Tax News & Views Walks Around Penalty Assessments Roundup

April 4, 2023

IRS Lacks Assessment Authority for Information Return Penalties - Andrew Velarde, Tax Notes ($):

The Tax Court has dealt a stunning blow to the IRS, holding that the agency lacks assessment authority in a case involving international information return reporting penalties.


The national taxpayer advocate's 2020 annual report to Congress identified assessment of international penalties under sections 6038 and 6038A as one of the most serious problems encountered by taxpayers, finding that systematic assessments are a burden to the IRS and taxpayers and are “legally unsupportable.” It also argued that summarily assessable penalties are found under chapter 68 of the code and that the punitive penalties under sections 6038 and 6038A are in chapter 61. The 2021 annual report warned of the potential for future litigation and recommended legislation that would subject foreign information reporting penalties to deficiency procedures.

For years practitioners have loudly objected to the IRS’s systematic and summary assessment of penalties after a return is filed late, which makes it impossible for taxpayers to avail themselves of deficiency procedures.


Tax Court Decision may hamper IRS penalty collection for controlled corporations and partnerships - Eide Bailly Tax News and Views:

The Tax Court today may have thrown a wrench in the gears of the IRS penalty process for controlled foreign entities. In a reviewed decision (160 TC No. 6), the Tax Court held that the $10,000 penalty for failing to timely file Form 5471 provided by Sec. 6038(b) is not "assessable" by the IRS, and cannot be collected under the usual IRS administrative procedures.

The opinion does not mean that the penalties no longer apply. Judge Marvel's opinion says the penalty "may be collected through a civil action." But it does mean that - assuming the IRS does not successfully appeal the decision - the current system for penalizing late foreign filings is no longer operative. It may also create refund opportunities for taxpayers who have been penalized.


Ben Peeler, head of the Eide Bailly Tax Controversies team, commented, “the IRS has been abating many of these penalties so might not have too broad an affect, but will definitely affect currently assessable penalty notices or force a quick statutory change and corrections for previously assessed penalties."

The IRS has automatically assessed these penalties. By making it harder for the IRS to impose the penalties, the decision may help taxpayers just by avoiding the automatic assessment process. But see the next item for a cautionary note.

Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Penalties - Jack Townsend, Federal Tax Procedure. "Even accepting the holding, however, is Fahry is a pyrrhic victory. Reading § 6038(b) literally, the liability exists without any assessment by the IRS. That means that, if the IRS cannot assess but must proceed by collection suit, the IRS can proceed by such a suit against Mr. Fahry. Section 6502, here, the statute of limitations for collecting assessments, doesn’t apply because it requires an assessment, which means that there is no statute of limitations to sue to collect a Title 26 nonassessment liability."


Beware of abusive tax avoidance schemes - IRS:

These schemes can take many shapes, ranging from abusive deals involving syndicated conservation easements and micro-captive insurance arrangements. They can also involve an international component, such as hiding cash and digital assets offshore or using Maltese foreign individual retirement accounts or foreign captive insurance.


Also called a small captive, a micro-captive is an insurance company whose owners elect to be taxed on the captive's investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs and in many cases, unnecessary duplication of the taxpayer's commercial coverages. In addition, the "premiums" paid under these arrangements are often excessive, reflecting non-arm's length pricing.

Abusive micro-captive transactions continue to be a high-priority enforcement area for the IRS. The IRS has won all micro-captive Tax Court and appellate court cases decided on their merits since 2017.

Related: Recent Developments in Micro-Captive Insurance—A Reportable Transaction


Manchin Contemplating White House Run After Tax Credit Fallout - Alexander Rifaat, Tax Notes ($):

Speaking on Fox News Sunday April 2, Manchin declined to rule out making a third-party run for president next year after being left “very, very disappointed” with the way the Biden administration has interpreted the tax subsidy for electric vehicle purchases, arguing that the White House is going against the spirit of the Inflation Reduction Act (P.L. 117-169), passed last year.


