2017 Loscalzo Institute, a Kaplan Company

Transcription

1 June 5, 2017 Section: Exam IRS Warns Agents Against Using IRS Website FAQs to Sustain Positions in Exam... 2 Citation: SBSE , 5/30/ Section: Payments User Fees For Certain Rulings, Including Private Letter Rulings, Must Be Submitted via Pay.gov... 4 Citation: IR , 6/1/ Section: 6662 Even Though Advice Was Significantly in Error, Taxpayer Reasonably Relied on Tax Professional, No Penalty Due... 6 Citation: Whitsett v. Commissioner, TC Memo , 6/1/ Section: 7705 IRS Issues First Notices of Certification in CPEO Program Citation: News Release IR , 6/1/ Loscalzo Institute, a Kaplan Company 1

2 2 Current Federal Tax Developments SECTION: EXAM IRS WARNS AGENTS AGAINST USING IRS WEBSITE FAQS TO SUSTAIN POSITIONS IN EXAM Citation: SBSE , 5/30/17 Not all IRS documents are created equal, and only certain documents are binding on the agency. Those binding documents do not include items published on the IRS s website in most cases, as the IRS Small Business/Self-Employed (SB/SE) Division reminded its agents in SBSE The memorandum gives guidance on the level of reliance that should be placed on frequently asked questions (FAQs) posted on the IRS website and the answer is, by default, none. The IRS regularly publishes information on its website that is meant to assist taxpayers in complying with the tax law. The IRS often creates pages of frequently asked questions in specific areas to address various issues. In fact, the IRS has a page to allow taxpayers to browse through the agency s FAQs 1 which contains a search box that can be used to search for information in the various FAQs. The categories of FAQs found on that page are as follows: IRS Procedures Filing Requirements, Status, Dependents, Exemptions Itemized Deductions, Standard Deduction Interest, Dividends, Other Types of Income Retirement Plans Social Security Income Childcare Credit, Other Credits Earned Income Tax Credit Estimated Tax Capital Gains, Losses, and Sale of Home Sale or Trade of Business, Depreciation, Rentals Small Business, Self-Employed, Other Business U.S. Resident Aliens and Citizens Living Abroad Electronic Filing (e-file) Electronic Filers 1

3 Current Federal Tax Developments 3 Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries) Individual Retirement Arrangements (IRAs) However, the IRS SB/SE Division memorandum cautions agents: The FAQs and other items should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin. Included with the memorandum was interim guidance that the memorandum states will be incorporated into the Internal Revenue Manual at IRM , Issue Resolution within two years. The interim guidance is reproduced below, with the key discussion found in the CAUTION at the end of the guidance: Internal Revenue Bulletin (1) The Internal Revenue Bulletin (I.R.B.) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official IRS rulings and procedures and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published on a weekly basis by the Government Printing Office. (2) It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. CAUTION: Internal Revenue Service employees must follow items published in the Bulletin and taxpayers may rely on them. Some items, such as FAQs, can be found on IRS.gov but have not been published in the Bulletin. FAQs that appear on IRS.gov but that have not been published in the Bulletin are not legal authority and should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.

4 4 Current Federal Tax Developments What should we make of this memo? Actually, it s not surprising as the memorandum notes, the IRS generally is only bound by subregulatory guidance that is published in the Internal Revenue Bulletin. The IRS has published informal guidance for years in the form of publications, and the FAQs and other material on the IRS website are simply an extension of that sort of guidance. Such guidance is useful to determine the likely position of the agency in a matter, but advisers must remember that the IRS is not bound by that information and, in fact, from time to time the agency does take a position contrary to such informal guidance and wins in court. 2 SECTION: PAYMENTS USER FEES FOR CERTAIN RULINGS, INCLUDING PRIVATE LETTER RULINGS, MUST BE SUBMITTED VIA PAY.GOV Citation: IR , 6/1/17 The IRS has announced in IR that user fee payments will be made online for items such as letter rulings, closing agreements, and certain other rulings. The payments will be made via the government s Pay.gov website and the program begins on June 15, The program will be phased in initially: From June 15 to August 15 payments may be made either via Pay.gov or by a check or money order; For payments made after August 15, the payments will only be accepted via Pay.gov. The release indicates the following rulings are affected by this change: Rulings described in Revenue Procedure and sent to the Docket, Records and User Fee Branch of the Legal Processing Division of the Associate Chief Counsel (Procedure and Administration) (CC:PA:LPD:DRU) are affected by this change. These include private letter rulings, closing agreements, and rulings using Form 1128, 2553, 3115 or A relatively recent example is found in the case of Bobrow v. Commissioner, TC Memo , 1/28/14 in which the IRS took a position on the one rollover per year rule for IRAs that was inconsistent with the position outlined in its own publication and the IRS prevailed in the case.

