Comm'r Rettig Blames Congress' Underfunding of IRS For Delays

A "start-stop" approach to congressional funding of the IRS has starved the agency of sustained, long-term investment needed to upgrade its technology systems, and this has contributed to ongoing delays in tax return processing, IRS Commissioner Chuck Rettig told lawmakers.

Having information technology dating back to the 1960s and '70s has meant that his agency must rely on paper-based processes, Rettig testified at an April 21 hearing of the House of Representatives Oversight and Reform subcommittee on government operations. The use of paper processes has exacerbated delays in the IRS's efforts to surmount a backlog of current- and prior-year returns as well as correspondence with taxpayers, millions of whom have been unable to learn the status of their refunds and other matters.

The IRS, along with other parts of the U.S. government, has endured more than 100 continuing resolutions, Congress' method of short-term government funding since 2001, Rettig pointed out to the subcommittee.

"It Is Virtually Impossible For Any Agency, Any Organization, Any Private Sector Organization, To Build Out A Robust, Meaningful Technology Infrastructure With The Start-Stop Going On Like That," He Said.

He further explained that the IRS received its omnibus budget on March 15, leaving just six months in the current federal fiscal year for the agency to use those IT funds.

Also testifying at the subcommittee hearing was National Taxpayer Advocate Erin Collins, who said taxpayers in 2022 are experiencing many of the same challenges the faced last year: delays in processing returns and correspondence with the IRS and difficulty reaching the IRS by phone. Collins added that new digital tools implemented by the IRS for tracking refunds and amended returns have been unable to give taxpayers the information they seek.

Repeating An Observation From Her 2021 Annual Report To Congress, Collins Said The IRS's Continued Reliance On Paper Remains "Kryptonite" To The Agency.

It received almost 170 million individual income tax returns last year, about 10% of which were filed on paper forms, she pointed out.

"Last year, the IRS received about 17 million original paper individual returns, and those processing delays are now running up to 12 months," the taxpayer advocate testified. 

Collins Said About 3 Million Individual And Business Returns And About 3.6 Million Amended Returns Await Processing

From The 2020 Tax Year And Another 9 Million
Paper Returns Filed For 2021.

Over the past two years, the IRS's backlog of unprocessed returns and pending correspondence "has snowballed," she said. "The IRS needs to get current on the inventory and get out of the hole it finds itself in."

In 2021, Collins said, only 32 million of 282 million calls from taxpayers were answered by an IRS employee or contractor.

Members of subcommittee took to partisan bickering at the hearing over whether ensuring multiyear funding for the IRS, a request repeatedly made by Rettig and his predecessors would solve the agency's problems with outdated technology and difficulty meeting taxpayer needs. Democrats on the subcommittee, led by its chairman, Rep. Gerry Connolly (D-VA), agreed that the agency requires more funding and blamed its woes on chronic cuts by past Republican majorities in the House and Senate.

Rep. Jody Hice of Georgia, the ranking Republican on the subcommittee, questioned why earlier efforts to modernize the IRS hadn't yielded better results. He pressed Rettig to explain how additional funding from Congress would improve the agency's systems.

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New IRS Digital Asset Information Reporting Starting 2023

The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. The IIJA includes IRS information reporting requirements that will require cryptocurrency exchanges to perform intermediary Form 1099 reporting for cryptocurrency transactions. Generally, these rules will apply to digital asset transactions starting in 2023.

Currently if you have a stock brokerage account, then whenever you sell stock or other securities you receive a Form 1099-B at the end of the year. Your broker uses that form to report details of transactions such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses. Furthermore, if you transfer stock from one broker to another broker, then the old broker is required to furnish a statement with relevant information, such as tax basis, to the new broker.

The IIJA expands the definition of brokers who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person ("Crypto Exchanges"). Thus, any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.

Sometimes you may have a transfer transaction that is not a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another Crypto Exchange, the transaction is not a sale or exchange. For that type of transfer, as with stock, the old Crypto Exchange will be required to furnish relevant digital asset information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. It is anticipated that such return will include generally the same information that is furnished in a broker-to-broker transfer.

For the reporting requirements, a "digital asset" is any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. Furthermore, the IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Furthermore, when a business receives $10,000 or more in cash in a transaction, that business is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA will require businesses to treat digital assets like cash for purposes of this reporting requirement.

