The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

During an April 21, 2022, hearing of the subcommittee, Rettig noted updated tax gap figures for the three-year period of 2012-2014, along with projections through 2019, will be released this summer. However, those projections do not account for the growth in cryptocurrency, which could be widening the tax gap beyond the current calculations and projections.

"What is not in those estimates is virtual currencies, and there is over a $2 trillion market cap for virtual currencies," Rettig testified before the committee. "Last year, there was over $14 trillion in transactions in virtual currencies and the United States, if you view relative GDP, is somewhere between 35 and 43 percent of that $14 trillion."

He said that knowledge generated from John Doe summons activity in these space reveals "that the compliance issues in the virtual currency space are significantly low."

"The tax gap estimates that the IRS prepares are based on information that the IRS is able to determine, not information that we know is out there but we are not able to determine," Rettig said, adding that the agency is trying to get more information about virtual currencies through adding questions on the Form 1040, first on Schedule L and then moving it to page one of the Form 1040 last year "to try to enhance compliance."

He added that the agency is looking to get more into that area.

The comments on the tax gap and the need to be able to tackle compliance in the cryptocurrency space underscores the agency’s need for more funding as requested in the White House budget request for fiscal year 2023.

In his written testimony submitted to the committee, Rettig noted that the agency "can no longer audit a respectable percentage of large corporations, and we are often limited in the issues reviewed among those we do audit. These corporations can afford to spend large amounts on legal counsel, drag out proceedings and bury the government in paper. We are, quite simply, ‘outgunned’ in our efforts to assure a high degree of compliance for these taxpayers."

He wrote that it is "unacceptable" that corporations and the wealthiest individuals have such an advantage to push back on the nation’s tax administrator.

"We must receive the resources to hire and train more specialists across a wide range of complex areas to assist with audits of entities (taxable, pass-through and tax-exempt) and individuals (financial products; engineering; digital assets; cross-border activities; estate and gift planning; family offices; foundations; and many others)," his written testimony states.

Rettig wrote that the agency current has fewer than 2,000 revenue officers, "the lowest number of field collection personnel since the 1970s," to handle more than 100,000 collection cases in active inventory.

He continued: "In addition to our active inventory, we have over 1.5 million cases (more than 500,000 of which are considered high priority) awaiting assignment to these same 2,000 revenue officers. We have classified roughly 85 percent of those cases as high priority, many of which involve delinquent business employment taxes."

The lack of funding is also hampering criminal investigations.

"Much like other operating divisions in the IRS, CI is close to its lowest staffing level in the past 30 years. With fewer agents, we have fewer cases and fewer successful convictions," he stated in the written testimony.

Much of this also is compounded by the ancient IT infrastructure at the agency, another reason Rettig advocated during the hearing for more funding.

"Limited IT resources preclude us from building adequate solutions for efficiently matching or reconciling data from multiple sources," he wrote. "As a result, we are often left with manual processes to analyze reporting information we receive."

Retting specifically highlighted the Foreign Account Tax Compliance Act, which Congress enacted in 2010 but, according to Retting, has yet to appropriate the funding necessary for its implementation.

"This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance," he wrote. "We have an acute need for additional personnel with specialized training to follow cross-border money flows. They will help ensure tax compliance by improving our capacity to detect unreported accounts and income generated by those accounts, as well as the sources of assets in offshore accounts."

Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.

Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.

"With respect to our current 2022 filing season, we are off to a healthy start in terms of tax processing and the operation of our IT systems," Rettig told members of the Senate Finance Committee during an April 7 hearing to discuss the White House budget request and update the panel on the current tax filing season. "Through April 1, we have processed more than 89 million returns and issued more than 63 million refunds totaling more than $204 billion."

Getting that backlog cleared has been bolstered in part by a direct hiring authority given to the agency in the recent passage of the fiscal year 2022 omnibus budget, Rettig told the committee.

The effectiveness of that hiring authority was highlighted in his written testimony submitted prior to the hearing, where Rettig stated that in-person and virtual job fairs near processing facilities in Austin, Kansas City, and Ogden, Utah, attracted eligible applicants for more than 5,000 vacancies and "we have been able to make more than 2,500 conditional offers at the conclusion of the interviews."

Rettig said the direct hiring authority is only related to those lower paygrade processing/customer service positions and the agency is going to ask Congress to expand that authority, although he did not specify what types of positions would be hired as part of that expansion.

The IRS addressed the following common myths about tax refunds:

The IRS addressed the following common myths about tax refunds:

• Myth 1: Calling the IRS or visiting an IRS office speeds up a refund. The best way to check the status of a refund is online through the “Where’s My Refund?” tool. Taxpayers can also call the automated refund hotline at 800-829-1954.

• Myth 2: Taxpayers need to wait for their 2020 return to be processed before filing their 2021 return. Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns. They should file when they are ready. Individuals with unprocessed 2020 tax returns, should enter zero dollars for last year's Adjusted Gross Income (AGI) on their 2021 tax return when filing electronically.

• Myth 3: Taxpayers can get a refund date by ordering a tax transcript. Ordering a tax transcript will not inform taxpayers of the timing of their tax refund, nor will it speed up a refund being processed. Taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation.

• Myth 4: "Where’s My Refund?" must be wrong because there is no deposit date yet. While the IRS issues most refunds in less than 21 days, it is possible a refund may take longer for a variety of reasons. Delays can be caused by simple errors including an incomplete return, transposed numbers, or when a tax return is affected by identity theft or fraud.

• Myth 5: "Where’s My Refund?" must be wrong because a refund amount is less than expected. Different factors can cause a tax refund to be larger or smaller than expected. The IRS will mail the taxpayer a letter of explanation if these adjustments are made.

• Myth 6: Calling a tax professional will provide a better refund date. Contacting a tax professional will not speed up a refund. Tax professionals cannot move up a refund date nor do they have access to any special information that will provide a more accurate refund date.

• Myth 7: Getting a refund this year means there is no need to adjust tax withholding for 2022. Taxpayers should continually check their withholding and adjust accordingly. Adjusting tax withholding with an employer is easy and using the Tax Withholding Estimator tool can help taxpayers determine if they are withholding the right amount from their paycheck.

As of the week ending April 1, the IRS has sent out more than 63 million refunds worth over $204 billion. The IRS reminded taxpayers the easiest way to check on a refund is the "Where’s My Refund?" tool. This tool can be used to check the status of a tax return within 24 hours after a taxpayer receives their e-file acceptance notification. Taxpayers should only call the IRS tax help hotline to talk to a representative if it has been more than 21 days since their tax return was e-filed, or more than six weeks since mailing their return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return. A manual review may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud. Other returns can also take longer to process, including when a return needs a correction to the Child Tax Credit amount or includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process. The fastest way to get a tax refund is by filing electronically and choosing direct deposit. Taxpayers who don’t have a bank account can find out more on how to open an account at an FDIC-Insured bank or the National Credit Union Locator Tool.

