In Notice 2022-36[1] the IRS has announced broad relief from certain penalties for taxpayers filing specified tax and information returns for taxable years 2019 and 2020.

Justification for Relief

Why is the IRS taking this action currently? While the Notice discussed COVID-19 related issues in general, the background concludes with what is likely the most significant factor driving this relief—the fact that, due to the backlog of unprocessed documents and returns, this is being done to hopefully clear out a lot of issues the IRS otherwise has to deal with before the agency could get back to pre-pandemic processing and response times:

The COVID-19 pandemic has also had an unprecedented effect on the IRS’s personnel and operations. The agency was called upon to support emergency relief for taxpayers, such as distributing economic impact payments, while sustaining its regular operations in a pandemic environment with limited resources, where employees were sometimes unable to be physically present to process tax returns and correspondence. In response to these challenges, the IRS has been working aggressively to process backlogged returns and taxpayer correspondence to return to normal operations for the 2023 filing season. The Treasury Department and the IRS have determined that the penalty relief described in this notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the COVID-19 pandemic.[2]

Even though the alimony deduction/taxation issue for divorced couples is no longer an issue in divorces finalized today, the issue of exactly what is federal income tax law alimony continues to be an issue for pre-2019 divorces. In the case of Redleaf v. Commissoner[1] the former spouses were disputing the treatment of payments totaling $51 million.

As is normal in a case like this, the IRS also has a protective assessment issued against the recipient spouse so the agency does not get whipsawed should the payor prevail in the court challenge, even though the agency had determined that the payments did not qualify as alimony. Thus, both former spouses were actively involved in this matter.

The IRS issued final regulations[1] that adopt proposed regulations originally issued in October 2017[2] without making any changes eliminating the requirement that the election under IRC §754 included with a partnership income tax return be signed by a partner of the partnership.

An election under IRC §754, once made, requires that the basis of partnership property be adjusted:

• For distributions, as provided in IRC §734 and

• For transfers of a partnership interest, as provided in IRC §743.

This election cannot be revoked except as provided for in regulations issued by the IRS.

In IRS News Release 2022-143,[1] the IRS has warned tax professionals about evolving scams that seek to obtain taxpayer information from the professionals’ networks. And this is important because, as the news release notes, “[f]or tax professionals, securing their network to protect taxpayer data is their responsibility as a tax preparer.”[2]

A taxpayer suing the U.S Government for failing to receive his economic impact payment from the IRS under the Consolidated Appropriations Act, 2021 had his case dismissed by the United States District Court in the case of Shaw v. Yellen.[1] And the reason why his claim was dismissed is one very few taxpayers will easily understand, even though the action is based on requirements all tax professionals should be aware of.

The taxpayer took the IRS to court over the early 2021 $600 check he was supposed to receive. As the opinion notes:

In his initial Complaint, Petitioner complains that the IRS did not send him the $600 he is owed under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. Petitioner provided a copy of a letter from the IRS dated February 5, 2021 that states a payment of $600 was issued by either check or debit card and that he should check the status of his payment if he has not received it within seven days of receiving the letter. ECF No. 1 at 6. Petitioner also explained that he wrote the IRS to inquire about the status of the missing check. He attached a copy of a letter from the IRS date August 25, 2021 that states that the IRS received his inquiry and needs another sixty days to work on his account to send a complete reply. ECF No. 1 at 8.[2]

The Tax Court denied an attempt by the breadwinner to obtain innocent spouse relief for tax liabilities in the case of Soler v. Commissioner.[1] And the case also contains a warning for spouses who may prefer to not get involved in tax matters in the marriage when their spouse happens to be an accountant.

The IRS issued a Technical Advice Memorandum[1] that looks at whether, to put it simply, if meeting the material participation test for an activity for five straight years by using the significant participation activity (SPA) test found at Reg. §1.469-5T(a)(4) means the activity cannot be included as an SPA in year six. And the IRS concludes that answer is yes, which could cause the taxpayer to lose material participation status for other SPAs for the year in question.

In the case of Keefer v. United States, USDC ND TX,[1] a taxpayer was denied a deduction for a contribution on two separate grounds. First, the Court found that the taxpayers had failed to give away the entire asset in question, resulting in an anticipatory assignment of income and, second, the taxpayers did not obtain a proper contemporary written acknowledgment of the contribution.

