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

This article does the following:

The IRS is now carrying out various enforcement campaigns. This has increased interest by taxpayers in pro-actively approaching the IRS to resolve matters on the most favorable terms possible. The IRS offers multiple programs designed to allow taxpayers to rectify specific types of non-compliance, but it has just one general program covering all types of violations, even those involving willful or possibly criminal wrongdoing. This program, called the updated voluntary disclosure practice (“UVDP”), was introduced by the IRS in 2018 and later modified in 2020 and 2022. This article explains the worldwide tax and information-reporting duties of U.S. persons, summarizes the current IRS programs available, and analyzes the five-year evolution of the UVDP.

Taxpayers always give heaps of confidential data to the IRS when they file their mandatory tax returns and information returns, and the IRS always has a legal duty to safeguard such data. Taxpayers sometimes become victims of improper disclosures, and the IRS sometimes gets punished for its transgressions. This article introduces key legal concepts, data-protection duties of the IRS, manners by which taxpayers can sue the IRS for breaches, and the potential for taxpayers to recover not only damages, but also costs incurred in fighting the IRS. This article then analyzes the most recent case, Castillo v. United States, which holds that taxpayers might be able to obtain punitive damages from the IRS, even when they do not suffer actual damages because of the IRS’s improper disclosure of confidential data.

The IRS sometimes utilizes aggressive tactics to convince taxpayers to concede cases without significant resistance. Unbeknownst to many taxpayers, they have a powerful tool for evening the proverbial playing field with the IRS: Making a so-called “Qualified Offer.” The basic notion is that if the IRS ignores or rejects a Qualified Offer, the case goes to trial, and the court ultimately rules that the taxpayer’s liability is the same as or less than the amount in the earlier Qualified Offer, then the taxpayer may recoup reasonable fees and costs from the IRS. This article describes the general rules for seeking fee recoupment with the IRS under Section 7430, explains the unique standards applicable to Qualified Offers, and analyzes a recent Tax Court case, Lewis v. Commissioner, which establishes new parameters for Qualified Offers.

Imagine a world where you could create a retirement plan in a foreign country with which you have no affiliation, contribute appreciated property to such plan without triggering immediate taxation, face no limitations on the amount or source of contributions you can make, defer taxes on the accretion inside the plan, start taking distributions as early as age 50, and avoid tax on the majority of the distributions from the plan. Many U.S. taxpayers, relying on flexible interpretations of the bilateral treaty between Malta and the United States, took these positions for several years. The IRS put its proverbial foot down in late 2021, announcing that taxpayers were misconstruing the treaty, and that the IRS was committed to pursuing those who participated in and/or promoted such abuses. This article explains general U.S. tax treatment of foreign pensions, key aspects of the treaty, examples of taxpayers claiming auspicious results, terms of the recent Competent Authority Arrangement designed to halt future activity, declarations by the IRS of severe enforcement actions, and resolution options still available to taxpayers.

After courts held that the IRS violated the law when it issued Notice 2017-10 classifying syndicated conservation easement transactions (“SCETs”) as “listed transactions,” the IRS scrambled to salvage the situation. In particular, it released Proposed Regulations in December 2022, which centered on information-reporting requirements for those involved with SCETs. About three weeks later, Congress enacted the Secure 2.0 Act. That legislation did not address disclosure duties; rather, it identified easement donations that would get a tax deduction of $0 if their value surpassed a certain amount. The disparate objectives, timing, terminology, and standards in the Proposed Regulations and Secure 2.0 Act have caused confusion among easement stakeholders. The attached article examines the current situation, as well as the actions leading up to it.

The IRS has long used mandatory disclosures by taxpayers on Form 8886 (Reportable Transaction Disclosure Statement) to discourage participation in reportable transactions and carry out enforcement campaigns. The IRS has taken a different approach in the past, though, when it comes to taxpayers taking positions on returns that might be considered aggressive, novel and/or divergent from existing guidance. The IRS favored the carrot, offering penalty protection to taxpayers on the condition that they adequately revealed their positions. The recent Green Book shows that the current Presidential Administration is advocating all stick, and no carrot, when it comes to disclosures to the IRS. This article gives taxpayers and their advisors key information about this important, evolving issue.