June 8, 2022
Dems Face Short Window To Pass Tax Bills This Year - Stephen Cooper, Law360 Tax Authority ($):
If recent history repeats itself, lawmakers are likely to end the month without a budget agreement and then send several continuing resolutions to the White House to buy more time until passage of an omnibus budget bill in December.
Even though lawmakers say they don't want to turn the budget bill into the proverbial "Christmas tree" for unrelated tax policy, conventional wisdom in Washington is that the budget will carry several tax measures to the White House, including a year-end tax extenders bill, renewal of several expiring business tax provisions from the 2017 GOP tax overhaul and the bipartisan retirement package known as Secure 2.0.
Yellen Nixes Foreign Tax Credit Reg Delay, Defends OECD Talks - Doug Sword, Tax Notes ($):
Treasury Secretary Janet Yellen declined requests from Republican senators to delay implementation of new foreign tax credit regulations but said changes might be considered and applied retroactively.
Yellen appeared June 7 before the Senate Finance Committee to discuss the Biden administration’s fiscal 2023 budget proposal. However, the $1.6 trillion spending plan never came up as Yellen was asked to weigh in on an array of topics, including OECD negotiations and the administration’s efforts to curb inflation. Yellen also urged greater IRS funding to assist in tax collections and a potential IRS rollout of tax return preparation software and said Treasury is exploring ways to administratively close estate and gift tax loopholes.
The foreign tax credit regulation proposal has been criticized for eliminating the credit for foreign taxes for which it has been allowed, resulting in double taxation of foreign earnings.
Senators urge creation of IRS Free-File Program to a hesitant Treasury Secretary - Jay Heflin, Eide Bailly. "Yellen appeared more interested in getting resources to combat the tax filing backlog than create a free-filing system."
The IRS encourages anyone considering entering a promoted microcaptive insurance transaction to first speak with a qualified, independent advisor. These transactions will result in serious economic loss to taxpayers, including the loss of deductions, required income inclusion and penalties. Taxpayers should understand that the IRS has asserted in many of these cases that the microcaptive insurance transactions lack economic substance and that when transactions are held to lack economic substance, then a 20% penalty (40% if undisclosed) will automatically apply, and it cannot be waived or reduced by the IRS or the courts.
Likewise, taxpayers who have already engaged in such a transaction should speak with a qualified independent tax advisor about their options. The IRS previously offered settlement opportunities for abusive microcaptive transactions, and for taxpayers who come forward seeking to resolve their case, the IRS will consider providing a resolution opportunity as appropriate.
The IRS and Department of Justice will use all available legal options to challenge improper attempts to avoid or evade U.S. income tax, regardless of how long it takes for these cases to wind their way through the courts. The IRS will also aggressively pursue penalties for all participants in these abusive transactions.
IRS Doubles Down on Microcaptives Enforcement - Chandra Wallace, Tax Notes ($). "The June 7 IRS warning comes in the wake of the government’s May 13 win in Reserve Mechanical Corp. v. Commissioner, No. 18-9011 (10th Cir. 2022). In that case, the Tenth Circuit affirmed the Tax Court’s ruling that the taxpayer’s captive insurance arrangement didn’t function as 'a true insurance arrangement for the distribution of risk' but was instead 'a sham' in which the captive entity wasn’t engaged in the business of insurance. As a result, the purported premiums paid were taxable income to the captive, the court found."
Inheriting a retirement plan? The IRS gets pushback to its stark proposal - Lynnley Browning, Accounting Today:
It all began last February, when the Internal Revenue Service jolted financial planners by introducing a potential rule for a recent law under which heirs must drain those accounts within 10 years. Under its proposal, the tax agency said that heirs would be required to take minimum distributions in years one through nine.
It was an about-face from the IRS’s previous guidance in May 2021 that suggested the tax-deferred accounts simply had to be emptied out by year 10. That earlier advice had led many wealth advisors to assume that more money could be left in them to grow during an heir’s lifetime. It also prompted some planners to tell clients they could skip taking a payout last year.
Bipartisan crypto bill outlines regulatory, tax framework - Sarah Wynn and Laura Weiss, Roll Call. "It would soften new tax reporting mandates created last year, allow an exemption from gross income for gains of up to $200 on cryptocurrency used to buy goods or services, and defer initial tax on digital coins earned from mining or staking until they’re sold."
Senate Crypto Legislation Seen as Too Industry-Friendly - Mary Katherine Browne, Tax Notes ($). "According to John Buhl of the Urban-Brookings Tax Policy Center, the bill would create huge tax avoidance opportunities for those involved in mining and staking because the new cryptocurrency tokens earned by those participating in such activities wouldn’t be taxable until they are sold."
A Problematic Crypto Tax Break Introduced in the Senate - John Buhl, TaxVox. "Crypto supporters argue this is in line with the tax treatment of other industries. But a closer look shows the Lummis-Gillibrand proposal would deviate from one of the tenets of good tax policy: neutral treatment of taxpayers across different parts of the economy. Deferring tax on investment income is one thing. But this bill would essentially allow mining and staking companies to indefinitely avoid tax on earnings from their core business activities, in stark contrast to existing tax law and legal precedents."
IRS warns scammers still using pandemic to steal Americans’ money, identities - Olafimihan Oshin, The Hill. "In a statement on Monday, IRS noted that scammers are sometimes using fake job offers and stimulus checks to gain access to victims’ information to file false unemployment claims or tax returns."