5 Current Federal Tax Developments 5 Determination letters are not covered by this change in procedures. Also, the ruling request itself will not be submitted via Pay.gov only the payment will be made at that site. The news release offers the following instructions on submitting a payment: To submit a user fee, visit and use the IRS Chief Counsel User Fees (or Supplemental User Fees) for Form 1128, Form 2553, Form 3115, Form 8716, Private Letter Rulings and Closing Agreements form. This form can be found by entering IRS Chief Counsel User Fees in the Search the Forms box or by clicking on the Agency List link under What Federal Agencies Can I Pay? and choosing Internal Revenue Service. Since the ruling request itself will not be submitted via Pay.gov, the taxpayer will need to submit evidence of payment with the request. The news release provides the following options for providing that information: Once payment is made, print a copy of the completed form and the receipt and include these with the letter ruling request. Then submit the complete package by mail or hand delivery: Mail to: Internal Revenue Service CC:PA:LPD:DRU P.O. Box 7604 Ben Franklin Station Washington, DC 20044; or Hand deliver, or if using a private courier service, to: Internal Revenue Service CC:PA:LPD:DRU 1111 Constitution Avenue, NW Room 5336 Washington, DC 20224

6 6 Current Federal Tax Developments In addition, for the fastest processing, please Efax a copy of the pay.gov receipt, the completed form and the ruling request to this efax line, SECTION: 6662 EVEN THOUGH ADVICE WAS SIGNIFICANTLY IN ERROR, TAXPAYER REASONABLY RELIED ON TAX PROFESSIONAL, NO PENALTY DUE Citation: Whitsett v. Commissioner, TC Memo , 6/1/17 The penalty for a substantial understatement of tax found at IRC 6662(b)(2) is triggered whenever a taxpayer faces a sufficiently large underpayment at the end of an examination. A substantial understatement exists for an individual if the understatement is greater than the greater of: $5,000 or 10% of the tax required to be shown on the return for the taxable year. Once the IRS establishes an underpayment that exceeds the thresholder, to escape the penalty, the taxpayer must meet one of the following criteria: If the underpayment did not arise from a tax shelter (as defined at IRC 6662(d)(2)(C)) either:

7 Current Federal Tax Developments 7 o There was or is substantial authority for the treatment of the item or o There was adequate disclosure (generally on a Form 8275 or Form 8275-R) and there exists or existed a reasonable basis for the position that gave rise to the underpayment (IRC 6662(d)(2)) or There existed reasonable cause for the underpayment, the taxpayer acted in good faith (IRC 6664(c)) and the underpayment did not arise from a tax shelter (again as defined at IRC 6662(d)(2)(C)). In the real world, the IRS is rarely going to agree that a position that lead to a tax underpayment had substantial authority and, in fact, the Courts, while not as sure that such a position does not exist, will generally conclude it won t exist in the vast majority of cases. As well, in the real world it s rare for the IRS to assert a penalty if there is disclosure on the return, if only because their burden to sustain the penalty becomes very difficult they have to prove there was not a reasonable basis for the position. For that reason the reasonable cause exception found at IRC 6662(d)(2)(C) is the one most often litigated in court cases and that was true in the case of Whitsett v. Commissioner, TC Memo There certainly existed a major understatement of tax in this case, along with a series of mistakes regarding the proper year in which the taxable event took place. The taxpayer had failed to report a gain of $1,076,038 in her 2012 income tax return, although she had paid what she thought was the tax due with a request for extension filed for her 2011 return though, as she later discovered, that 2011 return was never actually filed. The taxpayer had engaged her long-time tax preparer to prepare her 2011 and 2012 income tax returns. The preparer had been preparing Dr. Whitsett s taxes for many years. She knew he had been providing tax preparation services for more than 25 years, and before starting his own firm in 1995 he had worked for several small firms. He prepared, on average, returns per year, primarily for doctors and dentists. Dr. Whitsett had never had any serious problems with the IRS that arose from returns that she filed that had been prepared by this individual in the past.

