Tax Update Blog

Tax News & Views Farmer Smells the Coffee Roundup

September 29, 2022 | Blog
By Joe Kristan, CPA

Republicans urge IRS to extend COVID penalty relief deadline- Michael Cohn, Accounting Today:

The letter comes in response to tax penalty relief announced by Rettig last month (see story). In Notice 2022-36, the IRS provided penalty relief to most individual and business taxpayers who filed their 2019 or 2020 returns late due to the COVID pandemic, while refunding $1.2 billion in penalties to nearly 1.6 million taxpayers who filed late. The relief applied to the penalty imposed for failing to file, which is usually assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. It applies to forms in both the Form 1040 and 1120 series. To qualify for the relief, any eligible income tax return had to be filed on or before Sept. 30, 2022.

However, the GOP lawmakers believe that isn't giving taxpayers enough time to file their returns to qualify for the relief. "We have heard from both constituents and also large segments of the tax professional community that the deadline is simply too soon for some taxpayers," Brady and Crapo wrote. "The notice only provided 36 days (five weeks) for self-filers and practitioners to check their records and file any outstanding 2019 and 2020 tax returns."

The IRS is not expected to grant further relief. In a news release issued last week, the IRS Commissioner defended the September 30 deadline:

"We thought carefully about the type of penalties, the period covered and the duration before granting this penalty relief. We understand the concerns being raised by the tax community and others about the September 30 penalty relief deadline," said IRS Commissioner Chuck Rettig. "Given planning for the upcoming tax season and ongoing work on the inventory of tax returns filed earlier this year, this penalty relief deadline of September 30 strikes a balance. It is critical to us to not only provide important relief to those affected by the pandemic, but this deadline also allows adequate time to prepare our systems and our workstreams to serve taxpayers and the tax community during the 2023 filing season."

Given the seemingly whimsical decisions about which forms were listed in the relief - for example, Forms 5471 filed with corporate returns qualified, but not those filed with 1040s - it's fair to question the thought process behind the relief.

 

How to Identify the IRS’s Broad Penalty Relief Initiative and Other Helpful Tips for Understanding Tax Account Transcripts: Part One - Erin Collins, NTA Blog. "

Taxpayers seeking information about whether this relief has been applied to their tax situations will likely find that the most effective way to get this information is to use their online account with IRS.gov to view their transcripts. If the taxpayer does not have an online account, I highly recommend he or she create one. With an online account, taxpayers can check their account information including balance, payments, tax records, penalties, waivers, and more. It’s a simple and secure way to get information fast without having to pick up the phone and is a useful tool to obtain tax information throughout the year.

Tax Tip: To verify whether a failure-to-file penalty has been removed (abated), look for a 167 posting on the lefthand side of a taxpayer’s transcript of account. If a refund was issued, you will see an 846 posting together with the date and amount of the refund.

 

IRS continues relief to drought-stricken farmers and ranchers in 44 states, other regions - IRS:

Today, the IRS posted Notice 2022-43 listing the applicable regions, a county or other jurisdiction, designated as eligible for federal assistance on IRS.gov. This includes 44 states, two U.S. Territories and two independent nations in a Compact of Free Association with the United States. The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry, are not eligible.

The sales must be solely due to drought, causing an area to be designated as eligible for federal assistance. Livestock generally must be replaced within a four-year period, instead of the usual two-year period. The IRS is authorized to further extend this replacement period if the drought continues.

The one-year extension, announced in the notice, gives eligible farmers and ranchers until the end of their first tax year after the first drought-free year to replace the sold livestock. Details, including an example of how this provision works, can be found in Notice 2006-82.

 

Bill Would Bar Tax Break for Student-Athlete Likeness Payments - Fred Stokeld, Tax Notes ($):

The Athlete Opportunity and Taxpayer Integrity Act, introduced September 28 by Senate Finance Committee members John Thune, R-S.D., and Benjamin L. Cardin, D-Md., would deny the tax deduction for donations that compensate college or incoming college athletes for the use of their NIL.

I doubt that such a payment to a student-athlete would qualify for a charitable deduction even without this law. It could qualify as an advertising expense to a business, but an individual wanting to underwrite the pass-blockers for good old State U. shouldn't count on a charitable write-off.

 

Tax texting scams are increasing, warns IRS - Kay Bell, Don't Mess With Taxes. "The texting crooks offer lures like help obtaining COVID relief, tax credits, or setting up an online taxpayer account. What the texters really want is your personal, tax, and financial information so they can steal your identity and money."

IRS Extends Tax Deadlines For Alaska Storm And Flood Victims - Robert Wood, Forbes. "The IRS offers relief to any area designated for individual or public assistance by the Federal Emergency Management Agency (FEMA)."

Are Streamlined Audits Becoming More Common? The Streamlined Submission that went Belly-Up (Part II) - Virginia La Torre Jeker, Virginia - US Tax Talk. This relates to taxpayers catching up on late foreign account filings. "Given the IRS increased scrutiny of Streamlined submissions, be careful out there. Your tax advisor should be exercising extreme caution in recommending and/or submitting a Streamlined application."

Related: Eide Bailly Offshore Voluntary Disclosure. 

 

U.K. Prime Minister Defends Tax Cuts as Market Turmoil Continues - Max Colchester and Paul Hannon, Wall Street Journal. "'We had to take decisive action,' Ms. Truss told the British Broadcasting Corp. in her first public comments since the tax plan was presented last Friday. The new prime minister said she wouldn’t backtrack on plans to carry out big tax cuts and spending increases, a package funded by borrowing which raised alarm among investors."

