Tax News & Views Taps Out the Start of Tax Season Roundup

IRS Warns of Service Delays When 2021 Tax-Filing Season Opens on Jan. 24 - Richard Rubin, Wall Street Journal ($):

The Internal Revenue Service will begin accepting 2021 individual income-tax returns on Jan. 24, and administration officials are already warning of paperwork backlogs and difficulty reaching IRS employees on the telephone during this year’s filing season.

“In many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs. This is frustrating for taxpayers, for IRS employees and for me,” IRS Commissioner Charles Rettig said in a statement. “IRS employees want to do more, and we will continue in 2022 to do everything possible with the resources available to us.”

IRS Sets the 2022 Tax Filing Season - Jay Heflin, Eide Bailly:

The Internal Revenue Service has designated January 24th as the start to this year’s tax filing season and April 18th as the filing deadline for 2021 tax returns.

“The January 24 start date for individual tax return filers allows the IRS time to perform programming and testing that is critical to ensuring IRS systems run smoothly,” the agency stated in a January 10th news release, adding that “[t]he filing deadline to submit 2021 tax returns or an extension to file and pay tax owed is Monday, April 18, 2022, for most taxpayers.”

Treasury warns of ‘enormous challenges’ this tax filing season that could delay refunds - Jeff Stein, Washington Post ($). "The IRS closed last filing season with more than 35 million unprocessed returns — a fourfold increase from the last year before the pandemic. As the backlog increased, the IRS also failed to respond to the enormous increase in calls for assistance. Only 9 percent of calls were answered by an IRS customer service representative, while only 3 percent were answered for the 1040 support line for individual income tax returns, according to the National Taxpayer Advocate, a watchdog group."

Treasury, IRS Prepare for the Worst as Filing Season Looms - Jonathan Curry, Tax Notes ($):

In a statement provided to Tax Notes, AICPA President and CEO Barry Melancon criticized the IRS and Treasury for acknowledging the challenges posed by the filing season but failing to devise solutions. “For more than 18 months, the AICPA has repeatedly and publicly recommended to the IRS that they take reasonable actions that would meaningfully reduce persistent, unnecessary and erroneous notifications and help American taxpayers,” he said. 

The IRS could provide relief by pausing compliance efforts and providing a variety of opportunities for penalty relief, including creating a simplified penalty abatement process and providing targeted relief for underpayment or late payment tax penalties for 2020 and 2021. 

“The AICPA is calling on the IRS to do more than simply state the obvious — taxpayers and practitioners deserve solutions,” Melancon said.

IRS: Tax filing season to start Jan. 24 - Laura Weiss, Roll Call. "Officials urged taxpayers to file their taxes electronically and include information to deposit returns directly into their bank accounts to ensure quicker refunds. They encouraged particular attention for those who’ve received stimulus checks and monthly advance payments of expanded child tax credits, which lapsed last month."

California Governor’s Budget Proposes SALT Workaround Tweaks, NOL Restoration - Paul Jones, Tax Notes:

Newsom's budget proposes to modify the state's workaround to the Tax Cuts and Jobs Act's $10,000 cap on the federal state and local tax deduction, which allows eligible entities to elect to pay a 9.3 percent state tax on their owners' income at the entity level and allows owners to claim an equivalent tax credit against their California personal income tax. In response to complaints by businesses and tax experts that the workaround excludes taxpayers who own their share of passthrough businesses through disregarded entities, such as single-member LLCs, and that the credit can't be used to reduce a taxpayer's liability below the level of the tentative minimum tax, the budget proposes eliminating the tentative minimum tax limitation on the credit, calling the limitation unnecessary because "tax on the income has already been paid at the business entity level." The budget would also allow taxpayers who own their share of a passthrough entity through a disregarded entity to use the workaround. 

“These changes should be enacted in time to assist businesses with their 2021 tax liabilities before the March 15, 2022 tax filing and payment deadline for pass-through business entities,” according to the budget summary.

California would restore, one year ahead of schedule, the use of net operating losses and certain business tax credits, including the research and development credit, under a preliminary budget proposed Monday by Democratic Gov. Gavin Newsom.

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For small businesses, the proposed budget would exempt loans for restaurants and for shuttered businesses from state tax. For individuals and families, the proposed budget would create new payment plans for low- and middle-income taxpayers to be exempted from penalties and interest, expand the young child tax credit and expand the earned income tax credit to include foster children.

