Practice and Procedure

Chapter 10

Substance over Form Explained• Summa Holdings, Inc., No. 16-1712 (6th Cir.,

2/16/17)• Family set up DISC and Roth IRAs for sons in manner

designed to combine benefits to get large contributions to Roth beyond what owners could achieve by direct contributions

• IRS disallowed and Tax Court agreed• Substance over form – was really dividends from corp to

parents rather than corp paying commissions to entity owned by Roth IRAs. Thus, no commission deduction to corp, no tax owed by holding company and 6% excise tax on excess contributions.

2http://www.opn.ca6.uscourts.gov/opinions.pdf/17a0037p-06.pdf

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6th Circuit Holding in Summa• Use of DISC and Roth IRA ok per statute• Inappropriate use of substance over form

• Should only use when economics of transaction indicates a different answer.

• Parties followed what statute allows without a “’devious path’ to a certain result in order to avoid the tax consequences of the ‘straight path.’”

• A transaction cannot be undone by IRS “just because taxpayer undertook it to reduce their tax bills.”

• 6th – substance over form applies if transaction “fails to capture economic reality” and “distorts meaning of the Code”

• If Congress wants different result, needs to change IRC.

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Today! Page 10-7

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IRS Tools WebsiteAll of them at this site

• https://www.irs.gov/help-resources/tools

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https://www.irs.gov/tax-professionals/basic-tools-for-tax-professionals

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Need IRS Assistance? –Make an Appointment

IRS Special Edition Tax Tip 17-10• In person assistance – you MUST make an appt.• First though, check out self-service options, such

as Pub 17, how to pay, how to check refund, etc.• Also see Pub 5136, IRS Services Guide

• Also has resource tips for preparers.

https://www.irs.gov/uac/newsroom/irs-face-to-face-help-is-now-by-appointment

https://www.irs.gov/pub/irs-pdf/p5136.pdf

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14Excerpt – Pub 5136 - https://www.irs.gov/pub/irs-pdf/p5136.pdf

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Online Account Information Expanded

• New features:• See up to 18 months of tax payment history• View payoff amounts and tax balance due for each

tax year• Online transcripts of Form 1040 info through Get

Transcript• Critique the system and offer suggestions for

improvement.

https://www.irs.gov/uac/view-your-tax-account

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ITIN Renewals• ITINs with middle digits 70, 71, 72 and 80 expire in 2017• Renewal open now

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https://www.irs.gov/individuals/itin-expiration-faqs

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FinCEN and Residential Real Estate Transactions - $$$

• 2/23/17 announcement• Geographic Targeting Orders for certain RE

transactions• 6 specified areas including NYC, LA, SF, San Diego• Payment by certified check, personal ck, Traveler’s ck• Focus on all cash for high-end residential real estate

• Example - $2 million in counties of LA, SF, San Diego, San Mateo, Santa Clara

• Reporting by title insurance companies or other covered business

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User Fees and Pay.gov –Starts June 15

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https://www.irs.gov/uac/newsroom/for-letter-rulings-and-similar-requests-electronic-payment-of-user-fees-starts-june-15-replaces-paying-by-check

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Disaster Resources and Reminders• Donations for aid

• Be sure they are legitimate charities• IRS Publication 947 and websites (see outline)• AICPA resources made public for practitioners

• Practice Guide• Video

• See outline for links and add’l info – Chapters 1 and 5

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Quick links:http://21stcenturytaxation.blogspot.com/2017/09/disaster-relief-tax-links.html

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E-Services ChangesUpgrades/changes announced in Augusthttps://www.irs.gov/individuals/important-update-about-your-eservices-account

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SB-SE Fairness in Return Selection

SBSE-04-0317-0021 (3/7/17) memo• Interim guidance on a new program objective to evaluate fairness in case

selection. • Responds to GAO report (12/16) IRS Return Selection: Certain Internal

Controls for Audits in the Small Business and Self-Employed Division Should be Strengthened.

• New objective –• “Ensure examinations are initiated based on indicators of non-

compliance or on other criteria (such as selection for the National Research Program), identified in IRM. In addition, ensure a review of decisions to survey a return (i.e., not initiate an examination) are based upon factors outlined in IRM and approved by an appropriate level of management.”

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Audit Coverage Drops

• Per IRS FY2016 Data Book• 0.70% for individuals for FY2016

• Lowest in a decade

• About 69 million taxpayers helped via phone, in-person or automated.

