Taxpayer Both Required to Use Accrual Method and Had Been Using the Method for Tax Purposes

In the case of King Solarman, Inc. v. Commissioner, TC Memo 2019-103[1] the key issue was whether the taxpayer was reporting on the cash or accrual overall method of accounting and, even if the business was on the cash method of accounting, it was nevertheless required to use the overall accrual method of accounting for tax purposes.

Taxpayers are generally eligible to use the overall cash or accrual method of accounting or another method permitted under the Code or regulations.[2]  However, once a taxpayer has chosen an overall method of accounting, the taxpayer must obtain the IRS’s permission to change that method.[3]

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Willful Failure to File FBAR Found by Magistrate Where Taxpayer Signed Return Returns With Schedule B Indicating No Foreign Accounts

A U.S. magistrate judge has recommended that the government be granted summary judgment in a suit to collect a willful failure to file FBAR reports penalty in the case of United States v. Said, USDC Middle District Florida, Case No. 8:17-cv-00826.[1]

The Court outlined the standard to be used to determine if there was willfulness in the context of failure to file the FBAR reports:

In the FBAR context, willfulness “may be proven ‘through inference from conduct meant to conceal or mislead sources of income or other financial information,’ and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.’” Williams, 489 Fed. App’x at 658 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991))...[2]

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IRS Publishes Redacted Version of DNA Testing Private Letter Ruling

In a story posted on August 1, 2019 we noted that DNA testing firm 23andMe had reported receiving a private letter ruling from the IRS that allows for a portion of a DNA test kit fee paid for ancestry and health testing qualified as a deductible medical expense under IRC §213. The ruling (PLR 201933005) has been posted by IRS.

While most taxpayers do not itemize, and even those that do often have not incurred the necessary amount of medical expenses to begin to deduct them on Schedule A, the ruling clears the way to use HSA funds to reimburse the taxpayer for the medical portion of the fee. As well, flexible spending accounts also should be able to reimburse such amounts as well.

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IRS to Send Refunds of Underpayment Penalties to 400,000 Taxpayers

The IRS has announced that the agency will be sending out refunds to over 400,000 taxpayers who are eligible for relief previously announced from the IRS related to estimated tax penalties in IRS News Release IR-2019-144.[1] The checks will be issued to taxpayers who were eligible for relief the IRS announced on January 16 and March 22 but who either did not take advantage on that relief on their return or filed their return before the relief was announced and have not filed a claim for refund.

The IRS lowered the threshold for the application of the penalty for underpayment of estimated income taxes from its standard 90% of the current year’s tax to 80% of the tax being paid in via withholdings and estimated taxes.

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Estates Cannot Make Use of the Financial Disability Relief Rule to Extend the Statute for Filing a Refund Claim

The tolling of the statute of limitations for filing a claim for refund due to financial disability under IRC §6511(h) does not apply to estates, per a ruling from the US District Court for the Northern District of Alabama in the case of Carter v. United States, US DC ND Alabama, Case No. 5:18-cv-01380.[1]

IRC §6511(h) was enacted by Congress to provide relief for a case where a taxpayer fails to file a claim for refund within the time period provided otherwise by that section due to a financial disability. The provision provides “an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”[2]

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Even Under E-Filing, Taxpayer Cannot Reasonably Rely on Preparer to Escape Late Filing Penalties

The Fifth Circuit in March 2019 raised, but did not answer, the question of whether it was still appropriate to hold that taxpayers could not reasonably rely on a return preparer for timely filing of a return in the age of electronic filing.[1]  A U.S. District in Court in Tennessee decided that, since taxpayers could prepare their own paper return or obtain paper returns from the preparer, the prior rule should continue to apply.[2]  The Court also held that the taxpayer could not seek first-time abatement (FTA) relief in Court—rather, that is fully under the IRS’s control.

The US Supreme Court held in the Boyle case[3] that a taxpayer could not establish reasonable cause for failing to file a tax return by claiming he/she relied upon a tax preparer to timely file the return.  The Court found that the duty required no special knowledge or skill to file a return (a trip to the Post Office or local IRS office) and, as such, could not be delegated to a third party—the taxpayer had a duty to insure the third party actually took the desired action.

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Interim Revised Notice of Intent to Contact Third-Parties Procedures Issued by IRS

The Self-Employed/Small Business (SBSE) Division of the IRS has a memorandum outlining revised procedures for third party contact in SBSE-04-0719-0034.[1]  The revised procedures reflect changes made to IRC §7602(c)(1) by the Taxpayer First Act of 2019.

