The IRS has provided more information on its new policies related to claims for refund for research credits under IRC §41 in updates to its frequently asked questions (FAQ) page on research credit claims.[1] The IRS originally disclosed its new policies in FAA20214101F and an accompanying press release on October 15, 2021.

Under the revised IRS policy, every claim must contain five items of information at the time the claim is submitted. A claim omitting any of that information is deemed to not be a valid claim for refund and, in the view of the IRS, will also not qualify as an informal claim to preserve the taxpayer’s right to continue the challenge if the statute of limitations has passed on filing the claim when the claim is rejected.

Advisers have been noting that the IRS does not currently allow filing Schedules K-2 and K-3 electronically via MeF/XML, with the expected dates when such filing will be supported coming just after the original unextended due date for partnerships, but not until mid-June for S corporations. However, advisers should note that the IRS does provide an interim solution to attach PDFs of the forms to returns filed before the MeF/XML system is operational.[1]

IRS Director of the Office of Practice Sharyn Fisk stated that the IRS is looking at expanding functions available via the TaxPros account at the ABA Section of Taxation’s virtual meeting as reported by Tax Notes Today Federal in their February 7, 2022 edition.[1]

The IRS rolled out the TaxPros account in July 2021.[2] The primary feature it offered at that time was the ability to electronically submit a power of attorney or information authorization form online, with the taxpayer and tax professional signing the form online. While the system in the vast majority of cases provides the tax professional with access to transcript information immediately once both parties have signed electronically, the system only allowed these submissions for a limited of number of situations (with individual taxpayer matters being by far the most significant).

The IRS made modifications to the instructions for new partnership Schedules K-2 and K-3 (Form 1065)[1] that will require partnerships to either have all partners certify that certain information will not be necessary to complete some international tax related items on their return (including the Foreign Tax Credit) or complete the relevant portions of Schedule K-2 and K-3 and provide them to all partners that they are not aware will not need the information.

A similar statement and revision has been made to the instructions for the new S Corporation Schedules K-2 and K-3 (Form 1120S).[2]

Not all of the changes will cause increased reporting—in fact, some changes result in less work than would have been needed under the original instructions. But the changes made to the reporting of information that could impact a foreign tax credit calculation will create significant additional paperwork for many partnerships and S corporations.

In both cases the PDF with the instructions originally issued in September has not been updated to reflect these changes. Rather, taxpayers are expected to read these changes in addition to the PDF instructions.

The AICPA released what is, fundamentally, a critical response to the IRS statement on offering relief to taxpayers for automated notices,[1] stating “[t]he American Institute of CPAs (AICPA) believes this action is a positive first step, but believes that more should be and could be done by the IRS, without the need for congressional action, to reduce erroneous automated notices and unnecessary taxpayer contact with the Service.”[2]

The IRS has responded to growing pressure to provide some automated notice relief to taxpayers in a post to their website dated January 27, 2022.[1] The page provides a statement that both attempts to defend what the agency has done to date and provide information on actions being taken or that may be taken to reduce the automated notice issues that have drawn attention recently.

The IRS has added more clarification in the final Form 1120S instructions[1] about how expenses paid with PPP loan funds that lead to debt forgiveness should be treated in the computation of the accumulated adjustments account (AAA) and the other adjustments account (OAA).

On January 3, 2022, the IRS released draft instructions that first indicated that expenses paid with PPP loan proceeds should be treated as expenses related to tax exempt income under IRC §1368(e)(1)(A) and excluded from the calculation of AAA. However, some advisers weren’t sure how exactly this should be reported on Schedule M-2.

In final versions of instructions to Forms 1120S[1] and Form 1065,[2] the IRS has provided additional guidance on reporting PPP loan forgiveness on those forms using the methods outlined in Revenue Procedure 2021-48.

When the IRS released the final regulations updating the required minimum distribution and other life expectancy tables, the agency noted that it would be releasing additional guidance to deal with the impact on substantially equal payments. In Notice 2022-06[1] the IRS has now released that guidance.

