ND - 2023 legislative recap issued North Dakota issued a newsletter summarizing legislation enacted in 2023 affecting the corporate and personal income taxes. Among the topics covered are individual income tax rate reductions, deductio...
Amid a growing number of scams and fraudulent activity surrounding the Employee Retention Credit, the Internal Revenue Service will stop processingnewclaims, effective immediately, at least through the end of the year.
Amid a growing number of scams and fraudulent activity surrounding theEmployee Retention Credit, theInternal Revenue Servicewill stopprocessingnewclaims, effective immediately, at least through the end of the year.
"We are deeply concerned that this program is not operating in a way that was intended today, far from the height of the pandemic in 2020 and 2021,"IRSCommissioner Daniel Werfel said during a September 14, 2023, conference call with reporters."We believe we should see only a trickle of employee retentionclaimscoming in. Instead, we are seeing a tsunami."
Werfel said the agency has received about 3.6 millionclaimsby taxpayers taking advantage of the program and there are more than 600,000 that have yet to be processed,"virtually all of which were received within the last 90 days. That means about 15 percent of allERCclaimsreceived since the start of the program three and half years ago have been received in the last 90 days. That’s an incredibly large number to have so far beyond the pandemic and nearly two years after the time periods covered by the program."
He attributed the spike inclaimsto emergence and prevalence of so-calledERCmills.
"This great program to help small businesses has been overtaken by aggressive promoters,"Werfel said."The ads are everywhere. The program has become the centerpiece for unscrupulous marketing and profits from pushing taxpayers toclaima credit that they would not be eligible for."
The agency said in a September 14, 2023, press release that it will processclaimsalready received, but as of today, there will be nonewclaimsprocessed for the pandemic-era relief program aimed to help small businesses remain in operation while dealing with potential economic hardships due to the COVID-19 pandemic.
However, for those who have filedclaims, they can expect longer wait times for the financial relief offered by the credit as the agency conducts more detailed compliance reviews of theclaimsthat have been filed.
And that compliance work as already begun. Werfel stated that as of July 31, 2023, theIRSCriminal Investigation Division has initiated 252 investigations involving more than $2.8 billion worth of potentially fraudulentERCclaims. Fifteen of those cases have resulted in federal charges, with six cases resulting in convictions, and an average sentence of 21 months for those reaching the sentencing phase. He also stated that the agency has referred thousands ofclaimsfor audit.
"With the stricter compliance reviews in place during this period, existingERCclaimswill go from a standardprocessinggoal of 90 day to 180 days – and much longer if theclaimfaces further review or audit,"the agency stated in the press release."TheIRSmay also seek additional documentation from the taxpayer to ensure it is a legitimateclaim."
To help taxpayers who may have fallen victim to anERCmill, theIRSwill be introducing programs in the coming weeks and months to help taxpayers. First, the agency will be providing a process under which taxpayers with unprocessedclaimscan withdraw thoseclaims. To help taxpayers in self-reviewing their already submittedclaimsor who may be thinking about submittingclaimswhen theIRSbeginsprocessingnewclaimsagain, the agency on September 14, 2023, released an updated eligibility checklist. The process to withdraw aclaimwill be finalized soon.
For those who have had theirclaimsprocessed, received money and then later received a determination that they were in fact ineligible for the credit, theIRSwill be offering a settlement program to help taxpayers pay back funds they should not have received due to eligibility reasons. Details on the settlement program will be released in coming months.
This help may be needed because theIRSrecognizes that a business or tax-exempt group c"ould find itself in a much worse financial position if you have to pay back the credit than if the credit was never claimed in the first place,"Werfel said.
Werfel is encouraging those who have submittedclaimsto do an independent verification of eligibility with a trusted tax professional to ensure they were in fact eligible for the credit and if they were not, be ready to take the steps to withdraw theclaimif it hasn’t been paid or to look for the settlement program if necessary.
The Department of the Treasury is reaching out to Congress to get the appropriate tools to combat the wave of Employee Retention Credit fraud and other future issues.
TheDepartment of the Treasuryis reaching out to Congress to get the appropriate tools to combat the wave ofEmployee Retention Creditfraud and other futureissues.
In a September 14, 2023, letter to Senate Finance Committee Chairman Ron Wyden, the agency made two specific requests. First, the IRS asked for authority to regulate paid preparers, which it sated"could help protect taxpayers from penalties, interest, or avoidable costs of litigation that result from the poor-quality advice they receive."