In the case of United States v. Ward, USDC AK,[1] the taxpayers’ attempt to argue that some of the time period the statue for collections was suspended due to the taxpayers filing multiple times for collection relief should be ignored due to defects in those filings made by the taxpayer. The court decided the taxpayers would not be allowed to use their own mistakes to their advantage.

In the case of LaRochelle v. Commissioner, TC Summary Opinion 2022-12[1] the taxpayers argued they should not be liable for an accuracy related penalty under IRC §6662 related to their failure to report an IRA distribution when the Form 1099-R had been sent to their former, rather than current, address. The Tax Court found, in these circumstances, that there was not reasonable cause for their failure to report the distribution despite the Form 1099-R being sent to the wrong address.

The Tax Court denied relief from late filing,[1] late payment[2] and underpayment of estimated tax[3] penalties to a physician in the case of Bennett v. Commissioner.[4]

In Email Chief Counsel Advice 202226010[1] IRS counsel gave its conclusion on whether a federal tax lien (FTL) could be attached to payments made by the purchaser of a business to the seller’s former spouse to cover an alimony obligation of the seller who now faced a collection action related to a federal tax liability. This payment structure was entered as part of the taxpayer’s divorce action and was in effect prior to when the federal tax lien arose.

The IRS has issued a revised Revenue Procedure providing for a late portability election available to qualifying estates in Revenue Procedure 2022-32.[1] The procedure supersedes Revenue Procedure 2017-34 and becomes the only method by which a late election may be made for any estate that qualifies to use this procedure.

We don’t often write about criminal tax cases here on this site, but the case of United States v. VanDemark[1] discusses a taxpayer who, per the beginning of the Sixth Circuit opinion “tried to hoodwink the IRS.”[2] Of interest outside the criminal tax controversy context, he attempted to argue in his defense that he did not have to report cash deposits he received as income due to lack of “some guarantee” the business would keep the funds, an argument the appellate panel did not find persuasive given the facts of his case.

The National Taxpayer Advocate Service (TAS) has updated its criteria for accepting cases,[1] removing limitations on accepting paper-filed return cases for 2021 referred from Congressional offices.

The Fifth Circuit Court of Appeals sustained the Tax Court’s decision[1] denying a taxpayer a charitable contribution deduction in the case of Izen v. Commissioner,[2] finding that a taxpayer must strictly follow the documentation requirements set out by Congress in the statute to obtain a charitable contribution deduction.

This case was covered back when the Tax Court released its decision in 2017 on our tax update webpage[3] and involved a taxpayer’s attempt to claim a deduction for a donation for an aircraft on an amended income tax return.

While the IRS posted a news release[1] announcing the agency had hit a key milestone in dealing with paper return filings that have been backlogged since the pandemic began, the National Taxpayer Advocate issued a report[2] a day later showing the agency had lost ground over the past year in attempting to catch up on dealing with such returns.

The US Supreme Court has agreed to hear the taxpayer’s appeal of the Fifth Circuit Court of Appeals decision in the case of Bittner v. United States.[1] The key issue is whether, in assessing penalties for failing to report interests in foreign accounts on an annual FBAR, the penalties apply on a per-account or per-reporting form basis, a matter which was decided differently in 2021 cases heard by the Fifth and Ninth Circuits.

The IRS in News Release IR-2022-127[1] announced they have made available automated voice bot options to assist taxpayers in verifying their identities and setting up payment plans.

The release begins:

The Internal Revenue Service today announced expanded voice bot options to help eligible taxpayers easily verify their identity to set up or modify a payment plan while avoiding long wait times.

“This is part of a wider effort at the IRS to help improve the experience of taxpayers,” said IRS Commissioner Chuck Rettig. “We continue to look for ways to better assist taxpayers, and that includes helping people avoid waiting on hold or having to make a second phone call to get what they need. The expanded voice bots are another example of how technology can help the IRS provide better service to taxpayers.”[2]

The Tax Court found that clothes purchased by a nurse to meet an employer’s requirements that she be dressed in comfortable clothes and in a manner that reflected her profession as a nurse qualified as a deductible business expense in the case of Romana v. Commissioner, TC Summary Opinion 2022-9.[1]