Further, the IRS cautioned taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills. Taxpayers should also take into consideration the time it takes for a financial institution to post the refund to an account or to receive it by mail. Before filing, taxpayers should make IRS.gov their first stop to find online tools to help get the information they need to file. To check the status of a refund, taxpayers should use the Where’s My Refund? tool on IRS.gov. The IRS will contact taxpayers by mail when more information is needed to process a return. IRS representatives can only research the status of a refund if it has been: 21 days or more since it was filed electronically; six weeks or more since a return was mailed; or when the Where's My Refund? tool tells the taxpayer to contact the IRS.

Additionally, taxpayers whose tax returns from 2020 have not yet been processed should still file their 2021 tax returns by the April due date or request an extension to file. Those filing electronically in this group need their Adjusted Gross Income (AGI) from their most recent tax return. Those waiting on their 2020 tax return to be processed should enter zero dollars for last year's AGI on the 2021 tax return. When self-preparing a tax return and filing electronically, taxpayers must sign and validate the electronic tax return by entering their prior-year AGI or prior-year Self-Select PIN (SSP). Those who electronically filed last year may have created a five-digit SSP. Generally, tax software automatically enters the information for returning customers. Taxpayers who are using a software product for the first time may have to enter this information.

The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002.

The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002. For tax years 2002 through 2021, the limit was $250 per year. The limit will rise in $50 increments in future years based on inflation adjustments. For 2022, if an eligible educator is married and files a joint return with another eligible educator, the limit rises to $600 but not more than $300 for each spouse.

Educators can claim this deduction even if they take the standard deduction. Eligible educators include anyone who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during the school year. Both public- and private-school educators qualify. Educators can deduct the unreimbursed cost of:

• books, supplies, and other materials used in the classroom;
• equipment, including computer equipment, software, and services;
• COVID-19 protective items to stop the spread of the disease in the classroom; and
• professional development courses related to the curriculum they teach or the students they teach.

Qualified expenses do not include expenses for homeschooling or nonathletic supplies for courses in health or physical education. The IRS also reminded educators that for tax year 2021, the deduction limit is $250. If they are married and file a joint return with another eligible educator, the limit rises to $500 but not more than $250 for each spouse.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

To correct the annual maintenance certification of the investment standard, taxpayers should file an amended return or an administrative adjustment request (AAR). If an entity that receives the letter fails to act, the IRS may refer its tax account for examination. Additionally, taxpayers may receive Letter 6502, Reporting Qualified Opportunity Fund (QOF) Investments, or Letter 6503, Annual Reporting Of Qualified Opportunity Fund (QOF) Investments. These letters notify them that they may not have properly followed the instructions for Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. This may happen if it appears that they may not have properly followed the requirements to maintain their qualifying investment in a QOF with the filing of the form.

Finally, if these taxpayers intend to maintain a qualifying investment in a QOF, they can file an amended return or an AAR with a properly completed Form 8997 attached. Failure to act will mean those who received the letter may not have a qualifying investment in a QOF and the IRS may refer their tax accounts for examination.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022. These information returns include:

• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
• Form 1099-DIV, Dividends and Distributions
• Form 1099-G, Certain Government Payments
• Form 1099-INT, Interest Income
• Form 1099-K, Payment Card and Third-Party Network Transactions
• Form 1099-MISC, Miscellaneous Income
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-OID, Original Issue Discount
• Form 1099-PATR, Taxable Distributions Received from Cooperatives
• Form W-2G, Certain Gambling Winnings

These notices inform payers that the information return is missing a Taxpayer Identification Number (TIN), has an incorrect name or a combination of both. Each notice has a list of payees or the persons receiving certain types of income payments with identified TIN issues. Taxpayers need to compare the accounts listed on the notice with their account records and correct or update their records, if necessary. This can also include correcting backup withholding on payments made to payees. The notices also inform payers that they are responsible for backup withholding. Payments reported on these information returns are subject to backup withholding if:

• The payer does not have the payee’s TIN when making the reportable payments.
• The payee does not certify their TIN as required for reportable interest, dividend, broker and barter exchange accounts.
• The IRS notifies the payer that the payee furnished an incorrect TIN and the payee does not certify its TIN as required.
• The IRS notifies the payer to begin backup withholding because the payee did not report all of its interest and dividends on its tax return.

The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.

The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.

Background

Section 2202 of the Taxpayer First Act (TFA), P.L. 116-25, amended Code Sec. 6103(a)(3) and (c) to limit redisclosures and uses of return information received pursuant to the staxpayer consent exception. Code Sec. 6103(c), as amended by the TFA, explicitly prohibits designees from using return information for any reason other than the express purpose for which the taxpayer grants consent and from redisclosing return information without the taxpayer’s express permission or request. Further, Code Sec. 6103(a)(3), as amended by the TFA, imposes disclosure restrictions on all recipients of return information under Code Sec. 6103(c). The TFA did not amend Code Sec. 6103(e) or (k)(6), or Code Sec. 6103(a) with respect to disclosures under Code Sec. 6103(e) or (k)(6).

Disclosure Restrictions

The IRS cited seven situations where disclosure restrictions of Code Sec. 6103(a) would or would not be applicable with regard to returns or return information received as a result of disclosure under:

• Code Sec. 6103(c) with the consent of the taxpayer (taxpayer consent exception),
• Code Sec. 6103(e) as a person having a material interest, but not under Code Sec. 6103(e)(1)(D)(iii) relating to disclosures to certain shareholders (material interest exception), or
• Code Sec. 6103(k)(6) for investigative purposes (investigative disclosure exception).

Effect on Other Documents

Rev. Rul. 2004-53, I.R.B. 2004-23, has been modified and superseded.

The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.

The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.

Relief Provided

The countries for which the eligibility requirements have been waived for 2021 are Iraq, Burma, Chad, Afghanistan and Ethiopia. Accordingly, an individual who left the following countries beginning on the specified date will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of the country: (1) Iraq on or after January 19, 2021; (2) Burma on or after March 30, 2021; Chad on or after April 17, 2021; (4) Afghanistan on or after April 27, 2021, and; (5) Ethiopia on or after November 5, 2021. Individuals who left the above mentioned countries must establish a reasonable expectation that he or she would have met the requirements of Code Sec. 911(d)(1) but for those adverse conditions. Further, individuals who established residency, or were first physically present in Iraq, after January 19, 2021, are not eligible for the waiver. Taxpayers who need assistance on how to claim the exclusion, or how to file an amended return, should consult the section under the heading "Foreign Earned Income Exclusion" at https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad; consult the section under the heading How to Get Tax Help at the same web address; or contact a local IRS office.

The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.

The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.

Nonjurisdictional Nature of Filing Deadline

The Supreme Court analyzed the text of Code Sec. 6330(d)(1) and stated that the only contention is whether the provision limits the Tax Court’s jurisdiction to petitions filed within the 30-day timeframe. The taxpayer contended that it referred only to the immediately preceding phrase of the provision: a "petition [to] the Tax Court for review of such determination." and so the filing deadline was independent of the jurisdictional grant. The IRS, on the contrary, argued that "such matter" referred to the entire first clause of the sentence, which includes the deadline and granting jurisdiction only over petitions filed within that time. However, the Supreme Court held the nature of the filing deadline to be nonjurisdictional because the IRS failed to satisfy the clear-statement rule of the jurisdictional condition. It also stated that where multiple plausible interpretations exist, it is difficult to make the case that the jurisdictional reading is clear. Moreover, Code Sec. 6330(e)(1)’s clear statement—that "[t]he Tax Court shall have no jurisdiction . . . to enjoin any action or proceeding unless a timely appeal has been filed"—highlighted the lack of such jurisdictional clarity in Code Sec. 6330(d)(1).

