The IRS on October 25, 2022, released a draft copy of the instructions for Schedules K-2 and K-3 of Form 1065 for 2022 tax returns.[1] The draft contains a new formalized program for obtaining information from partners related to reporting on information that impacts information required to be provided to partners for possible use on Forms 1116 and 1118.

This release of the instructions was noted on the “Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865)” FAQ on the IRS website update on October 26, which read:

27. When will the 2022 draft instructions for the Schedules K-2 and K-3 be released and where can I find them? (added October 26, 2022)

On October 25, 2022, the IRS released drafts of the 2022 Partnership Instructions for Schedules K-2 and K-3 and the 2022 Partner’s Instructions for Schedule K-3 for the Form 1065. In response to stakeholder input, the draft instructions provide a new filing exception as described on page 3 of the 2022 Partnership Instructions for Schedules K-2 and K-3. Comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022.[2]

The IRS has released Revenue Procedure 2022-38[1] that contains most of the other inflation adjusted numbers for 2023 taxes.

As the numbers relate to the law as it existed at the date of publication of the procedure, something that could change based on pending Congressional action, the procedure contains the following warning:

This revenue procedure sets forth inflation-adjusted items for 2023 for various Code provisions as in effect on October 18, 2022. The inflation adjusted items for the Code sections set forth in section 3 of this revenue procedure are generally determined by reference to § 1(f) of the Code. To the extent amendments to the Code are enacted for 2023 after October 18, 2022, taxpayers should consult additional guidance to determine whether these adjustments remain applicable for 2023.[2]

On Monday at the American Bar Association Section of Taxation meeting, Timothy McCormally of the IRS Office of Professional Responsibility was quoted by Tax Notes Today Federal as announcing “a practitioner priority hotline enhancement which is an effort to deal with robocalls into the IRS, and specifically the autodialer programs…”[1]

The article went on to quote Mr. McCormally as stating that the IRS would use an artificial intelligence tool to sort out automated calls and prevent “line-cutting through technology.”[2] While the article did not provide a date when the pilot program would begin to be rolled out, the article quoted Mr. McCormally as saying that it would be soon.[3]

In Revenue Procedure 2022-19[1] the IRS has issued a series of “taxpayer assistance procedures” to resolve certain issues involving S corporations and their shareholders without requiring the issuance of a private letter ruling (PLR).

The areas covered by this guidance are:

• Agreements and Arrangements with No Principal Purpose to Circumvent One Class of Stock Requirement

• Governing Provisions That Provide for Identical Distribution and Liquidation Rights

• Procedures for Addressing Missing Shareholder Consents, Errors with Regard to a Permitted Year, Missing Officer's Signature, and Other Inadvertent Errors and Omissions

• Procedures for Verifying S Elections or QSub Elections

• Procedures for Addressing a Federal Income Tax Return Filing Inconsistent with an S Election or a QSub Election

• Procedures for Retroactively Correcting One or More Non-Identical Governing Provisions[2]

The IRS in Notice 2022-53[1] has announced that the agency will not impose penalties on failures to take specified RMDs for 2021 and 2022 that were required under provisions of proposed regulations issued to deal with changes in required minimum distributions under the SECURE Act passed in late 2019.

The AICPA Tax Executive Committee has released another letter[1] to the IRS regarding additional guidance needed for the state passthrough entity taxes beyond what was provided in Notice 2020-75.[2]

The AICPA summarizes their requests in this letter as follows:

We recommend:

1. The SITP liability is deductible in accordance with the partnership or S corporation’s method of accounting.

2. The SITP liability is a specifically identified tax and accordingly, a taxpayer should be entitled to adopt the recurring item exception method of accounting with respect to the liability.

3. An entity that is unable to make an entity level election until a year subsequent to the taxable year of imposition should be allowed to make a Federal election to deduct the tax in the taxable year of imposition or the following year (similar to the treatment of plan contributions made on account of a tax year but after the year they relate to under section 404(a)(6)).[3]

The US District Court for Middle District of Tennessee dismissed the suit in the case of Jarrett et al v. United States[1] as moot as the United States had granted the requested refund.