These digital asset reporting rules will apply to information reporting that is due after December 31, 2023. For Form 1099-B reporting, this means that applicable transactions occurring after January 1, 2023 will be reported. Whether the IRS will refine the Form 1099-B for digital asset nuances, or come up with an entirely new form, is yet to be seen. Form 8300 reporting of cash transactions will presumably follow the same effective dates.

Some things to keep in mind: 

1. If you use a Crypto Exchange, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so. 
2. The transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. 
3. A reporting intermediary does not always have perfect information, especially when it comes to an entirely new type of reporting. 

Have a Virtual Currency Tax Problem?

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Joint Return Signed & Filed By Ex-Husband After Her Divorce Found Valid

In Jones (CA9 2/03/2022) 129 AFTR 2d ¶2022-380, another innocent spouse was found to be not so innocent and is was decided that the Tax Court properly determined that a taxpayer's joint return was valid and she wasn't entitled to innocent spouse relief. The Tax Court's determination that the taxpayer consented to filing a joint return was supported by the record, according to the Ninth Circuit.

Innocent spouse relief. Generally, married individuals can file joint returns with their spouses. Spouses who file joint returns are jointly and severally liable for the tax liability reported on that return. However, an individual who has filed a joint return may seek relief from that joint liability under the innocent spouse procedures. 

To be relieved of a tax liability on a joint return, a spouse seeking relief must, among other things, prove that when they signed the return (1) they didn't know and had no reason to know of the tax liability, and (2) they didn't have reason to know that their spouse wouldn't pay the tax due.

Lindsey Jones Argued That Her 2010 Joint Return, Which Was Filed After Her Divorce From Her Husband In November 2012 Was Invalid Because She Didn’t Consent To Filing A Joint Return And Her Ex-Husband Signed Her Name
To The Joint Return Without Her Consent. 

However, the Tax Court found that even though Jones didn't sign the 2010 joint return, she consented to her former husband signing and filing it because: 

1.      she provided her ex-spouse with her W-2s and other tax information,

2.      she failed to file a separate income tax return, and

3.      she also allowed her current spouse to sign her name to their joint tax return. (Jones, TC Memo 2019-139)

The Ninth Circuit agreed that Jones was not entitled to innocent-spouse relief. The Tax Court properly determined that Jones's 2010 joint return was valid and she wasn't entitled to innocent- spouse relief, the Ninth Circuit held.

According to the Appeals Court, the Tax Court's finding that Jones had reason to know that her ex-husband couldn't pay the tax liability reported on their 2010 joint return was supported by the record. 

In addition, given the circumstances (Jones and her ex-husband had to sell their home to satisfy their 2008 tax liability) she should have taken some steps to "assure herself" that the tax liabilities on the 2010 joint return would be paid.

 

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TIGTA Finds That The Administration of IRS Partial Payment Installment Agreements Needs Improvement

TIGTA found that the IRS has not provided taxpayers with adequate information on PPIAs on its public website or with the instructions pertaining to the form used to request an installment agreement, nor has the IRS created an effective means for taxpayers to request PPIAs or appeal rejected PPIAs as required by law. 

PPIAs Generally Accounted For Less Than 2 Percent of 

The New Installment Agreements Established From Fiscal

 Years 2016 Through 2020, While Streamlined Installment Agreements Accounted For 56 Percent.

Also, TIGTA found that PPIAs were established without evidence of a complete financial analysis of the taxpayers’ ability to pay. From a judgmental sample of 30 PPIAs, TIGTA determined that the taxpayers’ financial statement had been deleted from IRS files for 11 PPIAs because more than one year had elapsed since the PPIA was established. With no financial statement in the file, TIGTA could not determine whether the IRS had properly computed the maximum monthly payment amount the taxpayers had the ability to pay. 

Collection default data indicate that the IRS is also establishing PPIAs for amounts that taxpayers cannot afford. 

The Default Rate For PPIAs Is Higher (23 Percent) Than
All Other Types Of Installment Agreements (9 Percent),
And In Some Years, The Amount Defaulted Was
Greater Than The Amount Placed Into PPIAs.

Contributing to the higher default rate, TIGTA found 1,007 taxpayers defaulted on their PPIA, with an original PPIA balance over $197 million, when they failed to comply with an essential term of their agreement. 