Equitable Tolling of Filing Deadline

The Supreme Court remanded the case to the Court of Appeals for the Eighth Circuit to decide whether the taxpayer was entitled to equitable tolling of the filing deadline. However, the Supreme Court did emphasize that Code Sec. 6330(d)(1) did not expressly prohibit equitable tolling, and its 30-day time limit was directed at the taxpayer, not the court. Further, the deadline mentioned in the provision was not written in an emphatic form or with detailed and technical language, nor was it reiterated multiple times. The IRS’ argument that tolling the Code Sec. 6330(d)(1) deadline would create much more uncertainty, was rejected. The Supreme Court concluded that the possibility of equitable tolling for relatively small number of petitions would not appreciably add to the uncertainty already present in the process.

The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.

The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.

Report Findings

GAO found that the IRS faced multiple challenges and struggled to respond to an unprecedented workload that included delivering COVID-19 relief. The IRS began the 2021 filing season with a backlog of 8 million individual and business returns from the prior year. The IRS reduced the backlog of prior year returns, but in December 2021, had about 10.5 million returns to process from 2021. The IRS suspended and reviewed 35 million returns with errors primarily due to new or modified tax credits. GAO found that some categories of errors occur each year, however, the IRS does not assess the underlying causes of taxpayer errors on returns. Additionally, the IRS paid nearly $14 billion in refund interest in the last 7 fiscal years, with $3.3 billion paid in fiscal year 2021. However, the IRS does not identify, monitor, and mitigate issues contributing to refund interest payments.

Recommendations

GAO made six recommendations, including that the IRS should assess reasons for tax return errors and refund interest payments and take action to reduce them; modernize its “Where's My Refund” application; address its backlog of correspondence; and assess its in-person service model. The IRS agreed with four recommendations and disagreed with two. The IRS said its process for analyzing errors is robust and that the amount of interest paid is not a meaningful business measure.

President Trump recently walked back consideration of capital gains indexing and a payroll tax cut, less than 24 hours after signaling his support for both.

President Trump recently walked back consideration of capital gains indexing and a payroll tax cut, less than 24 hours after signaling his support for both.

Payroll Tax Cut
Reports on Capitol Hill had begun swirling recently that the Trump administration was considering cutting payroll taxes.

"We’re looking at various tax reductions," Trump told reporters at the White House on August 20. "I have been thinking about payroll taxes for a long time," he added. "A lot of people would like to see that."

However, White House staff swiftly denied that any payroll tax cut was under consideration, according to several reports.

Along those lines, Michael Zona, communications director for Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, told Wolters Kluwer on August 20 that no such discussions were occurring between the SFC majority and the president. "Chairman Grassley has not discussed a potential payroll tax cut with the Administration," Zona told Wolters Kluwer.

Payroll taxes are used to fund certain social programs such as Social Security and Medicare. Generally, payroll taxes are paid primarily through the wages and salaries of employees, as noted by the nonpartisan Tax Foundation. Amid recent reports that the U.S. economy could be heading toward a recession, cutting payroll taxes could potentially benefit middle-income taxpayers and bolster consumer spending.

On August 20, Trump disputed the notion that a recession could be around the bend. Additionally, Trump told reporters that any consideration of a payroll tax cut is unrelated to mostly Democratic claims of an impending recession. In that vein, Zona told Wolters Kluwer on August 20 that "[a]t this point, recession seems more of a political wish by Democrats than an economic reality."

Indexing Capital Gains to Inflation
Further, Trump confirmed to reporters at the White House on August 20 that he is still considering indexing capital gains to inflation. Lately, lawmakers have become increasingly vocal concerning their differing viewpoints on the matter, both as to tax policy and legality.

"We’ve been talking about indexing [capital gains to inflation] for a long time," Trump said. "It can be done directly by me…I can do it directly," he said, referencing a recent uptick in debate between Republican and Democratic lawmakers on the legality of such an executive move.

No Tax Cuts, No Indexing
Then on August 21, Trump told reporters at the White House that "I’m not looking at a tax cut now; we don’t need it. We have a strong economy."

Additionally, Trump followed up his initial assertion of authority to circumvent Congress on the tax policy issue by stating on August 21 that if he wanted to unilaterally index capital gains to inflation, he would need a letter from the Attorney General.

However, the longstanding Republican and Democratic debate as to whether the executive branch has authority to index capital gains to inflation appears to be moot, at least for the time being.

"I’m not looking to do indexing," Trump said on August 21. "I’ve studied indexing for a long time. I want tax [cuts] for middle-class workers. I think indexing is probably better for the upper income groups; I’m not looking to do that."

The Senate’s top tax writers have released the first round of bipartisan task force reports examining over 40 expired and soon to be expired tax breaks known as tax extenders. Congress is expected to address these particular tax breaks, as well as temporary tax policy in general, when lawmakers return to Washington, D.C. in September.

The Senate’s top tax writers have released the first round of bipartisan task force reports examining over 40 expired and soon to be expired tax breaks known as tax extenders. Congress is expected to address these particular tax breaks, as well as temporary tax policy in general, when lawmakers return to Washington, D.C. in September.

Tax Extenders Task Forces
Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., on August 13 released three of six reports detailing the work of bipartisan task forces that were created to examine certain tax breaks, which expired or will expire between December 31, 2017, and December 31, 2019. The three remaining tax extenders task force reports are expected to be released soon.

The reports released by Grassley and Wyden on August 13 were from the following task forces:

• Energy;
• Cost Recovery; and
• Individual, Excise and Other Temporary Tax Policy.

Next Steps
Wyden also highlighted the importance of moving away from the notion of temporary tax provisions in general, which Democrats and Republicans alike largely agree is not good tax policy. "Tax policy should not be set a year or two at a time. We need to find permanent solutions that provide certainty to families and businesses," Wyden said in an August 13 press release.

Grassley and Wyden introduced their bipartisan tax extenders bill earlier this year. However, Grassley reiterated on August 13 that movement of all tax legislation must be initiated in the House. Although House Ways and Means Committee Chairman Richard Neal, D-Mass., has also introduced his own tax extenders proposal, the bill is unlikely to garner enough support from Senate Republicans.

"The next step will be to put together a legislative package based on the proposals that the taskforces received, the areas of consensus among the taskforce members and continued bipartisan discussions," Grassley said in an August 13 press release. "Taxpayers deserve predictability and clarity, and they haven’t received either for far too long on temporary tax policy."

Bonus depreciation guidance that applies to property acquired after September 27, 2017, in a tax year that includes September 28, 2017, allows taxpayers to make a late election or revoke a prior valid election to...

Bonus depreciation guidance that applies to property acquired after September 27, 2017, in a tax year that includes September 28, 2017, allows taxpayers to make a late election or revoke a prior valid election to:

• elect out of 100 percent bonus depreciation;
• elect 100 percent bonus depreciation on specified plants in the year of planting or grafting; or
• elect the 50 percent rate in place of the 100 percent rate.

