Tax News & Views IRS Updates Pet Enforcement Projects Roundup

April 11, 2023

Government Hardens Stance on Microcaptives in Proposed Regs - Chandra Wallace, Tax Notes ($).

Treasury and the IRS have issued proposed regulations that would obsolete Notice 2016-66 for microcaptive transactions but would replace it with slightly tougher rules and would continue existing audits and promoter investigations.

The proposed regs (REG-109309-22), issued April 10, are similar to rules in Notice 2016-66, 2016-47 IRB 745, which a Tennessee federal court vacated in March 2022, finding that the IRS had failed to comply with the formal notice and comment procedures required under the Administrative Procedure Act. Tax advisers expected the government to issue a reg package to head off further challenges to its microcaptive reporting rules.

IRS Proposes Disclosure Rules on Micro-Captive Transactions - Michael Rapoport, Bloomberg ($):

Micro-captive transactions involve small insurers owned by the businesses they insure. The IRS has warned frequently in the past that they can be used to avoid taxes.

The proposed rules would clarify what kinds of transactions are similar enough to micro-captive transactions that they should be considered listed transactions or transactions of interest—transactions that are or could be abusive and must be reported to the IRS. Material advisers and certain participants in those transactions can face financial penalties if they fail to disclose them.

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


Tennessee storm victims have new July 31 tax deadline - Kay Bell, Don't Mess With Taxes.

The outbreak led to the Federal Emergency Management Agency (FEMA) declaring a major disaster for several counties. The Internal Revenue Service followed, announcing today tax relief for individual and business taxpayers in Cannon, Hardeman, Hardin, Haywood, Lewis, Macon, McNairy, Rutherford, Tipton, and Wayne counties.


Those who qualify for the tax relief will have various tax filing and payment deadlines that occurred starting on March 31 postponed until July 31.

The IRS guidance says the deadline relief "includes 2022 individual income tax returns and various business returns due on April 18. Among other things, this means that eligible taxpayers will have until July 31 to make 2022 contributions to their IRAs and health savings accounts."


Fallout From Farhy on Assessable Penalties Could Be Extensive - Andrew Velarde, Tax Notes ($):

In its April 3 opinion in Farhy v. Commissioner, the Tax Court held that the IRS could not assess penalties under section 6038(b) against a taxpayer for his failure to file Forms 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations." Unlike other Tax Code provisions, Congress had not explicitly authorized assessment for those penalties, the Tax Court reasoned.

“You’re going to see a lot of litigation. . . . This is going to have a bigger impact on tax administration than [section] 6751(b) had,” Frank Agostino of Agostino and Associates PC said, comparing the dispute with the frequently litigated issue the IRS has had in recent years over failing to obtain written supervisory approval of penalties.

Related: Tax Court Decision may hamper IRS penalty collection for controlled corporations and partnerships


IRS Issues Safe Harbor Deed Language for Conservation Easements - Laren Vella, Bloomberg ($).

Notice 2023-30 addresses the safe harbor language needed for extinguishment and boundary line adjustment under Section 605 (d)(1) of the SECURE 2.0 Act. It also describes the process by which conservation easement donors can replace safe harbor language in the original deeds for easements they’re donating.


Monday’s notice allows donors to replace old language in their deeds that, due to unexpected changes, may make it impossible to continue using the property for conservation purposes.

IRS Issues Easement Safe Harbor Language via Notice - Kristen Parillo, Tax Notes ($). "Treasury and the IRS have responded to a congressional mandate by publishing safe harbor deed language for conservation easement donations and outlining how donors can make conforming changes to eligible deeds."

Related: Partial Victory for Syndicated Conservation Easements in U.S. Tax Court



IRS prepares to hire at warp speed - Benjamin Guggenheim, Politico:

In case you missed the story, the agency is looking to have 105,187 workers by fiscal year 2025 — a figure that takes into account the fact that two-thirds of current IRS workers will become eligible for retirement in the next six years, according to a source.

To put that in full perspective, since that that same data indicates the agency had around 72,700 employees in fiscal year 2022, the IRS’s workforce is set to increase by 45 percent in less than three years.

It will take years for those new hires to develop the experience needed to understand the tax returns they will be examining. 

The Problem With the IRS Pledge Not to Audit More Earners Under $400,000 - Josh Zumbran, Wall Street Journal. "An unscrupulous person who earned $500,000 might decide it is better to hide $100,000 instead of just a few thousand dollars, because they would then have the reported income of an ordinary person that the IRS has pledged not to pursue too hard."


Tax Court Sides With IRS in U.S.V.I. Filing Case - Amanda Athanasiou, Tax Notes ($). "Unless a taxpayer is a bona fide resident of the U.S. Virgin Islands under section 932(c), tax returns filed solely with the VIBIR for years ending before December 31, 2006, do not start the three-year limitations period, according to the court’s April 10 opinion in Tice v. Commissioner."

