International Information Return Penalties Impact A Broad Range Of Taxpayers

In a series of earlier blogs, I discussed some of the problematic aspects of the international information return (IIR) penalty regime. In Part 1, I advocated that, especially after the Tax Court’s decision in Farhy v. Commissioner, Congress should make Chapter 61 IIR penalties subject to deficiency procedures. In Part 2, I urged Congress to ensure that the statute of limitations in IRC § 6501(c)(8) governs these IIR penalties, while in Part 3, I reiterated my longtime recommendation that “willfulness” be proven by clear and convincing evidence. In this blog, I will address the broad scope of the IIR penalty regime.

There is a misconception that IIR penalties affect primarily bad-faith, wealthy taxpayers who are experiencing consequences of their own making. Reality, however, is much different. The IIR penalty regime disproportionately affects individuals and businesses of more moderate resources, and is by no means just a rich person’s problem. Wealthy individuals and large businesses tend to have knowledgeable and well-informed representation and as a result have fewer foot faults. Immigrants, small businesses, and low-income individuals may not be as well-informed about IIR penalties and may not have return preparers with the same technical expertise on international penalties.
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Chapter 61 Foreign Information Penalties: Taxpayers and Tax Administration Need Finality, Which Requires Legislation (Part Two)

Due process requires that matters be resolved according to established rules and principles and that taxpayers be treated fairly. The international information return (IIR) penalty regime under IRC Chapter 61, Subchapter A, Part III, Subpart A does not adhere to this fundamental mandate. Now is the time for Congress to fix this broken system by providing a clear path for implementation of these penalties. This fix, which would provide much-needed clarity and finality, will require legislation.

The need for this legislation has been brought to a head by the U.S. Tax Court’s recent decision in Farhy v. Commissioner, which holds that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b). In part one of this series, I provide a discussion of this decision and a recommendation that would protect the rights of both taxpayers and the government.

Since assuming the role of National Taxpayer Advocate, I have recommended that the IRS cease systemic assessment of these penalties, and I have requested that Congress enact legislation providing the IRS the ability to utilize deficiency procedures for IIR penalties. Among other things, deficiency procedures allow for judicial review in the Tax Court prior to the assessment and payment of the asserted penalties.

Compared to other courts, the Tax Court is more accessible for taxpayers and is by far the least expensive and easiest to navigate for low-income taxpayers. Amending the IRC to implement deficiency procedures would solve the problem highlighted by the Tax Court in Farhy. Nevertheless, there remains a separate and important issue regarding Chapter 61 IIR penalties that also needs a legislative fix.

Chapter 61 International Information Return Penalties Require Finality

Taxpayers are entitled to finality and a fair and just tax system. Protection of these rights is a bedrock aspect of quality tax administration.
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Chapter 61 Foreign Information Penalties: Part One: Taxpayers and Tax Administration Need A Legislation Fix

This blog specifically addresses information reporting penalties in Chapter 61, Subchapter A, Part III, Subpart A (hereafter referred to as Chapter 61 for brevity’s sake).

Taxpayers who receive foreign gifts or control certain foreign corporations and partnerships and fail to file required information returns are subject to penalties under IRC §§ 6038 and 6039 (which are in Chapter 61 of the IRC). IRC § 6038 is one of several code sections that require similar filings and provide for similar penalties for taxpayers with various types of foreign corporations, partnerships, assets, and accounts. These Chapter 61 penalties are peculiar in that each section specifically imposes the penalties but provides no authority to assess and collect the penalties. I raised this concern in my 2020 Annual Report to Congress and recommended that the IRS take steps to protect the government fisc and also taxpayer rights by maximizing taxpayers’ access to administrative and judicial review.

Farhy v. Commissioner
The ability of the IRS to assess a Chapter 61 penalty was recently challenged before the U.S. Tax Court in Farhy v. Commissioner and, in a precedential decision, the court held that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b).

In Farhy, the taxpayer had a reporting requirement under IRC § 6038(a) to report his ownership interests in two foreign corporations but failed to file required Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for multiple tax years. The IRS assessed an initial penalty under IRC § 6038(b)(1) for each year and continuation penalties under IRC § 6038(b)(2). The IRS sought to collect the penalties via levy, and the taxpayer timely filed a petition with the Tax Court challenging the IRS’s authority to assess and attempt to collect via levy.
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Disaster Relief: What The IRS Giveth, The IRS Taketh Away(Part One)

Disaster Relief: What the IRS giveth, the IRS taketh away. Or so it seems for disaster relief taxpayers until you get to page 4 of the collection notice (Part One)

Imagine you live in a county that has been battered by storms or wildfires so severe that the federal government has included your county in a disaster declaration. Imagine that the IRS grants you an extra four or six months to file your tax return and make your tax payment. Then imagine you file your return early but properly decide to hold off on making payment until the postponed deadline. That is what an estimated one million taxpayers living in California and seven other states (Alabama, Arkansas, Florida, Georgia, Indiana, Mississippi, and Tennessee) have done in the last few months. To their surprise and dismay – and contrary to IRS guidance and press releases – those taxpayers are now receiving “notice and demand” collection letters from the IRS telling them their payments are currently due and the IRS will begin to charge interest and penalties if the taxpayer doesn’t pay by a specified date on the notice which is months earlier than IRS guidance permits. Confused taxpayers and practitioners are wondering why they are receiving a balance due notice since they live in a disaster relief area and had months of additional time to pay.