The late election or revocation may be made by filing an accounting method change, or in certain cases by filing an amended return. The taxpayer must have timely filed its federal tax return for the 2016 or 2017 tax year. Most taxpayers will prefer the administrative ease of filing an accounting method change with their next return and making a single Code Sec. 481(a) adjustment. This route is easier than filling an amended return and, if necessary, amended returns for any subsequent affected year.

Background
The Tax Cuts and Jobs Act ( P.L. 115-97) increased the bonus depreciation rate from 50 percent to 100 percent, effective for property acquired and placed in service after September 27, 2017. Many taxpayers filed returns for a 2016 or 2017 tax year that included September 27, 2017, before proposed bonus depreciation regulations ( REG-104397-18, August 8, 2018) were issued to explain the related bonus depreciation changes. Consequently, the IRS is granting relief to taxpayers, and disregarding the general rule that advance IRS permission must be obtained in a letter ruling to make a late election or revoke a prior election and that making or revoking an election is not an accounting method change.

Amended Returns
A late election or revocation of an election may be made on an amended return for the 2016 or 2017 tax year that includes September 28, 2017. However, according to the guidance, the amended return must be filed before the taxpayer files its federal return for the first tax year succeeding the 2016 or 2017 tax year, and must include the adjustment directly related to the late election or revocation as well as any collateral adjustments. Thus, for a calendar year taxpayer, an amended return for 2017 may be filed if the 2018 tax year return has not been filed. (e.g., if an October 15, 2019 filing extension was obtained).

Accounting Method Changes
Instead of filing an amended return, a taxpayer may file Form 3115, Application for Change in Accounting Method, with a taxpayer’s timely filed federal tax return for the first, second, or third tax year succeeding the 2016 or 2017 tax year that includes September 28, 2017, to make or revoke a covered election.

The automatic consent procedures apply. Accordingly, no fee is required. Multiple Forms 3115 do not need to be filed if more than one election or revocation is made.

Rev. Proc. 2018-31, I.R.B. 2018-22, 637, which lists all automatic accounting method changes, is modified to include this accounting method change.

Deemed Elections
A taxpayer who filed a timely 2016 or 2017 return that includes September 28, 2017, without following the formal election procedures in Rev. Proc. 2017-33, I.R.B. 2017-19, 1236, may be deemed to have made a valid election. Specifically, with respect to property placed in service after September 27, 2017, in a 2016 or 2017 tax year that includes September 28, 2017:

• An election to claim 100 percent bonus depreciation on a specified plant in the year of planting or grafting is considered made if the 100 percent rate was actually claimed on the return.
• An election not to claim bonus depreciation for a class of property is considered made if the taxpayer did not claim 100 percent bonus depreciation (or the elective 50 percent rate) for that class of property on the return.
• An election to claim the 50 percent bonus rate in lieu of the 100 percent bonus rate is considered made if the taxpayer claimed bonus depreciation on all qualified property using the 50 percent rate or on all specified plants in the year of planting or grafting.

These deemed elections may be revoked by filing an amended return or an accounting method change under the general rules above.

The IRS has granted a six-month extension to eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, and furnish corresponding Schedules K-1, Partner’s Share of Income, Deductions, Credits. For a calendar year partnership, the deadline to file Form 1065 and corresponding Schedules K-1 was March 15, which has now been extended to September 15.

The IRS has granted a six-month extension to eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, and furnish corresponding Schedules K-1, Partner’s Share of Income, Deductions, Credits. For a calendar year partnership, the deadline to file Form 1065 and corresponding Schedules K-1 was March 15, which has now been extended to September 15.

The relief is available to a partnership that satisfies the following eligibility requirements for the applicable tax year:

• the partnership has not elected the application of Code Sec. 6221(b) (Election Out for Certain Partnerships with 100 or Fewer Partners);
• it has timely filed Form 1065 and
• it has timely furnished all required Schedules K-1 (without regard to the extensions of time provided by the revenue procedure).

The extensions are available only to partnerships that timely filed Form 1065 and timely furnished Schedules K-1 and also file a superseding Form 1065 and furnish corresponding Schedules K-1 on or before the date that is six-months after the non-extended deadline. Further, the filing and furnishing extensions apply only to partnership tax years that ended prior to the issuance of the revenue procedure and for which the extended due date for the partnership tax year is after July 25, 2019.

The IRS is allowing the extensions because certain Bipartisan Budget Act of 2015 (BBA) partnerships timely filed Form 1065 for the 2018 tax year and timely furnished Schedules K-1 to their partners but may have made errors, including not properly reporting all of the required information on the Schedules K-1. The relief is directed at partnerships that, having timely filed, did not request an extension of the deadline to file and, due to the restrictions on amending Schedules K-1 under Code Sec. 6031(a) may not amend the Schedules K-1, including for the 2018 tax year.

Eligible partnerships taking advantage of the extensions should file a superseding Form 1065 and furnish corresponding Schedules K-1 in the same manner as the original return and Schedules K-1 and write on the top of the superseding Form 1065 "SUPERSEDING FORM 1065 PURSUANT TO REVENUE PROCEDURE 2019-32."

Proposed regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The increase to $50,000 is effective for the 2018 calendar year. The maximum value is adjusted annually for inflation after 2018. The proposed regulations provide transition rules for certain employers.

Proposed regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The increase to $50,000 is effective for the 2018 calendar year. The maximum value is adjusted annually for inflation after 2018. The proposed regulations provide transition rules for certain employers.

Taxpayers may rely on the proposed regulations until final regulation amendments are published in the Federal Register.

Depreciation Limits Increased, Inflation Calculation Changed
The Tax Cuts and Job Act ( P.L. 115-97) substantially increased the maximum annual dollar limitations on the depreciation deductions for passenger automobiles. The new dollar limitations are based on the depreciation, over a five-year recovery period, of a passenger automobile with a cost of $50,000. As a result, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, providing that it intends to amend Reg. §1.61-21(d) and (e) to:

• incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules, effective for the 2018 calendar year; and
• adjust the $50,000 base value annually for inflation in 2019 and subsequent years.

Additionally, the Notice provides that the IRS will not publish separate maximum values for trucks and vans for use with the fleet-average and vehicle cents-per-mile valuation rules. For tax years beginning after December 31, 2017, inflation adjustments for these purposes are calculated using both the consumer price index (CPI) automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component ( Code Sec. 280F(d)(7)(B)). The C-CPI-U automobile component does not currently have separate components for new cars and new trucks.

The IRS later issued Notice 2019-34, I.R.B. 2019-22, 1257, to:

• provide a 2019 inflation increase to $50,400 for these amounts; and
• announce it would revise Reg. §1.61-21(d) to provide a transition rule for certain employers.

Transition Rules
The proposed regulations include the following transition rules.

Fleet-average valuation rule. If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Vehicle cents-per-mile valuation rule. An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018 may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

• the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
• the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the employer first used the commuting valuation rule, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

• the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
• the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

COMMENT 
An employer that adopts the vehicle cents-per-mile valuation rule generally must continue to use the rule for all subsequent years in which the vehicle qualifies for it. However, the employer may use the commuting valuation rule for any year during which use of the vehicle qualifies for the commuting valuation rule.
 

The temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, I.R.B. 2014-2, 276, is extended through plan years beginning in 2020. Notice 2014-5 provided temporary nondiscrimination relief for certain defined benefit pension plans that were "closed" before December 13, 2013. Notice 2014-5, I.R.B. 2014-2, 276, Notice 2015-28, I.R.B. 2015-14, 848, Notice 2016-57, I.R.B. 2016-40, 432, Notice 2017-45, I.R.B. 2017-38, 232, and Notice 2018-69, I.R.B. 2018-37, 426, are modified.

The temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, I.R.B. 2014-2, 276, is extended through plan years beginning in 2020. Notice 2014-5 provided temporary nondiscrimination relief for certain defined benefit pension plans that were "closed" before December 13, 2013. Notice 2014-5, I.R.B. 2014-2, 276, Notice 2015-28, I.R.B. 2015-14, 848, Notice 2016-57, I.R.B. 2016-40, 432, Notice 2017-45, I.R.B. 2017-38, 232, and Notice 2018-69, I.R.B. 2018-37, 426, are modified.

Closed Defined Benefit Plans
Employers have been moving away from traditional defined benefit plans for rank and file employees. Existing plans are sometimes closed for new employees as of a specified date. These plans are referred to as "closed plans," and the employees who continue to earn pension benefits under the closed plan are often known as a "grandfathered group of employees."

Closed plans must continue to meet the coverage and nondiscrimination tests, but they may eventually find it difficult because the proportion of the grandfathered group of employees who are highly compensated employees compared to the employer’s total workforce increases over time. This occurs because grandfathered employees usually continue to receive pay raises and so may become highly compensated employees, while new employees who are generally nonhighly compensated employees are not covered by the closed plan.

Notice 2014-5 Relief
For plan years beginning before 2016, Notice 2014-5 provides testing relief for defined benefit/defined contribution plans that include a closed defined benefit plan that was closed before December 13, 2013. Under this relief the plan can demonstrate satisfaction of the nondiscrimination in amount requirement on the basis of equivalent benefits, even if the does not meet any of the existing eligibility conditions for testing on that basis.

This relief has been extended several times in anticipation of the IRS issuing final amendments to the Code Sec. 401(a)(4) regulations. Most recently the relief was extended until plan years beginning in 2019, and it is now extended for plan years beginning in 2020. The IRS issued proposed regulations in 2016 to provide a permanent fix ( NPRM REG-125761-14, Jan. 29, 2016). The IRS expects the final regulations will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2021.

The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The final regulations—

• clarify the effect of Code Sec. 743(b) adjustments on the determination of net income in a CFTE category;
• include special rules regarding how deductible allocations (that is, allocations that give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category;
• include special rules regarding how nondeductible guaranteed payments (that is, guaranteed payments that do not give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category; and
• include a clarification of the rules regarding the treatment of disregarded payments between branches of a partnership for purposes of determining income attributable to an activity included in a CFTE category.

A transition rule applies to partnerships whose agreements were entered into before February 14, 2012.

Transactions involving digital content and cloud computing have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Transactions involving digital content and cloud computing have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Digital Content Transactions
Existing Reg. §1.861-18 provides rules for classifying transactions involving computer programs. The proposed regulations broaden the scope of the rules to apply to all transfers of digital content. "Digital content" is defined as any content in digital format that is either protected by copyright law or is no longer protected due solely to the passage of time.

The proposed regulations clarify that a transfer of the mere right to public performance or display of digital content for advertising does not alone constitute a transfer of a copyright.

Additionally, the proposed regulations clarify the title passage rule. When there is a sale of a copyrighted article through an electronic medium, the sale will occur at the location of the download or installation onto the end user’s device, or, in the absence of that information, the location of the customer.

A sale of personal property occurs at the place where the rights, title, and interest of the seller in the property are transferred to the buyer. If bare legal title is retained by the seller, the sale occurs where beneficial ownership passes.

Cloud Computing Transactions
Cloud computing transactions are typically characterized by on-demand network access to computer resources. The proposed regulations classify a "cloud transaction" as either:

• a lease of property (i.e., computer hardware, digital content, or other similar resources); or
• a provision of services.

The proposed regulations provide a nonexhaustive list of factors for determining how a cloud transaction is classified. In general, application of the relevant factors will result in a transaction being treated as a provision of services, rather than a lease of property. The factors include both statutory factors under Code Sec. 7701(e)(1) and factors applied by the courts.

The IRS Large Business and International Division (LB&I) has withdrawn its directive to examiners that provided instructions on transfer pricing issue selection related to stock based compensation (SBC) in cost sharing arrangements (CSAs).

The IRS Large Business and International Division (LB&I) has withdrawn its directive to examiners that provided instructions on transfer pricing issue selection related to stock based compensation (SBC) in cost sharing arrangements (CSAs).

U.S. taxpayers that are cost sharing participants must include SBC as intangible development costs (IDCs), under Reg. §1.482-7A(d)(2) and Reg. §1.482-7(d)(3) if these costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA. In 2015, the Tax Court invalidated Reg. §1.482-7A(d)(2) in Altera Corp., 145 TC 91, Dec. 60,354. The IRS appealed Alteraand issued Directive LB&I-04-0118-005 on January 12, 2018, directing examiners to stop opening new examinations for issues related to SBC included in CSA IDCs until the outcome of the Altera appeal was known.

On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the Tax Court’s opinion (Altera Corp., CA-9, 2019-1 ustc ¶50,231). Based on the Ninth Circuit’s decision, LB&I has formally withdrawn LB&I-04-0118-005.

LB&I has instructed examiners to continue applying Reg. §§1.482-7A(d)(2) and 1.482-7(d)(3), including opening new examinations of CSA SBC issues when appropriate. Because the issues may be factually intensive, LB&I states that transfer pricing teams should develop the facts to support their analyses and conclusions. Finally, LB&I instructs issue teams to consider consulting the Practice Network and Counsel where appropriate, for support in developing the most reliable analyses of this issue.

LB&I will continue to monitor further developments related to the Ninth Circuit’s decision.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

Reworked IRS Reform Bill

The Senate approved the Taxpayer First Act by voice vote on June 13. The measure was unanimously approved in the House on June 10.

The reworked IRS reform bill, originally introduced in the last Congress, was revised in early June after the House passed a prior version in April. However, the original House-approved bill (HR 1957) was quickly doomed in the Senate because of controversy surrounding the IRS’s Free File program.

The provision codifying the IRS’s Free File program was removed from the original bill, and the measure was reintroduced as HR 3151. Congress then quickly sent it to the president’s desk.

Taxpayer First Act Provisions

The Taxpayer First Act aims to reform the IRS into a more taxpayer-friendly agency. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign the IRS’s structure, modernize its technology, and enhance its cyber security.

The measure also:

• codifies and enhances an independent Office of Appeals within the IRS;
• waives the application fee for an offer in compromise (OIC) by a low-income taxpayer;
• sets new electronic filing requirements;
• clarifies information available about low-income taxpayer clinics (LITCs);
• codifies the Volunteer Income Tax Assistance (VITA) Program;
• requires notice regarding the closure of taxpayer assistance centers (TACs);
• improves the IRS whistleblower program;
• modifies the private debt collection program;
• clarifies procedures for equitable relief from joint liability;
• establishes new safeguards on seizing funds believed to be structured to avoid the $10,000 financial reporting requirement; and
• modifies procedures for the issuance of summons and notice of third-party contacts by the IRS.