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Bonus info

https://www.irs.gov/pub/irs-soi/16databk.pdf

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LB&I Compliance Campaigns• Launched Jan. 2017• “Address compliance and resource challenges.”• 13 announced as of April 2017, including

• Related party transactions• Land developer and completed contract method• S corp losses in excess of basis• Repatriation• 1120-F non-filer

https://www.irs.gov/businesses/large-business-and-international-compliance-campaigns

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11 more campaigns announced 11/3/17

1. Form 1120-F Chapter 3 and Chapter 4 Withholding2. Swiss Bank Program3. Foreign Earned Income Exclusion4. Verification of Form 1042-S Credit Claimed on Form 1040NR5. Agricultural Chemicals Security Credit6. Deferral of Cancellation of Indebtedness Income7. Energy Efficient Commercial Building Property8. Corporate Direct (Section 901) Foreign Tax Credit (FTC)9. Section 956 Avoidance10. Economic Development Incentives11. Individual FTC (Form 1116)

Supplement

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NTA and Appeals Process Changes• 6/21/17 NTA blog post

• Concern with October 2016 Appeals change to invite Counsel and Compliance to participate in appeals.

• IRM 8.6.1.4.4• Concerns:

• Views of auditor and taxpayer already known by time of appeals.• Appeals is to be “fresh look”• If examiner there, then client should also have rep• Increases costs for IRS and taxpayer

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Ongoing IRS Appeals Issues• Due to Oct 2016 IRM changes:

• Phone or video preference for the hearing• Allow exam personnel to participate

• Caught attention of Congress

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9/13/17 House Ways & Means Oversight Subcommittee Hearinghttps://waysandmeans.house.gov/event/hearing-reforming-irs-resolves-taxpayer-disputes/

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Virtual Appeals Service Pilot

• IR-2017-122 (7/24/17)• Launched 8/1/17• Allow for web-based virtual conference

• Face-to-face (virtually)

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Medical Marijuana Business and IRS Summons

High Desert Relief, Inc., No. 16-CV-469; No. 16-CV-816 (DC NM, 3/31/17)

• Regular audit by IRS• IRS issued 3 summons and HDR sought to quash• HDR arguments:

1. IRS using civil audit to conduct criminal investigation regarding Controlled Substance Act.

2. IRS did not satisfy Powell factors.3. CSA is a “dead letter” law [non-summons argument]

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Court holdings in HDR1. No criminal investigation exists

a) IRS examiner is not criminal investigator.b) §280E is not a criminal provision AND no big deal to

determine if HDR “trafficked”• Alpenglow Botanicals, LLC v. United States, (D. Colo. 2016) –

“Trafficking as used in §280E means to buy or sell regularly. … As such, real issue is whether IRS has authority to determine if plaintiffs regularly bought or sold marijuana. Such a determination does not require any great skill or knowledge, certainly not skill or knowledge of a criminal investigatory bent.”

2. Powell factors satisfied.

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Court holdings in HDR - continued3. CSA is not “dead letter” law

a) While DOJ Deputy Attorneys General have issued memos saying generally, feds won’t enforce CSA against state-regulated marijuana operation, Congress passes the laws!

b) 10th Circuit in Feinburg (2015): “ it's not clear whether informal agency memoranda guiding exercise of prosecutorial discretion by field prosecutors may lawfully go quite so far in displacing Congress's policy directives as these memoranda seek to do. There's always the possibility, too, that the next (or even the current) Deputy Attorney General could displace these memoranda at anytime[.]”

30Emphasis added.

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Private Debt Collection Launched• PL 114-94 (12/4/15); IRC §6306; Pub 4518• 4 agencies selected• IRS will notify t/p first• No enforcement action• Payments go to IRS

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Seriously Delinquent Tax Liability and Passports

• PL 114-94 (12/4/15)• New §7345• Passport can be denied or revoked

• > $50,000 (adj for inflation)• Notice of lien filed, administrative rights exhausted

or lapsed; or levy made• IRS Notice CP508C

• + Notice of reversal (if paid or OIC, etc.) – CP508R

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Offers in Compromise “Important Notice”

https://www.irs.gov/individuals/offer-in-compromise-1

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First-Time Abate and Statute• CCA 201713001 (3/31/17)

• IRS abated §6651(a)(2) FTP penalty under First Time Abatement (FTA) procedure.

• Later discovered W not eligible because had penalty in 3 prior years.

• Ok to reassess penalty• Not subject to 3-year statute of limitations

• If it were, would not be able to assess max 50 month penalty.

