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Monthly Archives: October 2022

Tax Lawyers Hope For Broad Privilege Ruling From The Supreme Court

According to Law360, The U.S. Supreme Court agreed this month to review a tax-related case on attorney-client privilege, and practitioners hope the court will use the occasion to take a broad approach toward privilege that acknowledges the importance of tax advice. 

A U.S. Supreme Court case on whether a law firm has to comply with grand jury subpoenas for tax-related client communications will likely have wide-reaching implications for how lawyers manage the combination of legal and nonlegal advice. 

The Case, Known As In Re: Grand Jury, Will Likely Have Wide-Reaching Implications For How Lawyers Manage Client Communications Containing Both Legal And Nonlegal Advice.

In the case, an unnamed law firm is challenging a Ninth Circuit decision finding it had to comply with grand jury subpoenas for communications and other materials related to a client's expatriation and tax return preparation. The firm's petition to the Supreme Court, filed in May, argued that the justices should clarify the law concerning when attorney-client privilege protects such mixed-use communications.

The controversy partly stems from uneven treatment in the federal courts on what is considered private tax information. Some have held that attorney-client privilege doesn't apply to communications that deal with a client's tax return preparation, while it does for tax controversy and tax planning issues.

Complicating matters is a split among the federal circuit courts on how far attorney-client privilege can protect communications that serve multiple purposes. Many business and legal groups prefer the more expansive privilege test set by the D.C. Circuit in 2014. In that case, known as In re: Kellogg Brown & Root Inc , the appeals court held in an opinion authored by then-U.S. Circuit Judge Brett Kavanaugh that multipurpose communications should be protected if one of the reasons for them was to obtain or provide legal advice.

Then, last year, the Ninth Circuit roiled tax attorneys with its decision in the In re: Grand Jury case, which said the primary purpose of the communications must be legal advice in order for them to remain confidential.

In A Footnote, The Court Said "Normal Tax Advice, Even Coming From Lawyers, Is Generally Not Privileged, And Courts Should Be Careful To Not Accidentally Create An Accountant's Privilege Where None Is Supposed To Exist."

Although the Ninth Circuit amended the footnote to change "tax advice" to "tax preparation assistance," the court's sentiment was troubling, said John Colvin of Seattle-based Colvin & Hallett.

The decision portrayed the tax legal practice as merely tax preparation service and "not real attorney work," he said. 

But nothing is further from the truth, Colvin said, because people specifically seek advice from tax attorneys to help them interpret complicated tax laws, including U.S. Department of Treasury regulations and court opinions, that apply to their own circumstances.

When Clients Come To Tax Attorneys, "We Know That Some Or All Of The Legal Advice Is Going To End Up In A Tax Return," He Said.

The Supreme Court agreed to examine the case at the request of the unnamed law firm that has been fighting to keep confidential tax expatriation documents, in the name of attorney-client privilege and work-product doctrine, from disclosure to a grand jury investigating a client.

The firm wants the justices to review the Ninth Circuit decision, which ordered the disclosure of client documents that the firm described as "dual purpose communications" with "tax advice."

The Ninth Circuit Said The Documents Were Not Privileged Because Their "Primary Purpose" Was Seeking
Tax Advice Rather Than Legal Advice.

The Washington Legal Foundation, a pro-business public interest law firm and policy center, also recognized the challenges of identifying what constitutes a tax issue in a May amicus brief endorsing Supreme Court review of the case. The group said the Ninth Circuit's narrow view of attorney-client privilege creates "tax-specific rules that conflict with rules that govern other areas of law."

That's why the Supreme Court in the In re: Grand Jury case should create uniform federal attorney-client standards in tax communications, the brief said, arguing that doing so would help compliance and enforcement.

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Serious Challenges Facing IRS for FY 2023, TIGTA Reports

The Treasury inspector general for tax administration, has submitted a memorandum to Treasury Secretary Janet Yellen offering the internal watchdog's "perspective on the most serious management and performance challenges confronting the IRS" for fiscal year 2023. (Memorandum dated October 13, 2022)

TIGTA emphasized the effect the Inflation Reduction Act of 2022 (PL 117-269), with its $80 billion in agency funding and numerous tax provisions, will have on the IRS.

"It will be a significant challenge for the IRS to administer these provisions and effectively use the additional funding to address the challenges of improving taxpayer service, modernizing outdated technological infrastructure, and increasing equity in the tax system through added enforcement actions," the memorandum stated.

For FY 2023, TIGTA identified the following as the IRS' top management challenges:

  1. The IRS had more than 14 million individual and business paper returns waiting to be processed, As of August 12, 2022. The number of calls answered and Level of Service on toll-free telephone lines remain at far-from-acceptable levels.
  2. Protecting Taxpayer Data and IRS Resources. "The proliferation of stolen Personally Identifiable Information poses a significant threat to tax administration by making it difficult for the IRS to distinguish legitimate taxpayers from fraudsters," according to the memorandum.
  3. Modernizing IRS Operations. Successful modernization of systems and the development and implementation of new information technology applications are critical to meeting the IRS' evolving business needs and enhancing services provided to taxpayers. The agency uses different legacy case management systems that vary widely in complexity, size, and customization to support tax administration. "Modernizing the IRS' computer systems has been a persistent challenge for many years and will likely remain a challenge for the foreseeable future," George wrote.
  4. Administering Tax Law Changes. "One of the continuing challenges the IRS faces each year in processing tax returns is the implementation of new tax law changes as well as changes resulting from expired tax provisions," the memorandum stated.
  5. Increasing Domestic and International Tax Compliance and Enforcement. "The IRS has indicated that insufficient funding remains a constraint to address its operations," George stated. Although increased funding provided for in the Inflation Redution Act will assist the IRS in replacing employees lost through attrition, onboarding, training, and assimilating large numbers of employees will create its own challenges for the IRS, the memorandum stressed.

