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2021 Year End Business Tax Newsletter
The IRS has announced an increase in the optional standard mileage rate for the final 6 months of 2022. Optional standard mileage rates are used by employees, self- employed individuals, and other tax...
The IRS has updated the "Where's My Refund?" online tool and introduced a new feature that allows taxpayers to check the status of their current tax year and two previous years’ refunds. Taxpayers...
The IRS has expanded voice bot options to help eligible taxpayers easily verify their identity to set up or modify a payment plan while reducing wait times. The IRS has been using voice bots on many t...
The IRS Employee Plans function is piloting a pre-examination retirement plan compliance program beginning in June 2022. This program will notify a plan sponsor by letter that their retirement plan wa...
The Treasury and IRS have released their third quarter update to the 2021-2022 Priority Guidance Plan. The 2021-2022 Priority Guidance Plan contained 193 guidance projects, 13 of which had been comple...
The Department of the Treasury has updated its compliance and reporting guidance and the Recovery Plan Performance Report template for the Coronavirus State and Local Fiscal Recovery Funds program tha...
The Alabama Department of Revenue’s (department’s) appeal from a judgment of the Circuit Court was dismissed for lack of jurisdiction because it arose from a nonfinal judgment. In this matter, the...
Alaska Gov. Mike Dunleavy proposed an amendment to HB 104 for the immediate suspension of the collection of tax on motor and marine fuels, aviation gas, and aviation jet fuel until June 30, 2023. HB 1...
Arizona has updated its conformity to the Internal Revenue Code (IRC) for income tax purposes. For tax years beginning after 2021, Arizona now conforms to the IRC as amended and in effect on January 1...
For sales and use tax purposes, a fuel distributor (taxpayer) would be subject to Arkansas gross receipts tax on the sale of kerosene for off-road use when sold from a terminal. Generally, dyed distil...
An out of state S corporation and its shareholders group (taxpayers) were properly subject to additional California corporate income tax assessment as the S corporation (corporation) was dissolved and...
The Colorado Department of Revenue (department) issued a letter ruling discussing the application of sales and use tax on the retail sale of heart monitors. In this matter a company (taxpayer) sold he...
Connecticut Gov. Ned Lamont signed emergency legislation (H.B. 5501, Laws 2022) that:suspends the imposition of motor vehicle fuels excise tax on gasoline from April 1, 2022 to June 30, 2022; andenact...
Delaware taxpayers located in areas affected by Hurricane Ida, that have been designated as disaster areas, will have until January 3, 2022 to file tax returns and submit tax payments. The Delaware ...
The District of Columbia has adopted an emergency act to clarify that the capital gains deduction for investing in a qualified opportunity fund will apply to an individual, estate, or trust. Act 246 (...
The Florida Senate approved and sent to Gov. Ron DeSantis legislation that would modify the IRC conformity tie-date for computing corporate income tax liability. H.B. 7071, as approved by the Florida...
The Georgia Department of Revenue has released a sales and use tax rate chart for sales exempt from certain local taxes. The rates are effective April 1, 2022. Georgia Sales and Use Tax Rates - Sal...
For personal income tax withholding purposes, the Hawaii Department of Taxation (department) has issued a tax announcement to remind all Hawaii employers about changes to due dates for Form W-2/HW-2.E...
Idaho has amended a 2021 law originally enacted to clarify that certain federal bonus depreciation should not be added back in determining Idaho taxable income. The new amendments change the 2021 law ...
The final Boone County equalization factor (multiplier) for Illinois property tax purposes has been set for 2021 at 1.0000. The final 2020 multiplier was also 1.0000. Release, Illinois Department of ...
Indiana property tax legislation is enacted that, among other provisions:effective January 1, 2023, provides that certain churches and religious societies are not required to file a personal property ...
Iowa has enacted legislation amending income tax credits including:extending the authorization of the Iowa Energy Center (IEC) and the IEC Board through the end of 2027 and requires the IEC to support...
The Kansas Senate approved amendments to legislation that include proposals to:provide an optional pass-through entity income tax to S corporations and partnerships;allow personal income taxpayers a c...
Kentucky adopted amendments to corporate income tax apportionment rules for financial institutions. A financial institution must apportion income from business activity in Kentucky using a receipts fa...
The interest rate on unpaid Louisiana taxes remains 6.5% for 2022. Revenue Information Bulletin No. 22-001, Louisiana Department of Revenue, December 29, 2021...
