IRS Discusses Data Security Issues Facing Tax Professionals

Information regarding methods being used to perpetrate tax refund frauds using preparer’s systems were discussed by IRS representatives at the New England IRS Representation Conference in North Haven, Connecticut, per a report published in Tax Notes Today Federal.[1]

One method, described by Margaret Romaniello, area manager, IRS stakeholder liaison division, is for intruders on the network to modify bank account information on returns that are awaiting transmission to the IRS for electronic filing.  The refund would end up being deposited somewhere other than where the taxpayer intended it to be deposited, such as a Green Dot prepaid debit card in the words of Romaniello.

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IRS Expands §199A FAQ Page to Include Issues Related to Rentals

The IRS has continued to add more questions to the set of frequently asked questions on IRC §199A.[1] 

For those hoping that this might mean the IRS has changed its answer regarding the treatment of S corporation shareholders and the self-employed health insurance deduction—you will be disappointed.  The answer to question 33 remains unchanged from the version first posted on April 11, 2019.[2]

However, in the most recent revision, the IRS added 12 questions related to rentals.  For the most part there is nothing terribly surprising in the IRS guidance on rentals posted on this site, but it is useful to have the information all in one place.  That is, there is nothing like the question 33 surprise that practitioners ran into with the April 11 revisions.

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Son of BOSS Transaction, Even if a Sham, Did not Trigger a Longer Statute to Assess Tax

The Tax Court took a second look at whether the IRS had been too late in attempting to collect tax from the taxpayers in the case of Beverly Clark Collection LLC et al. v. Commissioner, TC Memo 2019-150.[1]  The Ninth Circuit had sent the case back to the Tax Court to determine if the transaction was a sham, as the IRS alleged, and, if so, whether that made any difference in seeing if there had been an omission from gross income.

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Rules for Use of Optional Mileage Rates Revised to Reflect TCJA Changes

The IRS issued Revenue Procedure 2019-46[1] to update Revenue Procedure 2010-51 related to rules for using the optional standard mileage rates for business, charitable, medical or moving expense deductions.  The modifications are made to reflect changes made to IRC §§67 and 217 by the Tax Cuts and Jobs Act (TCJA).

Those changes removed the ability for taxpayers to deduct miscellaneous itemized deductions and moving expenses through 2025.  The new procedure makes clear that use of these special rules does not somehow “work around” those law changes to restore a deduction.

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Investment Advisory Fees Paid Out of Variable Annuity Are Not Considered Taxable Distributions from the Annuity

In a ruling that may provide an option for a deduction of what had become otherwise nondeductible investment advisory fees, the IRS in PLR 201945001[1] (and a series of nearly identical rulings issued at the same time) allowed an insurance company to treat investment advisory fees paid out of an annuity contract as an amount not received by the owner of the annuity under IRC §72(e).

Although investment advisory fees are considered expenses related to the production of income under IRC §212, they are treated as a miscellaneous itemized deduction for individuals.  For tax years beginning after 2017 and before January 1, 2026, such items are not deductible for individuals pursuant to IRC §67(g).

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Inflation Adjusted Numbers for 2020 Issued by IRS

The IRS published various cost of living adjusted numbers for the 2020 tax year in Revenue Procedure 2019-44.[1]

This procedure, published annually, deals with most items that are to be inflation adjusted by law aside from items related to retirement plans and health savings accounts, for which other revenue procedures are published each year.  In fact, the retirement plan numbers were published on the same day as this main procedure this year.

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2004 Law Change Invalidated Treasury Regulation Setting Cap at $100,000 for Penalty to Willfully File FBAR, Over $800,000 in Penalties Imposed

In 2018 we discussed two U.S. District Court cases where the IRS’s attempt to impose a greater than $100,000 penalty for willful failure to file a Foreign Bank Account Report (FBAR) return was denied by the courts, finding that a Treasury regulation that had not been changed since Congress removed the $100,000 maximum on such willful failures still controlled.[1]  The issue has now been addressed for the first time by a U.S. Circuit Court of Appeals in the case of Norman v. United States[2] and the IRS is much happier with the result.

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Taxpayer Allowed to Use Both §121 and §1031 in Dispositions for Property Following Fire

The IRS issued a private letter ruling to a taxpayer dealing with both the exclusion of gain on the sale of a residence under IRC §121 and the like-kind exchange provisions of IRC §1031 in PLR 201944006.[1]

The ruling involves a piece of property.

  • One of the taxpayers had purchased the property to use as a principal residence, and when the taxpayers were married they continued to use it as their principal residence.  Eventually the taxpayers moved into a new residence.

  • The property was then offered to rent.  While there was a period of time when the property was rented to full-time tenants, they also rented it for short-term rentals during other portions of this period of time.  The rental use ended when the property was destroyed in a fire.