Manchin, along with Republicans in Congress, lambasted guidance released by Treasury March 31 indicating that the administration will broaden the definition of a free trade partner and thus expand the reach of the credit, which Manchin and Republicans argue will weaken the aim of boosting domestic manufacturing.

So it's not about saving the planet?

Treasury’s needle thread on EV credits - Benjamin Guggenheim, Politico. "In addition, while countries that have formal free trade agreements with the U.S., such as Canada, Mexico, Israel and South Korea, automatically qualify for the credit, Treasury’s guidance left room for countries with more narrow agreements on critical minerals, such as one signed between the U.S. and Japan just last week, to qualify."

New EV Rules Mean Fewer Models Eligible for Tax Credit - Yuka Hayashi and Richard Rubin, Wall Street Journal. "John Bozzella, president and chief executive of the Alliance for Automotive Innovation, a top auto industry group, said only few of the electric-vehicle models that are currently for sale will qualify for the full $7,500 credit under the new criteria. Mr. Bozzella added that he doesn’t yet know which makes and models will. Individual auto makers will report to the government in the coming days which models meet the mineral and battery-component requirements."


IRS Extends Tax Filing Deadline For Storm-Hit States - Gareth Vipers, Wall Street Journal:

Storm victims in parts of Arkansas will now have until July 31 to file individual and business tax returns, the IRS said Tuesday. The relief covers parts of the state designated as a disaster area by the Federal Emergency Management Agency.

The IRS previously pushed back tax filing deadlines for individuals and businesses in parts of Mississippi, Alabama, Georgia, New York and California.


FedEx Wins Nix Of Transition Tax Reg In $89M Refund Fight - Theresa Schliep, Law360 Tax Authority ($). "Companies are permitted to offset foreign earnings included in income under the tax by the foreign losses they incurred from other subsidiaries. FedEx and the government disagreed over whether the business could claim credits for foreign taxes paid on those offset earnings."


TIGTA Dings IRS for Scrapping Employees’ Suggestion Box - Jonathan Curry, Tax Notes ($):

The Employee Suggestion Program — which launched and operated out of the IRS’s Human Capital Office in fiscal 2003 before being shut down effective October 1, 2021 — gave agency personnel the opportunity to submit suggestions for review and, in some cases, receive monetary awards. Suggestions could have tangible benefits, such as providing definable cost savings, or intangible benefits, like improving employee morale or reducing taxpayer burdens.

The IRS explained its decision to ax the program by citing the high administrative costs with little savings to show for it, along with an abysmally low rate of adopting suggestions. From fiscal 2017 through 2021, the agency estimated it saved about $225,000 but spent nearly $21 million to administer the program. During that same period, the IRS accepted just 162 of the 4,672 employee suggestions it received.

The suggestion box was in place for 18 years and cost over $1 million annually, it seems. But how? From the TIGTA report:

By far, the highest costs of the program were 207 ESP coordinators, who were not subject matter experts and whose role was administrative in nature. TIGTA found that administrative costs seemed excessive in that, of the 2,824 employee suggestions which made it through initial screening, the coordinators spent on average 31 hours per suggestion.

Link to report: The IRS Eliminated Its Employee Suggestion Program Without Plans for a Replacement


6 April tax-filing moves - Kay Bell, Don't Mess With Taxes. " I know, estimated taxes are a major pain in the backside. But if you don't make them on income that's not subject to withholding and then end up owing the next filing season, you could face underpayment penalties and interest charges."

IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’ - Kelly Phillips Erb, Forbes. "As part of its "Dirty Dozen" campaign, the IRS has renewed a warning about so-called Offer in Compromise "mills" that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees."

Accelerate tax refunds, reduce IRS audit risk: report all income including from gig economy and tips - Mark Friedlich, Wolters Kluwer Tax & Accounting. "The IRS stresses that income tax returns be complete and correct. That means including all income, including – where appropriate - income from sources other than regular wages from an employer. Income from gig economy activities and tip income are two common sources."

