In a memo to IRS employees and on an IRS webpage, the IRS says it is expanding a temporary deviation from its regular procedures that will allow electronic or digital signatures on various forms that currently require handwritten signatures, i.e., that are not e-fileable. The decision was made due to taxpayer representatives' concerns about securing handwritten signatures during the coronavirus pandemic. 

The memo notes that electronic and digital signatures may be created by many different technologies. No specific technology is required for this purpose during this temporary deviation.

IRS's webpage says that taxpayers can send the following forms with digital signatures if they are postmarked from August 28, 2020, through December 31, 2021:

• Form 11-C, Occupational Tax and Registration Return for Wagering;

• Form 637, Application for Registration (For Certain Excise Tax Activities);

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 706-A, U.S. Additional Estate Tax Return;

• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

• Form 706 Schedule R-1, Generation Skipping Transfer Tax;

• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

• Form 730, Monthly Tax Return for Wagers;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

• Form 1120-IC DISC, Interest Charge Domestic International Sales - Corporation Return;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

• Form 1128, Application to Adopt, Change or Retain a Tax Year;

• Form 2678, Employer/Payer Appointment of Agent;

• Form 3115, Application for Change in Accounting Method;

• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

• Form 4421, Declaration - Executor's Commissions and Attorney's Fees;

• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

• Form 8283, Noncash Charitable Contributions;

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

• Form 8802, Application for U.S. Residency Certification;

• Form 8832, Entity Classification Election;

• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and

• Elections made pursuant to Internal Revenue Code section 83(b).

The IRS previously allowed electronic or digital signatures for a smaller group of forms through June 30, 2021. 

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The IRS, in a News Release, has provided information about, and copies of, new and updated 2021 draft Forms K-2 and K-3 for domestic passthrough entities that have items of international tax relevance that are reported to partners and/or shareholders.

The early drafts of the Schedules K-2 and K-3 proposed for the 2021 Form 1065 were originally released in July 2020. In September 2020, the American Institute of Certified Public Accountants submitted a letter to the IRS saying the proposed international changes to Schedules K-2 and K-3 may result in significant overreporting of information that isn't relevant in determining U.S. federal income tax. 

The redesigned forms and instructions are meant to help partnerships, S corporations and U.S. people who must file Form 8865 for controlled partnerships by explaining how to provide international tax information. 

The Forms Only Apply To Those Required To File Forms 1065, 1120-S Or 8865 If The Entity Has Items Of International Tax Relevance Such As Foreign Activities Or Foreign Partners.

The IRS has now released updated drafts of Forms K-2 and K-3 for partnerships has well as new drafts of these schedules to be used by S corporations (Schedule K-2, Shareholders’ Pro Rata Share Items – International; and K-3, Shareholder’s Share of Income, Deductions, Credits, etc. – International), and foreign partnerships (Schedule K-2 (Form 8865), Partners’ Distributive Share Items – International; and Schedule K-3 (Form 8865), Partner’s Share of Income, Deductions, Credits, etc. - International). 

According to the IRS, these new and updated forms are designed to make it easier for partners and shareholders of passthrough entities with items of international tax relevance to compute their U.S. income tax liability with respect to those items, including claiming deductions and credits. The IRS also said that domestic passthroughs with no items of international tax relevance won't need to use these forms.  . 

According to the IRS, these new and updated forms are designed to make it easier for partners and shareholders of passthrough entities with items of international tax relevance to compute their U.S. income tax liability with respect to those items, including claiming deductions and credits. The IRS also said that domestic passthroughs with no items of international tax relevance won't need to use these forms.  

Both Schedule K-2 (Form 1065) and Schedule K-2 (Form 8865) request the following information: 

• Part A. Is the partnership a withholding foreign partnership?
• Part B. Is the partnership (including the home office or any branch) a qualified derivatives dealer?
• Part 1. Partnership's other current year international information; including, among other items, gains on personal property sales and partner loan transactions. 
• Part 2. Foreign credit limitation; including gross income and deductions.
• Part 3. Other information for preparation of Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) or Form 1118, Foreign Tax Credit - Corporations.
• Part 4. Information on partners’ Section 250 deduction with respect to foreign-derived intangible income (FDII).
• Part 5. Distributions from foreign corporations to partnership.
• Part 6. Information on partners’ Section 951(a)(1) and Section 951A inclusions.
• Part 7. Information to complete Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
• Part 8. The Schedule K-2 (Form 1065) requests information about a partnership’s interest in foreign corporation income (Code Sec. 960). The Schedule K-2 (Form 8865) asks for partners' information for base erosion and anti-abuse tax (Code Sec. 59A) purposes.

The Schedule K-2 (Form 8865) ends with Part 8. However, the Schedule K-2 (Form 1065) continues to request information on: 

• Part 9. Partners’ information for base erosion and anti-abuse tax (Code Sec. 59A); and 
• Part 10. Foreign partners' character and source of income and deductions. 

