Prose by Tax Pros - Another Article by Hale E. Sheppard

Many taxpayers parting ways with the United States must file Form 8854 (Initial and Annual Expatriation Statement). Failure to do so is problematic because it can expose taxpayers to the notorious “exit tax.” Few people have seemed to notice, but significant changes might be on the way. This article analyzes worldwide obligations of U.S. individual taxpayers, exit taxes, foundations for Form 8854 filing duties, legislative proposals for increased enforcement, a recent case invalidating the IRS document that introduced Form 8854, and IRS actions in other contexts where the courts have shot down administrative guidance.

The IRS tries to gather as much information and documentation as possible when conducting an audit.  It attempts to get the data directly from the taxpayer, but it often turns to other sources, too. This is called making third-party contacts. The IRS has been criticized over the years for giving insufficient warnings to taxpayers before starting third-party contacts, and Congress took notice. It enacted a law creating safeguards against inappropriate third-party contacts and later strengthened it. Now, the IRS has issued proposed regulations that severely undercut historical taxpayer protections. This article analyzes the filing and record-keeping duties of taxpayers, information-gathering tools of the IRS, and changes in protections for taxpayers and third-parties over the years.

Conservation easement disputes have lasted nearly a decade and the end is far for clear. What is apparent, though, is that the IRS is now eager conclude as many cases as possible, and fast. Why? The IRS might be concerned about losing a major case on valuation issues, which could unleash many taxpayer victories in later cases. Another possibility is that the IRS wants to clear its massive inventory of existing SCET cases. Yet another motive might be that battling sophisticated taxpayers in high-dollar, complex, document-intensive cases takes a serious toll on the IRS. The true reasons for the IRS’s desire to resolve conservation easement cases now is not particularly important; what matters is understanding the relevant settlement programs and their nuances. This article, which expands on several of my earlier ones, compares and contrasts three different IRS programs.

What began as an initiative to help businesses keep workers on the payroll during the COVID crisis has become a quagmire. The processing of new employee retention credit (“ERC”) claims is on hold, guidance is often dense and retroactive, legislation is in limbo, and audits and investigations are starting in earnest. Convinced that billions of dollars in ERC claims were improper, the government has initiated several actions. This article, another in a long series by the author, explores recent administrative, legislative and executive actions to address ERC issues.

Most people are somewhat confused about Employee Retention Credit (“ERC”) issues. This is logical given the massive amount of information, much of it inaccurate, released by various sources over the past four years. Among the aspects that escape most people are the enforcement actions taken by the IRS. Understanding these is critical because taxpayers and other parties that might end up in the IRS’s crosshairs cannot effectively defend themselves if they do not know what their adversary is doing. This article, another in a long series, explores the major enforcement tactics used by the IRS thus far in challenging what it considers improper ERC claims.

Employers generally are required to withhold, deposit, and remit taxes on wages paid to their employees. They are obligated to file various returns with the IRS documenting their actions, too. Many employers hire a third-party payer (“TPP”) to handle these duties. Things often go smoothly, but issues can arise when situations get complicated. One example is when an employer files an Employee Retention Credit (“ERC”) claim through its TPP, the IRS allows it, and then it starts looking for persons to audit. This article, the latest in a long series, explains the various ERC laws and analyzes the four main sources of IRS guidance thus far about liability for tax underpayments and penalties resulting from improper ERC claims.

The IRS has focused on several different transactions in recent years, but its indignation now centers on certain positions taken by taxpayers in connection with Charitable Remainder Annuity Trusts (“CRATs”). This article describes a growing list of IRS efforts to stop what it deems abusive transactions involving CRATs.  These include a legal memo, an injunction lawsuit, two Tax Court battles, a Dirty Dozen listing, and, most recently, regulations proposing to categorize items as “listed transactions.”

In its effort to win conservation easement cases, the IRS has trotted out lots of different arguments over the years. Some were rejected by the Tax Court upon arrival, others gradually disappeared as taxpayers improved pre-donation documentation to avoid “technical” flaws, and a few still exist. One of the lingering challenges centers on the character of the property on which an easement is placed. This argument has been dubbed the “inventory issue,” and the IRS is now raising it frequently. These efforts have resulted in three recent Tax Court victories for the IRS. This article examines concepts in easement disputes, key participants, legal support for the “inventory issue,” and three pivotal cases thus far.

At some point during most audits, taxpayers will ponder whether, or to what extent, they should “cooperate” with the IRS. They also might ask what, exactly, cooperation means in a particular situation. These are critical questions to which many taxpayers lack clear answers, and this type of unawareness can lead to bad decisions. This article describes duties associated with foreign accounts, standards for reducing penalties, a new case in which taxpayers were stuck with higher sanctions because they failed to fully cooperate during a voluntary disclosure program, and other contexts in which cooperation has a significant effect on IRS disputes.

Fighting over when owners of limited partnerships must pay self-employment taxes has lasted nearly five decades. This struggle is attributable to several things, including the absence of applicable regulations, rapid evolution of business entities, and more. Uncertainty has caused taxpayers to claim disparate tax positions and triggered several big-dollar cases. This article, just one in a series, explores the relevant rules, a long list of arguments advanced by taxpayers and the IRS in two pending cases, and the recent Tax Court ruling that it must apply a “functional test” to determine whether a partner in a limited partnership meets the relevant exemption.