Yearly Archives: 2020

In a Baker & McKenzie client alert, they point out that are Estate & Family planning opportunities amidst the economic environment created by the coronavirus pandemic.

On Wednesday, April 29th, 2020, the U.S. Bureau of Economic Analysis (BEA) released data showing that the United States economy shrank in Real GDP terms at a 4.8% annualized pace in the first quarter of 2020.

At the same time, the International Monetary Fund reported the Real GDP slide in the U.S. was even higher. In response to this economic decline, the U.S. federal reserve reduced its target federal funds interest rate on March 16th, with the benchmark U.S. Treasury 10-year bond hitting a record low yield on March 9th, 2020.

This has resulted in the IRS reducing the Applicable Federal Rate (AFR) to record lows.  Now, while this might not be welcome news on a whole, it does present an opportunity for certain families to take advantage of the depressed current fair market valuations and record low interest rates from a U.S. gift and estate tax perspective.

More specifically it can affect: 

• Definition of fair market value and timing of FMV assessment.
• Value of businesses for gift tax purposes.
• Interfamily sales and loans.
• Shareholder loans
• Grats

 

Due to COVID-19, the IRS’ People First Initiative provides relief to taxpayers on a variety of issues from easing payment guidelines to delaying compliance actions.

• Existing Installment Agreements – Under an existing Installment Agreement, payments due between April 1 and July 15, 2020 are delayed. Those currently unable to meet the terms of an Installment Payment Agreement or Direct Deposit Installment Agreement may cancel payments during this period with no default. By law, interest will continue to accumulate on any unpaid balances
• New Installment Agreements – People who can’t pay all their federal taxes can establish a monthly payment agreement.
•  Pending Offer in Compromise applications – Taxpayers have until July 15, 2020, to provide additional information for a pending OIC. The agency generally won’t close any pending OIC request before July 15 without the taxpayer's consent.
• OIC payments – Taxpayers can delay all payments on accepted OICs until July 15, 2020. Interest may accrue, and missed payments are due when the suspension period ends. Taxpayers can call the number on their acceptance letter to address their needs.
• Delinquent return filings – The IRS will not default an OIC for taxpayers who are delinquent in filing their tax return for 2018. However, they should file any delinquent 2018 return and their 2019 return by July 15, 2020.
• Non-filers – More than 1 million households who haven't filed tax returns in the last three years are owed refunds. The deadline to get refunds on 2016 tax returns is July 15, 2020.  Those who owe taxes on delinquent returns may visit IRS.gov for payment options. The longer the debt is owed, the more penalties and interest accrue.
• Field collection activities – IRS stopped field revenue officer enforcement actions, such as liens and levies. Revenue officers will continue to pursue high-income non-filers and perform other similar activities where necessary.
• Automated liens and levies – IRS delayed issuing new automated and systemic liens and levies. Taxpayers experiencing a hardship due to a levy should reach out to their assigned IRS contact or fax their information to (855) 796-4524.
• Certifications to the State Department – IRS has delayed new certifications of taxpayers who are considered seriously delinquent. This affects a person’s ability to receive a new or renewed passport. Existing certifications will remain in place unless their tax situation changes. 
• Private debt collection – IRS will not forward new delinquent accounts to private collection agencies during this period.

On the IRS website "Transfer Pricing Documentation Frequently Asked Questions (FAQs)" (updated 4/14/2020), the IRS has issued a series of frequently asked questions (FAQs) concerning the best practices and common mistakes in preparing transfer pricing documentation.

IRC Sec. 6662(e)(1)(B)(ii) provides that there is a substantial valuation misstatement if the net section 482 transfer price adjustment for the tax year exceeds the lesser of $5 million or 10% of the taxpayer's gross receipts ("net adjustment penalty"). 

The 20% (or 40%) Code Sec. 6662 penalty for underpayment of tax attributable to a substantial valuation misstatement (or a gross valuation misstatement) applies to Code Sec. 482 
company pricing adjustments.

 
Generally, if the dollar thresholds of the net adjustment penalty are met, a taxpayer potentially can avoid the penalty if the taxpayer's APA has satisfied the transfer pricing documentation requirements of Code Sec. 6662(e)(3)(B) and Reg. §1.6662-6 (sometimes referred to as the 6662(e) documentation). Reg. § 1.6662-6(d)(2)(iii)(B) sets forth the principal documents that must be maintained by a taxpayer to satisfy the 6662(e) documentation requirements.

