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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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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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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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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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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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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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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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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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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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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