IRC §7602(c)(1), both before and after amendment, required the IRS to provide notice to the taxpayer prior to contacting third parties.  The IRS had taken the position, noted in the Internal Revenue Manual at IRM 25.27, Third Party Contacts, that providing the taxpayer with Publication 1, Your Rights as a Taxpayer, was sufficient notice under the prior law.

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Kansas Adopts Remote Seller Rule Without Any De Minimus Level of Sales

Wayfair related state sales tax developments have continued since the ruling came down last summer, with virtually every state with a sales tax making changes over the past year in how they handle out of state sellers.  But the state of Kansas has decided to go where no one else has dared to tread, issuing Notice 19-04, Sales Tax Requirements for Retailers Doing Business in Kansas.[1]

As you read the document you’ll note one key item is missing—the minimum amount of sales (either in dollar volume or number of transactions) necessary to trigger the need to register and collect Kansas sales tax.  That is because, in the view of the Kansas Department of Revenue, any amount of sales into Kansas is enough to trigger the requirement to collect and pay over the tax

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IRS Issues PLR Holding a Portion of DNA Test Kit Represents Deductible Medical Expense

The Wall Street Journal reported that genetic testing service 23andMe has received a private letter ruling from the IRS that allows a portion of the payment made to the entity to be treated as a medical expense.[1]  A redacted copy of the ruling has been posted by the company on its website.[2]  The Wall Street Journal article noted that the IRS will publish the standard redacted PLR in August.[3]

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IRS Allows for Late Change of Bonus Depreciation Elections for Tax Years Containing September 28, 2017

The IRS has granted relief related to last minute decisions taxpayers had to make regarding bonus depreciation following the passage of the Tax Cuts and Jobs Act.  For the tax year that contained September 28, 2017 (the first day the new 100% bonus depreciation applied), the IRS will allow taxpayers to make or revoke elections related the various bonus depreciation issues.  The relief is provided in Revenue Procedure 2019-33.

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Organization Operated for Significant Purpose to Benefit For Profit Business, Exempt Status Retroactively Lost

To retain status as a §501(c)(3) charitable organization, an entity must not only have been organized for charitable purposes (a requirement for initial qualification), it must also be operated exclusively for charitable purposes in order to retain that status.  A failure on the second test caused the organization in the case of Giving Hearts, Inc. v. Commissioner, TC Memo 2019-94[1] to retroactively have its status revoked by the IRS.

The case involves an attempt by a business that was negatively impacted by the National Do Not Call Registry, a program conducted jointly by the Federal Trade Commission and the Federal Communications Commission, to blunt the impact of that program.  The business, Windows Plus, relied primarily upon telemarketing calls to sell replacement windows and other home improvement services to homeowners.

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IRS Sends Out 10,000 Letters to Virtual Currency Investors, Some of Which Demand a Response

The IRS has announced a program to send letters to taxpayers it believes had virtual currency transactions which the taxpayers have failed to report on their tax returns.[1]  The news release contains the following comments from the Commissioner:

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The news release indicates the IRS began sending these letters out the week before the news release came out (July 26, 2019) and more than 10,000 taxpayers will receive these letters.  The release indicates the names were obtained via “various compliance efforts.”

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IRS Grants Relief to CPAR Partnerships That Did Not Apply for an Extension and Now Wish to File a Superseding Return

One of the features of the new centralized partnership audit regime that was enacted as part of the Bipartisan Budget Act of 2015 is that once a partnership return is filed that is covered by the program, any later change does not lead to the partners amending their return for the year of change.  Rather, after the return is filed the partnership files an administrative adjustment request (AAR) and either:

  • Pays tax with the request, computed under the CPAR rules to compute tax due on the imputed adjustment or

  • If the partnership elects the alternative to the imputed adjustment, the partners report the additional tax, penalties and interest on their return for the year the AAR is filed.

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Refunds Going Back to 2009 May Be Available to Certain Taxpayers Who Paid French Taxes

The IRS posted a clarification on its website that the IRS has changed its position with regard to certain taxes paid to France, holding that these taxes are not covered by the Agreement on Social Security between the two countries.[1]  Thus, these taxes will be retroactively treated as income taxes for which a foreign tax credit is available.

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