Tax News & Views Don't Kick Sand at a Tax Court Judge Roundup

Tax Court Sanctions IRS for Backdated Penalty Approval - Kristen Parillo, Tax Notes ($):

The Tax Court has vacated an IRS summary judgment win on penalty compliance in a conservation easement case and awarded attorney fees to the petitioner as sanctions for the agency’s failure to alert the court that it had submitted a backdated penalty approval form.

“We find the actions of respondent’s counsel to be in bad faith and to have multiplied the proceedings in this case unreasonably and vexatiously,” Tax Court Judge Christian N. Weiler wrote in an August 29 memorandum opinion in LakePoint Land II LLC v. Commissioner.

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“It’s a rare day for a chief counsel attorney to be the subject of a non-frivolous motion for sanctions,” Daniel N. Price of the Law Offices of Daniel N. Price PLLC told Tax Notes.

Just yesterday Tax Notes reported that a different Tax Court judge chewed out IRS attorneys in another case for "reconstructing" deficiency notices, rather than providing a copy of the original notice, saying "We have no confidence that the slipshod-cut-and-paste Status Report Notice presented to the Court was the version of the notice of deficiency actually sent to petitioner." 

Combined with the news of the IRS triggering examinations of low-income taxpayers as a result of throwing away millions of unprocessed 1099 forms, the IRS has had a rough go if it in the last week or so.

Tax Court Sanctions IRS On $38M Easement Row Backdating - Anna Scott Farrell, Law360 Tax Authority ($). "As reprimand, Judge Weiler ordered the IRS to pay attorney fees to LakePoint Land, saying the government's failure to be forthcoming about the backdated evidence in the case had forced the partnership to hire additional attorneys and increased discovery and motion practice. He said the exact amount of the fees would be established later."

IRS Offers Flexibility for Developers in Energy Labor Rules - Erin Slowey and Rebecca Rainey, Bloomberg ($):

The IRS and Treasury Department are easing penalty procedures for developers and investors who don’t meet the labor rules for the clean energy tax credits on their projects.

The Biden administration’s Inflation Reduction Act ties the amount of some tax credits to labor standards, where developers will have to pay laborers and mechanics a prevailing wage and use trained apprentices to complete a certain percentage of the project. Meeting the requirements, which took effect Jan. 29, will increase some of the credit amounts in the law to 30% from 6%—a fundamental difference for project financing, some in the industry have said.

Energy Credit Labor Regs Aim To Encourage Pre-Hire Pacts - Kat Lucero, Law360 Tax Authority ($):

The U.S. Department of the Treasury formally proposed rules Tuesday on new apprenticeship and wage requirements tied to clean energy taxcredits, regulations that would encourage project developers to put in place pre-hire collective bargaining agreements to avoid getting hit with hefty fines.

Treasury and the U.S. Department of Labor said in the proposal that the potentially stiff penalties would not apply to projects with a qualified project labor agreement. A PLA is a collective bargaining agreement struck between contractors and unions before workers are hired, and it sets the terms and conditions of employment for construction projects. The penalties include $5,000 per laborer or mechanic not paid the prevailing wage and a 3% interest charge on the underpayment amount.

Related: Energy Efficiency Incentives and the Inflation Reduction Act.

TIGTA’s Review of IRS ‘Revolving Door’ Turns Up Little Dirt - Jonathan Curry, Tax Notes ($):

Only a few anomalies showed up in TIGTA’s investigation of IRS agency personnel who were former or future employees of a major accounting firm or corporation.

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Both TIGTA and the IRS acknowledged the need to hire from the top accounting firms and corporations if the agency wants to keep pace with the private sector.

“There is nothing inherently wrong with or prohibitions on individuals moving in and out of the private sector to public service. . . . However, this practice increases the risk for conflicts of interest,” TIGTA said. The IRS must balance the imposition of processes to protect its work from abuse, but those processes can’t be “so onerous that the Government can no longer attract the highly talented individuals it needs for positions of public service,” the watchdog noted.

IRS agents are getting paid by private accounting firms: watchdog - Tobias Burns, The Hill. "An analysis from the Treasury Inspector General for Tax Administration (TIGTA) released Tuesday found 496 employees who received income from a large accounting firm or corporation 'either prior to joining, during their time at, or after leaving the IRS.'"

Link: TIGTA report.

New Zealand Plans Digital-Services Tax for Multinationals From 2025 - Rhiannon Hoyle, Wall Street Journal:

New Zealand on Tuesday said it will prepare to impose a digital-services tax on large multinational companies from 2025 following delays to a planned overhaul of international tax rules.