For Maine property tax purposes, the Supreme Court affirmed the superior court’s decision affirming the State Board of Property Tax Review’s (Review Board’s) denial of a paper mill’s tax abate...
Maryland Gov. Larry Hogan, Senate President Bill Ferguson, and House Speaker Adrienne A. Jones have announced they have reached a bipartisan agreement to provide $1.86 billion in tax relief over five ...
The Massachusetts legislature is considering 2021 carryover legislation that proposes a tiered minimum corporate excise tax. The minimum tax would increase based on a corporation's total sales in Mass...
Michigan has enacted the "qualified heavy equipment rental personal property specific tax act." Beginning January 1, 2023, a 2% tax is imposed on each transaction of a qualified renter for renting q...
Minnesota Department of Revenue reminds taxpayers that the June accelerated payment for sales and use tax has ended due to a 2021 law change. The taxpayers must file and pay their June 2022 sales and ...
The sunset date for the Mississippi rural economic development credit that may be claimed against corporate and personal income taxes is extended to October 1, 2025. The credit was previously schedule...
The Missouri Department of Revenue has issued a sales and use tax rate table for the Show-Me Green Tax Holiday set for April 19 through April 25, 2022. Show Me Green Holiday Rates, Missouri Departmen...
Montana adopted amendments to its income tax rules regarding the student scholarship organization credit and the educational improvement program credit. Generally, the amendments reflect changes previ...
The Nebraska Department of Revenue has revised several cigarette tax regulations. The revised regulations reflect that "cigarette" has the same meaning as in the sales and use tax provisions. Nonpar...
The Nevada Supreme Court affirmed a district court decision that invalidated portions of a 2019 law (S.B. 551) affecting the rates of the modified business tax. The law had resulted in Nevada continui...
New Hampshire has enacted provisions stating that no out-of-state businesses or employees who are in the state to perform disaster-related or emergency-relate work will be deemed to have established s...
Individuals and corporations affected by Hurricane Ida now have until February 15, 2022, to file their New Jersey tax returns and submit payments for any return and/or payment, including estimated pay...
Applicable to taxable years beginning on or after January 1, 2022, New Mexico will allow pass-through entities to pay income tax at the entity level. The entity-level tax is imposed on the distributed...
A taxpayer’s petition for revision of a determination of New York State sales and use tax was dismissed as the Division of Tax Appeals (division) lacked subject matter jurisdiction. In this matter, ...
Taxpayer, an affiliate of original equipment manufacturers (OEMs) that sell parts through their network, is a marketplace facilitator who makes marketplace facilitated sales in North Carolina for sale...
North Dakota issued a summary containing highlights of corporate and personal income tax legislation enacted in 2021, including laws that:expanded the credits for nonprofit private school contribution...
Ohio informs employers that the Department of Taxation (department) is lowering the threshold for the electronic filing of W-2 and 1099-R information for calendar year 2021 information (submitted in 2...
The Oklahoma House of Representatives has passed a bill that would enact a 0% sales tax rate on food and food ingredients from July 1, 2022 through June 30, 2024. Local taxes would still apply.The leg...
For Oregon corporate income and personal income tax purpose, a corporation and its shareholders (taxpayers), were properly denied research tax credit as the taxpayers failed to establish whether or to...
A Pennsylvania trial court did not err in determining that the taxpayer was not entitled to property tax abatement on its apartment complex because the taxpayer failed to prove that the assessment of ...
Rhode Island has revised a notice about the change in the real estate conveyance tax. Effective January 1, 2022, an additional $2.30 will apply for each $500.00, or fractional part thereof, in conside...
South Carolina released an information letter discussing 2021 tax forms and reporting issues related to active trade or business income (ATBI). As previously reported, beginning with tax year 2021, So...
Coaches of youth and amateur sports teams whose gross receipts from coaching total less than $4,000 annually are exempt from South Dakota sales and use taxes. A youth or amateur sport is considered an...
Tennessee has decoupled from the federal Tax Cuts and Jobs Act changes affecting the deduction under IRC Sec. 174 for research and experimental expenditures. Accordingly, for tax years beginning after...
An audiovisual equipment and service provider was properly denied Texas franchise tax refund as the taxpayer's payments made to hotels that are corporations were not required to be included on Form 10...
The wages of some nonresident individuals who work in the state for 20 or fewer days will not be subject to Utah income tax, beginning in tax year 2023. To qualify for the tax exemption:the individual...
Vermont has announced the motor fuel transportation infrastructure assessment (MFTIA) and motor fuel tax assessment (MFTA) rates for the second quarter of 2022 (April to June 2022).MFTIA Rate Increase...