• But subject to §6502 ten-year collection limitation.

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Preparer Penalty and Levy Upheld• Mohamed, TC Summary Opinion 2017-69 (8/29/17)

• IRS assessed 20 penalties under §6695(g) for lack of due diligence in preparing EITC returns

• Appealed• 6 hours of review• Dropped to 14 penalties for total of $7,000

• Assessed on Form 8484• IRS later issued levy to collect and M objected

• Court upheld IRS motion for summary judgement• M was given every opportunity to plead his case

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International Information Returns and POA Form 2848 TAM 201736021 (9/8/17)

• Form 2848, Power of Attorney and Declaration of Representative

• Only covers int’l info return (such as 5471 or 3620) if specified on the Form 2848.

• Due to form changes in 2014.• “Without a specific description of the penalty involved, it

would be difficult for the Service to determine exactly the scope of the taxpayer’s authorization.”

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Check Your PTIN Listing

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https://irs.treasury.gov/rpo/rpo.jsf

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FOIA List of PTIN Holders –Open to Public for Free

https://www.irs.gov/tax-professionals/ptin-information-and-the-freedom-of-information-act 41

Can’t opt out of this, but be sure personal info isn’t in your file, such as home address.

PTIN Fee Found Invalid• Steele, et al., No. 14-cv-1523-RCL (DC DC, 6/1/17)

• Class action launched 2016 challenging validity of PTIN fee in light of Loving.

• Held –• IRS has authority to require PTIN• No authority to charge fee

• Fee implies regulatory scheme and can’t regulate individuals who only prepare returns.

• No “service or thing of value” provided by IRS• Anyone today can get a PTIN – nothing special from IRS• No proof that necessary for SSN disclosure purposes.

https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2014cv1523-78

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PTIN Fee – What’s Next• IRS website at 6/2/17

• PTIN reg and renewal suspended• IRS working with DOJ on how to proceed

• Check back at https://www.irs.gov/for-tax-pros• PTIN system reopened 6/21/17

• Refunds? For just one year:• IRS: 710,553 x $33 = $23.4 million!• 710,553 x $50 = $35.5 million!!• Per 6/21/17 FAQ – working with DOJ on next steps

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Trump and Regulating Preparers

• Increase Oversight of Paid Tax Preparers (page 104) – calls for giving IRS this authority by statute to reduce “the need for after-the-fact enforcement of tax laws.”

• Revenue estimate 2018-2027 = $439 million revenue

https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/spec.pdf

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IRS Dirty Dozen Scam List for 20171. Offshore tax cheating2. Frivolous tax

arguments3. Abusive tax shelters4. Falsifying income5. Falsely padding

deductions6. Excessive business

credit claims

7. Falsely inflating refund claims8. Fake charities9. Return preparer fraud10. Identity theft11. Phone scams12. Phishing schemes

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Avoiding Scams

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Avoid Spear Phishing• Geared to tax pros• Lure you with “bait” – email that looks like from a potential client

• Tries to get you to open an attachment (really malware)• Or update a software tool (really stealing password info)

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FBI Warns of E-Mail Frauds• BEC – business e-mail compromise

• aka “CEO impersonation” • Scammer targets company employee with access to financial

info• Scammers are very good at their job!

• Likely to hit when the person is out of the office and will impersonate them via email to get otherwise secure info to get into bank and other accounts.

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“The best way to avoid being exploited is to verify the

authenticity of requests to send money by walking into the CEO’s office or speaking to him or her

directly on the phone. Don’t rely on e-mail alone.”

Martin Licciardo, special agent, FBI Washington Field Office

49https://www.fbi.gov/news/stories/business-e-mail-compromise-on-the-rise

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Truncation of SSN on Form W-2 • REG-105004-16 (9/20/17)

• Response to PATH change (PL 114-113, 12/18/15)• 6051 and 6052• Employers may truncate SSN of worker on W-2

• XXX-XX-1234• Forms to IRS and SSA must have complete SSN• Effective for forms filed after 12/31/18

• So not for 2017 forms.

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Is it the IRS at Your Door?• Audit – letter first + set

appt• Collections or CID –

possibly unannounced• IRS person will have 2

forms of ID• Pocket commission• HSPD-12 card

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Avoid SSN Data Scam!