Short answer: Disaster area taxpayers can ignore the CP14 collection notice when the original due dates fall within the postponement period. The payment due date on the collection notice is wrong. The correct payment due date is stated on the disaster declaration. Taxpayers can verify the correct payment due date by checking

If you want to understand this perplexing situation, read on, but it involves several twists and turns.
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National Taxpayer Advocate Mid-Year Tax Checkup 2023

Summertime is the perfect time for a mid-year tax checkup. A tax checkup will help you avoid being surprised with a potentially large tax bill and may help uncover ways you can save throughout the rest of the year. It is also a good time to account for any life changes that may affect your overall tax liability.

Get Organized
Collect and keep your records and receipts. Record keeping can help you identify sources of income, track deductible expenses, and make preparing a complete and accurate tax return easier.
Notify the IRS if your address changes and notify the Social Security Administration of a legal name change.
Create and/or sign into your individual IRS online account to view your federal tax records, manage communication preferences, make payments and more.

Perform A Paycheck Check-up
Pay close attention to your paystubs to help prevent end-of year surprises. Make sure the earnings are correct and that you have the proper amount of tax withheld. As time passes, life events like marriage, divorce, having a child, buying a home, or a change in income may affect your taxes. The IRS’s Tax Withholding Estimator will help you assess your income tax, credits, adjustments, and deductions, and determine whether you need to change your tax withholding. If a change is recommended, the estimator will provide instructions to update your withholding with your employer either online or by submitting a new Form W-4, Employee’s Withholding Allowance Certificate.

Remember, most income is taxable. This includes the following sources and more:
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National Taxpayer Advocate: Small Business Filing And Recordkeeping Requirements

There are about 57 million small businesses and self-employed taxpayers in the United States, including:

Corporations and partnerships with assets less than $10 million
-Sole proprietors
-Independent contractors
-Members of a partnership that carries on a trade or business
-Others in business for themselves, even if the business is part-time
-Gig workers (i.e., Uber/Lyft drivers, owners of Airbnb rentals, delivery services, etc.)
-The Taxpayer Advocate Service is sharing the following information with small business taxpayers to:

Help you meet their filing requirements
Share resources for information and tax return preparation
Help you file accurate returns
Small Business Filing Requirements

Generally, the federal tax forms you will need to file vary depending on the type of business:
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Standard Mileage Deduction Rates Should Be Consistent For All Taxpayers

The IRS released a Strategic Operating Plan (SOP) outlining how it intends to use the nearly $80 billion in additional funding received as part of the Inflation Reduction Act of 2022 (IRA) to improve the taxpayer experience, modernize its information technology (IT) systems, and strengthen tax compliance programs in a fair and equitable manner.

This is a game changer to transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve.

However, of the nearly $80 billion in supplemental IRA funding, only $3.2 billion was allocated for Taxpayer Services and $4.8 billion was allocated for the IRS Business Systems Modernization (BSM) projects. Combined, that’s just ten percent of the total. By contrast, 90 percent was allocated for Enforcement ($45.6 billion) and Operations Support ($25.3 billion). The additional long-term funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer service needs and IT modernization.

As discussed in the Estimated Allocation of Funds section of the SOP, the additional resources the IRS has deployed to meet current taxpayer service needs will deplete the entire $3.2 billion IRA allocation for Taxpayer Services in less than four years if additional annual appropriations or supplemental funding is not provided. The SOP also expresses concern about the adequacy of BSM funding to modernize the agency’s antiquated IT systems.
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National Taxpayer Advocate Urges Congress To Re-Direct Additional Funds

In the latest NTA BLOG, National Taxpayer Advocate Erin M. Collins urges Congress to increase funding for IRS taxpayer services and business systems/IT modernization to better meet taxpayer needs.

In the blog, the National Taxpayer Advocate notes that the Inflation Reduction Act passed last August provided the IRS with $80 billion in additional funding over the next ten years, but only 10 percent of the funding was directed toward taxpayer services and IT modernization. Ninety percent was directed toward enforcement and operations support.

“The top tax administration priority now should be to improve taxpayer service, particularly after the struggles of the last few years, and to do that, the IRS needs more funding in the Taxpayer Services and Business Systems Modernization accounts,” Collins writes.

The blog outlines four alternative ways Congress can ensure the IRS receives enough funding to effectively serve taxpayers, and it provides concrete examples of how poor customer service and antiquated technology has led to problems.

Collins emphasizes that improving service and technology can help the IRS save money on enforcement.