The Virginia Department of Taxation issued a bulletin regarding the expiration of the retail sales and use tax exemption for personal protective equipment (PPE) related to COVID-19. Effective March 24...
A Washington sales and use tax deferral program has been authorized for solar canopies placed on large-scale commercial parking lots.ApplicationThe department must issue a sales and use tax deferral c...
Home inspection services do not qualify as professional services exempt from West Virginia sales and use tax.Professional ServicesThe term "professional service" is not defined in the tax code. Howe...
Wisconsin enacted an exemption for income received in the form of grants from the restaurant revitalization fund under the federal American Rescue Plan Act. In addition, otherwise deductible amounts t...
Wyoming has announced the following local sales and use tax rate changes:Beginning April 1, 2022, the rate in Laramie County increases to 6%.Beginning July 1, 2022, the rate in Johnson County decrease...
The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.
The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.
Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, including filing an amended return and seeking independent advice. Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list and may assert accuracy-related penalties. Further, the IRS informed that to combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Promoter Investigations (OPI). The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials.
Further, the IRS reminded taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves. Additionally, the IRS informed that taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits.
The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.
The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.
To date, more than twice as many returns await processing compared to a typical year at this point in the calendar year. A greater percentage of this year’s inventory awaiting processing is comprised of original returns that, generally, take less time to process than amended returns. To address the unprocessed inventory by the end of this year, the IRS has taken aggressive steps including significant, ongoing overtime for staff throughout 2022, creating special teams of employees focused solely on processing aged inventory and expediting hiring of thousands of new workers and contractors. Additionally, the IRS has improved the process for taxpayers whose paper and electronically filed returns were suspended during processing for manual review and correction.
The IRS reminded taxpayers who have not yet filed their 2021 tax returns this year, including those who requested an extension until October 17, to make sure they file their returns electronically with direct deposit to avoid delays. The IRS urged taxpayers to file as soon as they are ready and to not wait until the last minute before the October 17 extension deadline. Filing sooner avoids potential delays for taxpayers and assists the larger ongoing IRS efforts to complete processing tax returns this year.
Internal Revenue Service Commissioner Charles Rettig is pushing back on assertions that the agency is spending less time targeting wealthy taxpayers for audit in favor of lower income taxpayers.
Internal Revenue Service Commissioner Charles Rettig is pushing back on assertions that the agency is spending less time targeting wealthy taxpayers for audit in favor of lower income taxpayers.
"This is damaging to tax administration in this country when people say IRS audits more lower income people than higher income people," Rettig told attendees June 23, 2022, at the NYU Tax Controversy Forum.
He asserted that audit rate figures can be skewed depending on when the calculation is taking place. For example, he noted that if data is published on rates of audit for the 2021 tax year in 2022, the numbers will be considerably off.
"[W]hen you see these audit rates, don't jump on that train and say IRS is only auditing .0000 something," he said. "I go, Wow. Who are these folks we picked up? Right? The average audit gets picked up, particularly for high wealth taxpayer at least 16 months after that return has been filed. Why would we audit in the same calendar year that it's filed?"
Rettig noted that wealthy people may be filing later toward the extended filing deadline and filing more returns covering multiple years simultaneously, which would push back when audits take place. The would give the appearance that audits for more wealthy taxpayers may not be happening as much as for lower income taxpayers when examining a single-year audit rate.
But in reality, he said that audit rates for those who make more than $10 million "runs right around seven or eight percent. And as of this year, it’s at 8.7 percent. You will see that the $5 to $10 million group runs about 4.2%. You will see the $1 to $5 million group runs about 2.2%. Most of you have done the math and you understand exactly what I'm telling you, you go for the higher income folks."
After that, the numbers drop off "considerably," he said.
"The $1 million-and-under person is really the executive who has W-2 and 1099 income and we have that information," Rettig said. "The over $1 million person is the entrepreneur who has a lot of pass-through entities and whatnot, we don't have that information," and they get audited more because of it.
Rettig also used the forum to continue advocacy for more funding and guaranteed funding over multiple years to help improve not only enforcement, but to help improve the services that the agency provides to taxpayers, including hiring for call centers and providing better outreach.
Republican members of the Senate Finance Committee are the latest group to call on the Internal Revenue Service to implement 2-D barcoding technology on individual tax forms.
Republican members of the Senate Finance Committee are the latest group to call on the Internal Revenue Service to implement 2-D barcoding technology on individual tax forms.