RMD Rules Have Changed – Do You Have to Start Receiving Payments from Your Retirement Plan? - Roger McEowen, Agricultural Law and Taxation Blog. "The rules can be tricky, and the Congress has modified the rules in recent years.  One of those changes applies to some people and will require the beginning of distributions (a required minimum distribution (RMD)) from certain retirement accounts by April 1, 2023"

Bozo Tax Tip #10: Email Your Social Security Number or EIN! - Russ Fox, Taxable Talk. "Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number."


Proposed Regulations Implement the Advanced Manufacturing Investment Credit - Parker Tax Pro Library. "The proposed regulations address (1) the credit's eligibility requirements; (2) an election that eligible taxpayers may make to be treated as making a payment of tax (including an overpayment of tax), or for an eligible partnership or S corporation to receive an elective payment instead of claiming a credit; and (3) a special 10-year credit recapture rule that applies if there is a significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern."

Tax Court addresses allocation of COO salary to research - National Association of Tax Professionals. "The court found the compensation paid an S corporation’s chief operating officer could not be included in the R&D credit calculation because the taxpayer did not adequately substantiate the time the executive spent on qualified research, and he was not engaged in direct supervision or support of the research."

Related: Research & Development Tax Incentives


Alabama Tax Tribunal Says Out-of-State Workers Owe Income Taxes - Janelle Fritts, Tax Policy Blog. "The tax tribunal’s decision essentially creates a more aggressive “convenience of the employer” rule in Alabama, which stipulates that an individual’s income is subject to tax if their office is located in the state, even if they both lived, and performed the work, elsewhere. Only five states levy convenience rules—Delaware, Nebraska, New York, and Pennsylvania, plus Connecticut, which only applies the rule retaliatorily against other states with similar rules—so Alabama joins a very short and unenviable list, without the legislature ever taking a vote."

Related: Telecommuting Workers in Refuge States Complicate State Taxes.


Facebook Tax Case Could Decide Fate of Anti-Profit-Shifting Rules - Ryan Finley, Tax Notes Opinions. "But Facebook’s arguments also challenge the general validity of the IRS’s valuation method itself, the income method, which was one of the signature features of a regulatory scheme introduced in 2009. The method targets cases in which a U.S. participant contributes valuable self-developed intangibles and an offshore “cash box” participant simply cuts checks to fund its share of the U.S. participant’s development activities."

The Qualified Domestic Minimum Top-Up Tax--Corporate Taxpayers' New Nightmare, or Pillar Two's Missing Piece? - Alex Parker, Things of Caesar. "For taxpayers, this raises the exhausting possibility of needing to calculate the Pillar Two tax based on slightly different rules in every jurisdiction they operate in, rather than using one measurement for all of the countries at the outset."

FATCA Statute of Limitations: IRS’ 2018 Assessment Grabs Tax & Penalties Back to 2003 - Virginia La Torre, Jeker, US Tax Talk. "At the end of the day, the court determined the deficiency notice was timely because IRC Section 6501(c)(8) (copied below) kept the assessment limitation period open simply because the couple had not complied with the Section 6048 reporting requirements (e.g., filing the forms pertaining to transactions with foreign trusts) and lacked reasonable cause for the failure."

Related: Foreign Trust & Estate Compliance.


DC Judge Grants IRS Win In Dispute With Ayahuasca Church - Sam Reisman, Law460 Tax Authority:

In a decision granting summary judgment in favor of the government, U.S. District Judge Beryl A. Howell found that plaintiff Iowaska Church of Healing was not entitled to tax-exempt status because its activities included distributing a federally controlled substance to members.

Judge Howell wrote that as long as the church engaged in federally illegal activity it could not be said to be primarily organized as a religious organization.

The church was headquartered in Des Moines. It used Ayahuaska in its services. Wikipedia describes Ayahuasca as "a South American psychoactive and entheogenic brewed drink traditionally used both socially and as a ceremonial or shamanic spiritual medicine among the indigenous peoples of the Amazon basin, and more recently in North America and Europe The tea causes altered states of consciousness often known as 'psychedelic experiences' which include visual hallucinations and altered perceptions of reality." (footnotes omitted). 


Better than tripping over them. Today is National Walk Around Things Day!

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