Second, the IRS asked for legislation specific to theERC, but it was more vague in what it wants, asking Congress"to consider other ways to help reduce fraud and abuse associated with theERC, while protecting honest taxpayers. For example, legislating targeting contingency fee practices would help prevent overzealous promoters from profiting off small businesses."
During a September 14, 2023, conference call with reporters, Laurel Blatchford, chief implementation officer of the Inflation Reduction Act at theTreasury Department, said that having the ability to regulate paid preparers would make it easier to targetERCmills that have popped up in recent months.
"Congress should pass legislation making clear these mills have to play by the same rules as other professionals who prepare returns for taxpayers,"Blatchford said."These mills may claim they aren’t paid preparers, but they receive compensation for their advice."
And while the IRS andTreasurycould promulgate regulations for something like banning contingency fees that would prevent mills from collecting a portion of the money refunding through the credit,"alegislativeprohibition takes effect far more quickly."
The Internal Revenue Service detailed plans on some of the high-incometaxpayers that will be targeted for more complianceefforts in the coming fiscal year.
TheInternal Revenue Servicedetailed plans on some of thehigh-incometaxpayersthat will be targeted for morecomplianceeffortsin the coming fiscal year.
IRSCommissioner Daniel Werfel, during a September 7, 2023, teleconference with reporters, said that the newcompliancepush"makes good on the promise of the Inflation Reduction Act to ensure theIRSholds our wealthiest filers accountable to pay the full amount of what they owe,"adding that the agency will simply be enforcing already-existing laws.
Werfel stated that theIRSwill be"pursuing 1,600 millionaires who owe at least $250,000. … TheIRSwill have dozens of revenue officers focused on these high-end collection cases in fiscal year 2024,"which begins on October 1, 2023."This group of millionaires owes hundreds of millions of dollars in taxes, and we will use Inflation Reduction Act resources to get those funds back."
He also said that the agency will be making a “dramatic shift” on large partnerships.
"These are some of the most complex cases theIRSfaces, and it involves a wide range of activities and industries where it’s been far too easy for tax evaders to cut corners,"Werfel said.
To help with thiseffort, Werfel highlighted that the agency will be using expanded artificial intelligence programs and additional Inflation Reduction Act resources to help with the audit process for large complex partnerships.
"The selection of these partnership returns for review is the result of groundbreaking collaboration among experts in data sciences and tax enforcement,"Werfel said."They have been working side-by-side to apply cutting-edge machine learning technology to identify potentialcompliancerisks in the area of partnership tax, general income tax, and accounting and international tax in a segment that historically has been subject to limited examination coverage."
The AI will be used to help spot trends that might not be obvious and help the agency determine which partnerships are at the greatest risk of noncompliance, starting with 75 specific partnerships with assets of more than $10 million.
"These are some of the largest [partnerships] in the U.S. that the AI tool helped us identify,"Werfel said."These organizations will be notified of the audit in the coming weeks. These 75 organizations represent a cross section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries."
Werfel also noted that starting in October,"hundreds of partnerships will receive a specialcompliancealert from us in the mail. The alert relates to what we have identified as an ongoing discrepancy on balance sheets involving partnerships with over $10 million in assets,"adding thattaxpayersfiling partnership returns are showing more and more discrepancies in recent years. Approximately 500 partnerships will be receiving this mailing.
"We will need to do more in the partnership arena,"Werfel said."But this is historic. And these are examples of how the Inflation Reduction Act funding will make a difference and help ensure fairness in the tax system."
Other areas that will getcomplianceattention in the coming fiscal year include those with digital assets,high-incometaxpayerswho use foreign banks to avoid disclosure and related tax obligations, as well as a previously announcedeffortto target the construction industry where companies are using subcontractors, which are shell corporations, to engage in tax fraud. The agency will also be targeting scammers such as the current trend of Employee Retention Credit mills.
Werfel also noted that there are ongoingeffortsto keep hiring people to conduct these enforcement actions.
"We know we need to make more progress in our hiringefforts, as we will be accelerating these,"Werfel said."This is particularly important given our aging workforce and the relatively high attrition rate amongIRSemployees."
