues or general questions about applying the regulations, ‘and then we’ll consider whether there’s a vehicle we can use to clarify those issues that we’re hearing about,’ said Teisha Ruggiero, an attorney in the IRS’s Office of Chief Counsel, speaking at a Federal Bar Association conference.

Ruggiero didn’t specifically say whether Treasury plans any further guidance on the matter.


Treasury Mulling Scope of Future Transfer Pricing Rules - Isabel Gottlieb, Bloomberg ($). “The U.S. Treasury is contemplating several pieces of guidance on intercompany pricing transactions, an official said Friday at a Federal Bar Association event.”

The government is still looking to finalize transfer pricing rules addressing aggregation that expired in 2018, said Chris Bello, senior counsel at Treasury’s Office of the International Tax Counsel.

‘There’s no big rush to get these out,’ he added, because the 2017 tax overhaul ‘largely’ addressed what the regulation covers.


Covid Could Feature in Tax Disputes Soon, IRS Official Says - Isabel Gottlieb, Bloomberg ($). “The IRS expects to see pandemic-related risk issues crop up in dispute resolution cases in the years ahead, an agency official said Friday.”

While some companies talk about the impact of Covid-19, ‘trying to identify what that impact is, quantify it, and then also deal with who should bear the impact of that’—including relating to the concept of risk in transfer pricing—'are issues that I think we’re still working our way through,’ said John Hughes, the outgoing director of the IRS’s Advance Pricing and Mutual Agreement Program, speaking at a Federal Bar Association virtual event.

‘Those are issues where I think there will continue to be some differences of views,’ in the treaty-partner dispute resolution known as mutual agreement procedure, he added.


Happy National Be Heard Day! Today is for the small business owners.  They employ roughly half of all workers in the U.S. and can add a lot of pizzazz to the town in which they reside. Today is for them tooting their own horn. Let’s hear it!  

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