• Per the IRS:• “Cybercriminals use various spoofing techniques to disguise an email to make

it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2. This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES).”

https://www.irs.gov/individuals/form-w2-ssn-data-theft-information-for-businesses-and-payroll-service-providers

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New Data Elements for 2018 for Filing Business ReturnsTax prep software to ask:

• Name and SSN of company exec authorized to sign corporate return. • Payment history – Were estimated tax payments made? If yes, when were

they made, how were they made, and how much was paid?• Parent company information – Is there a parent company? If yes, who?• Additional information based on deductions claimed• Filing history – Has the business filed Form(s) 940, 941 or other business-

related tax forms?IR-2017-123 (7/25/17)

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Gramm-Leach-Bliley Act Violation, FTC and TaxSlayer

• 8/29/17, FTC - “Operator of Online Tax Preparation Service Agrees to Settle FTC Charges That it Violated Financial Privacy and Security Rules.”

• Violations of Safeguard and Privacy Rules• Lacked sufficient risk assessment plan

• Led to ID theft• Protections should have included requiring strong

passwords

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FTC Tips on Safeguards Rule Compliance• All professional tax return preparers subject to rule• “As part of its plan, each company must:

• designate one or more employees to coordinate its information security program;

• identify and assess risks to customer information in each relevant area of company’s operation, and evaluate effectiveness of current safeguards for controlling these risks;

• design and implement a safeguards program, and regularly monitor and test it;• select service providers that can maintain appropriate safeguards, make sure

your contract requires them to maintain safeguards, and oversee their handling of customer information; and

• evaluate and adjust the program in light of relevant circumstances, including changes in the firm’s business or operations, or the results of security testing and monitoring.”

• Note: CPAs exempt from Gramm-Leach-Bliley Privacy Rule

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Executive Orders - Regs• EO 13771 (1/30/17) – Reducing

Regulation and Controlling Regulatory Costs.

• EO 13777 (2/24/17) – Enforcing the Regulatory Reform Agenda.

• EO 13789 (4/21/17) – Identifying and Reducing Tax Regulatory Burdens.

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Executive Orders UpdateEO 13789 (4/21/17)• Review tax regs issued 1/1/16 thru

4/21/17 that impose undue burden, impede economic growth.

• Notice 2017-38• IRS notes 8 possible regs• Sought comments by 8/7/17

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EO 13789 Update• EO 13789 (4/21/17) – Identifying and Reducing Tax

Regulatory Burdens• Called for Treasury to review regs issued in 2016 and early 2017

• Do any impose undue financial burden or complexity• Notice 2017-38 (7/7/17) – 8 regs + seek comments• 10/2 – final report from Treasury

• 8 regs and actions• Rec’d over 140 comments

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More info – see end of this website:http://www.sjsu.edu/people/annette.nellen/website/2017regs.html

8 Regs Treasury Addressing

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Regulation Action§2704 – Prop. Regs on Restrictions on Liquidation of an Interest for Estate, Gift and GST Taxes (REG-163113-02)

Withdraw entirely

§103 – Prop. Regs on Definition of Political Subdivision (REG-129067-15)

Withdraw entirely

§7602 – Final Regs on Participation of a Person Described in §6103(n) in a Summons Interview (TD 9778)

Revoke in part

§707 and §752 Regs on Treatment of Partnership Liabilities (TD 9788) Revoke in part

§385 – Final and Temp Regs on Treatment of Certain Interest in Corporations as Stock or Indebtedness (TD 9790)

Revoke in part

§367 – Final Regs on Treatment of Certain Transfers of Property to Foreign Corporations (TD 9803)

Substantially revise

§337(d) – Temp Regs on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770)

Substantially revise

§987 – Final regs on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794)

Substantially revise

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Regulation Tally – 2017 and last few years

•2014 – 78 regs•2015 – 64•2016 – 103•2017 – 25 (through 10/29/17)

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http://www.sjsu.edu/people/annette.nellen/website/2017regs.html

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FAQs Are Not Legal Authority• IRS Memo to Field

• SBSE-04-0517-0030 (5/18/17)• “to remind examiners that frequently asked questions

(FAQs) and other items posted on IRS.gov that have not been published in the Internal Revenue Bulletin are not legal authority. The FAQs and other items should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.”

https://www.irs.gov/pub/foia/ig/spder/sbse-04-0517-0030.pdf

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FAQs – National Taxpayer Advocate

7/26/17 blog post• “can be trap for the unwary”• Criticizes OVDP FAQs• Should only use for emergency guidance and then converted to published

guidance quickly• Let public know not bunding – should display disclaimer:

• “Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin. Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on IRS.gov. Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”

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