IRS Releases Guidance On Elective Payments And Transfers Of Certain Credits Under The Inflation Reduction Act

The Internal Revenue Service issued proposed regulations and frequently asked questions describing rules for applicable entities that earn certain clean energy credits and choose to make an elective payment election and rules for eligible taxpayers that elect to transfer certain credits to unrelated parties.

For tax years beginning after Dec. 31, 2022, applicable entities can choose to make an elective payment election, which will treat certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This payment will first offset any tax liability of the entity and any excess will be refundable.

Applicable entities generally include tax-exempt organizations, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority and rural electric cooperatives. All other taxpayers may elect to be treated as an applicable entity for a limited number of credits.

Also, for tax years beginning after Dec. 31, 2022, certain eligible taxpayers (generally taxpayers that are not applicable entities) can make an election to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments.
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When To Use A Durable Power Of Attorney To Authorize Representation Before The IRS

As the U.S. population ages, taxpayers and their representatives are increasingly confronted with the question of how to appoint a power of attorney (POA) to act on behalf of taxpayers in the event of incompetence or incapacity. When taxpayers are competent, they use a Form 2848, Power of Attorney and Declaration of Representative, for this purpose. However, an incompetent or incapacitated taxpayer is in no position to execute a Form 2848. Likewise, even a preexisting Form 2848 is usually voided if taxpayers become incompetent or incapacitated. In other contexts, individuals typically rely on various types of POA instruments to enable representation, but the IRS often will not recognize these for tax purposes. Thus, in the event of unforeseen circumstances, taxpayers can find themselves without a voice in their own tax matters beyond that of a court-appointed fiduciary.

One way of avoiding this potential pitfall is through creative and well-informed use of a durable power of attorney (DPOA). DPOAs are a common tool in the realm of estate planning and financial and medical decision-making. The key feature of a DPOA is that it remains operative or becomes effective when the principal (the individual who granted the authority) becomes incompetent or unable to act on his or her own behalf.

Tax practitioners rarely rely on DPOAs because, in their usual format, they do not authorize representation before the IRS. For this reason, individuals who have been acting on behalf of someone via a DPOA (often known as “attorneys-in-fact”) may have an unwelcome surprise when it comes to IRS representation.

Based on regulatory requirements, the Form 2848 includes information beyond a typical DPOA, such as:
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Lookback Rule: The IRS Fixes The Refund Trap For The Unwary

For tax year (TY) 2019, there were nearly 34 million returns filed between the postponed period of April 16, 2020, and July 15, 2020, and for TY 2020, there were nearly 29 million returns filed between the postponed period of April 16, 2021, and May 17, 2021. Without IRS intervention, any claims for credit or refund filed during the postponed period three years later that included withholding or estimated taxes would have been denied because the withheld amount(s) would have been credited to the taxpayer’s account as of April 15, outside the three-year lookback period.

Good news: Earlier today the IRS issued Notice 2023-21 addressing the mismatch between the time for filing a claim for credit or refund and the three-year lookback period caused by postponing certain filing deadlines for filing seasons 2020 and 2021, which would result in the denial of timely claims for credit or refund for those taxpayers who took advantage of the postponed deadlines and who had withholding or estimated payments. Taxpayers will never know this was a potential problem as the IRS did the right thing and proactively fixed the lookback period to eliminate challenges and refund denials for taxpayers.

I first raised this issue internally after the IRS postponed the filing date for the 2020 filing season (TY 2019 returns). On May 11, 2021, I posted a blog, in which I publicly suggested the IRS publish guidance to remedy this problem and submitted a recommendation to include in the U.S. Department of the Treasury/Internal Revenue Service Priority Guidance Plan. I also provided a legislative recommendation as to how Congress could remedy this issue for these tax years and for all future instances when the filing deadline is postponed. This notice resolves the issue for the 2020 and 2021 COVID-19 disaster relief, yet it does not provide relief for other disaster filing postponements.
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U.S. Government Concedes In Case Of Large Foreign Gifts

An American citizen got a big cash gift from his mom back in Poland. The U.S. government went after him for failure to report foreign gifts – but now has changed its tune regarding “reasonable cause” and “willful” failure to file.