For those who may not remember this case, it involved an attempt by the taxpayers in question to get a federal court to rule that staking rewards do not generate taxable income. While the IRS initially denied the taxpayers’ claim for a refund, after the case was filed the IRS authorized the refund plus interest.

The IRS updated its Fact Sheet for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery (SLRF) Funds.[1] The update added questions 15-17 to the existing FAQ, with the new questions dealing with assistance paid to individuals related to purchases of a home and payment of premium mortgage insurance.

Treasury’s Financial Crimes Enforcement Network (FinCEN) released final regulations regarding financial transparency disclosures of beneficial corporate ownership per the Corporate Transparency Act (CTA).[1] At the same time Treasury released a “Beneficial Ownership Information Reporting Rules Fact Sheet”[2] that described the basic reporting requirements.

The IRS has announced filing deadline relief for residents of the state of Florida related to Hurricane Ian.[1]

Relief Covers the Entire State of Florida

The release indicates that this relief will apply to any individuals that reside or have a place of business in Florida:

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). This means that individuals and households that reside or have a business anywhere in the state of Florida qualify for tax relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.[2]

Most likely relief of some sort will expand as, at the time this article was written, the storm was expected to make landfall again in South Carolina.

The AICPA has issued a second letter[1] asking for an additional expansion of the relief the IRS provided in Notice 2022-36. The AICPA’s original letter, issued on August 30, 2022, had asked for an expansion and extension of the relief provided in the IRS Notice,[2] with the new letter giving additional requests for modifications.

In Chief Counsel Advice 202237010[1] the IRS indicated that if a taxpayer obtained forgiveness of a paycheck protection program (PPP) loan when he/she was not actually qualified to receive such forgiveness, the forgiveness would represent taxable income to the taxpayer even though the SBA would have the right to demand repayment of the loan balance.

In the case of United States v Koncurat,[1] the Court rejected the taxpayers’ argument that they should not be subject to penalties for failure to file their tax returns timely under IRC §6651(a)(1) and failure to timely pay taxes due under IRC §6651(a)(2).

The IRS, via a letter to Rep. Bennie G. Thompson, D-Miss, Chair, House Homeland Security Committee, reported that the agency had inadvertently made available for bulk download certain XML Form 990-T data that should not have been disclosed.[1]

The AICPA has released an exposure draft of significant proposed changes to the Statements on Standards for Tax Services.[1] The AICPA states it will consider all comments received by December 31, 2022. These proposed standards would be effective no earlier than January 1, 2024.

The document also contains an invitation to comment on potential later revisions to the Statements that could create quality control guidance for tax practices.

The AICPA sent a request[1] to the IRS to provide additional and immediate guidance for Schedules K-2 and K-3 for the 2021 and later tax years.

The American Institute of Certified Public Accountants (AICPA)[1] and the National Association of Enrolled Agents (NAEA)[2] have both written the IRS asking for the September 30 filing deadline to obtain penalty relief under Notice 2022-36 be pushed back.

The Notice, issued by the IRS on August 24, 2022, provides for automatic relief from failure to file penalties for certain 2019 and 2020 tax year returns filed on or before September 30, 2022.[3]

Including an option in a purported charitable remainder trust for the trustee to choose between making distributions of the annual unitrust payment to the surviving spouse or a charity ended up with the decedent’s estate not being able to claim either a charitable contribution or marital deduction by the estate for these amounts, the IRS ruled in a Chief Counsel Advice.[1]

The National Taxpayer Advocate published a blog post[1] that discussed the impact of Notice 2022-36 that was issued by the IRS. The information in the blog clarifies issues related to the Notice.

Failure to File Penalty is Waived, But Not Failure to Pay

The Notice did not provide a waiver for all penalties, and the blog begins by noting that while the failure to file penalty under IRC §6651(a)(1) is waived under the Notice, the relief does not apply to the failure to pay penalty under IRC §6651(a)(2) that such taxpayers would generally also be subject to.

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]