IRS Using Inflation Reduction Act Funding To Ensure Large Corporations & High Income Earners Pay Taxes Owed

According to IRS release IR-2023-194 the IRS announced new initiatives to ensure large corporations pay taxes owed. This is in addition to the initiatives to improve compliance among high-income individuals and complex partnerships.

The IRS is working to ensure large corporate and high-income individual filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

• Large foreign-owned corporations transfer pricing initiative: The IRS is increasing compliance efforts on the U.S. subsidiaries of foreign companies that distribute goods in the U.S. and do not pay their fair share of tax on the profit they earn of their U.S. activity. These foreign companies report losses or exceedingly low margins year after year through the improper use of transfer pricing to avoid reporting an appropriate amount of U.S. profits. To crack down on this strategy, the IRS is sending compliance alerts to approximately 150 subsidiaries of large foreign corporations to reiterate their U.S. tax obligations and incentivize self-correction.

• Expansion of the Large Corporate Compliance program: The IRS' Large Business & International Division's (LB&I) Large Corporate Compliance (LCC) program focuses on noncompliance by using data analytics to identify large corporate taxpayers for audit. LCC includes the largest and most complex corporate taxpayers with average assets of more than $24 billion and average taxable income of approximately $526 million per year. As new accountants come on board in early 2024, 
  
  
• LB&I is expanding the program by starting an additional 60 audits of the largest corporate taxpayers selected using a combination of artificial intelligence and subject matter expertise in areas such as cross-border issues and corporate planning and transactions.

• Cracking down on abuse of repealed corporate tax break: Following the 2017 repeal of a provision of the code that provided a deduction for producing goods in the U.S., the IRS received hundreds of claims collectively seeking more than $6 billion in refunds, with a significant portion of filers claiming the deduction for the first time. The IRS launched a campaign to address noncompliance and review high-risk claims in this area. IRS efforts have been incredibly successful in ensuring revenue is collected. The efforts have recently been supported by a significant win in the Tenth Circuit Court of Appeals, which sided with the Tax Court and IRS in denying a refund claim based on a $1.8 billion deduction. This will have far-reaching benefits to the IRS' ongoing efforts in this space.

• Prioritization of high-income cases: The IRS has been ramping up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, dozens of revenue officers are focusing on these high-end collection cases in the coming fiscal year. As announced in September, the IRS has begun contacting about 1,600 new taxpayers in this category that owe hundreds of millions of dollars in taxes.

• The IRS has now collected $122 million dollars in 100 of these already assigned 1,600 cases. Examples of cases closed since the Inflation Reduction Act passed follow:
   
  • An individual last month was ordered to pay more than $15 million in restitution. The individual falsified millions of dollars of personal expenses as deductible business expenses and financed construction of a 51,000-square-foot mansion, including expenses of interior and exterior construction costs; an outdoor pool and pool house; and tennis, basketball and bocce courts. The individual falsified millions of dollars of expenses for luxury vehicles, artwork, country club memberships and homes for his children.
     
  • An individual last week pled guilty to filing false tax returns and skimming more than $670,000 from his business. The individual spent $110,000 on personal expenses and $502,000 on gambling.
     
  • An individual was sentenced to 54 months in federal prison for fraudulently obtaining $5 million in COVID relief loans for sham businesses. The individual then spent the money on himself, purchasing Ferrari, Bentley and Lamborghini cars.

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Proposed IRS Regulations Expanding Online Sales of Seized Property

According to Law360, Property seized by the Internal Revenue Service to satisfy tax debts could sell for more money under proposed regulations released October 13, 2023 that the agency said would create a more competitive bidding process, remove barriers to online sales and for the first time allow buyers to pay by credit card.

These proposed regulations, mark the first major changes to its process for selling seized property since 1954, would allow the agency to solicit bids online from people in the county in which the property was seized. The agency is currently allowed to sell properties online only after obtaining a special order from the U.S. Treasury secretary, the notice of proposed rulemaking said.

The proposed regulations also would allow the IRS to pursue special permission to sell properties online to buyers outside the county in unusual situations and when doing so would be more efficient or more likely to attract more competitive bids. Those unusual situations include sales of property in places where internet access is limited or when property has been put into storage elsewhere, according to the proposed regulations.

• The bidding itself would become more competitive under the proposal by ending the current regulatory requirement that the agency draw lots to settle a bidding war when there is a tie. 
• Under the proposed regulations, bidding would remain open until the highest bid is submitted.
• Bidders also would be allowed to submit and withdraw bids electronically, rather than only in writing through sealed envelopes or by public auction, according to the proposed regulations. 
• Winning bidders would be allowed to pay by credit card or other electronic means for the first time, rather than only by check or money order.

While The Current Regulations Require A Winning
Bidder To Put Down 20% Of The Bid Amount,

The Proposed Regulations Would Allow The IRS To Set
The Down Payment On A Case-By-Case Basis.

The agency would also be able to more freely group properties for sale to try to attract the highest bids.