The U.S. Department of Justice has conceded in Wrzesinski v US that an American citizen and a native of Poland does not owe penalties for failing to file IRS Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” after receiving $830,000 from his mother in Poland.

Krzysztof Wrzesinski immigrated to America in 2005 at age 19 and for the past nine years he has been a Philadelphia police officer. In 2010, his mother, Barbara Wrzesinska, a citizen and resident of Poland, made a gift to her son of $830,000 after winning the Polish lottery.

Wrzesinski visited his mother in mid-November 2010 and while there phoned his tax advisor in the United States to ask if he needed to document the gift in the U.S. The advisor, a tax accountant and an Enrolled Agent, told Wrzesinski there was no need to include the gift on his U.S. tax returns and that there was no other U.S. legal requirement in connection with the gift. Wrzesinski received the money in four payments from December 2010 to March 2011.

A Problem Unearthed
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How The IRS Shares Taxpayer Info With Other Governments

A recent case highlights how freely taxpayers’ data flows between national borders – and how holders of international assets must realize how much overseas tax authorities can learn about them fast.

The Internal Revenue Service is ready, willing and able to help authorities worldwide with tax enforcement – especially with the sharing of taxpayers’ information.

In Zhang v. United States, taxpayers recently appealed a decision from the U.S. District Court for the Northern District of California that denied their petition against an IRS summons for information. The summons was at the request of the Canadian tax authority; the U.S. and Canada have a bilateral tax treaty.

The Ninth Circuit Court sided with the IRS, saying the agency can seek information for a foreign government if the request satisfies accepted guidelines.

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IRS Quickly Moves Forward With Taxpayer Service Improvements; 4,000 Hired Plus 1000 More By End Of Year

The Internal Revenue Service announced significant progress to prepare for the 2023 tax filing season as the agency passed a milestone of hiring 4,000 new customer service representatives to help answer phones and provide other services.

These assistors have been hired over the last several months and are being trained to provide help to taxpayers, including answering phone questions. This is part of a much wider IRS improvement effort tied to the Inflation Reduction Act funding approved in August. The IRS continues working hard on implementing the landmark 10-year legislation, and updates on other improvement areas will be provided in the near future.

“The IRS is fully committed to providing the best service possible, and we are moving quickly to use new funding to help taxpayers during the busy tax season,” said IRS Commissioner Chuck Rettig. “Our phone lines have been simply overwhelmed during the pandemic, and we have been unable to provide the help that IRS employees want to give and that the nation’s taxpayers deserve. But help is on the way for taxpayers. As the newly hired employees are trained and move online in 2023, we will have more assistors on the phone than any time in recent history.”

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IRS Fires Warning Shot At Promoters Of Employee Retention Credit (ERC)

Enacted as part of the CARES Act in 2020, the Employee Retention Credit (ERC) provided much-needed relief to employers during the COVID-19 pandemic, particularly those who were on the fence as to whether they would maintain their payroll.  However, with the COVID-19 pandemic largely behind us now, the IRS has taken steps to begin to identify whether employers who claimed the ERC on prior year employment tax returns were actually entitled to the credit and, if so, whether they properly reduced their wage expense deductions for the employment periods in which the credit was claimed.

More recently, the IRS has indicated that it is now aware of third-party ERC promoters who may have nudged employers to claim the ERC even when those employers did not qualify for the credit.  On October 19, 2022, the IRS issued an announcement in the Internal Revenue Bulletin, warning employers of these schemes.  To the extent the IRS identifies an employer who improperly claimed the ERC when it otherwise did not qualify, the IRS has indicated that it intends to reclaim the credits with penalties and interest.  In addition, given the warning shot fired at third-party promoters of ERC schemes, such promoters are now on notice that the IRS may attempt to impose civil penalties or criminal sanctions against them as well under various federal statutes that prohibit unscrupulous promoter and tax-return preparation activities.  See, e.g., I.R.C. § 6694 (understatement penalty for unreasonable position or willful or reckless conduct); § 6700 (promoting abusive tax shelters); § 6701 (aiding and abetting an understatement of tax liability).