From Fiscal Year 2016 To Fiscal Year 2020, The IRS
Established PPIAs For Nearly $19.7 Billion, While
Taxpayers Defaulted On PPIAs Totaling $17.6 Billion.

Lastly, TIGTA found that the IRS procedures to close cases as currently not collectible should be enhanced with a PPIA option. The decision process for determining a currently not collectible case are similar to the steps taken by the IRS prior to granting a PPIA. 

TIGTA Reviewed A Random Sample of 51 Taxpayer Accounts Closed As Uncollectible During Fiscal Year 2020 And Determined That The IRS Should Have Offered Four (8%) of The Taxpayers A PPIA Instead of Closing the Case as Currently Not Collectible.

If PPIAs were established for these four taxpayers, TIGTA estimates that they could have paid over $79,724 before their respective collection statutes expired. Based on our random sample, TIGTA projects that the 16,026 taxpayers who had tax liabilities closed as uncollectible could have entered PPIAs and paid a total of over $319 million before their respective collection statutes expired. 

TIGTA made six recommendations to help the IRS improve administration of PPIAs. IRS management agreed to inform taxpayers of the availability of PPIAs and provide outreach; explore and consider additional changes to the instructions for Form 9465; extend AMS history note retention requirements; remind Collection employees to conduct and document a financial analysis; and request a change to Computer Paragraph 522. IRS management partially agreed to revise CNC procedures.

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Know Your Choices to Pay Your Tax Bill! - Part 1

Now that April 18th deadline for filing 2021 income tax has passed, practitioners may encounter some clients who don't have cash to pay the balance due on their returns. Clients can avoid penalties but not interest if they can get an extension of time to pay from IRS. Financially distressed clients may be able to defer paying their income taxes, including installment agreements and offers in compromise with IRS.

Paying in full within 120 days (short-term payment plan). A taxpayer can pay the full amount owed within 120 days, without having to pay any fee, but interest and any applicable penalties continue to accrue until the tax is paid in full. Taxpayers can use an online payment application (IRS website) or call IRS at 800-829-1040.

Installment agreements (long-term payment plan). Taxpayers unable to pay the full amount owed within 120 days may be able to enter into an installment agreement with IRS to pay the tax. Apply using Form 9465, Installment Agreement Request, and Form 433-F, Collection Information Statement. (IRS website)

There are different installment agreement rules for taxpayers who owe $10,000 or less, and for taxpayers who owe $50,000 or less.

Taxpayers are eligible for a guaranteed installment agreement-in other words, IRS is required to enter into the agreement-if the aggregate amount of the liability (determined without regard to interest, penalties, additions to the tax, and additional amounts) is not more than $10,000 and:

• During the past five tax years, the taxpayer (and spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement under Code Sec. 6159 for payment of income tax;
• The taxpayer agrees to pay the full amount owed within three years and to comply with all Code provisions while the agreement is in effect; and
• The taxpayer is financially unable to pay the liability in full when due and submits information that IRS may require to make this determination (i.e., a financial statement). (Code Sec. 6159(c)(2); Reg. § 301.6159-1(c)(1)).

Despite the last condition, the Internal Revenue Manual 
5.14.5.3, notes that as a matter of policy, IRS grants
guaranteed installment agreements even if the taxpayer
can pay his or her liability in full.

 There's a streamlined procedure for granting agreements for payment of tax in installments for amounts of $50,000 or less. IRS may accept streamlined installment agreements without requiring financial statements or managerial approval if the taxpayer

1.     has an "aggregate unpaid balance of assessments" (tax, assessed penalty and interest) of $50,000 or less, 

2.     has filed all returns, and 

3.     will pay up within 72 months, or will pay in full before expiration of the collection statute of limitations, whichever comes first. (IRM 5.14.5.2, IRS website)

Remember to FILE YOUR RETURN,
Even if You CANNOT Pay Your Tax!

I know this is counterintuitive, since no one wants to bring attention to the fact that they cannot pay their taxes by filing a tax return showing a tax due and not paying the tax. However by filing your return,

1.     You begin the running of the Statute of Limitations for assessment & collection,

2.     You begin the running the two-year period for discharging this debt in bankruptcy and

3.     You reduce your associative tax return penalties from 5% a month for late filing to .05% for late payment penalty. 

o    The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

o    If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

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US Ask Swiss Court For Help Collecting $316K FBAR Case

According to Law360, a federal court in Virginia issued a formal request Friday for Switzerland to serve a U.S. citizen there with a lawsuit seeking $316,000 in penalties for his purported failure to file reports of his foreign bank accounts in the case of U.S. v. Albert K. Cambata, case number 5:21-cv-00065, in the U.S. District Court for the Western District of Virginia.