Hill Reaction

"This signing is the culmination of a lengthy, bipartisan process undertaken by the [House] Ways and Means Committee to implement pro-taxpayer reforms at the IRS for the first time in more than 20 years," Senate Finance Committee (SFC) Ron Wyden, D-Ore., said in a July 1 statement. "New protections for low-income taxpayers, practical enforcement reforms, and upgraded assistance for taxpayers and small businesses will all now go into place."

Additionally, the House’s top Republican tax writer issued a statement after Trump signed the IRS reform legislation. "I’m proud that after three years of thoughtful bipartisan work, our bold package of reforms to the Internal Revenue Service are the law of the land," Ways and Means ranking member Kevin Brady, R-Tex., said on July 1. "Thank you to President Trump for signing this historic legislation, which is the biggest and boldest step in over 20 years to redesign and restructure the IRS into an agency with a singular mission – quality taxpayer service."

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

ACA Cadillac Tax Repeal

The Middle Class Health Benefits Tax Repeal Bill (HR 748) cleared the House on the evening of July 17 by a 419-to-6 vote. The bipartisan bill would repeal the 40 percent excise tax under the ACA known as the "Cadillac tax" on certain high-cost employer-sponsored health care plans.

Congress has repeatedly delayed the ACA’s "Cadillac" tax, which is currently set to go into effect in 2022. However, HR 748 would fully repeal the tax.

Although the measure has bipartisan support in the Senate, as for when it will get its legs in the upper chamber remains to be seen. Lately, Senate Majority Leader Mitch McConnell, R-KY., has been viewed on Capitol Hill as focusing more on moving nominations than considering tax bills.

HR 748’s Large Price Tag May Signal Hope for Tax Extenders

Notably, HR 748 dodged House Democrats’ "pay as you go" rules for tax legislation, thus carrying with it a large price tag with no offsets. The nonpartisan Congressional Budget Office (CBO) has estimated that the bill would cost the federal government more than $196 billion over 10 years.

Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, has signaled that Democrats’ support for repealing the ACA’s "Cadillac"tax without pay-fors may signal a newly opened door for tax extenders. Grassley has consistently expressed that he is focused on addressing the previously and soon to be expired tax breaks known as tax extenders but has been waiting for the Democratic controlled House to send such a bill, noting that tax legislation must originate in the House.

However, House Democrats’ tax extenders bill, the Taxpayer Certainty and Disaster Tax Relief Bill of 2019 (HR 3301) would offset its costs by causing the GOP tax law’s increase in estate tax exemption amounts to sunset early at the beginning of 2023. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the estate tax provisions would expire at the start of 2026.

The bill cleared the House Ways and Means Committee last month but has not yet reached the House floor. Senate Republicans have called any proposal to repeal provisions under the TCJA a "nonstarter."

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The Treasury Department and the IRS had issued the temporary regulations ( T.D. 9766) to clarify that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of any individuals who are partners in a partnership that owns a disregarded entity. The temporary regulations continued to explicitly provide that the owner of a disregarded entity who is treated as a sole proprietor for income tax purposes is subject to self-employment taxes. A notice of proposed rulemaking ( REG-114307-15) cross-referencing T.D. 9766was published on the same day.

The final regulations adopt the proposed regulations as amended. The corresponding temporary regulations are removed.

Disregarded Entity

These regulations affect partners in a partnership that owns a disregarded entity, and contain amendments to 26 CFR part 301. Generally, under Reg. §301.7701-2(c)(2)(i) and except as otherwise provided, a business entity that has a single owner and is not a corporation under Reg. §301.7701-2(b)is disregarded as an entity separate from its owner (a disregarded entity). However, Reg. §301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation for purposes of employment taxes imposed under Subtitle C of the Internal Revenue Code. This exception to the treatment of disregarded entities does not apply to taxes imposed under Subtitle A of the Code, including self-employment taxes.

Effective Date

These regulations are effective on July 2, 2019.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Why Truncate?

The Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113) amended Code Sec. 6051(a)(2) by replacing the requirement that employers include employees’ SSNs on copies of Forms W-2 furnished to employees with a requirement to use an "identifying number for the employee."Because the SSN was no longer required to appear on Forms W-2 furnished to employees, the IRS published proposed regulations in 2017 to allow employers to truncate employees’ SSNs on those Forms W-2 ( REG-105004-16). The amendments were intended to aid employers’ efforts to protect employees from identity theft.

The final regulations adopt the proposed regulations without substantive changes to the content of the rules.

SSN Truncation on Forms W-2

The final regulations permit employers to truncate employees’ SSNs on copies of:

• Forms W-2 furnished to employees to report wages paid, employment taxes withheld, etc.;
• Forms W-2 furnished to employees to report wages paid in the form of group-term life insurance;
• Forms W-2 furnished to payees to report third-party sick pay; and
• Forms W-2c furnished to correct errors on Forms W-2.

The regulations do not apply to any other forms. Also, truncation is not mandatory; the regulations permit truncation but do not require it.

Under the general truncation rules, a TTIN cannot be used on a statement or document if a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions:

• specifically requires use of an SSN, IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or IRS employer identification number (EIN); and
• does not specifically permit truncation.

For instance, an employer cannot truncate an employee’s SSN on copies of Forms W-2 filed with the Social Security Administration.

The IRS intends to incorporate the revised regulations into forms and instructions.

Effective Date; Applicability Date

The final regulations are effective on July 3, 2019, but when they apply varies. Reg. §31.6051-1, Reg. §31.6051-3, and Reg. §1.6052-2, as amended, apply for statements required to be filed and furnished under Code Sec. 6051 and Code Sec. 6052 after December 31, 2020. Reg. §31.6051-2, as amended, applies on July 3, 2019. Reg. §301.6109-4, as amended, applies to returns, statements, and other documents required to be filed or furnished after December 31, 2020.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

Partners and S shareholders who receive the credit (i.e., are the ultimate credit claimants) must make income inclusions in proportion to their share of the credit.

No Basis Increase for Partners and S Shareholders

The regulations resolve a contentious issue against taxpayers. They provide that a partner’s income inclusions are not treated as an item of partnership income under subchapter K. A similar rule applies to S corporations. Therefore, basis adjustment rules that would increase a partner’s outside basis or S shareholder’stock basis if the income inclusion amounts were treated as items of income do not apply. The IRS says its interpretation is appropriate because the investment credit and limitations on the investment credit are determined at the partner and S shareholder level.

Coordination With Recapture Rules

If a recapture event occurs an adjustment is made to the lessee’s (or ultimate claimant’s) gross income to account for any difference between the amounts that were included in income and the credit that is allowed after recapture. Special rules are provided when the amount of the unrecaptured credit exceeds the income inclusions and when the income inclusions exceed the unrecaptured credit.

Election to Accelerate Income Inclusion Upon Lease Termination

The lessee (or ultimate claimant) may make an irrevocable election to include in gross income any remaining income inclusion amounts in the tax year in which a lease terminates or is otherwise disposed of. If a partner or S shareholder disposes of its partnership or S corporation interest, the partner or S shareholder may also make an irrevocable election to include remaining inclusion amounts in income in the year of disposition. These elections may only be made if the recapture period has expired and a recapture event had not occurred during the recapture period.

