A hearing is scheduled for September 11, 2023 for interested persons and organizations to provide testimony on proposed regulations on the timing and approval process for penalties. Section 6751(b) provides that:

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. 

The timing of when the approval is required by Section 6751(b) has been the subject of significant litigation. The Second Circuit in Chai v. Commissioner concluded that Congress enacted section 6751(b) to “prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” This has caused a lot of litigation in both the Tax Court and U.S. District Courts such that there are currently two different standards on timing of when such supervisory approval is required. If supervisory approval is to meet the goal of not being used as an unfair “bargaining chip” it must be required before such unwanted behavior can occur. Many groups have submitted comments asking for supervisory approval to be done earlier in the examination process than the proposed regulations require and that approval be done by a direct supervisor and not just anyone with penalty approval rights within the IRS.

Continue Reading IRS Sanctioned for Bad Faith on Supervisory Approval of Penalties While Proposed Regulations on the Same Issue are Pending

Providers of digital asset services would be subjected to tax reporting regulations akin to those governing brokers of securities and analogous financial instruments, as outlined in the inaugural set of proposed regulations delineating protocols for assets like cryptocurrency and nonfungible tokens. These guidelines, disseminated by the Internal Revenue Service on Friday, introduce the requirement for digital asset brokers to submit information returns and payee statements relating to asset sales conducted on behalf of customers during specific transactions, in accordance with Internal Revenue Code Section 6045.

Additionally, the comprehensive 282-page proposal recommended that brokers incorporate gain or loss details and basis information for sales occurring on or after January 1, 2026, under specific circumstances. This provision is designed to equip customers with the requisite information for compiling their tax returns.

The effective date of these regulations is slated for transactions from the preceding year, with enforcement beginning in 2026.

Law360 covered the topic in an article on August 25, 2023 where Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.

Continue Reading Joshua Smeltzer Quoted by Law360 on Proposed Broker Rules for Digital Asset Transactions

The FATCA Data Haystack Remains Just That

The Foreign Account Tax Compliance Act (FATCA) has resulted in a massive influx of financial information to the IRS over the past 13 years, but the extent of this data remains unknown. Despite expectations of significant revenue, FATCA has not met its financial goals, and the IRS is grappling with the challenge of effectively utilizing the data it has received from partner jurisdictions to enforce tax compliance. Tax Notes covered the topic in an article on August 23, 2023. Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.

Excerpt:

Some of the funding will be used to help narrow the field of taxpayers potentially selected for audit, as the agency has been given a mandate to go after wealthy taxpayers, said Joshua D. Smeltzer of Gray Reed. “It will be difficult to target improvements in enforcement directly to FATCA because . . . dissecting enforcement increases on a granular level is just too hard,” Smeltzer said. However, because many more taxpayers in middle- and high-income brackets have worldwide finances, “the efforts by the IRS for FATCA enforcement will increase as well,” he said.

Continue Reading Joshua Smeltzer Quoted by Tax Notes on FATCA and Cryptocurrency

For some time, promoters have shopped around an arrangement known as a “section 643(b) trust,” known alternatively as a “non-grantor, irrevocable, complex, discretionary, spendthrift trust.”  On August 9, 2023, IRS Chief Counsel issued a Memorandum that shoots down many of the contentions raised by the promoters relating to the tax benefits of these arrangements. The full Memorandum can be found here.  Taxpayers who have entered into these types of arrangements should take careful note of the IRS Chief Counsel Memorandum and should discuss its implications with a tax professional.

Continue Reading IRS Takes Warning Shot at Section 643(b) Trust Arrangements

Section 2301 of the CARES Act, as amended, permits employers to claim employee retention credits (“ERCs”) if they meet certain requirements. Under one of those requirements, an employer may claim an ERC if the employer’s trade or business operations were fully or partially suspended due to a federal or state COVID-19 governmental order (the “Business Suspension Test”).

Continue Reading IRS Chief Counsel Issues GLAM on ERC Supply-Chain Disruption Eligibility

Monetized installment sale transactions (“MISTs”) have been on the IRS’s radar for some time.  On May 7, 2021, IRS Chief Counsel issued an advice memorandum, contending such transactions were “problematic” and “flawed”.[1]  And shortly thereafter, on July 1, 2021, MISTs found themselves on the annual IRS “Dirty Dozen” list, or the publication the IRS uses to alert the public of abusive transactions.[2]  The IRS’s “Dirty Dozen” list for 2022 and 2023 also includes MISTs.[3]

Continue Reading IRS Characterizes Monetized Installment Sales as Listed Transaction in Proposed Regulations

Deadlines are important, particularly in federal tax law.  Many taxpayers are aware, for example, of the significant penalties that the IRS may impose upon them for failure to timely file an income tax return or timely pay all taxes owed.  But fewer taxpayers have an understanding or appreciation for the deadline rules associated with filing a timely petition with the United States Tax Court. 

Continue Reading Federal Courts Mixed on Whether the 90-Day Tax Court Petition Deadline Under Section 6213 is Jurisdictional

In a recent article by Tax Notes, tax experts expressed their concerns and hopes for the influx of funding granted to the IRS via the Inflation Reduction Act. Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.

Excerpt:  “The IRS plans to add thousands of new employees for service, audits, and technology responsibilities. Enforcement functions are also supposed to focus on wealthy taxpayers with more complicated tax returns. A less experienced workforce handling more complicated tax issues is almost certainly going to result in some significant growing pains for the IRS and continued frustration for taxpayers trying to resolve tax disputes while the IRS rebuilds.”

Read the full article here (subscription required).

The IRS, like the rest of society, has faced several challenges as a result of the pandemic. Some of those challenges are still lingering, such as funding, backlog, lack of guidance and inexperienced auditors. Efforts to fix these problems are underway but will take time. As taxpayer advisors, it’s important to recognize the limitations in the current system, navigate them effectively for clients and help with the efforts to fix the problems permanently.

Gray Reed’s Joshua Smeltzer, a former litigator for the U.S. Department of Justice – Tax Division, discusses all of these challenges and what CPAs need to know when it comes to guiding clients through audits in the September/October issue of Today’s CPA. Click here for the full article.

Former Trump Organization Finance Chief Allen Weisselberg pled guilty last week to 15 felonies for what he admitted was a tax fraud scheme he committed while an executive for Trump’s company. Law360 covered the story and quoted Gray Reed Partner Tony Box multiple times. Tony is a former Assistant US Attorney and tax coordinator responsible for leading federal tax investigations and prosecutions in the Eastern District of Missouri. He’s also a CPA and former FBI agent who handled a broad range of white-collar criminal investigations. He’s now a partner in our Dallas office representing businesses and high-net-worth individuals in all types of civil and criminal tax controversies, white-collar defense cases, regulatory investigations and enforcement actions, and compliance matters.

Excerpt: “I think the plea is substantial in harming the Trump Organization,” said Tony Box of Gray Reed & McGraw LLP, a former federal tax prosecutor in St. Louis. “If Mr. Weisselberg testifies the way he pled guilty today, it’s going to be hard for them to be able to obtain an acquittal with that kind of evidence.”

Read the full article here (Law360 subscription is required).