Yearly Archives: 2024

According to Law360, The U.S. Treasury Department proposed regulations on May 8, 2024 that provide guidance on the requirements for individuals to report their transactions with foreign trusts to the Internal Revenue Service, including the receipt of large gifts.

The proposed rules cover several disclosure provisions regarding interactions with foreign trusts, including reporting obligations under Internal Revenue Code Section 6048 and penalties under IRC Section 6677 for the failure to comply with those requirements. In addition, the guidance addresses IRC Section 6039F, which requires individuals to report the receipt of large foreign gifts, in part by proposing an anti-avoidance rule.

In general, the proposed regulations for Section 6039F incorporate guidance that Treasury provided in a 1997 notice. The rules also provide new guidance to address subsequent statutory developments and to target certain abuses the IRS has flagged, according to the preamble.

This additional guidance includes an anti-avoidance rule that allows the IRS to recharacterize purported loans and other transfers from foreign trusts as gifts if the agency determines the transfer "is in substance" a gift, Treasury said in the preamble. The department noted the IRS has become aware of U.S. individuals who are seeking to circumvent Section 6039F by claiming that the amounts they receive from overseas aren't gifts but that the transfers are otherwise not taxable, Treasury said.

"These amounts, however, objectively have all the indicia of being a gift," Treasury said. "Under the existing principles of federal tax law, the IRS therefore will recharacterize these amounts as foreign gifts that should have been reported under Section 6039F."

According to the preamble, Congress enacted many of the reporting requirements in response to abusive tax schemes involving foreign trusts that reemerged in the mid-to-late-1990s after previously peaking in the 1980s. These schemes generally involved U.S. individuals using foreign trusts to transfer large amounts of assets offshore, where it was difficult for the IRS to identify ownership and related tax payments on the income from such trusts, Treasury said.

The proposed guidance generally implements rules that were first outlined in a notice and revenue procedures for Section 6048, which provides reporting rules regarding a U.S. person's interactions with a foreign trust, including creating and owning the trust, along with transferring and receiving assets.

Under Section 6677, failures to comply with the reporting requirements under Section 6048 can amount to a civil penalty equal to 35% of the trust's gross reportable amount. The statute also allows the IRS to impose an additional penalty of $10,000 every 30 days that somebody fails to comply with reporting obligations within 90 days of notification from the agency.

The proposed guidance includes three separate civil penalties under Section 6677 that correspond to each reporting requirement that Treasury proposed under Section 6048. Failure to comply with one proposed Section 6048 rule, which involves requirements for reporting information about U.S. owners of foreign trusts, initially imposes a penalty amounting to the greater of $10,000 or 5%, rather than 35%, according to Treasury.

The proposed rules also cover IRC Section 643(i), which includes reporting rules for U.S. individuals that receive loans from foreign trusts and use foreign trust property.

The Section 643(i) guidance generally incorporates a previous notice, with certain modifications to provide procedural rules, such as how to determine a loan's yield to maturity, according to Treasury. In addition, the guidance includes anti-abuse rules, such as requiring payments and information to be timely reported, Treasury said.

Read more at: Tax Times blog

In IR-2024-119 dated April 24, 2024, the Internal Revenue Service Independent Office of Appeals today announced the formation of a new Alternative Dispute Resolution Program Management Office. This office will collaborate with the IRS Business Operating Divisions to help taxpayers resolve tax disputes earlier and more efficiently.

“This new office will revitalize existing programs and pilot new initiatives as part of IRS transformation efforts in alignment with the IRS Strategic Operating Plan,” said IRS Commissioner Daniel Werfel. “We’re committed to providing taxpayers who wish to resolve their issues without litigation a choice of early resolution options, and the Alternative Dispute Resolution Program Management Office will ensure taxpayers are aware of those options.”

For years, the IRS has offered ADR at various stages of the tax administrative process. While ADR can be a quicker, more collaborative and cost-effective approach to case resolution, use of the programs has declined in recent years.