Third Circuit Sustains FBAR Willful Penalty - Jack Townsend, Federal Tax Crimes:
The District Court, on trial, “found a ‘decades-long course of conduct, omission and scienter’ by Collins in failing to disclose his foreign accounts” and held that the penalty determination (as mitigated) was “neither arbitrary and capricious nor an abuse of discretion.”
Chrisleys Are Convicted Of Tax Evasion & Bank Fraud, Don’t Know Best - Robert Wood, Forbes. "The jury believed prosecutors that the Chrisleys tried to hide their money from the IRS. Saying different things to your bank and to the IRS can be a major mistake. even The feds showed that they provided banks with false information such as personal financial statements containing false information, and fabricated bank statements when applying for and receiving millions of dollars in loans. Prosecutors said that the Chrisleys used much of the proceeds for their own personal benefit."
Tax Court Building Reopens - Keith Fogg, Procedurally Taxing. "The reopening of the Tax Court building, which has been closed for most of the period since March 2020 when most of the United States shut down in response to COVID, means that persons interested in the public records of Tax Court cases who can get themselves to the Judiciary Square area of Washington, D.C., can now view the records at no cost by going to the Records Office. The Records Office contains a small space where, unless things have changed, two computer terminals provide access to case information at no cost to the person sitting at the terminal. It also means that a person who can get to the Records Office can make an in person request for documents in Tax Court cases and obtain them immediately without having to wait to call the office and go through the procedure to order documents."
10 states have their own child tax credits - Kay Bell, Don't Mess With Taxes. "And seven states — California, Colorado, Maryland, Massachusetts, New Mexico, New York, and Vermont — did follow Uncle Sam's lead and made their state child tax credits refundable."
Self-Directed IRA Retains Qualified Status and Is Exempt from Bankruptcy Estate - Parker Tax Pro Library. "According to the court, in taking an allowed distribution, Moore acted as a beneficiary, not as a plan fiduciary or disqualified person. Therefore, the court concluded, no transfer between the IRA and a disqualified person occurred."
Can a Church or Other Public Charity Endorse a Candidate? Tax Treatment of Political Campaign and Lobbying of Tax-Exempt Organizations - Cory Halliburton, Freeman Law. "Indeed, if a public charity endorses or evaluates the qualifications of a candidate for public office, then the organization has violated the requirements for tax-exemption, and the tax-exemption may be revoked or excise tax sanctions levied against the organization or its management, or both."
Related: How to Protect your Tax-Exempt Status.
What the IRS’s 2021 Data Book Says About Tax Administration - Marie Sapirie, Tax Notes Opinions. "The IRS is notoriously behind the times in buying and implementing new technology, mostly because of the costs of replacing its museum-piece computers. The data book explains that the agency spent $348 million on business systems modernization, which is a thin slice of its $13.7 billion budget but should help it move into the 21st century a little faster because that spending funds capital asset acquisition of information technology systems. Spending on modernization was up from $299 million in 2020."
Global Tax Deal Delayed for Foreseeable Future - John Osborn, TaxBuzz. "If approved, the international deal would both assess a universal 15% tax on the world’s biggest companies and allow countries where those multinational corporations are operating to reallocate their profits and see more income from their sales."
Biden’s FY 2023 Budget Would Result in $4 Trillion of Gross Revenue Increases - Erica York and Garrett Watson, Tax Policy Blog. "Altogether, President Biden is proposing raising revenue by more than $4 trillion primarily from new taxes on U.S. businesses and individuals, exceeding the magnitude of his proposed tax hikes during the 2020 campaign ($3.7 trillion on a gross basis). The gross tax increase would be reduced on a net basis by increases in tax credits for certain individuals and economic activities."
California OTA: Shareholder's Passthrough Income Includes Capital Gain - Christopher Jardine, TaxNotes ($):
In 2013 SD Mega Block filed a Form 568, "California Limited Liability Company Return of Income," for the 2012 tax year and reported an IRC section 1231 gain of $8,027,522 for the sale of property owned by the company. Leeding Edge filed the same form and reported the same amount in gains from a passthrough entity. The Leeding Edge return also included a Schedule K-1 for EM Johnson, reporting a section 1231 gain of $4,013,761.
On their 2012 joint income tax return, Johnson and his wife reported taxable income of -$4,603 with no tax due and an overpayment of $2,955. The couple did not report any pro rata share of income or gains from the sale of the property by SD Mega Block.
There's a lot more to the case, including an attempt to claim that the gain was actually cancellation of debt, eligible for exclusion as a result of the S corporation's insolvency. The CPA who prepared the returns said he never received the K-1 from the taxpayers.
The moral? Give your CPA your K-1s, even if you don't like what's on them. States notice these things, especially things with $4 million of income.
As the 6th item on the 2022 "Dirty Dozen" scams warning list, the Internal Revenue Service today cautioned taxpayers with pending tax bills to contact the IRS directly and not go to unscrupulous tax companies that use local advertising and falsely claiming they can resolve unpaid taxes for pennies on the dollar.
Offer in Compromise (OIC) "mills" make outlandish claims usually in local advertising regarding how they can settle a person's tax debt for pennies on the dollar. The reality usually is that taxpayers pay the OIC mill a fee to get the same deal they could have gotten on their own by working directly with the IRS.
Ten years ago national OIC mills flooded sports talk radio and late night TV. I dealt with people who scoffed at the need for tax compliance, convinced that whatever happened, they could settle for "pennies on the dollar." It doesn't work that way.
Related: Tax Debt Relief: A Case Study.
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.