Yearly Archives: 2020

TIGTA issued its report Reference Number:  2020-30-031 on June 22, 2020 to the Commissioner of Internal Revenue.

The IRS’s primary objective in selecting returns for examination is to promote the highest degree of voluntary compliance. The LB&I Division has a variety of examination programs and uses a multitude of methods to select returns.  However, it consistently spent most of its examination resources on large business returns.

The IRS compiles Tax Gap data to periodically update appraisals of the nature and extent of tax payment noncompliance for use in formulating tax administration strategies.  

The largest component, $352 billion, is attributable to underreporting of taxes. Large corporation (assets of $10 million or more) tax noncompliance contributes an estimated $26 billion to the average annual underreporting Tax Gap.

This audit was initiated to evaluate the selection process, use of resources, and examination productivity for corporate returns examined as part of the Large Business and International (LB&I) Division’s Discriminant Analysis System (DAS) workstream.  Approximately 44 percent of Form 1120, U.S. Corporation Income Tax Return, examinations during Fiscal Years 2015 through 2018 were closed from the DAS workstream. If

TIGTA Analyzed The 10,755 Returns Closed in the DAS Workstream During Fiscal Years 2015 Through 2018 

and Found That 47 Percent Were Closed
With No Change to the Tax Return.

TIGTA analyzed the potential cost for excessive time charged to no-change returns, i.e., time in excess of 200 hours, and estimated that potentially $22.7 million was spent examining no‑change returns in excess of 200 hours.

Of the 10,755 returns:

• 7,831 returns (73 percent) were systemically selected, i.e., were selected as the primary tax return to be examined.  
• The overall no-change rate for these returns was about 55 percent (4,327 of the 7,831), and 
• The no‑change rate was generally high across all activity codes for businesses with assets of $10 million or more (ranging from 44 percent to 61 percent).

The LB&I Division is updating the DAS model to improve the no‑change rates.  However, TIGTA found that the LB&I Division is not leveraging all available information to improve the model, such as the examination scope and which tax issues are the most productive to examine.  LB&I also plans to test the new formulas only on returns that are nearly a decade old.

TIGTA Reviewed The Examination Results For The 10,755 DAS Returns and Found That the LB&I Division
Is Not Adequately Monitoring DAS Examination Results
To Assess Whether The Model Is Effectively Ranking Returns
Based On The Likelihood of Potential Tax Adjustment.

When assessing the productivity of its models, the LB&I Division does not use the actual examination amount when an examination results in a refund.  Instead, it treats examinations that result in a refund as no change in tax.  By not using the actual examination amount for refunds, the LB&I Division’s productivity is skewed to the positive and does not accurately reflect the true compliance impact.

TIGTA recommended that the LB&I Division:

• Develop an action plan to reduce the examination no-change rates; 
• Avoid working pickup returns unless issues are established on primary tax returns that may affect prior or subsequent years; 
• Minimize hours expended on no‑change closures; 
• Test newly developed formulas on current examined returns;
• Consider breadth of scope and noncompliance issues found in past examinations; and 
• Analyze DAS return actual examination results on a regular basis. 

The LB&I Division agreed with two recommendations and will formulate a plan to reduce the no‑change rate and hours incurred.  The LB&I Division also plans to analyze examination results on a regular basis.  

The LB&I Division disagreed with three recommendations pertaining to the DAS model and noted that it released a new DAS model in April 2020.  The LB&I Division also disagreed with using actual examination dollar results for evaluating the effectiveness of the DAS model.

 

To view the report, including the scope, methodology, and full IRS response, go to: https://www.treasury.gov/tigta/auditreports/2020reports/202030031fr.pdf.

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In IR-2020-130 the Internal Revenue Service Office of Chief Counsel announced a time-limited settlement offer to certain taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions. Taxpayers eligible for this offer will be notified by letter with the applicable terms.

The settlement offer would bring finality to these taxpayers with respect to the syndicated conservation easement issues in their docketed U.S. Tax Court cases. 

The Settlement Requires A Concession of The Income Tax Benefits Claimed By The Taxpayer and Imposes Penalties.

“The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions,” said IRS Commissioner Chuck Rettig. “These abusive transactions undermine the public's trust in private land conservation and defraud the government of revenue. Ending these abusive schemes remains a top priority for the IRS."