Owe Taxes This Year? Here’s How to Lower Your Balance Due in the Future. - Ashlea Ebeling, Wall Street Journal. "Avoid a balance due by adjusting tax withholding or making estimated tax payments well before tax time. This applies if you get a bonus and your employer didn’t withhold enough in taxes, if you sell stocks at a gain without offsetting losses, if you have self-employment income or if you take money out of retirement accounts."


IRS Strategic Operating Plan Has Potential to Transform Tax Administration - Erin Collins, National Taxpayer Advocate. "Although my primary goals as the National Taxpayer Advocate are to protect taxpayer rights and improve taxpayer service, we need to acknowledge that enforcement is also central to the IRS’s tax collection mission. It is necessary both to collect the taxes essential to fund the government and to ensure equity, so that all taxpayers are paying their fair share."

Bozo Tax Tip #4: Procrastinate! - Russ Fox, Taxable Talk. "Today is April 11th. The tax deadline is just seven days away."

No, the IRS isn't calling you. It isn't texting or emailing you, either - Kaitlyn Radde, NPR. "Don't fall for it. It's not the IRS getting in touch with you."

IRS FAQs Address Medical Expenses Related to Nutrition, Wellness, and General Health - Parker Tax Pro Library. "The FAQs address issues such as whether the cost of nutritional counseling, weight-loss programs, gym memberships and treatment for substance use disorders are considered medical expenses that may be paid or reimbursed under an HSA, FSA, Archer MSA or HRA."


The Marital Deduction, QTIP Trusts and Coordinated Estate Planning - Roger McEowen, Agricultural Law and Taxation Blog. "QTIP trusts can be beneficial, and they do have their place, but clearly they are not for everyone.  Estate planning is difficult and often there is a need to coordinate the planning over subsequent deaths and even subsequent generations."

How Lawsuit Structured Settlements Work And Are Taxed - Robert Wood, Forbes ($). "They have to be set up properly, and you can't own the annuity policy or the tax benefits won't work."

Lesson From The Tax Court: It Takes More Than Putting In The Hours To Avoid §469 Restrictions - Bryan Camp, TaxProf Blog. "We learn today there are two other tests to being a real estate professional and these taxpayers failed one of them:  they were unable to show the Court the how the hours they worked their rentals related to the hours they spent earning wages."


Trump’s Indictment Contains 34 Counts Of Falsifying Business Records. What Is The Other Crime? - Peter Reilly, Forbes. "In order for this to rise a felony there has to be some other crime involved, although it does not have to be charged."

Missouri Tax Package Would Set State Up for Success - Janelle Fritts, Tax Policy log. "House Bill 816, which recently passed the House and crossed over to the Senate, would build on past tax reforms and give Missouri one of the most competitive state tax codes in the country according to the State Business Tax Climate Index, a measure of the competitiveness of state tax structures."

Sorry, my fellow Americans, but your taxes are probably too low - Catherine Rampell, Washington Post. "By all means, raise taxes on the ultrawealthy. They should pay more. But if we really want a more robust welfare state, or even to sustain the welfare state we’ve already promised, that probably requires higher taxes from most of the rest of us, too."


The ‘Gamification’ of Tax Return Preparation Has Arrived - Caitlin Mullaney, Tax Notes ($):

A free anime dating video game that taxpayers can use to prepare their returns may seem strange, but it could be engaging with an untapped market that traditional tax prep providers aren’t reaching.

I am quoted: 

Kristan noted that based on user responses, it appears that gig economy participants are one group that the game is unable to assist. He added that taxes for those workers can be “nightmarishly complex for the uninitiated.”

“With the emergence of tools like ChatGPT, I can imagine a new generation of software that helps with taxes in ways that adapt to the users. Turning the drudgery of doing taxes into some kind of game might be the ticket for some people,” Kristan said. “Maybe some other role-playing games will work for others. In any case, it can’t make the compliance experience significantly worse.”

Kelly Phillips Erb digs more deeply into the game with Swipe Right On Your 1040EZ: Inside The ‘Tax Heaven 3000’ Dating Sim. She went where I wouldn't, clicking on the "X-Rated Patch." You can see for yourself here, but be ready to be overwhelmed with pink.


Four Tampa Bay area tax preparers plead guilty -IRS (defendant names omitted). "They conspired to defraud the United States by preparing false income tax returns for numerous clients of Business #1 in order for the Internal Revenue Service (IRS) to issue tax refunds in excess of what the clients were entitled to receive. In doing so, Defendants documented on Schedule C forms they prepared that clients owned fictitious businesses which maximized the clients’ ability to claim the Earned Income Credit on their tax returns and thereby increase their tax refunds. They also fraudulently reported that clients were entitled to claim credits for fuel taxes or education expenses paid to make it appear that their clients were entitled to tax refunds."

The biggest refund doesn't always mean the best preparer. The IRS won't be inclined to let their clients keep the excessive refunds. 


Extra treats are in order.  It's National Pet Day!

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