8 8 Current Federal Tax Developments Dr. Whitsett had acquired shares in a company that was being acquired by another entity. She had paid $11,000 for those shares and now was offered over $1,000,000 for her shares. She accepted the offer and informed her preparer of this fact. She received a document from the buyer s agent, Computershare Trust Co., along with the check for her shares labeled Corporate Action Advice. The document stated that the payment date was August 19, 2011 and the tax year was They also included a letter dated January 9, 2012 indicating her sale was processed as of January 4, She provided these documents to her preparer to be used in preparing her tax return for The preparer advised her: The sale should be reported on her 2011 income tax return (a conclusion that was incorrect the sale actually took place in 2012 when payment was made); Her basis was $639,437, which was the total of the $11,000 she had originally paid and $628,437 of dividends the advisers erroneously concluded, by looking at prior year s tax returns, had been reinvested; He needed extra time to prepare her return (this was true), and so she needed to pay $154,776 with the extension, which she did and When he finally completed the return in February 2013, he advised her that he was going to electronically file the return for her (but it turns out it never actually got filed) and gave her a Form 1040-V to send in with a check for $5,393 which she paid. The taxpayer again engaged the preparer to handle her 2012 returns. Sometime in early 2012 she received a Form 1099-B from Computershare showing the sales proceeds being reportable on her 2012 return. She sent this to her preparer along with a filled in organizer, along with a letter noting that she believed she had sold the stock in Again she filed for an extension of time to file the tax return. The preparer determined that no gain should be reported in 2012, presumably holding to his prior conclusion that this was a 2011 tax event. Thus, no sale was reported on her 2012 income tax return which was again filed late in November 2013.

9 Current Federal Tax Developments 9 In December of 2013 Dr. Whitsett received her first (but not to be her last) notice from the IRS, a Form CP80 indicating that the IRS had a credit of $165,562 on her account for 2011 but that no 2011 return had been filed. She wrote the IRS indicating her belief that the return had been electronically filed by her prepare and send along a copy of the 2011 return she believed had been filed. She asked her preparer in January 2014 if she should the IRS another copy of the 2011 return for processing, and was assured that this was not necessary, as her return had been electronically filed. In October of 2014 the IRS sent Dr. Whitliff another CP80 form again showing a large credit balance and stating (correctly) that no 2011 return had been filed. On October 18, 2014 she responded to this notice, again stating that her 2011 return had been electronically. Nine days later the IRS issued a CP2000 notice on Dr. Whitliff s 2012 income tax return, noting the missing sales proceeds of $1,717,038 on this return and advising the doctor she had a balance due of $680,086. This letter worried the taxpayer, so she sent the preparer both notices and asked him what was going on. He responded by asking her to execute a power of attorney, which she apparently did. Over the next few months, the preparer assured Dr. Whitliff by that he was talking with the IRS about her 2011 and 2012 returns. Finally, in an dated February 2, 2015, the preparer indicated that he had now concluded the sales proceeds really should have been reported in 2012 and that he would prepare amended income tax returns for her to file on paper with the IRS. However, he never actually provided her with these promised returns. In April of 2015 the IRS, having not heard from anyone on the CP2000 issue, issued a notice of deficiency for 2012, looking for $541,522 of tax and an accuracy related penalty of $107,995. At this point Dr. Whitliff decided something has gone very wrong, and she sought the advice of an attorney who prepared a 2011 Form 1040 that did not report the sale which was filed with the IRS and showed a refund due which was requested to be applied to the 2012 tax. The attorney also prepared a petition before the Tax Court for 2012 to redetermine the deficiency and penalty. Prior to trial the IRS and the taxpayer agreed on the tax due for 2012, so the only item left for the Tax Court to deal with was the penalty. Clearly the underpayment was well over the trigger level for a substantial understatement and the taxpayer did not argue that there