The IRS recognizes the important role of conservation easement deductions in incentivizing land preservation for future generations. However, abusive syndicated conservation easement transactions have been of concern to the IRS for several years. 

In Notice 2017-10, the IRS identified certain syndicated conservation easement transactions as tax avoidance transactions and provided that such transactions (and substantially similar transactions) are listed transactions for purposes of Treasury Regulation § 1.6011-4(b)(2) and §§ 6111 and 6112 of the Internal Revenue Code.  Also, in 2019, the IRS added syndicated conservation easement transactions to its annual “Dirty Dozen” list of tax scams.
 
Taxpayers should note that the U.S. Tax Court has held in the government’s favor in several opinions and orders in syndicated conservation easement cases.  The IRS realizes that some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution.  When deciding whether to accept the offer, the IRS encourages taxpayers to consult with independent counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.  

In listed syndicated conservation easement structures, promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount. The promoters obtain an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement.  After the investors invest in the partnership, the partnership donates a conservation easement to a land trust.  Investors in the partnership then claim a deduction based on an inflated value. The investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.

The IRS has developed a comprehensive, coordinated enforcement strategy to address abusive syndicated conservation easement transactions and has also been working closely with the U.S. Department of Justice to shut down the promotion of them.  The IRS will continue to disallow the claimed tax benefits, asserting civil penalties to the fullest extent, considering criminal sanctions in appropriate cases, and continuing to pursue litigation of the cases that are not otherwise resolved administratively. This syndicated conservation easement resolution should not be deemed to have any impact on the potential criminal exposure, investigation and/or prosecution of any individual or entity that participated in or assisted or advised others in participating in a syndicated conservation easement transaction in any manner whatsoever.

In addition, part of the IRS’ strategy is the creation of two new offices that are actively investigating these transactions: the Promoter Investigation Coordinator and the Office of Fraud Enforcement. For certain taxpayers involved in syndicated conservation easements, the IRS Office of Chief Counsel has decided, however, to offer taxpayers an opportunity to resolve certain docketed cases on standardized terms. The settlement offer will be sent by mail to those eligible. Among the key terms of the settlement offer:

• The deduction for the contributed easement is disallowed in full.
• All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.
• “Investor” partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.
• Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.

Taxpayers Should Not Expect To Settle Their 
Docketed Tax Court Cases on Better Terms.

Based on cases the Independent Office of Appeals has encountered to date, and the existing state of the law, taxpayers should not later expect a better result than what is provided in this settlement offer. 

“With this announcement, we encourage taxpayers and their advisors to take a hard, realistic look at their cases. They should carefully review this settlement offer. We believe this is clearly the best option for them to pursue given all of these factors,” said IRS Chief Counsel Michael J. Desmond. “Those who choose not to accept the offer should keep in mind the Office of Chief Counsel will continue to vigorously litigate their cases to the fullest extent possible.”

Have a Tax Problem?

 Contact the Tax Lawyers at 
Marini & Associates, P.A.  

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid

Read more at: Tax Times blog

The global outbreak of the COVID-19 virus (the COVID-19 Emergency) has significantly limited the ability of many individuals to leave the United States. Regardless of whether they are infected with the COVID-19 virus, individuals may have become severely restricted in their movements, including by order of government authorities. Individuals who do not have the COVID-19 virus and attempt to leave the United States may also face canceled flights and disruptions in other forms of transportation, shelter-in-place orders, quarantines, and border closures, or they may feel unsafe traveling during the COVID-19 Emergency due to recommendations to implement social distancing and limit exposure to public spaces (collectively, COVID-19 Emergency Travel Disruptions). 

Nonresident alien individuals who perform services or other activities in the United States and foreign corporations who employ individuals or engage individuals as agents to perform services or other activities in the United States may be considered engaged in a U.S. trade or business (USTB). If the individuals performing those services or other activities are temporarily in the United States solely due to COVID-19 Emergency Travel Disruptions, this may cause the nonresident alien or foreign corporation to become engaged in a USTB when the nonresident alien or foreign corporation would not be so engaged were these individuals not present in the United States. Generally, a nonresident alien or foreign corporation that is engaged in a USTB is taxable on its business income connected to that USTB.