"We are writing to strongly encourage the Internal Revenue Service (IRS) to work with tax return software companies to implement 2-D barcoding technology for use during the 2023 tax filing season for the 1040 family of paper returns," the GOP senators, led by Ranking Member Mike Crapo (R-Idaho), said in a May 24, 2022, letter to IRS Commissioner Charles Rettig.
Similar calls have been made by other stakeholders, including the National Taxpayer Advocate, who sent a directive to the IRS in March to implement 2-D barcoding in time for use with the 2023 tax season.
The GOP senators noted that the IRS is financially capable of doing this now. In the letter, the senators referenced the 2017 budget request of $8.4 million for implementation of 2-D barcoding and the $1 billion earmarked in the American Rescue Plan of 2021 for IT modernization, of which they state only $98.5 million so far has been spent.
The group also called on the agency to "stop chasing technological perfection" in the letter.
"If we were to wait for the promise of better technology, nothing would ever get implemented," the letter states. "To the contrary, the fact that 2-D technology is a bit older probably means it has been tested and is less expensive. Many states currently use 2-D barcoding for tax returns, so we have proof it works."
2-D barcoding came back into the forefront of needed IT upgrades for the IRS during the pandemic that caused a significant backlog of unprocessed paper returns. As of April 29, the agency still had more than 18 million unprocessed paper returns, though Commissioner Rettig has stated in numerous congressional hearings that the backlog will be back to its "normal" levels by the end of 2022.
The IRS Whistleblower Office has released the fiscal year (FY) 2021 annual report to Congress. In FY 2021, the Whistleblower Office made 179 award payments to whistleblowers totaling $36,144,926, including 20 awards paid under Code Sec. 7623(b). Whistleblower claim numbers assigned in FY 2021 grew by 55 percent year over year and claim closures increased by 13 percent. Additionally, this year’s report introduces the Code Sec. 7623 Payment and Claim Processing Analysis. The analysis shows Code Sec. 7623(b) awards were paid on average in 17 days.
The IRS Whistleblower Office has released the fiscal year (FY) 2021 annual report to Congress. In FY 2021, the Whistleblower Office made 179 award payments to whistleblowers totaling $36,144,926, including 20 awards paid under Code Sec. 7623(b). Whistleblower claim numbers assigned in FY 2021 grew by 55 percent year over year and claim closures increased by 13 percent. Additionally, this year’s report introduces the Code Sec. 7623 Payment and Claim Processing Analysis. The analysis shows Code Sec. 7623(b) awards were paid on average in 17 days.
Code Sec. 7623 Payment and Claim Processing Analysis
The average claim processing time for Code Sec. 7623(b) award payments made during FY 2021 increased by 2.9 percent from the prior year and average claim processing time for Code Sec. 7623(a) award payments increased by 10.4 percent. The report stated that it is likely average claim processing times will continue to increase as claim inventory continues to age while the Whistleblower Office awaits audits, exams, investigations, appeals, tech services, collection, statutes to expire, and whistleblower litigation.
Ten Most Common Allegations Submitted In FY 2021
The ten most common allegations submitted on Form 211, Application for Award for Original Information, for FY 2021 were:
- unreported income;
- general allegations of fraud, tax fraud, wire fraud, insurance fraud, and related allegations;
- false dependent exemptions;
- employee vs. subcontractor;
- failure to file;
- wage under reporter;
- capital gains tax;
- wages being paid in cash or under the table;
- rental income; and
- false deductions or expenses.
The report also provided other information including disclosures made under Taxpayer First Act, additional information on submissions received in FY 2021, information on claim numbers issued, claims remaining open and claims that were closed in each FY from 2019 to 2021, geographic location of all whistleblowers by region, open Code Sec. 7623(b) claims as of FY 2021, and reasons for closures that occurred during FY 2021.
Department of the Treasury Secretary Janet Yellen is continuing to promote the agreement on international taxes reached by most members of the Organisation for Economic Co-operation and Development on a global corporate minimum tax, but acknowledged that its overall impact will be determined by the final details.
Department of the Treasury Secretary Janet Yellen is continuing to promote the agreement on international taxes reached by most members of the Organisation for Economic Co-operation and Development on a global corporate minimum tax, but acknowledged that its overall impact will be determined by the final details.
Testifying before the Senate Finance Committee at a June 7, 2022, hearing about the White House’s fiscal 2023 budget request, Secretary Yellen noted in her opening remarks that she is "keenly focused on moving forward on the global agreement on international tax reform, including a global minimum tax that will level the playing field and raise crucial revenues to benefit people around the world."