Effective Date

The final regulations are effective on July 17, 2019 and apply to investment credit property placed in service on or after September 19, 2016.

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Individuals

The GOP framework proposes consolidating the current seven individual tax rates into three: 12, 25 and 35 percent. However, the framework leaves open the possibility of an additional top rate “to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

For individuals, the GOP framework also proposes to:

• Eliminate the alternative minimum tax
• Roughly double the standard deduction
• Repeal the federal estate tax
• Preserve the home mortgage interest deduction and the deduction for charitable contributions
• Eliminate most other itemized deductions
• Repeal the personal exemption for dependents
• Retain tax benefits that encourage work, higher education and retirement security

Family incentives

Family incentives have traditionally garnered bipartisan support in Congress and the GOP framework includes several. The child tax credit, for example, currently phases out when incomes reach certain levels. The GOP framework calls for increasing the income levels for the credit to unspecified amounts.   Another proposal would create a new non-refundable $500 credit for non-child dependents. The details would be left to the tax-writing committees.

Businesses

One pillar of the GOP framework is a corporate tax rate cut. The framework calls for a 20 percent corporate tax rate, down from the current 35 percent rate. Businesses that operate as passthroughs, such as S corporations, would have a maximum tax rate of 25 percent, subject to unspecified limitations to prevent abuses.

Other business proposals include:

• Enhanced expensing
• Limiting the deduction for net interest expenses by C corporations
• Eliminating the Code Sec. 199 deduction
• Preserving the research and development credit and tax preferences for low-income housing
• Reforming certain international taxation rules

Drafting legislation

After the GOP framework was released, the chairs of the tax writing committees said their committees would begin drafting legislation. The Ways and Means Committee is made up of 24 Republicans and 16 Democrats. Republicans also have a majority on the Senate Finance Committee but only by two votes (14 to 12). This narrow vote margin is likely to influence any tax bill out of the Senate Finance Committee. Our office will keep you posted of developments.

Extenders

A number of popular but temporary tax incentives have expired. Unless extended, these “extenders” will not be available to taxpayers when they file their 2017 returns in 2018. They include:

• Tax exclusion for canceled mortgage debt
• Mortgage insurance premium deductibility
• Higher education tuition deduction
• Special expensing rules for film, television, and theatrical productions
• Seven-year recovery period for motorsports entertainment complexes

Other tax bills

Several tax-related bills may be taken up by either the House or Senate, including:

• RESPECT Act, passed by the House and waiting for a vote in the Senate, would limit the IRS’s ability to seize assets related to structured transactions
• FY 2018 IRS budget bill, passed by the House and waiting for a vote in Senate, which would fund the IRS for FY 2018

Please contact our office if you have any questions about tax reform, the extenders or other tax bills.

As millions of Americans recover from Hurricanes Harvey, Irma and Maria, Congress is debating disaster tax relief. The relief would enhance the casualty loss rules, relax some retirement savings rules, and make other temporary changes to the tax laws, all intended to help victims of these recent disasters. At press time, a package of temporary disaster tax relief measures is pending in the House. The timeline for Senate action, however, is unclear.

As millions of Americans recover from Hurricanes Harvey, Irma and Maria, Congress is debating disaster tax relief. The relief would enhance the casualty loss rules, relax some retirement savings rules, and make other temporary changes to the tax laws, all intended to help victims of these recent disasters. At press time, a package of temporary disaster tax relief measures is pending in the House. The timeline for Senate action, however, is unclear.

Tax relief

In past years, after disasters similar to Hurricanes Harvey, Irma and Maria, Congress passed disaster tax relief measures. After Hurricane Katrina, far-reaching disaster tax relief was passed by Congress, which benefited businesses and individuals. In 2008, lawmakers passed a national disaster tax relief law. However, that law was temporary. After Hurricane Sandy several years ago, disaster tax relief was introduced in Congress but ultimately was not passed. Now, Congress is revisiting disaster tax relief.

Targeted tax relief

The House bill is the Disaster Tax Relief Act of 2017. The bill provides targeted tax relief to victims of Hurricanes Harvey, Irma and Maria. Unlike national disaster tax relief, discussed below, the measures in the House bill are temporary.

Included in the House bill is language to:

• Enhance the deduction for personal casualty losses
• Allow penalty-free access to retirement funds
• Encourage charitable giving
• Provide a tax credit to qualified employers
• Allow taxpayers to use prior year income for EITC and child tax credit

At press time, a similar disaster tax relief bill has not been introduced in the Senate. Reports have surfaced that the Senate Finance Committee may unveil some proposals in the near future. These proposals could mirror some or all of the ones in the House bill.

National disaster tax relief bill

In September, Rep. Bill Pascrell, D-New Jersey, and Rep. Tom Reed, R-New York, introduced the National Disaster Tax Relief Act of 2017. Their bill aims to create disaster tax relief not just for victims of Hurricanes Harvey, Irma and Maria, but victims of all disasters. The lawmakers modeled their 2017 bill on previous national disaster tax relief acts, including the legislation passed in 2008.

Like the House-passed temporary disaster tax relief bill, the National Disaster Tax Relief Act would relax the casualty loss rules. The National Disaster Tax Relief Act would also provide a temporary five-year net operating loss (NOL) carryback for qualified natural disaster losses; allow an affected business taxpayer to deduct certain qualified disaster cleanup expenses; and increase temporarily the limits that an affected business taxpayer could expense for qualifying Code Sec. 179 property.

Please contact our office if you have any questions about disaster tax relief.

IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.

IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.

Staffing

"Examination is a vitally important aspect of maintaining a voluntary tax compliance system because 85 percent of the Gross Tax Gap is comprised of underreported tax on timely filed returns," TIGTA reported. Although hiring increased in FY 2016, it did not make up for recent attrition and retirements, TIGTA found. Examination staffing in FY 2016 reached a 20-year low with 8,847 employees, a decrease of four percent from FY 2015 (9,189 employees) and 23 percent lower than FY 2012 (11,432 employees).

Overall, the number of IRS full-time employees has declined by some 14 percent since FY 2012. The decline in the number of employees is likely to continue, TIGTA predicted. Approximately 22 percent of full-time permanent employees in the IRS are eligible to retire, and the IRS expects this number to increase to 34 percent by 2019, TIGTA found. "Should this loss of staffing be realized, the gap created by the loss of knowledge and experience has the potential to materially affect the administration and enforcement of tax laws," TIGTA reported.

Audit coverage

Individuals. TIGTA reported that the IRS examined one of every 143 individual income tax returns in FY 2016. This reflected a 16 percent decline compared to FY 2015 and 30 percent fewer examinations than the five-year high reported in FY 2012. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, is a decline of 29 percent compared to FY 2015.

Corporations and S corps. TIGTA found that fewer corporate tax returns were examined during FY 2016 than any year since FY 2004. The number of S corp examinations fell 15 percent from FY 2015 to FY 2016 (one in every 295 S corp returns in FY 2016 compared to one in every 248 S corp returns in FY 2015).