Modernizing to expand online sales allows the IRS to attract a wider range of potential buyers, and therefore higher bids, while lowering its cost to make the sales, the agency said in the proposed regulations. Ultimately, taxpayers would benefit, the IRS said, because the agency uses the sale proceeds first to pay its own sales costs, leaving whatever's left to pay down a taxpayer's liability.

While The Proposal Largely Gives The Agency More
Flexibility To Sell Seized Property, It Would Prohibit Revenue Agents Who Participated In Seizing A Property From Selling It.

That restriction incorporates advice from members of Congress, who said the practice was unfair under the Internal Revenue Service Restructuring and Reform Act of 1998.

The proposal starts the clock on the public comment period, with 60 days for the public to submit comments and request a public hearing on the proposed regulations, the notice said.

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TIGTA Found That IRS Did Not Always Comply With Legal Guidelines When Issuing Levies

According to Report Number: 2023-30-066 TIGTA reviewed levies issued by the Automated Levy Programs for more than 2 million taxpayers during the period July 1, 2021, through June 30, 2022, and certain levies issued by revenue officers. TIGTA identified 11,258 instances of noncompliance that resulted in violations of taxpayers’ rights and taxpayers being burdened. TIGTA identified the following violations:

This is a significant number of CDP violations. 

The majority (10,095) of the taxpayer rights violations occurred from the untimely input of taxpayers’ CDP levy hearing requests by Automated Collection System Support due to an unexpected large initial volume of requests following the July 2021 restart of the Automated Levy Programs. Levy CDP notices had been suspended during the Coronavirus Disease 2019 pandemic. 

As a result, levies were issued while CDP hearings were pending, which is a violation of Internal Revenue Code § 6330. In addition, 561 taxpayers’ rights were violated when they were not notified or timely notified of their CDP rights, including 374 who were not notified due to errors in the Print to Correspondence Production Services pilot program that was initiated in December 2019.

TIGTA made nine recommendations to help improve the proper issuance of levies by the IRS, including that the IRS should periodically conduct a study of CDP levy hearing requests Form 12153, Request for a Collection Due Process or Equivalent Hearing. This will allow the IRS to determine the average time frame from when CDP levy hearing requests are received to when they are input into the CDP tracking system to determine a reasonable time frame to begin taking levy action against a taxpayer after they have been issued their CDP notice. IRS management agreed with eight of the recommendations and partially agreed with one recommendation.

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Tax Court Rules That 30-day Rule For Requesting a Collection Due Process Hearing Is Subject To Equitable Tolling

The U.S. Tax Court in Organic Cannabis Foundation, LLC v. Commissioner, 161 T.C. No. 4 (September 27, 2023), held that the 30-day time limit for requesting a collection due process hearing under section 6320(a)(3)(B) is a nonjurisdictional deadline subject to equitable tolling. 

The Internal Revenue Service Must Consider A Cannabis Company's Day-Late Request For An Administrative Hearing With The Agency To Discuss A Federal Tax Lien Notice.

The taxpayer had unpaid tax for 2010, 2011, and 2018. The IRS issued notices of federal tax lien filings to the taxpayer for all three years, and the taxpayer timely requested a hearing with the IRS Independent Office of Appeals during the 30-day period for requesting a collection due process hearing under section 6320(a)(3)(B) for 2010 and 2011, but requested a hearing for 2018 after the 30-day period.

IRS Appeals provided a hearing for 2010 and 2011, but because the taxpayer’s hearing request for 2018 was untimely, it provided an equivalent hearing for 2018 under Treas. Reg. § 301.6320-1(i)(1). IRS Appeals issued a notice of determination for 2010 and 2011 but no determination for 2018.

The taxpayer then filed a petition before the Tax Court seeking review for all three years. After the petition was filed, IRS Appeals issued a decision letter for 2018.

The IRS moved to dismiss the taxpayer’s case before the Tax Court as to 2018 for lack of jurisdiction on the ground that IRS Appeals did not make a determination for review under section 6330(d)(1). The taxpayer argued that the 30-day period for requesting a collection due process hearing under section 6320(a)(3)(B) is subject to equitable tolling and thus IRS Appeals erred in failing to make a determination for 2018. In response, the IRS argued that the 30-day period is a fixed deadline that is not amenable to equitable tolling.

The Tax Court began its discussion by noting that it previously held in Kennedy v. Commissioner, 116 T.C. 255 (2001), that the 30-day period for requesting a collection due process hearing is a fixed deadline not subject to equitable tolling. 

However, in Boechler, P.C. v. Commissioner, 142 S. Ct. 1493, 1501 (2022), the U.S. Supreme Court held that a different 30-day period in section 6330(d)(1) for a taxpayer to file a petition with the Tax Court for review of IRS Appeals’ determination following a collection due process hearing is a nonjurisdictional deadline that is subject to equitable tolling. 

Thereafter, in Hallmark Research Collective v. Commissioner, 159 T.C. 126 (2022), the Tax Court distinguished Boechler in holding that the 90-day deadline for filing a deficiency petition under section 6213(a) is jurisdictional.

In the light of the Supreme Court’s decision in Boechler and its opinion in Hallmark, the Tax Court decided to reexamine its precedent as to the 30-day deadline in section 6320(a)(3)(B) for requesting a collection due process hearing. The court ultimately held that the 30-day period in section 6320(a)(3)(B) is subject to equitable tolling when the circumstances warrant it, and overruled Kennedy in that regard.  