Britain's Supply-Side Turn - Ryan Bourne, The War on Prices. "Now, logically, the actions of Truss and Kwarteng are what prioritizing growth looks like. For years, the UK approach has been essentially to set out first what public spending it wanted to do (falling under Chancellor Osborne, rising under Chancellor Sunak) and then mapping out a path for taxes to finance those ambitions. Growth was seen as a different, secondary objective of policy. That produced a historically high tax burden, alongside pathetically weak growth."

European Union-Busting - Alex Parker, Things of Caesar ($). "With unanimity required at the Council of the European Union for most tax matters, Poland was the first to block a directive mandating that EU members enact the new OECD standards into their national laws. (The minimum tax agreement isn’t just an agreement on tax rates–it’s a complex new tax regime that participating nations must apply to the foreign income of corporations headquartered in their jurisdictions.) When Poland finally seemed mollified, Hungary stepped forward to block the process, claiming that the project should be delayed amid inflation and other economic headwinds."

 

Why Congress Should Restore The Expanded Child Tax Credit In A Lame Duck Session - Elaine Maag, TaxVox. "Increasing credits for the very lowest income families and delivering the payments monthly both helped reduce food insecurity."

Doing Tax Policy at the Ballot Is Not for the Faint of Heart - Jared Walczak, Tax Policy Blog. "Doing tax policy at the ballot box is nothing new, and it isn’t unique to these states. This fall, voters will weigh in on 26 tax ballot measures in 13 states, to say nothing of the many tax questions involving local governments across the country. Sometimes the questions are straightforward; other times they are obscure at best. And frequently they fit somewhat uneasily with the rest of the tax code."

 

Woman sentenced for tax evasion- Sharon Wren, Ourquadcities.com (taxpayer name omitted): "An Oxford Junction woman was sentenced on September 27 to 18 months in federal prison for tax evasion... The Defendant, age 48, was also ordered to serve three years of supervised release and pay $75,849 in restitution to the Internal Revenue Service. 'Defendant admitted that by receiving checks and cash payments from the individual, her affirmative acts of personally and willfully cashing these checks at the customer’s bank and not depositing any of these checks or cash in a bank account, she concealed any usual record of the gross income she received and attempted to evade the assessment of federal income tax.'"

 

Farmers Can’t Reap Charitable Remainder Trust Tax Benefits - Nathan Richman, Tax Notes ($):

Farmers running their crop sales through charitable remainder annuity trusts (CRATs) lost out on tax deductions and income exclusions because they didn’t have any basis in what they grew, according to the Tax Court.

Judge Albert G. Lauber’s September 28 memorandum opinion in Furrer v. Commissioner granted the IRS summary judgment on the only two issues remaining after concessions: Did the CRAT donations generate charitable deductions, and did annuity payments to the taxpayers generate ordinary income?

The case arises out of a scheme that has been marketed in the Midwest to farmers, purporting to make crop sales tax-free while using proceeds to buy life insurance and make distributions to the taxpayer. Judge Lauber takes up the story [taxpayer names omitted]:

During 2015-2017 petitioners were actively engaged in the farming business, growing and selling corn and soybeans. In July 2015, after seeing an advertisement in a farming magazine, petitioners formed the [Taxpayer] Charitable Remainder Annuity Trust of 2015 (CRAT I), of which their son was named trustee. The trust instrument designated petitioners as life beneficiaries and three eligible section 501(c)(3) charities as remaindermen.

The opinion is silent as to whether the taxpayers consulted an independent tax advisor. The scheme makes two alternate assumptions in its attempt to wipe out crop sale income - that the trust gets a stepped-up basis for the crops when they receive them from the farmer; or, that the farmer gets a full fair market value charitable deduction for the contribution. Short answer: No stepped up basis, no charitable deduction. From the opinion:

Petitioners were engaged in the farming business, and the corn and soybeans grown on their farm constituted ordinary income property. Thus, any charitable contribution deduction would be limited to their cost or adjusted basis in the crops. See Jones v. Commissioner, 560 F.3d at 1199. As petitioner husband conceded when filing the 2015 and 2016 gift tax returns, petitioners' basis in the corn and soybeans transferred to the CRATs was zero.

...

Petitioners advance two theories to support the proposition that the CRATs acquired a stepped-up basis, rather than a zero basis, in the [*11] corn and soybeans. First, they contend that they sold the crops to the CRATS, so that the CRATs acquired a “cost basis” under section 1012. This argument does not pass the straight-face test. As evidenced by the filing of gift tax returns, petitioners contributed the crops to the CRATs. There is no evidence that the CRATs, which had no assets before the crops were transferred to them, paid any consideration that could give rise to a “sale or exchange.” See § 1222. And if petitioners had sold the crops to the CRATs, they would have had to report additional farming income on their Schedules F for 2015 and 2016, which they did not do.

The charitable deduction also failed because the taxpayers failed to get a "qualified appraisal" as required by the tax law for property contributions, other than gifts of marketable securities, when the claimed deduction exceeds $5,000.

This scheme was included in the IRS "dirty dozen" list of tax scams for 2022. It was always a bad idea, and now the Tax Court has agreed. 

The moral? There is no tax fairy waiting in the pages of a farming magazine to wave a wand to wipe out your taxes. Get an independent opinion before you try a tax scheme that magically makes your income disappear.

 

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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.