The court sent what are called letters rogatory to Swiss judicial authorities after the U.S. government asked for them as part of its case against Albert Cambata. Letters rogatory or letters of request are a formal request from a court to a foreign court for some type of judicial assistance. 

The government said Cambata, who lives in Switzerland, owes around $316,000 for his non-willful failure to file reports of foreign bank and financial accounts between 2010 and 2012. 

He Was Cited in Those Years for FBAR Violations Associated With Foreign Accounts At Banks Including UBS, HSBC and Bank Julius Baer & Co. Ltd., The Government Said, and Has Yet To Pay Any Fines Despite Receiving Notice of Them.

The court said in Friday's letter that it would reimburse Switzerland for the cost of serving Cambata. 

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Supreme Court Upholds Day-Late IRS Levy Challenge

On September 30, 2021 we posted Is the CDP Petition Filing Deadline Jurisdictional? -  SC Agrees to Hear The Issue, where we discussed the U.S. Supreme Court agreed to hear Boechler v. Commissioner of Internal Revenue, appealed from the Eighth Circuit and the Question Presented Is Whether the Time Limit in Section 6330 (D)(1) Is a Jurisdictional Requirement or a Claim Processing Rule Subject to the Equitable Tolling?

Now according to Law360, the U.S. Supreme Court on April 21, 2022 found that the U.S. Tax Court had the authority to consider a North Dakota law firm's day-late challenge to an Internal Revenue Service levy, reversing an Eighth Circuit decision that sided with the agency.

Boechler PC's suit challenging the IRS collection actions is not barred by a 30-day deadline under Internal Revenue Code Section 6330(d)(1) for bringing lien and levy challenges in the Tax Court, the justices said in a unanimous opinion. 

That Deadline Isn't A Jurisdictional Bar That Needs
To Be Cleared To Get In Front Of The Tax Court,
According To The Justices.

"The text does not clearly mandate the jurisdictional reading," Justice Amy Coney Barrett said in the court's opinion. The statute's "30-day time limit to file a petition for review of a collection due process determination is an ordinary, nonjurisdictional deadline subject to equitable tolling."

The dispute between Boechler and the IRS centers on a notice Boechler received in 2015 from the IRS communicating a discrepancy between information reported by Boechler to the IRS and the Social Security Administration, according to court filings. The firm did not respond to the correspondence from the IRS, which thereafter assessed a roughly $19,000 penalty under IRC Section 6721 that the firm failed to pay.

The IRS indicated it would levy the firm's property, and the agency affirmed that determination in collection due process hearings, which are a means of challenging IRS collection actions like property levies and liens. The firm was required to file a petition with the Tax Court challenging that determination on or before Aug. 28, 2017, but it instead filed that case Aug. 29, according to court filings. 

The Tax Court dismissed Boechler's case because of this missed deadline in a decision ultimately affirmed by the Eighth Circuit. A three-judge panel said Congress intended for Section 6330's deadline to be jurisdictional based on the actual language of the statute, although U.S. Circuit Judge Jane Kelly noted concerns about the ruling's potential impact on low-income taxpayers.

Some have argued in briefs with the high court that interpreting Section 6330(d)(1) as creating a jurisdictional hurdle has the potential to disproportionately harm low-income people and those representing themselves in the Tax Court. The U.S. has rejected some of those arguments, contending that the data do not obviously support that low-income people are most likely to use collection due process procedures. 

Oral arguments in the case centered in part on the grammar of the statute, which says in a parenthetical that "the Tax Court shall have jurisdiction with respect to such matter." The firm and the U.S. government disagreed specifically over what "such matter" refers to and, more importantly, the phrase's jurisdictional implications.

This decision will help taxpayers who don't file petitions for review of CDP determinations within the 30-day filing period in Code Sec. 6330(d)(1). The IRS will still try to get late-filed petitions dismissed for lack of jurisdiction, but now late-filing taxpayers will be able to argue that they're entitled to equitable tolling of the filing deadline.

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