The court said it "must honor" the choice Congress made to add taxpayer protections by creating an administrative process for challenging the IRS. CDP hearings are meant to balance taxpayer concerns about collections with the government's need to quickly collect, the court said.

"These principles are reinforced by the application of equitable tolling," Judge Goeke said.

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IRS Not Filing Liens For All $10,000+ Tax Delinquencies

According to Law360, the Internal Revenue Service did not file notice of federal tax liens against more than 1.5 million taxpayers with high-dollar delinquencies, the Treasury Inspector General for Tax Administration said in a report published on September 25, 2023.

The cases, which occurred from July 1, 2021, to June 30, 2022, involved individual and business taxpayers with a balance due greater than $10,000, according to the report. The IRS' federal watchdog also reported that the agency did not always properly provide taxpayers a notice of a federal tax lien or of their collection due process rights.

One Reason That This Is Important, Is That Tax
 Obligations, Without Federal Tax Liens, Are Unsecured
 Debt Which Is Dischargeable In Bankruptcy.

Additionally, the report noted that there were 1,214 cases of automated levies for the federal payment levy program that were issued during a taxpayer's 30-day period to elect a collection due process hearing, as well as 91 cases where levies were automatically issued during a taxpayer's pending appeal.

TIGTA made eight recommendations to the IRS, including ensuring that notices are properly updated to include correct information. The IRS agreed with seven of the eight recommendations, rejecting the implementation of codes allowing for review to determine the date of nonautomated levy program levies and seizures.

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The IRS Orders an Immediate Stop to New Employee Retention Credit Processing Amid Surge of Questionable Claims

Amid rising concerns about a flood of improper Employee Retention Credit claims, the Internal Revenue Service today announced an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program to protect honest small business owners from scams.

IRS Commissioner Danny Werfel ordered the immediate moratorium, beginning today, to run through at least Dec. 31 following growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.

The IRS continues to work previously filed Employee Retention Credit (ERC) claims received prior to the moratorium but renewed a reminder that increased fraud concerns means processing times will be longer. On July 26, the agency announced it was increasingly shifting its focus to review these claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS announced today that hundreds of criminal cases are being worked, and thousands of ERC claims have been referred for audit.

The IRS emphasizes that payouts for these claims will continue during the moratorium period but at a slower pace due to the detailed compliance reviews. With the stricter compliance reviews in place during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit. The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim.

This enhanced compliance review of existing claims submitted before the moratorium is critical to protect against fraud but also to protect the businesses from facing penalties or interest payments stemming from bad claims pushed by promoters, Werfel said.

"The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in," Werfel said. "The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants."

"For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in," Werfel said. "In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers."

In addition, the IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. This option – which can be used by taxpayers whose claim hasn't yet been paid– will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees. Filers of these more than 600,000 claims awaiting processing will have this option available. Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

As part of the wider compliance effort, the IRS is working with the Justice Department to address fraud in the ERC program as well as promoters who have been ignoring the rules and pushing businesses to apply.

The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is actively working to identify fraud and promoters of fraudulent claims for potential referral for prosecution to the Justice Department.

IRS Criminal Investigation (IRS-CI) investigates a variety of COVID fraud allegations ranging from fraudulently obtained employee refund tax credits to falsified Paycheck Protection Program loans. To date, IRS-CI has uncovered suspected pandemic fraud totaling more than $8 billion. As of July 31, 2023, IRS-CI has initiated 252 investigations involving over $2.8 billion of potentially fraudulent Employee Retention Credit claims. Of those, fifteen of the 252 investigations have resulted in federal charges. Of the 15 federally charged cases, so far six matters have resulted in convictions, four of those cases have reached the sentencing phase with the average sentence being 21 months.

Criminal Investigation's work is in addition to ERC audits that have started. The IRS has already referred thousands of ERC cases for audit.

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IRS To Establish Special Pass-Through Organization To Help With High-Income Compliance Efforts

The Internal Revenue Service will launch a new group focused on scrutinizing pass-through organizations as part of its broader plan for beefing up enforcement work against the wealthy, according to an agency statement on September 20, 2023.

This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come."

Following a top-to-bottom review of enforcement efforts, the IRS announced on September 8, 2023 the start of a sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation's tax laws.

President Joe Biden signed the Inflation Reduction Act into law in August 2022. It gave the IRS nearly $80 billion in increased funding, though this year's Fiscal Responsibility Act cut $1.4 billion, including money for IRS enforcement and operations support, and a side deal between the White House and lawmakers cuts $20 billion more from the agency, leaving The IRS with roughly $60 billion in net increased funding for enforcement.

Greater resources are needed to evaluate the compliance of pass-through entities, especially large and complex ones, and pass-through audit rates dropped because of funding cuts, the agency said in the strategic plan.

The agency audited 4.4% of pass-throughs in 2010, and the rate dropped to 0.1% in 2017, the most recent year with nearly all audits closed, according to the plan, which was released in April.

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