    Over The Next Six Years, The IRS Estimates It
    Will Need To Hire 52,000 Employees Just
    To Maintain Its Current Staffing Levels.

  6. Reducing Tax Fraud and Improper Payments. While the IRS continues to increase the number of fraudulent tax returns detected and stopped from entering the tax processing system, the problem remains persistent, both with individual and business tax returns. To combat business identity theft, the IRS should adopt "successful taxpayer detection and assistance options, similar to what it provides individual taxpayers." The IRS continues "not to be in compliance with the goal of reducing the overall improper payment rate for the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit to less than 10%."

a person holding a phone to the ear and a stack of papersAlthough not listed separately, human capital is also a significant concern, and it affects the IRS' ability to address the above challenges."

The likelihood of a significant improvement in the IRS and increased ability to audit sufficient taxpayers who are causing the tax gap, is just not likely, given these facts.

So, for the near future, expect make more the same from the IRS, despite the additional $45.6 billion in enforcement funding, as part of a nearly $80 billion funding increase included in the Inflation Redution Act. 😥

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Deadline To File 2019 & 2020 Tax Returns & Get 5472 Penalty Relief is Extended To 2/15/23 In Disaster Areas (Florida)

In IR-2022-185, issued on October 19, 2022, the IRS reminds taxpayers affected by Hurricane Ian in areas covered by certain Federal Emergency Management Agency (FEMA) disaster declarations they may have more time to file their returns to qualify for the penalty relief under Notice 2022-36 for their 2019 and 2020 tax returns.

On October 4, 2022 we posted IAN Tax Relief May Have Extended Penalty Relief To Fla LLCs Until February 15 to File Their Late 2019 & 2020 Form 5472, where we discussed that FL–2022–19 which provides victims of hurricane IAN until February 15, 2023 to file returns for deadlines falling on or after September 23, 2022 and before February 15, 2023, may also extend the time for single member LLC to file their Form 1120, with the associated Form 5472, pursuant to Notice 2022 – 36 provides penalty relief for 2019 & 2020 where tax returns that were filed on or before September 30, 2022.  

This notice confirms that taxpayers affected by Hurricane Ian in areas covered by certain Federal Emergency Management Agency (FEMA) disaster declarations they may have more time to file their returns to qualify for the penalty relief under Notice 2022-36 for their 2019 and 2020 tax returns.

Have an IRS Tax Problem?

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TIGTA Wants the IRS to do More to Promote Repatriation Tax Compliance

The Treasury Inspector General for Tax Administration (TIGTA) has reported that the amount of revenue generated pursuant to Code Sec. 965 repatriation tax provision "has lagged behind initial estimates" by some $88 billion.

This audit was initiated to evaluate the IRS’s efforts to ensure compliance of those taxpayers subject to the Internal Revenue Code Section 965 because it was expected to be a main revenue generating provision of the Tax Cuts and Jobs Act.

According to the IRS, multiple issues, including complex payment deferral procedures, have limited the agency’s ability to compile accurate Section 965 data. Those limitations aside, the following figure shows that the amount of Section 965 tax reported has lagged behind initial estimates.

Projected Revenue From Section 965                                $338.8 billion
Amount of Section 965 Liability Reported                       $251 billion
Amount of Section 965 Tax Paid                                          $  94 billion
Amount of Section 965 Tax Currently Deferred to
Be Paid in Installments                                                           $157 billion

The Large Business and International Division, which is responsible for ensuring that taxpayers comply with the Section 965 tax, initiated three compliance campaigns to address individual and business taxpayer compliance.

The Two Ongoing Campaigns Have Resulted In
Taxpayers Filing Amended Returns Reporting The Tax
And Significant Changes To The Section 965 Tax Calculation.

However, TIGTA is concerned that the campaign focused on the compliance of individuals does not plan any follow-up actions with the taxpayers who did not respond to the soft letters.

The Section 965 repatriation tax can be paid in eight installments. Some installment payments were applied to incorrect tax periods, which could result in the taxpayer being identified as not compliant. Numerous payments were miscoded as Section 965 payments,
impacting the IRS’s ability to determine Section 965 revenue. Also, the IRS does not have the ability to systemically identify taxpayers not compliant with the required installment payments or S Corporation shareholders who failed to annually report their deferred liability on the Form 965-A, Individual Report of Net 965 Tax Liability.

TIGTA recommended that the IRS:

  1. Prioritize and follow up with compliance actions on nonresponsive taxpayers issued soft letters;
  2. Revise notices to add more information on how the Section 965
    installment payments should be made;
  3. Ensure that system changes identify Section 965 payments that were potentially processed incorrectly;
  4. Develop procedures to systemically identify taxpayers that are not compliant with the Section 965(h) deferral requirements; and
  5. Develop procedures to identify S Corporation shareholders who made an election under Section 965(i) and who did not annually submit the Form 965-A or did not report the correct amount of the Section 965 deferral on the Form 965-A.

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Contact the Tax Lawyers at
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