10 10 Current Federal Tax Developments existed substantial authority for her position. Rather she argued that the penalty should not apply based on the reasonable cause exception found at IRC, specifically arguing that she had reasonably relied upon the advice of her preparer as discussed at Reg (c). The Court first looked the basic issue of whether the taxpayer acted in good faith since without good faith, reliance on a professional will not be an effective defense. The IRS contended the taxpayer should have known from the documents she received from Computershare that the gain should have been reported on the 2012 return. But the Tax Court disagreed while the taxpayer was a highly educated individual, she did not have special expertise in taxation and the documents were, at best, confusing. So, she acted reasonably by referring the question of the proper year of inclusion to her tax adviser. And, as the Court pointed out, she sought this advice even though it would have been to her advantage (based on the time value of money) to delay reporting the gain until So her request for advice was a genuine attempt to comply with the law, not an attempt to get a better than she should obtain result. The Tax Court outlined, in the case of Neonatology Associates, PA v. Commissioner, 115 TC 43, 99, three criteria the taxpayer must show to justify relief based on reliance on the advice of a tax professional: The adviser was a competent professional who had sufficient expertise to justify reliance; The taxpayer provided necessary and accurate information to the adviser; and The taxpayer actually relied in good faith on the adviser s judgment. The IRS first tried to argue that the large number of errors made by the professional meant that the taxpayer could not meet the first test. But the Court notes that if there weren t errors made by a professional in giving advice, the question of reasonable reliance would likely never come up. Rather, the question was whether Dr. Whitliff, given her education and background, reasonably (even if erroneously ultimately) believed her long-time preparer was competent and had sufficient expertise to handle this matter. The Court found, based on years of interactions with the adviser, knowledge of his background and no prior significant issues with returns he had prepared, that her reliance was justified.

11 Current Federal Tax Developments 11 The taxpayer also clearly provided the adviser with all information she received, forwarding documents to the preparer as she received them as she believed they were relevant to obtaining proper advice. She had approached him shortly after she received the check specifically to obtain information on reporting. At no time did the adviser lack the information necessary to provide proper advice. Finally, the Court found her reliance on his advice was reasonable. The Court noted that the advice she received was not too good to be true advice that she should have realized was likely in error. Quite the contrary: As noted previously, Mr. Whittemore s advice (to report the gain in 2011 rather than 2012) was contrary to petitioner s economic interest, but she nevertheless accepted it. In our view, this constitutes proof positive of her good faith. But, the IRS protested, what about that $600,000+ overstatement of her basis shouldn t that have tipped her off about relying on this advisers s advice? The Tax Court disagreed, nothing in a footnote: The original 4,000 shares had been purchased in 1982; she had acquired them from her ex-husband in 1998; and they had mushroomed to 63,594 shares because of stock splits and (Mr. Whittemore erroneously told her) reinvested dividends. Petitioner did not have records going back 30 years, and she had no knowledge of how basis in corporate stock should be computed under these circumstances. She reasonably left this determination to her tax adviser and reasonably relied on his advice. SECTION: 7705 IRS ISSUES FIRST NOTICES OF CERTIFICATION IN CPEO PROGRAM Citation: News Release IR , 6/1/17 In News Release IR the IRS announced that it has finally approved the first batch of certified professional employer organizations (CPEOs) The legislation authorizing CPEOs was passed in late 2015 and the legislation originally targeted January 1, 2016 as the date employers could begin using such organizations. However, the IRS took time to publish the rules under which an application could be made and to process such an application, so the program got off to a late start. Now the IRS has issued notices of certification to 84 organizations.

12 12 Current Federal Tax Developments The new release indicates that once an approved organization provides the IRS with a surety bond, the CPEO s name, address and effective date of certification will be published on irs.gov. The news release describes the program as follows: Certification affects the employment tax liabilities of both the CPEO and its clients. A CPEO is generally treated as the employer of any individual performing services for a client of the CPEO and covered by a CPEO contract between the CPEO with the client, but only for wages and other compensation paid to the individual by the CPEO. As a practical matter this means that if the requirements are met (including the organization agreeing to act as a CPEO for the employer as part of its engagement) the employer will no longer be at risk for unpaid payroll taxes. Normally a business remained liable for the payroll taxes being paid to the IRS should the PEO fail to actually pay over the tax money it had obtained from the business. CPEOs have to meet certain requirements to maintain that status. As the news release notes: To become and remain certified under the new program, CPEOs must meet tax compliance, background, experience, business location, financial reporting, bonding, and other requirements. The release concludes by noting the IRS is continuing to process applications, and those who weren t included in the first batch of 84 certifications should receive a decision from the IRS in the coming weeks and months.