However, she noted that because the specific details of how the international tax reforms will be defined and implemented, the impact on American businesses cannot be determined.
In response to a question as to whether the agency will provide Congress with the analysis of data currently available on whether the pillar one agreements will have a positive or negative impact, she said "that it could go either way, depending on the details which have not yet been decided. In the pillar one negotiations, the impact on fiscal revenues will be small."
Yellen continued: "Pillar two has a big impact. Pillar one will have a small impact. We're a very large market economy. We will gain revenue from our ability to tax foreign corporations that are doing business in the United States where we consume those services, we will lose some from revenue. Yet, it could be positive or negative, depending on details that have not yet been worked out. And that's why we've not provided data. We will when those details are clear."
That being said, Yellen also highlighted that countries will not be able to skirt the requirements of the treaty, responding to a question on whether China, a signee of the agreement, can be expected to comply with it when the nation has a questionable record complying with other international agreements.
Secretary Yellen testified that she expects China to comply with the terms of the agreement, but if it fails to do so, "this agreement contains an enforcement mechanism that will allow the United States or any other country that has adopted the global minimum tax to impose taxes on China's companies that would be the same as if China had complied. So there is a tough enforcement mechanism in this deal."
She also testified that Treasury will be negotiating on the details to ensure that business tax credits and subsidies will not negatively impact corporations once the international tax reforms are implemented.
Defending the Budget
During the hearing, she also addressed a number of issues that have become common themes among Biden Administration officials in recent months, including a recent focus on the tax gap and the disparities in auditing following a Government Accountability Office report that highlighted those concerns.
"Tackling that $600 billion annual tax gap is absolutely important in ensuring fiscal responsibility," Yellen told members of the Senate Finance Committee in response to a comment that the White House is requesting $80 billion over 10 years to address this. "It would generate substantial revenue in a manner that's efficient and fair. It would enable deficit reduction and help these price pressures by providing the funding a part of the funding we need for the urgent fiscal priorities."
She reinforced a common call to better fund the Internal Revenue Service to make sure it has the proper personnel in place to do things such as conducting more complicated audits to ensure the top earners are paying their fair share of taxes, in addition to helping the IRS serve the overall population and update its information technology infrastructure.
"We absolutely have to invest in the IRS to close that tax gap, which reflects opaque sources of income, mainly by high income earners that are not taxed," she said. "And they need the resources to serve taxpayers to be able to answer their phones to be able to ensure that they receive the payments that they are due, and they need to modernize their technology which is really the oldest dating back to the [19]60s in the federal government."
Yellen also took the opportunity to encourage Congress to extend the child tax credit, noting that while it may have played a minor role in contributing to the inflation issues the nation is tackling, it has had a significant effect on helping to reduce childhood hunger.
"It enabled families to get a little bit of breathing room and to help their kids afford nutritious food and clothing and back to school supplies." Yellen said.
She also mentioned during the Senate Finance Committee hearing that the Treasury Department is looking forward to working with Congress to get a tax deduction for union dues reinstated after it was cut in 2017.
A day later, on June 8, 2022, Secretary Yellen appeared before the House Ways and Means Committee in a hearing also advertised as a review of the White House budget but one that focused heavily on inflation, current energy policy, and international tax reform.
The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.
The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.
AICPA expressed concern that "service challenges will persist long after the pandemic has ended unless sufficient, targeted funding for technology improvements, human talent and training, and taxpayer services are appropriated."
The organization also noted that there needs to be more than money thrown at the agency to help its functioning. "It should be clear that funding alone will not solve the IRS’s problems,” AICPA wrote. “Structural reforms and organizational alignment from Congress, the President, the Secretary, and the Commissioner are necessary to delivering the promised goals. We look forward to working with all parties involved to this end and create an IRS that taxpayers deserve."
Priority Guidance Recommendations
In a separate letter sent to the IRS May 24, 2022, AICPA outlined its suggestions for the guidance that the agency should be prioritizing. The guidance recommendations cut across a range of programs and legislation, such as the Tax Cuts and Jobs Act, the SECURE Act, and the CARES Act and covering a number of areas such as corporation and shareholder taxation, employee benefits taxation, individual taxation, and international taxation.
R&E Recommendations
AICPA is also recommending the Internal Revenue Service issue specific regulations related to the treatment of research and experimental (R&E) expenditures under Sec. 174.