Collins says, “The most efficient way to improve compliance is by encouraging and helping taxpayers to do the right thing on the front end. That is much cheaper and more effective than trying to audit our way out of the tax gap one taxpayer at a time on the back end.”

Please visit the NTA BLOG to read more details about the National Taxpayer’s call to Congress to meet taxpayer needs and support an effective, fair, and equitable tax administration. We encourage you to share this important information with your audience.

National Taxpayer Advocate

The IRS Must Be Proactive In Issuing Timely And Clear Guidance To Resolve Tax Reporting Ambiguities

I have written frequently about the burdens the complexity of the Internal Revenue Code imposes on taxpayers and the IRS alike. One of the burdens it imposes on the IRS and its Office of Chief Counsel is the responsibility to clarify ambiguities in the law and make reporting requirements workable so that taxpayers, tax professionals, and tax return software developers know how to report items of income, deduction, and credit on federal income tax returns.

The IRS must issue guidance and provide education in a proactive and timely manner. Timely guidance is vital to taxpayers, tax professionals, and industry, and it is just good tax administration. It is key to eliminating confusion and frustration for taxpayers and tax professionals, earning the trust of the American people, and providing quality service. Sometimes, timing is everything.

While the IRS deserves credit for the volume of guidance it provides, there are times when it delays or fails to issue timely guidance and thereby creates serious problems, including uncertainty and confusion, for taxpayers, tax professionals, and tax software developers. Two recent, well-publicized examples stand out as instances where the IRS missed the boat.

Special State Tax Refunds or Payments
The first example relates to the federal tax treatment of special state tax refunds or payments to residents of more than 20 states. Among these states are California, Massachusetts, and Virginia. In California, taxpayers who filed 2020 California tax returns reporting adjusted gross incomes up to $500,000 for a joint return or $250,000 for a single return were eligible for Middle Class Tax Relief benefits worth up to $1,050. To date, nearly 17 million payments have been made.

Are they taxable for federal income tax purposes?
The State of California thinks the answer may be yes. The California Franchise Tax Board website says: “Individuals who received a California Middle Class Tax Refund (MCTR) of $600 or more will receive a 1099-MISC for this payment… The MCTR payment may be considered federal income. You should consult IRS Publication 525, Taxable and Nontaxable Income, or your tax professional regarding the federal tax treatment of this payment.”

The Commonwealth of Virginia largely agrees. It provided a one-time tax rebate, and its Department of Taxation’s website says: “If you itemized your deductions, you may be required to report the rebate amount you received as income on your federal return. You’ll receive a Form 1099G in the mail, just like you would if you received a state tax refund.”
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The National Taxpayer Advocate’s Annual Report to Congress identifies taxpayers’ problems and provides suggestions to further protect taxpayer rights and ease taxpayer burden.

IRS Postpones Implementation of $600 Form 1099-K Reporting by a Year

As a result of taxpayer confusion, lack of clear guidance, concerns about the existing backlog, and impact on the upcoming filing season, industry and stakeholders urged the IRS to postpone the implementation of the new reporting requirements of the Forms 1099-K. Good news: The IRS listened, and on Friday, December 23, the IRS issued Notice 2023-10 delaying the requirement for electronic payment networks to report transactions over $600 to the IRS on a Form 1099-K, Payment Card and Third Party Network Transactions, until 2024.
Key Points:

  • The IRS is delaying lowering the threshold for Form 1099-K reporting by a year. The $20,000 and 200 transactions thresholds remain in place through December 31, 2023.
  • The rules for reporting income are not changing. Anybody receiving taxable income paid through third-party networks must still track and report their taxable income.

Why does this matter for taxpayers?

A Form 1099-K is an information form typically provided to freelancers or small business owners who receive payments of income from a client via a third-party payment system (e.g., Venmo, PayPal, or Cash App) and it is often considered self-employment income. However, with the convenience of Venmo, PayPal, or Cash App, many individuals pay personal expenses as well as payments associated with goods and services with these apps.

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What The Inflation Reduction Act Means for You

The Inflation Reduction Act, which includes expanded or extended tax credits and additional funding for the IRS, was signed into law on August 16, 2022.

How could the Inflation Reduction Act impact you when filing your next tax return?

Below is a simplified summary of how the Inflation Reduction Act may affect you.

Health Care

The Inflation Reduction Act includes:

  • Extension of Affordable Care Act (ACA) funding through 2025. This funding, which was due to expire at the end of 2022, will allow consumers to continue to buy insurance with lower premiums through the Health Insurance Marketplace (also referred to as the Marketplace or the Exchange).
  • Extension of the American Rescue Plan Act (ARPA) temporary exception that allows taxpayers with incomes above 400 percent of the Federal Poverty Level to qualify for the Premium Tax Credit.

Energy Efficient Home Improvement Credit

The Nonbusiness Energy Property Credit was extended through 2032 and renamed the Energy Efficient Home Improvement Credit.

Starting in 2023, the credit will be equal to 30 percent of the costs of all eligible home improvements made during the year. Additionally:

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