Partnerships. Partnership examinations also declined, TIGTA found. The number of partnership returns examined decreased 24 percent from FY 2015 to 14,645 in FY 2016. "Due to a focus on partnership examinations in FY 2015, one of every 196 returns filed were examined; however, this number decreased to one of every 263 returns being examined in FY 2016," TIGTA reported.

TIGTA Ref. No. 2017-30-072

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

Background

A qualified business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. This payroll credit for research expenditures is limited to the lesser of: (a) the research credit for the tax year; (b) $250,000; or (c) the amount of the business credit for the tax year, including the research credit that may be carried forward to the tax year immediately after the election year.

Schedule B. Chief Counsel explained that if an employer is a semiweekly schedule depositor, it must complete Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. Schedule B is also referred to as Record of Federal Tax Liability (ROFTL) for semiweekly schedule depositors. The IRS uses this information to determine if the employer made its federal employment tax deposits on time. Current Instructions for Schedule B describe the payroll tax credit.

Payroll credit

Employers, Chief Counsel explained, know the maximum amount of payroll tax credit potentially available for a quarter at the beginning of the quarter. This is because the return reflecting the payroll tax credit election on Form 6765, Credit for Increasing Research Activities, must have been filed before the quarter begins in which the employer can claim credit. However, the amount of the credit that is allowed for the quarter is limited to the employer Social Security tax on wages paid to the employer's employees during the quarter.

Therefore, as the employer makes payments of wages from the beginning of the quarter for which the payroll tax credit is taken, the employer can take the payroll tax credit into account for purposes of the Schedule B and for purposes of deposit liability on the Form 941 or other employment tax return, provided the employer later files Form 8974, "Qualified Small Business Payroll Tax Credit for Increasing Research Activities," Chief Counsel explained.

Further, the payroll tax credit should be taken against deposit liabilities and reflected on Schedule B as the employer incurs liability for employer Social Security tax on wages paid in the quarter to which it applies, beginning with the first payment of wages in the quarter. "It would be counter to the purpose of the payroll tax credit to allow it as a credit only when the employer files its Form 941 for the quarter claiming the credit and not as the employer is paying wages during the quarter subject to employer Social Security tax," Chief Counsel stated.

Deadline opportunity: The IRS also recently announced that it would allow start-up companies to make the payroll tax credit election on an amended return for the 2016 tax year, but as long as the amended return is filed by December 31, 2017.

Every year, millions of post-secondary students access the IRS Data Retrieval Tool (DRT) to complete the Free Application for Federal Student Aid (FAFSA). This year, the DRT is unavailable for FAFSA filers because of cybersecurity concerns. The information needed to complete the FAFSA can be found on a previously filed federal income tax return.

Every year, millions of post-secondary students access the IRS Data Retrieval Tool (DRT) to complete the Free Application for Federal Student Aid (FAFSA). This year, the DRT is unavailable for FAFSA filers because of cybersecurity concerns. The information needed to complete the FAFSA can be found on a previously filed federal income tax return.

FAFSA

To apply for federal student aid, an individual must complete and submit the FAFSA. He or she will automatically be considered for federal student aid. In addition, the individual's post-secondary institution may use his or her FAFSA information to determine eligibility for nonfederal aid. The DRT provides tax data that automatically fills in information for part of the FAFSA form.

Individuals who plan to attend post-secondary schools from July 1, 2017 to June 30, 2018 must submit the 2017-2018 FAFSA. Individuals will need tax information from 2015 to complete the 2017-2018 FAFSA.

Suspicious activity

Earlier this year, the IRS reported that cybercriminals may have tried to obtain tax information through the DRT. The agency's security filters identified fraudulent returns using information obtained from the DRT. According to the IRS, as many as 100,000 taxpayer accounts may have been compromised through the DRT by cyberthieves. In response, the IRS took the DRT offline.

Work-around

FAFSA filers can manually provide their tax return information, the IRS has instructed. Our office can help you prepare a FAFSA while the DRT is offline.

FAFSA filers can also use the IRS's online Get Transcript Tool. Individuals can obtain a Tax Return Transcript, which reflects most line items including adjusted gross income (AGI) from the original tax return filed, along with any forms and schedules. This transcript is only available for the current tax year and returns processed during the prior three years. Individuals can also obtain a Tax Account Transcript, which reflects basic data such as return type, marital status, adjusted gross income, taxable income and all payment types. This transcript is available for the current tax year and up to 10 prior years. Keep in mind that a transcript is not a photocopy of the return. A transcript can be confusing to read. Again, please contact our office for assistance.

Income-driven repayment plan

The DRT also provides tax data that automatically fills in information for the income-driven repayment (IDR) plan application for federal student loan borrowers. The DRT is online for DRT applications.

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

Tax reform

House Ways and Means Chair Kevin Brady, R-Texas, has predicted that tax reform will lower the tax rates for all businesses. "We are proposing a corporate rate of 20 percent and for small businesses, a top rate of no more than 25 percent," Brady said in February. As for the timeline of tax reform, Brady said that tax reform legislation will be unveiled in the "coming months," but "repeal and replacement of the Affordable Care Act (ACA) comes first.”

Senate Finance Committee Chair Orrin Hatch, R-Utah, has said that the Senate will work through its own tax reform process. "No one should expect the Senate to simply take up and pass a House tax reform bill," Hatch said in February. Hatch added that Senate tax writers are in the early stages of drafting a tax reform proposal. Hatch did not provide details of the proposal but said that House and Senate Republicans generally agree on basic principles, such as lower tax rates for individuals and businesses.

One area of potential friction is the House GOP’s so-called “border adjustability” proposal. Hatch has questioned if the border adjustment proposal, essentially taxing imports but not U.S. exports, is “in line with international trade obligations” and if “adjustments would need to be made to prevent shifting a tax burden onto specific industries.”

Democrats, although in agreement the tax code is in need of reform, have been critical of Republicans’ proposed solutions as appearing to focus on tax cuts for the wealthy. "They (Republicans) are for trickle-down economics…giving tax breaks to the wealthy, it trickles down and if somebody gets a job, that’s great, if they don’t, so be it,” House Minority Leader Nancy Pelosi, D-Calif., said in February. "You don’t receive economic security by tossing the rich even more tax breaks," she added.

Affordable Care Act

The Affordable Care Act (ACA) included a host of tax-related provisions. The ACA created the net investment income (NII) tax, the additional Medicare Tax, an excise tax on certain medical devices, and more. The ACA also imposes shared responsibility requirements on individuals and employers (known as the individual and employer mandates). Although President Trump and Republicans in Congress have called for repeal and replacement of the ACA, it is not clear at this time if repeal includes the ACA’s tax provisions. In February, Hatch said that all of the ACA’s taxes “need to go.”

The timeline for Congressional action on the ACA is expected to be known in March. GOP leaders in Congress have said that they will unveil an ACA repeal and replacement measure in March.

Pelosi said in February that Democrats have still not seen a repeal and replacement plan for the ACA. "They're supposed to have their plan to repeal the Affordable Care Act. We have not seen hide nor hair," Pelosi said. According to Pelosi, the GOP’s chosen route of reforming the healthcare law is a difficult endeavor "You have to know how to legislate," she said.

If you have any questions about tax reform, please contact our office.