New York Business Owners Sidestep Billions in Federal Taxes With State’s Help - Richard Rubin and Jimmy Vielkind, Wall Street Journal ($). "By paying New York’s new pass-through entity tax, those business owners shifted their state income taxes from their individual tax returns—where the cap would pinch them—to their business filings, where the cap doesn’t affect them."

Pass-through Entity Taxes like the one in New York will be among the topics I will cover Friday as a panelist in our Tax Update webinar.

Interim Guidance on Crypto Brokers Is Still Cooking - Mary Katherine Browne, Tax Notes ($):

Congress amended the definition of broker under section 6045(c)(1)(C) in the IIJA to read, “Any person who (for consideration) regularly acts as a middleman with respect to property.” A subparagraph (D) has also been added to the definition of broker, which reads, “Any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”

Some observers worry that under that definition, anyone engaging in cryptocurrency exchanges would be considered a broker, including popular trading apps such as Robinhood.

Supreme Court Won't Hear $3.2M IRS Trust Penalty - David Hansen, Law360 Tax Authority ($):

The estate of Joseph Wilson came to the high court after the Second Circuit ruled it must pay the 35% penalty for trust owners failing to report a foreign distribution instead of the 5% penalty for beneficiaries who fail to report.

The dispute centers on the $9.2 million distribution Wilson made in 2007 from the foreign trust when his divorce proceedings concluded and he sought to bring his funds back to the U.S., according to court filings. Wilson and the trust failed to timely file Forms 3520 and 3520-A. The Internal Revenue Service subsequently assessed a 35% penalty.

Some people think foreign trusts are cool tax avoidance devices. If you don't tell the IRS about them on Form 3520, though, the penalties are painful. 

Related: U.S. Tax Reform: What Does It Mean for U.S. Citizens, Green Card Holders Living Outside the U.S.?

Supreme Court Won’t Hear U.S.V.I. Filing, Foreign Trust Cases - Patrice Gay, Tax Notes ($). "Judith S. Coffey, who had claimed to be a bona fide resident of the U.S. Virgin Islands, petitioned the Court to review an Eighth Circuit decision that reversed a Tax Court holding that an IRS deficiency determination issued to Coffey and her late husband was untimely. The IRS made that determination after it found that Coffey wasn’t a U.S. Virgin Islands resident, but the Tax Court concluded that the couple’s filing requirements were satisfied because the limitations period for assessing their taxes began to run when a portion of the returns that they filed with the Virgin Islands Bureau of Internal Revenue was provided to the IRS."

BBB update — and a new take on retail consolidation - Bernie Becker, Politico:

On some level, it certainly seems like the White House and Democratic leaders should be able to strike a deal with Sen. Joe Manchin (D-W.Va.), who opposes the House-passed version of the big tax-and-spend bill.

“I do think there's an agreement to be reached,” House Speaker Nancy Pelosi said on CBS’ “Face the Nation.”

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But as The Washington Post’s Jeff Stein reported, Manchin might have pulled back on a counter-offer to the White House offered last month, leaving the next steps for the BBB further up in the air.

We’re just not going to let this die,' says Sen. Sherrod Brown on child tax credit - Theodoric Meyer and Jacqueline Alemany, Washington Post ($). "The credit is perhaps the highest hurdle standing in the way of passing President Biden’s stalled health care, child care and climate bill. Democrats included a temporary expansion of the credit in the $1.9 trillion relief package they passed last year, but it expired at the end of last month after the Senate failed to pass the Build Back Better Act (BBB)."

On the Money — Democrats grow less confident in Manchin - Aris Foley, The Hill. "Senate Democrats are growing less and less confident about whether Sen. Joe Manchin (D-W.Va.) wants to strike a legislative deal to help secure passage for President Biden’s sweeping economic agenda."

IRS-CI countdown of 2021's Top 10 criminal tax cases - Kay Bell, Don't Mess With Taxes. "5. Owner of bitcoin exchange sentenced to prison for money laundering"

Will 2022 Bring New Tax Law? - Kristine Tidgren, Ag Docket. "Ten days into 2022, it appears increasingly unlikely that this scaled-down BBB will pass the Senate and become law."