State of Play: Will Congress Pass a Tax Bill this Year? - Jay Heflin, Eide Bailly. "Passing tax legislation is not a top priority: Even if a partial shutdown of the federal government does not happen, lawmakers have other legislative priorities more pressing than passing a tax bill."

Once Upon a Time: Bipartisan Senate Group OK’d $40B for IRS - Doug Sword and Jonathan Curry, Tax Notes ($). "Instead of bipartisan funding, the IRS got $80 billion in August 2022 from the Inflation Reduction Act, which didn’t receive a single Republican vote. Clawing back that funding and cutting the agency’s annual operating budget has become job No. 1 for House Republicans, leaving the agency to plan its vaunted overhaul with a shrinking pot of money."

IRS delays Roth workplace retirement plan catch-up requirement to 2026 - Kay Bell, Don't Mess With Taxes. "A major problem is that many workplaces that offer regular plans, including private sector 401(k)s and similar 403(b) nonprofit organization and 457(b) governmental plans, do not offer Roth versions."

Loans Discharged by Cancellation of Life Insurance Result in Taxable Distributions - Parker Tax Pro Library. "The Tax Court held that a taxpayer who took out loans against two life insurance policies and later stopped paying the premiums on the policies, resulting in the termination of the policies and the loans, received a constructive distribution equal to the excess of the taxpayer's investment in the life insurance contracts over the outstanding loan amounts."

An IRS Identity Protection Unit Saga: Part 1 - Russ Fox, Taxable Talk. "The process when you receive such a letter is that you must create an account on IRS.gov.  That’s now done through a third-party company, ID.me.  That company requires you to verify your identity–so you end up having to verify your identity twice."

Lesson From The Tax Court: The DOI Downside To Disregarded LLC - Bryan Camp, TaxProf Blog. "The upside of disregarded status is generally a reduced tax burden and reduced compliance burden.  Today we learn of a potential downside to disregarded status:  a lender’s discharge of a disregarded LLC’s debt results in income to the owner even though neither the owner nor the owner’s personal assets were on the hook to repay the loan and the discharge happened long after the LLC went defunct." 

Australia TikTok Tax Fraud Illustrates Misinformation Escalation - Nana Ama Sarfo, Tax Notes Opinions. "Apparently, social media influencers helped entice nearly 60,000 people to claim fraudulent refunds on goods and services taxes that they never actually paid. The social media posts reportedly promised that the refunds were like a temporary loan from the government, but that turned out to be untrue. Now, some hapless taxpayers are facing arrest, prison sentences, and other legal action because they relied on viral TikTok advice that had no basis in reality."

IRS Takes Aim At "Copyrighted" Trust Scheme - Peter Reilly, Forbes. "Basically there is a law firm that provides the trust. It takes a month or so to set everything up properly and you have to pay them $30,000 to $40,000. You end up with the trust which you are in control of, somehow. You have an ID number so you can open accounts, etc. And you have a requirement to file Form 1041. Income is reported on Form 1041, but somehow or other thanks to the magical language it does not make its way into the tax computation."

South Carolina Revenue Department Hopes That Back To School Includes Tax Education - Kelly Phillips Erb, Forbes. "Just about half of states require either a personal finance or economics course to graduate high school, which might explain why, as of 2021, 73% of teens reported wanting more personal finance education."

Opportunity Zones “Make a Good Return Greater,” but Not for Poor Residents - Scott Hodge, Tax Policy Blog. "Despite evidence that place-based tax incentives have been largely ineffective in raising the economic fortunes of people in low-income neighborhoods, an undeterred Congress created Opportunity Zones (OZs) in the 2017 Tax Cuts and Jobs Act. A recent analysis by economists at Treasury’s Office of Tax Analysis cautions that while it’s too soon to reach conclusions regarding the effectiveness of Opportunity Zones, the available data suggests the big winners are investors and developers, not poor residents."

Physician under-reports over half a million dollars to IRS - IRS (Defendant name omitted):

A local physician pleaded guilty to filing false tax returns with the Internal Revenue Service, under-reporting his income by more than half a million dollars over a five-year period.

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Defendant hid income from his accountant by depositing checks issued by health insurance companies for medical services rendered into his personal bank accounts, resulting in substantial undisclosed personal income as follows: $78,537.19 for tax year 2014; $131,842.35 for tax year 2015; $132,500.78 for tax year 2016; and $128,207.70 for tax year 2017.

After Defendant's accountant grew suspicious and terminated him as a client, Defendant turned to a new accountant but continued to deposit checks issued by health insurance companies for medical services rendered into his personal bank accounts. This resulted in undisclosed income of $102,692.43 for tax year 2018.

Suspicious accountant for the win.

Why am I at my desk? It's National Beach Day!