Tax News Highlights 03.25.22
What’s Up in Washington, D.C.
Supreme Court Confirmation Hearings Conclude
Senate Judiciary Committee confirmation hearings for the nomination of Judge Ketanji Brown Jackson to the Supreme Court have concluded. Jackson endured two days of questioning from the committee, with the hearing finishing with testimony from the American Bar Association and outside witnesses on her
qualifications. The Judiciary Committee will vote on a recommendation of her nomination on April 4, followed by a vote from the full Senate if it’s decided she should move forward. A simple majority vote can confirm Judge Jackson, and Senator Manchin (who has derailed many of Democrats’ goals recently) has said he is on board with a “yes” vote.
Judge Jackson repeatedly stated her approach to deciding the law is to be impartial. She has seen a variety of cases in her career, including these tax-related cases, if you’re interested.
Word on the street is that a bipartisan retirement package that has been simmering for some time may gain more steam and head to the House for a vote next week. Both the “SECURE Act 2.0” and the Retirement Improvement and Savings Enhancement (RISE) Act were approved in House committees last year, but have since stalled. The bills’ changes include mandating retirement savings auto-enrollment for employer plans and expanding the Saver’s tax credit for contributing to a retirement plan. Required minimum distributions would also be moved from beginning at age 72, to age 75, and catch-up contributions allowed would increase.
BBB still lifeless at the moment, but Senator Manchin indicated he’s willing to talk energy and deficit reduction.
Good Enough for Government Work
The Treasury Inspector General for Tax Administration (TIGTA) recently reported that of the 175 million round 3 stimulus payments stemming from the American Rescue Plan Act (ARPA), 99.48 percent were correctly computed, an admirable accuracy result! Even still, the inaccurate payments send to potentially ineligible individuals in that small percentage doled out equal $1.9 billion. TIGTA reports that the errors stem from deficiencies found after the first two rounds that the IRS did not address, including payments to ineligible dependents and duplicate payments to individuals with a filing status change.
The ARPA, enacted March 11, 2021, provided $1,400 of an advance Recovery Rebate Credit per eligible individual for 2021. The advances were generally calculated using an individual’s prior year tax return information, with a reconciliation on the 2021 filing as to what an individual should receive using current year information. Those who did not receive enough of an advance are able to take the balance as a Recovery Rebate Credit on their individual income tax return, and those who received too much have no requirement for overpayments to be repaid.
BBA Audits Have High No-Change Rate
TIGTA also reported on the IRS’s efforts in examining partnerships subject to the centralized partnership audit regime that resulted from the Bipartisan Budget Act of 2015. The oversight organization found that as of the end of fiscal year 2021, 78 percent of returns examined resulted as a no-change, which is higher when compared to the 50 percent average no-change rate for all partnerships during the same tax years reviewed. The IRS agrees that the no-change rate for the BBA partnership audits is high, but too early to form conclusions as to why.
One recommendation by TIGTA was for the IRS to implement a matching verification process for partnerships that push-out changes, matching the information to the ultimate taxpayer picking up the change. This can get particularly tricky when a partnership has multiple tiers of ownership. The IRS agreed with the recommendation, noting that they may have something to use already, in addition to development of a systemic method for the verification process.
“IRS Mess” is said in jest, because the real problem, the IRS says, is that they need more funding to properly operate. Current tax return backlog stats show us exactly how bad it is:
Tax Naughty List
Two tax fraud promoters, Backstrom and Bey, have been sentenced to nearly 9 and 11 years in prison and ordered to pay over $26 million in restitution to the government for promoting a nationwide tax fraud scheme to more than 200 people.