The documentation must also be assessed for adequacy and reasonableness. To satisfy the documentation requirement of the penalty regulations, taxpayers must select and apply a method in a reasonable manner and document the fact they reasonably selected and applied the best method for their analysis. (Section A of Transfer Pricing Documentation Frequently Asked Questions (FAQs))

• The suggestions and recommendations are consistent with the requirements in the regulations to provide adequate and reasonable support for the arm's length nature of intercompany pricing.
• Many taxpayers would benefit from insights on the information that could be provided to the IRS to increase the chance of audit deselection or more efficient audits.
• The IRS believes the potential for deselection of issues earlier in the examination process could be a powerful incentive for many taxpayers to improve their transfer pricing documentation.
• These FAQs and responses are illustrative and are being shared in the spirit of transparency to encourage cooperative compliance by taxpayers. The responses, and examples therein, are high-level only and should not be relied on to analyze actual transactions.

According to Law360, when the IRS' operations are fully restored, the agency will have to face a mounting set of problems that have grown while offices have been shuttered, and addressing problems with the CDP program is likely to be low on its list of priorities, according to Bob Probasco, director of the Texas A&M University School of Law's Low-Income Tax Clinic.

While the agency is currently tied up with doling out economic impact payments to mitigate the economic effects of the pandemic, and it still has to fulfill its obligations under recently passed laws such as the Taxpayer First Act and the Tax Cuts and Jobs Act,  the CDP program remains vitally important, according to Caleb Smith, director of the University of Minnesota Law School's Ronald M. Mankoff Tax Clinic.

"Once we're done focusing so heavily on getting money to people, the next thing is going to be, now people can't afford to pay back taxes, and CDP will probably take an even higher priority then," he said.

An initiative known as the CDP Summit, a collaboration among private tax practitioners, law professors, directors of low-income taxpayer clinics and the IRS aimed at putting in place needed reforms to the CDP program, was launched as a result of a panel discussion at the American Bar Association Section of Taxation's 2019 May meeting on issues with the program. That effort, and government reports, have identified ways the program can be improved.

The CDP Summit has already resulted in some positive changes, according to Schmidt. After a discussion during a December low-income taxpayer representation workshop in Washington, the IRS chief counsel's office released legal advice saying requests for hearings that taxpayers incorrectly send to the wrong address would still be treated as timely filed, Schmidt said.

T. Keith Fogg, the director of the federal tax clinic at Harvard Law School's Legal Services Center, who is also involved with the summit, said he doesn't know when it will resume. For the time being, the pandemic has reduced some of the pressures on the CDP program, since the IRS has temporarily paused lien and levy enforcements through July 15 and will be slow to restart that work, Fogg said.

The summit's work so far has led to significant improvements in CDP notices, Fogg said, noting the newest version of the notice provides more information on the opportunity for a CDP. hearing. However, more needs to be done to ensure that taxpayers understand they have to act to preserve their rights to a hearing under the CDP program, he said.

A taxpayer may not raise issues in a CDP hearing if the issues have already been raised and considered at prior judicial or administrative hearings and the taxpayer meaningfully participated in those hearings, according to the national taxpayer advocate's 2019 annual report to Congress. Taylor said he'd lost three cases at the appellate level arguing taxpayers should have the opportunity to litigate their liabilities in CDP hearings if they haven't already had the opportunity to challenge them in court.

While the number of CDP cases may increase due to the pandemic, participation rates are not likely to follow suit, Santos said.

"The absolute number of CDP hearings might rise, but I'm not sure that the rate of CDP hearings requested as a percentage of all lien and levy notices will rise," he said.

Whether more hearings occur will depend on how IRS collection staffers manage their workload, Taylor said. He's not sure, he said, how nuanced an approach the agency will take to collection work starting July 15, but he was confident more taxpayers would find themselves struggling.

"You're going to have a lot of folks who have new tax problems or have a new inability to manage tax problems that were being managed," he said, adding that many people who weren't previously in the position of having to choose between paying taxes, and food or housing costs, will find themselves there.