In a May 26, 2022, letter to the IRS, AICPA said that the Department of the Treasury and the IRS should "issue regulations providing that section 174(a) expenditures include direct costs, including employee compensation, contract labor, and materials, and at the taxpayer’s election, allocable indirect and overhead costs."
AICPA also said that Treasury and the IRS "should issue regulations that illustrate, using detailed examples, which costs are ‘incident to’ the development or improvement of a product as per Reg. §1.174-2."
If the agency doesn’t issue new regulations, AICPA recommended guidance to cover these requests.
Additionally, AICPA identified issues that have arisen with Rev. Proc. 2000-50, which covers the treatment of costs paid or incurred to develop, purchase, or lease computer software.
"IRS should modify the scope limitation under section 4 of Rev. Proc. 2000-50 to clarify that the limitation on costs that a taxpayer has treated as R&E expenditures under section 174 only applies to costs previously subject to an irrevocable election under section 174, including 174(b) or charging the expenses to capital account."
The Department of the Treasury is continuing its push to get funding for much needed information technology infrastructure upgrades from Congress.
The Department of the Treasury is continuing its push to get funding for much needed information technology infrastructure upgrades from Congress.
During a June 14, 2022, hearing before the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government, Treasury Deputy Secretary Wally Adeyemo testified as to why the funds were needed.
The "IRS’ technology is decades out of date, written in a programming language no longer taught, and incredibly expensive to maintain the master file that under grids," Adeyemo told the committee in his opening statement. "The tax system dates back to the 1960s when there was no internet, no cell phones, and no spreadsheets or automatic payments."
The White House is requesting a 12 percent budget increase in fiscal year 2023 compared to 2022 enacted levels "to begin to remedy this mismatch between the IRS’ responsibilities and its resources."
Treasury’s request for increasing funds to help address IT infrastructure upgrades for the IRS did not come up during the hearing’s question-and-answer period, as the committee focused its attention on Russian sanctions, the role of using cryptocurrency to evade sanctions, energy policy and independence, and other criminal-focused activities.
The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).
The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).
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Background
U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency ( 31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. §§1010.350, 1010.306).
If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for non-willful violations, unless the violation was due to reasonable cause. For a willful violation, the maximum penalty is the greater of $100,000 or 50 percent of (1) the amount of the transaction when a violation involves a transaction, or (2) the balance in the account at the time of the violation when a violation involves a failure to report the existence of an account. There is no reasonable cause exception for willful violations ( 31 USC 5321).
Fifth Circuit: FBAR Penalty Per Account
In A. Bittner, the Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the "violation" of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-form basis.
The Fifth Circuit agreed with the government that the district court had erred in determining what constituted a "violation" under 31 USC 5314 by focusing on the regulations under section 5314 to the exclusion of section 5314 itself. Section 5314 does not create the obligation to file a single report, stated the Fifth Circuit, but instead gives the Treasury Secretary discretion to prescribe how to fulfill the statute’s requirement of reporting qualifying accounts.
The Fifth Circuit observed that by authorizing a penalty for any "violation of ... any provision of section 5314," as opposed to the regulations under section 5314, section 5314 "naturally reads" as referring to the statutory requirement to report each account, not the regulatory requirement to file FBARs in a particular manner. Further, the circuit court stated that the reasonable cause exception for non-willful violations was framed in terms of "the transaction" and "the account," and thus it also "naturally reads" as excusing the failure to report a transaction or account, not the failure to file an FBAR.
Ninth Circuit: FBAR Penalty Per Form
In J. Boyd, the Ninth Circuit ruled that the IRS can impose only one non-willful penalty when an untimely but accurate FBAR is filed, regardless of the number of foreign financial accounts. The Ninth Circuit determined that the statutory and regulatory scheme under 31 USC 5314 authorizes a single non-willful penalty for the failure to file a timely FBAR, and that the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.
The Ninth Circuit was not persuaded by the government's argument that, based on the statutory scheme as a whole and legislative intent, the penalty amount could be assessed on a per-account basis. The Ninth Circuit found nothing in the statute or regulations to suggest that the penalty could be calculated that way for a single failure to file a timely FBAR that is otherwise accurate. The Ninth Circuit presumed that Congress had purposely excluded the per-account language from the non-willful penalty provision because it had included such language in the previously-enacted willful penalty provision. Further, the inclusion of per-account language in the reasonable cause exception supported the view that Congress had intentionally omitted per-account language from the non-willful penalty provision.