The Treasury Inspector General for Tax Administration is calling on the Internal Revenue Service to improve its training of revenueagents that will be focused on auditing high-incometaxpayers.
The Treasury Inspector General for Tax Administration is calling on theInternal Revenue Serviceto improve itstrainingofrevenueagentsthat will be focused on auditinghigh-incometaxpayers.
In an August 31, 2023,report, the Treasury Department watchdog noted that despite receiving supplemental funding from the Inflation Reduction Act that has been earmarked, in part, to increase examination ofhigh-incometaxpayers, the"IRS’s efforts to train new hires do not appear to be fully leveraging"the expertise it has within the Large Business and International Division.
"TheIRStreats thistrainingas specialized and only offers it when necessary for employees auditing in this specialized area,"that current continued, recommending that with the new IRA funding,"theIRSshould revise itstrainingparadigm and expose new hires to the types of issues associated withhigh-incometaxpayerreturns."
TIGTAalso criticized the agency for not having"a unified or updated definition for individualhigh-incometaxpayers,"noting that"current examination activity code schema still uses $200,000 as the main threshold"as established in the Tax Reform Act of 1976. This threshold exists even as theIRScontinually uses $400,000 as the income threshold, with the population underneath it not expecting to see a rise in audit rates against historical levels from a decade ago.
"TheIRS’s Inflation Reduction Act Strategic Operating Plan sets forth leveraging data analytics to improve theIRS’s understanding of the tax filings of high-wealth individuals and to address potential noncompliance,"the report states."Consequently, theIRSneeds to update itshigh-incometaxpayerdefinition to better identify and track examination results and manage examination priorities."
IRSin its response to theTIGTAfindings, published in the report, did not agree with the recommendation related to the definition ofhigh-incometaxpayers, stating that"a static and overly proscriptive definition ofhigh-incometaxpayersfor the purposes of focusing on income levels above whichtaxpayershave unique and varied opportunities for tax would serve to deprive theIRSof the agility to address emerging issues and trends."
The IRS has provided additional interim guidance in Notice2023-64 for the application of the newcorporate alternative minimum tax (CAMT). This guidanceclarifies and supplements the CAMTguidance provided in Notice2023-7, I.R.B. 2023-3, 390, and Notice2023-20, I.R.B. 2023-10, 523, which were issued earlier this year. The IRS anticipates that the forthcoming proposed regulations on the CAMT will be consistent with this interim guidance and that they will apply for tax years beginning on or after January 1, 2024. Taxpayers may rely on the interim guidance for tax years ending on or before the date the forthcoming proposed regulations are published, and for any tax year that begins before January 1, 2024.
TheIRShas providedadditionalinterimguidanceinNotice2023-64for theapplicationof thenewcorporate alternative minimum tax(CAMT). Thisguidanceclarifiesand supplements theCAMTguidanceprovided inNotice2023-7, I.R.B. 2023-3, 390, andNotice2023-20, I.R.B. 2023-10, 523, which were issued earlier this year. TheIRSanticipates that the forthcoming proposed regulations on theCAMTwill be consistent with this interimguidanceand that they willapplyfor tax years beginning on or after January 1, 2024. Taxpayers may rely on the interimguidancefor tax years ending on or before the date the forthcoming proposed regulations are published, and for any tax year that begins before January 1, 2024.
For tax years beginning after 2022, a 15-percentCAMTis imposed on the adjusted financial statement income (AFSI) of an applicable corporation (generally, a corporation with a three-year average annual AFSI in excess of $1 billion) (Code Secs. 55(a)and(b), and59(k)). To determine if the threshold is met, corporations under common control are generally aggregated and special rulesapplyin the case of foreign-parented multinational groups. TheCAMTdoes notapplyto S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs).
A corporation’s AFSI is the net income or loss reported on the corporation’s applicable financial statement (AFS) with adjustments for certain items, as provided inCode Sec. 56A. Special rulesapplyin the case of related corporations included on a consolidated financial statement or filing a consolidated return. Applicable corporations are allowed to deduct financial statement net operating losses (FSNOLs), subject to limitation, and can reduce their minimum tax by theCAMTforeign tax credit (CAMTFTC) and the base erosion and anti-abuse tax (BEAT). They can also utilize a minimum tax credit against their regular tax and the general business credit.
