Corporation Liable for Payroll Taxes Left Unpaid by PEO

When an employer decides to use a third party from which to lease employees, the employer does not escape liability for the payroll taxes if they remain unpaid even if the employer makes the payment.  This was the issue the IRS was looking at in Chief Counsel Advice 201724025

In this case the taxpayer had hired an outside professional employer organization (PEO) to manage its payroll.  Although the company had paid the PEO for the payroll and the amount that was due on the payroll taxes, the PEO failed to pay the payroll taxes.  The corporation discovered this fact on exam.

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Disaster Relief Delay for Actions Does Not Provide for Relief from Penalties or Interest for Acts With Due Date Before Disaster

IRC §7508A allows the IRS, for taxpayers affected by a federally declared disaster, terrorist, or military action, to delay for up to one year the period for performing certain acts under the IRC and, in such cases, disregarding such period for the imposition of interest, penalties, etc. related to that act.  In Chief Counsel Email 201723023, the question raised was whether who had failed to, say, file a return before the disaster took place would have penalties and interest waived for the period in question.

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Mescalero Case Does Not Require IRS to Disclose Information on Returns Filed Outside of Tax Court Proceeding

Earlier this year we analyzed the Tax Court's decision in Mescalero Apache Tribe v. Commissioner, 148 TC No. 11 (See Taxpayer Can Obtain Information on Payment of Tax By Contractors From the IRS in Employment Tax Dispute).  In that case, a taxpayer facing potential liability for failing to withhold taxes from individuals reclassified as employees was able to convince the Tax Court that the IRS needed to provide the taxpayer with information regarding whether individuals they had been unable to located had reported the income on their return.  If that was the case, the tribe was not liable for the income taxes it had failed to withhold from those individuals.

The IRS Chief Counsel’s office reacted shortly after the Mescalaro decision in an email (Chief Counsel Email 201723020), indicating that in its view this case does not grant taxpayers facing such liability may not require the IRS to provide worker tax information during the exam.  Rather the agency’s position is that the case only holds that such disclosure may be required by the Court during discovery, not that employers facing potential liability have the right to obtain that information directly from the service immediately upon the issue being raised in exam.

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On Second Attempt, IRS Publishes Proposed Regulations for BBA Partnership Audit Regime Taking Effect Next Year

The IRS, after pulling back a version in January in light of President Trump’s executive order limiting the issuance of new regulations, has finally released the important proposed guidance on the implementation of the revised partnership audit regime enacted as part of the Bipartisan Budget Act of 2015.  This version was published in the Federal Register on June 14, 2017. [REG-136118-15]. 

This second pass is little changed from the version the IRS was set to release in January of 2017.  Aside from fixing minor typographical errors in the original, this version removes a single example that dealt with the imputed underpayment and added some additional discussion in the preamble of the issues the IRS continues to consider regarding tiered partnerships and these regulations.

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ESOP Participants Accrued Compensation Found Not Deductible Until Paid

The Tax Court found, in the case of Petersen v. Commissioner, 148 TC No. 22, found that participants in an ESOP that owned shares of an S corporation were related individuals for purposes of the deduction deferral rules of IRC §267(a)(2).

IRC §267 generally requires deferring a deduction by a taxpayer to a “related person” until such time as the income in includable in income of the related person.  Thus, if a calendar year accrual basis taxpayer has accrued but unpaid compensation in existence at December 31 payable to a cash basis related person, no deduction will be allowed until the following year when the cash basis related person, having received payment, includes that amount in income.

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Partnership Interest Held in a Single Member LLC Precludes Qualification as a Small Partnership Under TEFRA Provisions

In Revenue Ruling 2004-88 the IRS held that if a single partner of a partnership is a disregarded entity (such as a single member LLC or a grantor trust), that partnership cannot qualify for an exemption from the TEFRA consolidated partnership audit rules under the provisions of IRC §6231(a)(1)(B)(i).  In the case of Seaview Trading, LLC, et al v. Commissioner, (CA9 2017), Case No. 15-71330 the Ninth Circuit Court of Appeals agreed with the IRS’s view expressed in that Revenue Ruling.

Robert Kotick and his father Charles Kotick formed Seaview Trading, LLC, which was taxed as a partnership.  Each of the Koticks held their interest in Seaview through a single member LLC that was treated as a disregarded entity. 

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Automatic Late Portability Election Relief Procedure Published by IRS

In Revenue Procedure 2017-34 the IRS published a simplified method to obtain permission for an extension of time under Reg. §301.9100-3 to file a Form 706 and elect portability without the need to apply for a private letter ruling and pay the associated fee.