If a U.S. income tax treaty applies, however, the nonresident alien individual or foreign corporation generally will not be liable to tax on the income of its USTB (i.e., business profits) unless the business is conducted through a permanent establishment in the United States (PE) such as an office or other fixed base or a dependent agent.

Q1. Will a nonresident alien or foreign corporation, not otherwise engaged in a USTB, be treated as engaged in a USTB as a result of services or other activities conducted by one or more individuals temporarily present in the United States if, but for COVID-19 Emergency Travel Disruptions, those services or other activities would not have been conducted in the United States?

A1. A nonresident alien, foreign corporation, or a partnership in which either is a partner (Affected Person) may choose an uninterrupted period of up to 60 calendar days, beginning on or after February 1, 2020, and on or before April 1, 2020 (the COVID-19 Emergency Period), during which services or other activities conducted in the United States will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB, provided that such activities were performed by one or more individuals temporarily present in the United States and would not have been performed in the United States but for COVID-19 Emergency Travel Disruptions. For purposes of these FAQs, an "individual temporarily present in the United States" means an individual who is present in the United States on or after February 1, 2020, and on or before April 1, 2020, and is a nonresident alien, or a U.S. citizen or lawful permanent resident who had a tax home as defined in section 911(d)(3) outside the United States in 2019 and reasonably expects to have a tax home outside the United States in 2020. In addition, to determine the nonresident status of an alien, the relief provided in Rev. Proc. 2020-20 is applicable.

Q2. If a nonresident alien or foreign corporation is engaged in a USTB (taking into account the application of the treatment in Question 1) but otherwise does not carry on such USTB through a PE under an applicable income tax treaty, will the nonresident alien or foreign corporation be treated as conducting business through a PE due to services or other activities conducted by individuals temporarily present in the United States that would not have been conducted in the United States but for COVID-19 Emergency Travel Disruptions?

A2. During an Affected Person's COVID-19 Emergency Period, services or other activities performed by one or more individuals temporarily present in the United States will not be taken into account to determine whether the nonresident or foreign corporation has a PE, provided that the services or other activities of these individuals would not have occurred in the United States but for COVID-19 Emergency Travel Disruptions.

General Information

An Affected Person's income earned during the COVID-19 Emergency Period will not be subject to the 30% gross basis tax imposed under section 871(a) or section 881(a) solely because the Affected Person is not treated as having a USTB or PE under these FAQs.

In all events, the Affected Person should retain contemporaneous documentation to establish the period chosen as the COVID-19 Emergency Period and that the relevant business activities conducted by individuals temporarily present in the United States during the COVID-19 Emergency Period would not have been undertaken in the United States but for COVID-19 Emergency Travel Disruptions. The Affected Person should be prepared to provide that documentation upon request by the IRS.

Nonresident aliens and foreign corporations (including those that are partners in partnerships) may make protective filings of their annual U.S. tax returns, even if they believe they are not required to file for the 2020 taxable year because they were not engaged in a USTB, to avail themselves of the benefits and protections that arise from such filings (such as those relating to deductions, statutes of limitations, and claiming tax treaty-based relief).

The IRS will continue to monitor the evolving effects of the COVID-19 Emergency on nonresident alien individuals and foreign corporations and may update these FAQs as appropriate.

Have an International Tax Problem?

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On June 2020 we posted IRS Reopening Offices In 8 States & Puerto Rico By June 29!, where we discussed that the Internal Revenue Service plans to reopen operations in eight states and Puerto Rico in June that had been shuttered because of the COVID-19 pandemic, IRS Commissioner Chuck Rettig told employees in an internal email.

So far, employees with non-portable work returned to offices in Kentucky, Texas, and Utah on June 1, 2020. Additional IRS offices and centers are opening in the coming weeks, including: 

• Georgia and Tennessee beginning June 15
• Missouri and Michigan beginning June 15
• Indiana and Ohio beginning June 29
• California, Puerto Rico, Oregon beginning June 29

These re-openings include key processing centers, notice print facilities, and call center operations.The IRS also announced some changes to operations. According to Forbes, here's a look at some of what's open or opening soon:

Telephone Lines. Automated phone lines are available now. But if you want to talk to a real person, including the EIP phone line for those who received an EIP letter (Notice 1444), you should expect to wait. If you're looking for an update for your regular tax refund, you can call the automated number at 1-800-829-1954. And before you dial: this line has no information about the status of your stimulus checks (Economic Impact Payments).