A number of tax professional organizations, including the AICPA and NAEA, have sent a joint letter to the IRS calling for the agency to take actions to reduce the burden on taxpayers from the agency’s extreme backlog in processing tax returns and dealing with correspondence.[1]

The organizations signing the letter are:

• American Institute of CPAs (AICPA)

• Latino Tax Pro

• National Association of Black Accountants, Inc. (NABA)

• National Association of Enrolled Agents (NAEA)

• National Association of Tax Professionals (NATP)

• National Conference of CPA Practitioners (NCCPAP)

• National Society of Accountants (NSA)

• National Society of Black Certified Public Accountants, Inc. (NSBCPA)

• National Society of Tax Professionals (NSTP)

• Padgett Business Services

• Prosperity Now

The individual tax filing season will open on January 24 when the IRS begins accepting returns the agency announced in News Release IR-2022-08.[1] The release also discusses a number of other issues related to the upcoming filing season.

The IRS updated the 2020 unemployment compensation exclusion FAQ to allow certain taxpayers to keep an erroneous reduction of their federal taxes when the IRS corrected their 2020 Form 1040 to compute the excludable unemployment compensation following changes made in the American Rescue Plan Act.[1] The issue affects certain married taxpayers filing joint returns in non-community property states who received unemployment compensation in 2020.

Most advisers are aware the IRS faced a number of challenges beginning in 2020 that carried into 2021. The enactment of the American Rescue Plan Act which made certain retroactive changes to the law that applied to 2020 didn’t help, especially not coming just over two months after Congress made a number of late year changes to 2020 tax law at the very end of 2020.

The IRS has now disclosed one particular error the agency made trying to deal with the American Rescue Plan Act’s changes to the taxation of unemployment compensation. The error resulted in the IRS computing an erroneously low total federal tax for certain taxpayers on their 2020 income tax return. The agency has now announced those taxpayers will not be required to amend their 2020 tax return or pay the additional tax that they should have paid.

A potential problem for S corporations that received PPP loan forgiveness who had accumulated earnings and profits involved the proper classification of the expenses paid with the PPP loan proceeds in the computation of the accumulated adjustments account (AAA). A post by Dan Chodan, CPA on Twitter on January 3, 2022 pointed out that the IRS had now given guidance on this issue.[1]

The issue arose after Congress, in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act signed into law on December 27, 2020, provided that expenses paid that led to the forgiveness of the PPP loan would be deductible for federal tax purposes, overriding IRS Notice 2020-32 that provided such expenses would not be deductible for federal tax purposes.

Determining the fair market value for a closely-held business for various tax purposes depends upon valuations assuming a willing buyer and willing seller aware of all relevant facts. In CCA 202152018[1] the IRS finds that the valuation used by a taxpayer in attempting to set up a grantor retained annuity trust (GRAT) did not consider the fact that there was a high likelihood the entity being valued would be likely involved in a lucrative merger in the near future.

The Eleventh Circuit Court of Appeals has ruled invalid a portion of regulations adopted in 1986 related to contributions of conservation easements in the case of Hewitt v. Commissioner.[1] The issue involved the Tax Court’s finding, which the appellate panel overruled, that the easement failed to satisfy the “protected-in-perpetuity” requirement found at IRC §170(h)(5), as it violated the judicial extinguishment formula found at Reg. §1.170A-14(g)(6)(ii). The panel found that Treasury had violated the Administrative Procedures Act by failing to address comments provided on this issue as part of issuing the regulations in final form.

The Tax Court ruled that a taxpayer’s attempt to make a deposit rather than a payment of taxes failed when the tax had been assessed prior to the date the attempted deposit was made in the case of Ahmed v. Commissioner, TC Memo 2021-142.[1]

The IRS in News Release IR-2021-256 reminded taxpayers who deferred paying employer FICA for a portion of 2020 or a portion of their 2020 self-employment tax that a deadline is approaching on January 3 to pay a portion of the deferred taxes.[1]

The release explains the option provided to qualified taxpayers in 2020:

As part of the COVID relief provided during 2020, employers and self-employed people could choose to put off paying the employer’s share of their eligible Social Security tax liability, normally 6.2% of wages. Half of that deferral is now due on January 3, 2022, and the other half on January 3, 2023.[2]