Notice2023-7announced that theIRSintends to issue proposed regulations (forthcoming proposed regulations) addressing theapplicationof theCAMT, and provided interimguidanceregarding time-sensitiveCAMTissues that taxpayers may rely on until the forthcoming proposed regulations are issued.
Notice2023-20providedadditionalinterimguidancethat taxpayers may rely on until the issuance of the forthcoming proposed regulations, including interimguidanceintended to help avoid substantial unintended adverse consequences to the insurance industry arising from theapplicationof theCAMT.
Considering the challenges of determining theCAMTliability,Notice2023-42, 2023-26 I.R.B. 1085, provided relief from the addition to tax underCode Sec. 6655in connection with theapplicationof theCAMT(specifically, theIRSwill waive the penalty for a corporation’s estimated income tax with respect to itsCAMTfor a tax year that begins after December 31, 2022, and before January 1, 2024).
TheIRSintends to propose rules in the forthcoming proposed regulations consistent with the interimguidanceinNotice2023-64, which provides taxpayers withadditionalclarity inapplyingtheCAMTbefore the issuance of the forthcoming proposed regulations. Specifically,Notice2023-64sets forth the followingguidance:
Definition of a taxpayer for purposes of theguidance- a taxpayer includes any entity identified inCode Sec. 7701and its regulations, including a disregarded entity, regardless of whether the entity meets the definition of a taxpayer underCode Sec. 7701(a)(14).
Determining a taxpayer’s AFS - theguidanceprovides a definition of an AFS, a list of financial statements that meet the AFS definition, priority rules for identifying a taxpayer’s AFS; rules for certified financial statements, restatements, annual and periodic financial statements; and special rules for an AFS covering a group of entities.
Determining a taxpayer's AFSI - theguidanceprovides definitions of financial statement income (FSI) and AFSI; general rules for determining FSI and AFSI, including federal tax treatment not relevant for FSI or AFSI; and rules for determining FSI from a consolidated AFS.
Determining the FSI, AFSI, andCAMTof tax consolidated groups – rules are provided for priority of consolidated AFS; calculation of FSI of a consolidated group; and calculation of theCAMTof a tax consolidated group.
Determining AFSI with respect to certain foreign corporations – special rules are provided for theapplicationofCode Sec. 56A(c)to certain foreign corporations.
Determining the AFSI adjustment for depreciation – thenewguidancemodifies andclarifiestheguidancefor the AFSI depreciation adjustments provided inNotice2023-7, and provides other AFSI rules for Section 168 property. Taxpayers that choose to rely on the interimguidancein section 4 ofNotice2023-7on or after September 12, mustapplytheguidancein section 4 ofNotice2023-7, as modified and clarified byNotice2023-64.
Determining the AFSI adjustment for qualified wireless spectrum.
Determining adjustments to prevent certain duplications and omissions of AFSI – rules are provided for adjustments resulting from a change in financial accounting principle or restatement of a prior year’s AFS; and adjustments for amounts disclosed in an auditor’s opinion.
Determining the use of financial statement NOL (FSNOL) carryovers - the amount of an FSNOL carried forward to the first tax year a corporation is an applicable corporation (and subsequent tax years) is determined without regard to whether the taxpayer was an applicable corporation for any prior tax year.
Determining an applicable corporation status – specific rules are provided for theapplicationof the aggregation rules underCode Sec. 59(k)(1)(D); for determining an applicable corporation status of members of a foreign-parented multinational group; and for disregarding the distributive share adjustment.
Determining theCAMTforeign tax credit (CAMTFTC) - generally, a foreign income tax is eligible to be claimed as aCAMTFTC in the tax year in which it is paid or accrued for federal income tax purposes by either an applicable corporation or a CFC with respect to which the applicable corporation is a U.S. shareholder, provided the foreign income tax has been taken into account on the AFS of the applicable corporation or CFC.
Applicability Dates, Request for Comments, and Effect on Other Documents
TheIRSintends to publish forthcoming proposed regulations regarding theapplicationof theCAMTthat would include proposed rules consistent with the interimguidanceprovided inNotice2023-7, as modified and clarified byNotice2023-64,Notice2023-20, andNotice2023-64. It is anticipated that the forthcoming proposed regulations wouldapplyfor tax years beginning on or after January 1, 2024. Taxpayers may rely on the interimguidanceprovided in theseNoticesfor tax years ending on or before the date forthcoming proposed regulations are published. However, in any event, a taxpayer may rely on such interimguidancefor any tax year that begins before January 1, 2024.