Practitioner Priority Service (PPS). My colleagues have been rejoicing about the reopening of the Practitioner Priority Service (PPS) line, but I've yet to talk to a representative. That may be because the PPS line is open but has limited staffing.

Centralized Authorization File (CAF). The IRS says that it's processing some Centralized Authorization File (CAF) requests on a limited basis. However, anecdotally, I've not spoken with any tax professionals who have managed to get through (my request failed again today). According to the IRS, only the CAF unit at Ogden is operational at this time, which would explain my issues: Ogden services mostly west coast taxpayers.

Web services. IRS.gov remains open. That means:

• Practitioners with e-Services accounts and client authorization can access the Transcript Delivery System (TDS) to obtain taxpayer transcripts. 
• Taxpayers can also access "Where's My Refund?" and "Get Transcript Online."
• Taxpayers can check the status of their Economic Impact Payment at Get My Payment, their refund status at Where's My Refund? or obtain a tax transcript at Get Transcript Online. 
• Taxpayers also can make tax payments through Direct Pay.
• Taxpayers who previously have been issued an Identity Protection PIN but lost it must use the Get an IP PIN tool to retrieve their numbers. 

Taxpayer Protection Program: If you received correspondence (Letters 5071C, 5447C, or 5747C) from the IRS asking if you filed a suspicious tax return, you can use the online Identity Verification Service to validate your identity. If you received a Letter 4883C, follow its instructions. While online services are available, phone assistance is limited.

Office of Chief Counsel. The Office of Chief Counsel continues to work to resolve cases in litigation, including those recently canceled by the U.S. Tax Court. Although Counsel is not meeting with taxpayers or their representatives in face-to-face meetings or taking depositions, attorneys are available to discuss their cases by telephone.

Independent Office of Appeals. Appeals employees are continuing to work their cases. Appeals is not currently holding in-person conferences with taxpayers, but conferences may be held over the telephone or by videoconference.

Taxpayer Advocate Service (TAS) Local Numbers. TAS is open, in theory, to receive phone calls at the local phone numbers (visit taxpayeradvocate.irs.gov to find yours). I have personally not had any success reaching anyone (I have been able to leave voice mail messages).

Tax-exempt Sector Determinations, Rulings, and Closing Agreements. The IRS continues to process applications for recognition of tax exemption for exempt organizations and continues to work rulings and determinations for employees plans and closing agreements for municipal issuers (this does not include paper applications for tax exemption and paper filed information returns submitted after March 26, 2020) 

What's Not Open:

Services by mail. The "Get Transcript by Mail" is not operational since the offices that print and mail the transcripts are closed.

Most other mail processes. The IRS is receiving and storing mail, but they're not really opening and processing mail. Officially they say, "our mail processing functions have been scaled back to comply with social distancing recommendations." Mail correspondences could take a while to process, or in some cases, correspondence sent to IRS offices may be returned to the taxpayer if that office is closed and no one is available to accept them.  

Most phone lines. As noted earlier, some specific phone lines have resumed service, but most have not.

U.S. Residency Certification: The Philadelphia Accounts Management Campus is closed, so the U.S. Residency Certification Program's processing is temporarily suspended. 

Taxpayer Advocate Service (TAS) Toll-Free Number and Walk-in Services. The centralized toll-free number is unavailable until further notice. Additionally, there are no walk-in services.

Paper Tax Returns: All taxpayers should file electronically through their tax preparer, tax software provider, or IRS Free File if possible. The IRS is not currently able to process individual paper tax returns. If you have already filed via paper, do not file a second tax return or write to the IRS to inquire about the status of your return or your stimulus check. 

Ordering Forms: The IRS's National Distribution Center cannot take any orders for forms or publications to be mailed during this time. Most forms and publications are available for download electronically at IRS.gov/forms.

Have a Tax Problem?

 Contact the Tax Lawyers at 
Marini & Associates, P.A.  

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com 
orToll Free at 888-8TaxAid

Read more at: Tax Times blog