  • Following the fire the taxpayers received funds for the destroyed residence, sold the land without rebuilding the residence and acquired new property in a transaction they hoped would qualify for deferral of gain under IRC §1031.[2]

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Wisconsin Appeals Court Rules Microsoft's Payments from OEMs for Machines Eventually Sold for Use in Wisconsin Is Not Wisconsin Income

The state of Wisconsin lost in an attempt to look further down the line to find an ultimate consumer to source sales in the case of Wisconsin Department of Revenue v. Microsoft Corporation, Court of Appeals, District IV, Appeal No. 2018AP2024.[1]

The case involves the state of Wisconsin looking to include in the sales factor fees paid to Microsoft for licensing Windows that are included in machines eventually purchased for use in Wisconsin. The purchasers of the computers enter into a sublicense with the manufacturer to use Windows.  The Wisconsin Department of Revenue argues that the licensing fee paid by the manufacturer when they installed Windows on the machine should be sourced to Wisconsin when sold to a Wisconsin resident.[2]

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§280E Is Not An Excessive Fine Under the Eighth Amendment and Also is Not Limited Just to Barring Deductions Under §162

A majority of the Tax Court concluded in the case of Northern California Small Business Assistants Inc. v. Commissioner, 153 TC No. 4,[1] that the denial of deductions for those operating businesses trafficking in cannabis is not a fine.  Therefore, the provision could not be found to be an excessive fine.

The Eighth Amendment to the U.S. Constitution provides:

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

The taxpayer, a medical marijuana dispensary operating under California law that allows such operations, argued that IRC §280E served as an excessive fine under the Eighth Amendment and thus should be disregarded by the Court.

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Interim Guidance Issued to Appeals Employees on BBA Partnership Audit Cases

The IRS has issued guidance to Appeals Employees regarding procedures that will be used in cases involving the Bipartisan Budget Act of 2015’s (BBA) revision to the partnership audit rules.[1]

The memorandum consists of a summary of procedural changes, followed by interim guidance until IRM 18.9 is revised along with an appendix containing the interim procedures and a glossary of BBA terms..  The interim guidance has an expiration date of October 18, 2021.

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Chief Counsel Establishes Procedures to Use S/MIME and Encrypted ZIP to Communicate with Taxpayers With Matters Before Counsel's Office

In Chief Counsel Norice 2020-002 the IRS Chief Counsel provides for two methods to use secure email to communicate personally identifiable information (PII) and return information with taxpayers and representatives involved in Tax Court litigation or in regard to letter ruling and closing agreements.[1]

The notice provides the following changes in procedures to communicate with taxpayers for Chief Counsel employees:

Effectively immediately, Chief Counsel employees may exchange PII and return information with taxpayers or their representatives during Tax Court litigation and letter ruling or closing agreement processes, using one of two email encryption methods:

1. The LB&I Secure Email System (SEMS), which authorizes the exchange of encryption certificates under specific circumstances, allowing the exchange of fully-encrypted emails and attachments, and

2. SecureZIP encrypted email attachments, allowing the sending of password-protected encrypted email attachments to anyone with a compatible zip utility.[2]

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California Rules that Directors Fees Are Sourced to State Where Highest Ranking Officers Carry Out the Board's Directions

In Chief Counsel Ruling 2019-03[1], the Franchise Tax ruled on the application of California’s market based sourcing rules as applied to an outside director that attended a shareholder or board of directors meeting in California.

Market based sourcing is increasingly being used by states to determine whether the state has the right to impose an income tax on the amounts paid to an out of state organization or resident for services rendered.  Previously states had generally looked to the location of the sale being tied to where the services were primarily performed.

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Tax Court Cannot Order the IRS to Reexamine Taxpayer When Whistleblower Believes IRS Assessment is "Woefully Inadequate"

A whistleblower found out that his award is limited to what the IRS decides to collect, even if the whistleblower believes the agency should have assessed substantially more tax in the case of Apruzzese v. Commissioner, TC Memo 2019-141.[1]

The plaintiff and his co-claimant had submitted a Form 211, Application for Award for Original Information, to the IRS Whistleblower Office (WO).  The plaintiff and the co-claimant had been involved in litigation against an estate and claimed the estate had omitted substantial assets from its Form 706 filed with the IRS, understating its estate tax by several million dollars.[2]

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Due to Delays in the Issuance of WOTC Certifications, Agents Directed to Not Challenge Taxpayers Who Claim Credit in Year Certification Received

The IRS Large Business and International (LB&I) and Small Business/Self-Employed (SBSE) Divisions have issued a memorandum to agents regarding issues with claims of the Work Opportunity Credit.[1]  Agents are directed not to question the timing of claiming the work opportunity credit when the employer claims the credit in the year a delayed certification is received rather than the year the employer paid or incurred qualified wages.

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