TheIRShas requested comments on any questions arising from the interimguidanceprovided inNotice2023-64as well as comments addressing specific questions listed in theguidance.
Sections 3, 4, and 7 ofNotice2023-7are modified and clarified.
Taxpayers may rely on a notice that describes proposed regulations that will address the amortization of qualified research and experimentation (R&E) expenses. Before 2022, R&E expenses were currently deductible, but the Tax Cuts and Jobs Act (P.L. 115-97) replaced the deduction with a five-year amortization period (15 years for foreign research).
Taxpayers may rely on anoticethat describes proposed regulations that will address theamortizationof qualifiedresearchand experimentation (R&E)expenses. Before 2022, R&Eexpenseswere currently deductible, but the Tax Cuts and Jobs Act (P.L. 115-97) replaced the deduction with a five-yearamortizationperiod (15 years for foreignresearch).
Thenoticeprovides guidance on:
the capitalization andamortizationof specifiedresearchor experimentalexpenditures;
the definition of specifiedresearchor experimental (SRE)expendituresand softwareexpenditures;
the treatment of SREexpendituresperformed under contract with a third party, including long term contracts underCode Sec. 460;
the application ofCode Sec. 482tocostsharing arrangements involving SREexpenditures; and
the disposition or abandonment of SREexpenditures.
The guidance generally applies to tax years ending after September 8, 2023. Thenoticeis not intended to change therulesfor determining eligibility for or computation of theCode Sec. 41researchcredit, includingrulesfor"researchwith respect to computer software,"and the definitions of"qualifiedresearch"and"qualifiedresearchexpenses."
Thenoticerequires taxpayers to capitalize SREexpendituresandamortizethem ratably over the applicableamortizationperiod beginning with the midpoint of the tax year. The midpoint is the first day of the seventh month of the tax year in which the SREexpendituresare paid or incurred.
However, the midpoint of a short tax year is the first day of the midpoint month. If the short tax year has an even number of months, the midpoint month is determined by dividing the number of months in the short tax year by two and then adding one. For example, for a short tax year with ten months, the midpoint month is the sixth month ((10 / 2) + 1 = 6)). If the short tax year has an odd number of months, the midpoint month is the month that has an equal number of months before and after it. For example, for a short tax year with seven months, the mid-point month is the fourth month.
If a short tax year includes part of a month, the entire month is included in the number of months in the tax year, but the same month may not be counted more than once. If a taxpayer has two successive short tax years and the first short tax year ends in the same month that the second short tax year begins, the taxpayer should include that month in the first short ta year and not in the second short year.
For purposes of the 15-yearamortizationperiod, foreignresearchis anyresearchconducted outside the United States, the Commonwealth of Puerto Rico, or any U.S. territory or other possession of the United States.
Thenoticeclarifies the scope ofCode Sec. 174by defining SREexpendituresand SRE activities. Otherwise, thenoticeadopts the definitionsprovidedinReg. §1.174-2.
SREexpendituresfor tax years beginning after 2021 areresearchor experimental (R&E)expendituresthat are paid or incurred by the taxpayer during the tax year in connection with the taxpayer’s trade or business. R&Eexpendituresmust
be paid or incurred in connection with the development of computer software (defined below), regardless of whether they satisfyReg. §1.174-2.
SRE activities are software development costs (defined below), orresearchor experimental activities defined inReg. §1.174-2.
Costs that may be SREexpendituresinclude labor costs, materials and supplies costs,costrecovery allowances, operation and management costs and travel costs that are used in the performance or direct support of SRE activities, as well as patent costs. Costs that are not SREexpendituresinclude general and administrative costs, interest on debt, costs to input content into a website, website hosting and registration costs, amounts representingamortizationof SREexpenditures, andexpenseslisted inReg. § 1.174-2(a)(6).
Costs are allocated to SREexpenditureson the basis of a cause-and-effect relationship between the costs and the SRE activities or another method that reasonably related the costs to benefitsprovidedto SRE activities. A taxpayer may use different allocation method for different types of costs, but must apply each method consistently. SREexpendituresmust also be treated consistently for all provisions under subtitle A of the Code.