The Schedule K-2 (Form 1120-S) requests much the same information as the other two Schedules K-2. 

The Schedule K-3 for Form 1065, Form 8865, and Form 1120-S follows the structure of their respective Schedule K-2 and is provided by a passthrough entity to each partner or shareholder. 

There are no instructions for Schedules K-2 and K-3 (Form 1120-S) or Schedules K-2 and K-3 (Form 8865). The IRS plans to release draft instructions for these schedules in the summer of 2021. 

Read more at: Tax Times blog

The Treasury and the IRS released on April 30, 2021 updated early drafts of new Schedules K-2 and K-3 for Forms 1065, 1120-S, and 8865 for tax year 2021 (filing season 2022). The schedules are designed to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.

The early release drafts of the schedules are intended to give a preview of the changes before final versions are released.  The release of an early draft of the instructions for the schedules is planned for this summer.

The redesigned forms and instructions will also give useful guidance to partnerships, S corporations and U.S persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information.  The updated forms will apply to any persons required to file Form 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners).

The Changes Do Not Affect Partnerships And S Corporations With No Items Of International Tax Relevance.

The Treasury Department and the IRS released prior drafts of Schedules K-2 and K-3 for the Form 1065 in July 2020 and engaged with stakeholders to solicit input on the changes.  Helpful comments were received, and changes have been made to the schedules and instructions as appropriate.

To promote compliance with adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the Treasury Department and the IRS intend to provide certain penalty relief for the 2021 tax year in future guidance. 

Read more at: Tax Times blog

The IRS has updated its Practice Unit on the reasonable cause defense to certain penalties. This Practice Unit provides auditors with information on how to determine whether a taxpayer has a reasonable cause defense to a proposed penalty. 

Certain penalties are not imposed if the taxpayer can prove “reasonable cause” for the return position giving rise to the penalty (“reasonable cause defense”). Penalties that have a reasonable cause defense include:

• Most accuracy related penalties under Code Sec. 6662, and the civil fraud penalty under Code Sec. 6663. (Code Sec. 6664(c))

• The Code Sec. 6662A reportable transaction understatement penalty (when the transaction is adequately disclosed). (Code Sec. 6664(d))

• The penalty for erroneous claims for refund or credit. (Code Sec. 6676(a))

• Failure to file and/or failure to pay under Code Sec. 6651. (Code Sec. 6651(a)(1))

• Understatement of taxpayer's liability by return preparer under Code Sec. 6694. (Code Sec. 6694(a)(3))

In some cases, to take advantage of the reasonable cause defense, the taxpayer must also show that they acted in good faith or that their failure to comply was not due to willful neglect. 

Whether the taxpayer has a reasonable cause defense to a penalty depends on which penalty the IRS seeks to impose. However, in general, reasonable cause depends on all the facts and circumstances. 

According to the Practice Unit, an auditor should determine whether the taxpayer acted with reasonable cause on a case-by-case basis. The most significant of the facts and circumstances the auditor must consider is the taxpayer’s effort to report their proper tax liability.

• Example 1. On their return, a taxpayer reports amounts from an erroneous information return but does not know the amounts are incorrect. This type of error may indicate that the taxpayer has reasonable cause for reporting the incorrect amounts on their return. However, there must be additional facts suggesting the taxpayer made a reasonable effort to ascertain the correct amounts. 
• Example 2. On their return, the taxpayer makes an isolated computation or transposition error. This type of error may indicate the taxpayer’s good faith effort to report their proper tax liability. 

Other factors for an auditor to consider are the taxpayer’s experience, knowledge, education, and whether the taxpayer relied on the advice of a tax advisor.

When the auditor considers a taxpayer’s reliance on the advice of a tax advisor, the auditor should consider whether:

1. The taxpayer's reliance on the advice of a tax advisor was objectively reasonable.
2. The taxpayer provided their tax advisor with all the necessary information to evaluate the tax matter.
3. The tax advisor had enough knowledge and expertise related to the tax matter to provide advice.
4. The taxpayer "actually relied" on their tax advisor's advice.
5. The taxpayer exercised the care that a reasonably prudent person would have used under the circumstances when relying on the tax advisor's advice.

The taxpayer is responsible for timely filing and payment, and this responsibility cannot be delegated. However, an auditor should consider factors that might excuse late filing or late payment such as whether the taxpayer's records were unavailable (for example, due to disaster or casualty) or whether there was a law change of which the taxpayer could not reasonably have been expected to be aware.

In addition, a taxpayer's forgetfulness is not generally a basis for reasonable cause; however, it could be if there is a medical reason for such forgetfulness (e.g., the taxpayer has dementia).

Read more at: Tax Times blog