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Plug-In Electric Drive Vehicle Credit (IRC 30D)

The Treasury Department and the IRS issued Notice 2022-46 PDF requesting comments on any questions arising from the IRA amendments to the Clean Vehicle Credit. Comments should be submitted by November 4, 2022.

Updated information for consumers as of August 16, 2022

New Final Assembly Requirement

If you are interested in claiming the tax credit available under section 30D (EV credit) for purchasing a new electric vehicle after August 16, 2022 (which is the date that the Inflation Reduction Act of 2022 was enacted), a tax credit is generally available only for qualifying electric vehicles for which final assembly occurred in North America (final assembly requirement).

The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement. Because some models are built in multiple locations, there may be vehicles on the Department of Energy list that do not meet the final assembly requirement in all circumstances.

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DAVID ELLIS - IRS Providing Automatic Penalty Relief: 2019 And 2020 Returns

The IRS has announced that it will provide automatic relief from certain failure to file penalties and information reporting penalties for 2019 and 2020 taxable years. (Notice 2022-36) The IRS will determine whether a taxpayer qualifies and will automatically abate, refund, or credit the taxpayer’s account, as appropriate. No action on the taxpayer’s part is required.

Tax professionals should be ready to answer questions from clients who receive unexpected refund checks and/or IRS notices in the mail informing them of automatic changes to their IRS account.

The purpose of the relief is to allow the IRS to focus more of its resources on clearing its backlog, as well as provide relief to taxpayers affected by the COVID-19 pandemic.

To be eligible for the automatic failure to file penalty relief for the 2019 and 2020 taxable years, eligible entities must have filed their returns by September 30, 2022. The relief applies to:

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Signs Of Identity Theft Tax Pros Should Watch Out For

With identity thieves continuing to target the tax community, Internal Revenue Service Security Summit partners today urged tax professionals to learn the signs of data theft so they can react quickly to protect clients.

The IRS, state tax agencies and the tax industry – working together as the Security Summit – reminded tax professionals that they should contact the IRS immediately when there’s an identity theft issue while also contacting insurance or cybersecurity experts to assist them with determining the cause and extent of the loss.

“Tax pros must be vigilant to protect their systems from identity thieves who continue to look for ways to steal data,” said IRS Commissioner Chuck Rettig. “Practitioners can take simple steps to remain on the lookout for signs of data and identity theft. It’s critical for tax pros to watch out for these details and to quickly take action when tell-tale signs emerge. This can be critical to protect their business as well as their clients against identity theft.”

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Tax Scams

WASHINGTON – J. Russell George, the Treasury Inspector General for Tax Administration, announced the release of new public service announcements (PSAs) to educate taxpayers about the continuing threat of Internal Revenue Service (IRS) impersonation scams.

The English and Spanish-language PSAs are available on TIGTA’s YouTube Channel.

“IRS impersonation scams continue to plague Americans and have claimed victims in every State,” George said. “TIGTA’s new public service announcements share advice on how to recognize these scams. If you receive a suspicious phone call from someone claiming to be from the IRS, just hang up.”

Scammers undermine Federal tax administration by impersonating IRS employees in an effort to obtain personally identifiable information (PII) from unsuspecting taxpayers or to steal their money. Such impersonators may claim to be IRS employees on the telephone or may misuse IRS logos, seals, or symbols to create official-looking letters and e-mails.

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The IRS And Nominee Liability

Nominee Liability

Under the Internal Revenue Code, the IRS can satisfy a tax deficiency by imposing a lien on any “property” or “rights to property” belonging to the taxpayer.  The statutory language is broad and reaches virtually every interest in property that a taxpayer might have, with limited exceptions.  In fact, the IRS’s legal ability to reach “property” and “rights to property” can include not only property and rights to property owned by the taxpayer in the taxpayer’s name, but also property held by a third party if the third party is holding the property as a nominee of the delinquent taxpayer.

What is a nominee?

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