Computer Software Development
Thenoticedefines computer software as a computer program or routine (that is, any sequence of code) that is designed to cause a computer to perform a desired function or set of functions, and the documentation required to describe and maintain that program or routine. The code may be stored on a computing device, affixed to a tangible medium (for example, a disk or DVD), or accessed remotely via a private computer network or the Internet (for example, via cloud computing).
Software includes a computer program, a group of programs, and upgrades and enhancements, which are modifications to existing software that result in additional functionality (enabling the software to perform tasks that it was previously incapable of performing), or materially increase the software’s speed or efficiency. Computer software can include upgrades and enhancements to purchased software.
Thenoticeprovides several examples of activities that constitute software development, such as planning the development, designing, building a model, and testing the software or updates and enhancements; and writing and converting source code.
As mentioned above, computer software may include upgrades and enhancements to purchased software. However, software development does not include the purchase and installation of purchased computer software, including the configuration of pre-coded parameters to make the software compatible with the business and reengineering the business to make it compatible with the software, and any planning, designing, modeling, testing, or deployment activities with respect to the purchase and installation of such software.
Thenoticealso provides clarity in the treatment of costs paid or incurred forresearchperformed under contract. For purposes of theserules, aresearchprovider is the party that contracts to performresearchservices or develop an SRE product for aresearchrecipient. An SRE product is a pilot model, process, formula, invention, technique, patent, computer software, or similar property (or a component thereof) that is subject to protection under applicable domestic or foreign law. For example, mere know-how gained by theresearchprovider that is not subject to legal protection is not an SRE product.
Costs incurred by theresearchrecipient are governed byReg. §1.174-2(a)(10)and(b)(3). A provider may incur SREexpendituresunder the contract if the provider:
bears financial risk sunder the terms of the contract (that is, the provider may suffer a financial loss related to the contractresearch); or
has a right to use any resulting SRE product in its own trade or business or otherwise exploit through sale, lease or license. The provider does not have such rights if it must obtain approval from another party to theresearcharrangement that is not related to the provider.
Disposition, Retirement or Abandonment of Property
Thenoticeprovides clarity in the treatment of unamortized SREexpendituresif the related property is disposed of, retired, or abandoned in certain transactions during the applicableamortizationperiod. The disposition, retirement or abandonment generally does not accelerate the recovery of unamortized SREexpenditures(that is, theamortizedSREexpendituresthat have not yet been recovered). Thus, the taxpayer must continue toamortizetheexpendituresover the remainder of the applicableamortizationperiod.
If a corporation ceases to exist in aCode Sec.381(a)transaction or series of transactions, the acquiring corporation will continue toamortizethe distributor or transferor corporation’s unamortized SREexpendituresover the remainder of the distributor or transferor corporation’s applicableamortizationperiod beginning with the month of transfer.
However, a corporation that ceases to exist in any other transaction or series of transactions may generally deduct the unamortized SREexpendituresin its final tax year, unless a principal purpose of the transaction(s) is to allow the corporation to deduct theexpenses.
Taxpayers may not rely on theserulesfor SREexpenditurespaid or incurred with respect to property that is contributed to, distributed from, or transferred from a partnership.
Long-Term Contracts andCost-Sharing Regs
Thenoticeprovides that costs allocable to a long-term contract accounted for using the percentage-of-completion method (PCM) includeamortizationof SREexpendituresunderCode Sec. 174(a)(2)(B), rather than the capitalized amount of suchexpenditures. Thisamortizationis treated as incurred for purposes of determining the percentage of contract completion as deducted.
Thenoticealso makes changes to regulations forcostsharing transaction payments (CST payments) between controlled participants in acostsharing arrangement (CSA) that are made to ensure that each controlled participant’s share of intangible development costs (IDCs) is in proportion to its share of reasonably anticipated benefits from exploitation of the developed intangibles (RAB share).
Accounting Method Changes
The IRS intends to issue additional guidance for taxpayers to obtain automatic consent to change methods of accounting to comply with thisnotice. Until the issuance of such procedural guidance, taxpayers may rely on section 7.02 ofRev. Proc. 2023-24to change their methods of accounting underCode Sec. 174to comply with thisnotice. Unless specifically authorized by the IRS or by statutes, a taxpayer may not request or make a retroactive change in accounting method by filing an amended return.