By increasing awareness, changing and revitalizing existing programs and piloting new approaches, the IRS hopes to make its ADR programs, such as Fast Track Settlement, Fast Track Mediation, Rapid Appeals Process and Post-Appeals Mediation more attractive and accessible for all eligible parties.

“We’re excited to give our programs the focus they merit,” said Acting Chief of Appeals, Elizabeth Askey. “Michael Baillif, who recently joined Appeals as a senior advisor, will serve as the director of the new office; he has extensive dispute resolution experience in both the private sector and the IRS, and I know he’ll be excellent in this role.”

Among other things, the ADR PMO will pilot changes to Fast Track Settlement—a program that allows Appeals to mediate disputes between a taxpayer and the IRS while the case is still in Exam’s jurisdiction.

More specifically, the new office will also remove barriers to participating in Post-Appeals Mediation—a program that introduces a new mediator if the parties are unable to reach agreement during traditional Appeals settlement negotiations. More specifically, the ADR PMO plans to:

• Test ADR programs that allow Appeals to help resolve or mediate disputes earlier in the examination process;
• Streamline and clarify existing guidance; and
• Remove barriers to enable easier use of and access to ADR.

The ADR PMO, in collaboration with the IRS Business Operating Divisions, will also perform outreach and education, coordinate the training and support of mediators, collect data and monitor the effectiveness of ADR offerings.

The traditional appeal process will remain available for taxpayers who choose it. 

These proposed ADR enhancements reflect input from both internal and external stakeholders who submitted comments in response to the IRS's July 27, 2023 request. The office is still developing the proposed pilots and changes to existing programs and will communicate changes as they become available.

Read more at: Tax Times blog

By The Time Taxpayers File Their 2026 Taxes, The IRS
Plans To Implement A 50 Percent Increase In The Audit
Rate For Households With Incomes Of $10 Million
And Up, Compared To 2019, As Well As A Near
Tripling Of The Rate Of Corporate Audits.

That means that it plans to audit 16.5 percent of the 2026 returns for households with total positive income of at least $10 million, up from 11 percent in 2019. The agency plans to audit 22 percent of returns from corporations with at least $250 million in assets, up from 9 percent in 2019.

Werfel also spoke about the agency's hiring plans through the end of the decade, MarketWatch reported. The IRS now has approximately 90,000 full-time employees, up from around 79,000 employees in fiscal year 2022, he noted. Werfel is seeking a headcount of around 102,500 at the end of this decade, he said. "We believe that figure represents a right-sized IRS," he said. 

At the same time, the agency will not increase audit rates for individuals and small businesses making under $400,000, Werfel said, adding that audit rates for those taxpayers remain at historically low levels. 

The IRS also plans to expand enforcement efforts by increasing its total trained staff, identify and implement strategic options to rapidly increase enforcement activities, including nonaudit activities, and expand efforts involving digital assets, including releasing proposed regulations on broker reporting, according to the update supplement.

The agency's recent enforcement efforts set an important tone for large and complex filers and provide incentives for organizations to be diligent in ensuring that they're meeting their tax responsibilities, Werfel said.

Read more at: Tax Times blog

According the Law360, the D.C. Circuit on May 3, 2024 overturned Fahy v. Commissioner, 160 T.C. No. 6 (2023), which held that the IRS was without the authority to assess the Form 5471 imposed by Internal Revenue Code Section 6038(b). 

Now a three-judge appellate panel found that the Tax Court had wrongly stripped the agency of its power to automatically assess $500,000 in penalties against businessman Alon Farhy, who for eight years failed to report his ownership of Belizean corporations as required by Internal Revenue Code Section 6038(a).

The Tax Court held that the IRS could only collect these penalties through a civil suit filed by the U.S. Department of Justice, not through administrative collection methods. However, the United States Court of Appeals for the District of Columbia Circuit disagreed with the Tax Court’s interpretation. 

Read more at: Tax Times blog