Under IRC §2010 a surviving spouse may make an election to claim any lifetime transfer tax exclusion that was not used to reduce the estate tax on the deceased spouse.  This amount, known as the deceased spouse unused exclusion amount (DSUE) can end up being equal to the entire maximum lifetime transfer amount ($5,490,000 for 2017), especially if the deceased spouse left his/her entire estate to his/her spouse.

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Privilege Did Not Allow Tax Preparer to Avoid Answering Questions Regarding Client Under IRS Scrutiny

The IRS was investigating tax preparer Isana Radchik’s clients for tax related matters, including a potential failure to file foreign financial bank account reports and whether the proper amounts of federal tax liabilities.  In the case of United States v. Radchik, USDC NJ, Case No. 2:17-cv-01187, the question before the Court was whether the preparer could be required to respond to an IRS summons for information related to her work.

The taxpayer claimed two reasons why should not be required to respond to the IRS’s summons:

  • Under §7525 the information in question was protected by the tax practitioner privilege and
  • She asserted her own fifth amendment right against self-incrimination.I

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IRS Can Require PTINs for Tax Preparers, But Cannot Charge User Fees for Issuance and Renewal

The IRS has lost yet another battle in the United States District Court for the District of Columbia related to their attempts to expand regulation of tax preparers.  In the case of Steele, et al v. United States, USDC DC,119 AFTR 2d ¶2017-818, while the Court the IRS was justified in establishing the requirement that tax preparers obtain a practitioner tax identification number (PTIN)—but that the agency had no authority to impose a fee for issuing that number.

The IRS had lost previous cases in this venue regarding their attempt to set up a preparer testing system (Loving, 113 AFTR 2d ¶2014-867) as well as the attempt to apply Circular 230 rules to tax preparation (Ridgely, 113 AFTR 2d ¶2014-5249).

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Procedures to Maintain CPEO Status Released by IRS

In News Release IR-2017-103 the IRS announced that it has finally approved the first batch of certified professional employer organizations (CPEOs)   The legislation authorizing CPEOs was passed in late 2015 and the legislation originally targeted January 1, 2016 as the date employers could begin using such organizations.

However, the IRS took time to publish the rules under which an application could be made and to process such an application, so the program got off to a late start.  Now the IRS has issued notices of certification to 84 organizations.

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User Fees For Certain Rulings, Including Private Letter Rulings, Must Be Submitted via Pay.gov

The IRS has announced in IR-2017-102 that user fee payments will be made online for items such as letter rulings, closing agreements, and certain other rulings.  The payments will be made via the government’s Pay.gov website and the program begins on June 15, 2017.

The program will be phased in initially:

  • From June 15 to August 15 payments may be made either via Pay.gov or by a check or money order;
  • For payments made after August 15, the payments will only be accepted via Pay.gov.

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Even Though Advice Was Significantly in Error, Taxpayer Reasonably Relied on Tax Professional, No Penalty Due

The penalty for a substantial understatement of tax found at IRC §6662(b)(2) is triggered whenever a taxpayer faces a sufficiently large underpayment at the end of an examination.  A substantial understatement exists for an individual if the understatement is greater than the greater of:

  • $5,000 or
  • 10% of the tax required to be shown on the return for the taxable year.

Once the IRS establishes an underpayment that exceeds the thresholder, to escape the penalty, the taxpayer must meet one of the following criteria:

  • If the underpayment did not arise from a tax shelter (as defined at IRC §6662(d)(2)(C)) either:
    • There was or is substantial authority for the treatment of the item or
    • There was adequate disclosure (generally on a Form 8275 or Form 8275-R) and there exists or existed a reasonable basis for the position that gave rise to the underpayment (IRC §6662(d)(2)) or
  • There existed reasonable cause for the underpayment, the taxpayer acted in good faith (IRC  §6664(c)) and the underpayment did not arise from a tax shelter (again as defined at IRC §6662(d)(2)(C)).

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IRS Warns Agents Against Using IRS Website FAQs to Sustain Positions in Exam

Not all IRS documents are created equal, and only certain documents are binding on the agency.  Those binding documents do not include items published on the IRS’s website in most cases, as the IRS Small Business/Self-Employed (SB/SE) Division reminded its agents in SBSE-04-0517-0030.  The memorandum gives guidance on the level of reliance that should be placed on frequently asked questions (FAQs) posted on the IRS website—and the answer is, by default, none.

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IRS Grants Estate Relief to Make Late Election to Claim Charitable Contribution in Prior Year

While PLR 201720003 is not really a major ruling—the IRS is merely granting an estate a right to make a late election—it does provide a reminder about the special rules that impact trusts and estates when claiming charitable contributions.  These rules are in some ways more restrictive than those imposed on other taxpayers, but in other ways they are far more generous.