The IRS request comments on issues arising from the interim guidanceprovidedin thenotice, as well as issued that are not addressed. Written comments should be submitted by November 24, 2023; however, the IRS will consider late comments if doing so will not delay the issuance of the forthcoming proposed regulations. Comments may be submitted by mail or electronically via the Federal eRulemaking Portal atwww.regulations.gov. The subject line for the comments should include a reference toNotice2023-63.
Taxpayers may rely on proposedregulations that detail how to satisfy the prevailingwage and apprenticeship (PWA) requirements for bonus amounts that may apply to several energy and business credits. The regs also explain the correction and penalty provisions that allow taxpayers to claim the bonus credits even if they failed to satisfy the PWA tests. Comments are requested.
Taxpayers may rely onproposedregulationsthat detail how to satisfy theprevailingwageandapprenticeship(PWA)requirementsforbonusamounts that may apply to severalenergyandbusinesscredits. Theregsalso explain thecorrectionand penalty provisions that allow taxpayers to claim thebonuscredits even if they failed to satisfy the PWA tests. Comments are requested.
The Inflation Reduction Act of 2022 (P.L. 117-169) providedbonuscredits as part of several new and existing components of the generalbusinesscredit. The initial credit amount is increased for taxpayers that satisfy the PWArequirementsduring the construction, alteration and repair of a credit facility.
Thebonuscredits apply to the following 11 credits, plus one deduction:
thebusinesscredit component of theCode Sec. 30CAlternative Fuel Vehicle Refueling Property Credit
theCode Sec. 179DEnergyEfficient Commercial Buildings Deduction (increased deduction).
The IRS previewed theseproposedregsinNotice 2022-61(TAXDAY, I.1, 11/30/2022).
In determiningprevailingwages, theproposedregslargely incorporate the Davis-Bacon Act (DBA), as administered by theWageand Hours Division of the Department of Labor (DOL), to the extent it is relevant and consistent with sound tax administration. However, theregsdo not adopt the DBA’s federal contracting provisions, or its exemptions for Tribal governments and the Tennessee Valley Authority. The definition of “employed” is also broader for the PWA tests than it is for other purposes of the Code.
Under theproposedregs, the taxpayer that claims the increased credit would be solely responsible for:
making sure the PWArequirementsare satisfied,
keeping appropriate records, and
thecorrectionand penalty provisions and the good faith effort exception.
“Taxpayer” includes an applicable entity that elects to treat the credit as a federal tax payment underCode Sec. 6417, and an eligible taxpayer that elects to transfer the credit to an unrelated person underCode Sec. 6418. Thus, the PWArequirementsapply to the eligible taxpayer, not the transferee taxpayer.
Theproposedregsdefine several relevant terms, including applicablewagedetermination, laborer, mechanic, construction, alteration, repair, locality or geographic area (including DOL site of work definitions), andprevailingwagerate. Theproposedregsgenerally adopt DOL rules that allow lowerprevailingwagerates for apprentices.
Theproposedregswould require taxpayers to use the generalwagedetermination in effect when the construction of the facility begins, but would not require taxpayers to update those rates during construction. However, consistent with DOL guidance under the DBA, a new generalwagedetermination would be required when a contract is changed to include additional, substantial construction, alteration, or repair work, or to require work to be performed for an additional time period. Taxpayers would also need to updatewagerates for alteration or repairs after the facility has been placed in service.
A generalwagedetermination would be one issued and published by the DOL that includes a list ofwageand bona fide fringe benefit rates determined to beprevailingfor laborers and mechanics for the various classifications of work performed with respect to a specified type of construction in a geographic area. Theproposedregulationswould largely incorporate the definition of “wages” from 29 CFR 5.2 for thePrevailingWageRequirements. This definition is not relevant in determiningwagesorcompensationfor other federal tax purposes.
Theproposedregswould provide special procedures when a generalwagedetermination does not provide applicablewagerates; as, for example, when no generalwagedetermination has been issued for the geographic area, for the specified type of construction, or for a labor classification. According to the DOL, these situations should be rare. The taxpayer, contractor, or subcontractor would need to request a supplementalwagedetermination orprevailingwagerate for an additional classification from the DOL. However, taxpayers could not use these requests to split, subdivide, or otherwise avoid classifications in a generalwagedetermination.