The pair sought out clients by publicizing the scheme in seminars and convinced taxpayers that their mortgages and other debts entitled them to tax refunds. Apparently, they falsely claimed that banks had withheld income tax from their clients, and even went as far as filing fraudulent tax documents, posing as the bank, with the IRS to avoid a matching notice. They then helped prepare fraudulent tax returns to claim refunds totaling more than $64 million for their clients. However, to avoid any tracing back to them, they marked the tax returns as self-prepared and coached their clients on how to deflect IRS scrutiny. In exchange for their services, Backstrom and Bey charged $10,000-$15,000 per return.
No Snow Mobile for You
An Ohio man was sentenced to a year in prison and ordered to pay over $1.1 million in employment taxes. He owned several businesses and prepared the books of each himself, including payroll, however at all but one business he failed to timely file employer tax returns or make deposits to the IRS. The businesses in default were shut down and the assets were moved from one business to another in an attempt to keep operations going but avoid paying the lapsed payroll taxes due. Undeposited taxes were used to fund a lavish lifestyle, the IRS said, including a snow mobile and allowing himself and business associates to buy furniture and jewelry.
Refund Scheme Busted
A New York tax preparer got 18 months’ in prison and ordered to pay nearly $900,000 to the IRS for filing false tax returns for herself and aiding and abetting the filing of false returns for hundreds of clients. On her own return, she failed to report gross receipts for several years, and on her clients’ returns she falsely reported business income, rental losses, and/or claimed a more advantageous filing status for which the clients did not qualify.
Tax preparation operations were reportedly run out of the preparer’s home and she charged her clients $30 – 50 per return! But where she really got paid was in the direction of client refunds to a bank account which she controlled, where she reportedly kept a percentage of the false refunds without her clients’ knowledge. It’s unclear if her clients were willing participants in her scheme.
The pandemic was difficult for many, but some saw it as an opportunity to game the system for their own personal benefit. To the criminals’ dismay, the Department of Justice and the IRS have been well aware of attempts to take advantage of the relief stemming from legislation such as the CARES Act and are handing out sentences averaging 42 months in federal prison. The IRS recently released COVID-related fraud stats, reporting that the agency investigated 660 tax and money laundering cases totaling $1.8 billion in alleged activity resulting in a 100 percent conviction rate.
Case of the Fridays
Micro-Captive Transaction Notice Invalidated
A district court vacated (voided) Notice 2016-66, which identifies micro-captive insurance transactions as a reportable transaction requiring disclosure of information, finding that the IRS failed to comply with the Administrative Procedure Act (APA) in its implementation of the Notice.
A reportable transaction is one that has the potential for tax avoidance or evasion. The IRS is said to have failed to observe the APA’s required notice-and-comment procedures, in addition to acting arbitrarily and capriciously in issuing the Notice by failing to provide they examined relevant data and a detailed explanation for its decision to issue the Notice. As a result, the IRS is required to return information and documents to taxpayers and advisors provided by those involved with micro-captive transactions described in the Notice.
Notice 2016-66 provides a description of micro-captive transactions as “attempts to reduce the aggregate taxable income of the taxpayer, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for premiums for insurance coverage. The related company that the parties treat as a captive insurance company elects under § 831(b) of the Internal Revenue Code (the “Code”) to be taxed only on investment income and therefore excludes the payments directly or indirectly received under the contracts from its taxable income.”
The IRS believes these micro-captive transactions have the potential for tax avoidance or evasion due to a lack of an arm’s length transaction and sound business practices and added these and similar transactions as those of interest to the IRS for purposes of $1.6011-4(b)(6), and §§6111 and 6112. Disclosure is required under the Notice for persons entering into these transactions on or after November 2, 2006 to disclose and adhere to requirements in the aforementioned code sections.
Form 8886, Reportable Transaction Disclosure Statement, requires taxpayers with transactions of interest to provide certain information to the IRS, including describing the transaction in detail and identifying all parties involved. Failing to disclose a reportable transaction exposes the parties involved to potential penalties.
The decision is important for the IRS’s compliance with the APA in general for identifying reportable transactions, but it’s uncertain how the case will impact IRS enforcement.
CIC Services, LLC, v. IRS