What's Appropriate for Phaseout Rules and Refundable Credits? - Annette Nellen, 21st Century Taxation. "Our federal tax law has several phaseout provisions designed to prevent higher income individuals from claiming certain credits and deductions. These phaseouts are mostly all different in terms of how income ("modified AGI") is measured and the amount of MAGI. I think the different dollar amounts serve to prevent someone from having a very high marginal rate when they move one dollar past any single dollar amount for the entry into 'high income.'"

Puerto Rico Tax Haven Is Alluring, But Are There Tax Risks? - Robert Wood, Forbes. "Among the most glossed over qualifiers to the rules is about Puerto Rico source income. You get the great benefits only on income sourced in Puerto Rico, not on everything else—which the IRS can still tax. Many people might like to ignore established sourcing rules, and might imagine that if they live in Puerto Rico, everything is Puerto Rico source income. Another qualifier is the rule that pre-move appreciation on your assets is still taxed by the IRS. The rules for stocks are quite clear on this point. The rules for crypto are not as clear, so there are some differences of opinion about how crypto will be treated."

How to Apply the New OSHA Emergency Temporary Standard - Eide Bailly. "Over two-thirds of private sector workers in the nation will be impacted by this initial requirement. This standard applies to any large business (100 or more employees) under OSHA’s jurisdiction and covers a wide variety of industries, including manufacturing, retail, agriculture, healthcare and more."

Stimulus Checks, Unpassed Tax Provisions And Other Fun In 2021 - Peter Reilly, Forbes. "A lot of practitioners and regular people get upset about IRS inability to provide reasonable service. I share this concern. I am also concerned about their failure to get people into compliance. It has actually become a viable strategy to just not pay the tax that you owe with the hope of waiting out the ten year statute of limitations as I discussed in IRS Collections Appears To Be Broken. "

IRS Information Letter Addresses Cases Where a Controller Is and Is Not a Paid Preparer of Returns - Ed Zollars, Current Federal Tax Developments. "In IRS Information Letter 2021-0029[1] the agency addresses an issue that CPAs employed as a controller in small, closely held businesses with various related businesses run into.  If they are asked to prepare a number of returns for individuals and other related entities that aren’t their employer, at what point does the controller become a paid preparer with regard to some or all of those returns."

State Tax Changes Effective January 1, 2022 - Timothy Vermeer and Savanna Funkhouser, Tax Policy Blog. "Among the more novel tax policy “experiments” to be implemented in 2022 is Maryland’s first-in-the-nation digital advertising tax. Meanwhile, five new states will join the list of those that allow pass-through businesses to be taxed at the entity level to sidestep federal limits on state and local tax (SALT) deductions. And Washington is attempting to implement a 7 percent capital gains tax under a constitution which defines income as a form of property and allows no property to be taxed at a rate greater than 1 percent."

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return - Audrey Patten, Procedurally Taxing. "While the burden will be on the IRS to prove a return with a missing signature is valid, the doctrine of tacit consent holds that if the facts and circumstances show that a non-signing spouse intended to file a joint return, a return the taxpayer did not actually sign can still meet the criteria for a valid joint return."

Understanding How the United States Fails to Tax So Much Business Income - William Gale, Swati Joshi, and Christopher Pulliam, TaxVox. "Over the past three decades, the United States has gone from taxing roughly half of closely held business (that is, firms other than corporations) and investment income to taxing less than a third, our new analysis has found."

How ‘Tax Ferrets’ Revealed the Limits of Heavy-Handed Enforcement - Joseph Thorndike, Tax Notes:

In the late 19th century, state and local tax officials employed private tax investigators — known as “tax ferrets” or “tax inquisitors” — to facilitate the collection of general property taxes. Compensated using a bounty system, these private sector collectors were expected to shore up flagging fiscal systems. And to some extent, they did.

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The relationship between taxpayers and the state is always adversarial. But some relationships are more adversarial than others; paying tax collectors with a bounty system is a good way to ensure that a relationship becomes as toxic and hostile as possible.

A ghost of the tax ferret system survives in states that allow qui tam lawsuits, which allow private parties to sue taxpayers for alleged underpayments, sharing a portion of the proceeds with the state.

Maybe you can get a Candygram. Today is "Learn Your Name in Morse Code Day." Who knows, perhaps we can someday telegraph our tax returns from smart phones.