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Court Accepts IRS's Reconstruction of Business Using Bank Deposits and Forms 1099K

In the case of Kahmann v. Commissioner, TC Summary Opinion 2017-35 the IRS was suspicious that the taxpayers had understated their gross income from their business for the year.  Some of this suspicion arose because the taxpayers failed to turn over bank statements for the business to the agent when they were requested. 

The agent was forced to issue summonses to banks where she was aware the taxpayers maintained at least three accounts. She obtained those accounts to be able to perform a bank deposits analysis, looking for unreported income.

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Organization Formed to Support "Community Journalism" Did Not Qualify for Exempt Status

In PLR 201720010 the IRS ruled the fact that an organization is not being operated to generate a profit and may be providing services to organizations that are themselves performing charitable and educational purposes does not mean the organization providing the services can qualify as a §501(c)(3) organization.  The organization in question was therefore denied its request to be granted §501(c)(3) status.

The organization had changed its proposed purpose a few times as it attempted to assist in the development of community oriented independent journalism initiatives.  Originally the organization had planned to develop open source software to be used by such organizations, but such software became available from other sources. 

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Tax Court Finds §2036(a)(2) Triggers Inclusion in Estate

The Tax Court again agreed with the IRS that a family limited partnership arrangement (FLP) had run afoul of IRC §2036(a), the IRS’s most successful route to undo such planning due to “bad facts.”  But, in the case of Estate of Powell v. Commissioner, 148 TC No. 18 the Tax Court, for the first time since it proposed a “lack of real fiduciary duties” theory for invoking IRC §2036(a)(2) in the case of Estate of Strangi v. Commissioner¸ TC Memo 2003-145 that the Court invoked that provision, rather than the general “implied life estate” theory under IRC §2036(a)(1) to unwind the plan.  Also, the majority opinion also provided that IRC §2043 served to limit the inclusion in the estate to only the excess value of the assets transferred over the interest received.

The plan in this case was very much a “deathbed” plan, with the transfers occurring one week before Nancy Powell died.  As well, at the time of the transfers Nancy was incapacitated as well as terminally ill, so her son, acting under a Power of Attorney (POA), formed the partnership with himself as general partner and then transferred Nancy’s assets into the partnership in exchange for a 99% limited partnership interest.   On that same day, her son, again acting under the POA, transferred Nancy’s limited partnership interest to a charitable lead annuity trust (CLAT).

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Ninth Circuit Panel Finds Statute for IRS to Assess Listed Transaction Disclosure Penalty Does Not Start Unless Form 8886 Filed

The Ninth Circuit Court of Appeals reversed a District Court decision that determined the IRS had acted too late in attempting to assess a penalty in the case of May v. United States, CA9, Case No. 15-16599.  In a 2-1 split decision the panel decided that the one statute found in IRC §6501(c)(10)(A) does not begin to run until a taxpayer files a Form 8886 with the IRS, regardless of whether the IRS is already in possession of the information that is provided in that form.

The District Court found that the IRS had attempted to assess the penalty for failure to disclose a listed transaction more than one year after the IRS agent examining the taxpayer came into possession of information that would justify the imposition of the penalty.

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CEO and President, Relying on Work of Outside Auditor, Reasonably Believed Trust Fund Taxes Had Been Paid

The Sixth Circuit Court of Appeals in the case of Byrne v. United States, CA6, No. No. 2:06-cv-12179 had to decide if the president and CEO had acted recklessly in not insuring that trust fund taxes had been deposited when they were aware of issues with the quality of work performed by the controller.  If they had, they would be liable personally for the undeposited trust fund taxes under IRC §6672.

Any responsible person may be held personally liable by the IRS for unpaid trust fund taxes (that is, federal income taxes and FICA taxes withheld from employee’s paychecks) if the IRS can show that individual either:

  • Had actual knowledge that the taxes had not been paid and had the ability to pay the taxes (even if that meant not paying other bills) or
  • Recklessly disregarded known risks regarding a failure to pay such trust fund taxes.

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CCA Outlines When Refunds Created by OVDP Filings Can Be Offset Against Tax Due

In Chief Counsel Advice 201719026 the IRS looked at what happens to taxpayers who, under terms of the Offshore Voluntary Disclosure Program (OVDP), find that there is a refund due on one of the prior year returns filed under the program.  The key question was whether any such refund could be offset against other taxes due or refunded to the taxpayer.

The OVDP program was created in 2009 to allow a method for taxpayers with previously undisclosed foreign bank accounts to come into compliance voluntarily.  Under the terms of the program a taxpayer must disclose all such offshore accounts and file original or amended returns reporting the income for the most recent eight years of returns whose due date has passed.  The taxpayer also gives consent for the IRS to assess tax for all those years as part of the program regardless of whether the period for assessment generally under IRC §6501 has run.

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