A request for a supplementalwagedetermination or aprevailingwagerate for an additional classification would need to include information consistent with the information that must be provided by a contracting agency when requesting a projectwagedetermination or a conformance for purposes of the DBA. After review, theWageand Hour Division will notify the taxpayer as to the labor classifications andwagerates to be used. Theproposedregulationswould also adopt the review and appeal procedures available to any interested party under the DBA with respect towagedeterminations generally.
If construction of a credit facility spans adjacent geographic areas, theprevailingwagerate would the highest rate for each classification. For an offshore facility, taxpayers could rely on the generalwagedeterminations in the geographic area closest to the area where the qualified facility will be located.
PrevailingWageCorrectionand Penalty Provisions
A taxpayer that fails to satisfy the PWArequirementsmay still qualify for the increased credit or deduction by satisfyingcorrectionand penalty provisions. Theproposedregulationswould provide that the obligation to makecorrectionpayments and pay the penalty would not become binding until the taxpayer files a return claiming the increased credit. The taxpayer generally would have to makecorrectionpayments to the underpaid workers before filing the return, and pay any penalty when the return is field.
In addition, the taxpayer would have to make thecorrectionand penalty payments within 180 days after the IRS makes a final determination that a taxpayer failed to satisfy thePrevailingWageRequirements, which would come in the form of a notice sent by the IRS. Although deficiency procedures would not apply to the penalty payment, deficiency procedures would apply to any IRS disallowance of the increased credit.
Taxpayers that cannot locate the underpaid workers are not excused from thecorrectionrequirements. The IRS expect that taxpayers will be able to establishcorrectionpayments by using existing state and tax withholding procedures. Taxpayers that underpay workers while waiting for a supplementalwageor additional classification determination would have 30 days after the determination to makecorrectionpayments. For purposes of credit transfers underCode Sec. 6418, thecorrectionand penaltyrequirementswould continue to apply to the eligible taxpayer, not the credit transferee.
For purposes of the increasedcorrectionand penalty amounts for intentional disregard of the PWArequirements, theproposedregswould provide that failures would be due to intentional disregard if they are knowing or willful, based on all relevant facts and circumstances. There would be a rebuttable presumption against intentional disregard if the taxpayer makes thecorrectionand penalty payments before receiving a notice of an examination.
Theproposedregswould provide limited penalty waivers when PWA failures are small in amount or occur in a limited number of pay periods. The penalty also would not apply with respect to a laborer or mechanic employed under a project labor agreement that meets certainrequirements, ifcorrectionpayments are made by the time the taxpayer claims the increased credit. Theproposedregswould use the IRS’s general enforcement discretion to allow taxpayers to correct limited failures to payprevailingwagesif the taxpayers pay the mechanics and laborers backwagesand interest in a timely manner before claiming the increased credit.
To satisfy theapprenticeshiprequirement, taxpayers must satisfy:
1. the Labor HoursRequirement, by ensuring that the applicable percentage of the total labor hours are performed by qualified apprentices;
2. the RatioRequirement, by ensuring that any applicableapprenticeship-to-journeyworker ratio is satisfied on a daily basis; and
3. the ParticipationRequirement, which is intended to prevent taxpayers from satisfying the Labor HoursRequirementby only hiring apprentices to preform one type of work.
Theproposedregsexplain that the Labor HoursRequirementgenerally is subject to the RatioRequirement, and the ParticipationRequirementapplies in addition to those tworequirements.
Failure to SatisfyApprenticeshipRequirements
Theproposedregsprovide addition guidance regarding the good faith effort exception to theapprenticeshiprequirementswhen a taxpayer’s request for a qualified apprentices is denied. The taxpayer may need to submit requests to multipleapprenticeshipprograms, and each request must include prescribed information. A taxpayer would have to submit a second request within 120 days of a first denial. The good faith exception would apply only to a particular denied request. A taxpayer that does not qualify for the good faith exception may be treated as satisfying theapprenticeshiprequirementsby paying a penalty to the IRS. Theproposedregsspell out how taxpayers determinecorrectionamounts are determined.
Failures to meet theApprenticeshipRequirementswould be due to intentional disregard if they are knowing or willful under all relevant facts and circumstances. Theproposedregulationsprovide a non-exhaustive list of relevant facts and circumstances.
Theproposedregulationswould also provide the penalty paymentrequirementfor failures to meet the Labor Hours or ParticipationRequirementwould not apply if a project labor agreement that meets certainrequirementsis in place. In addition, there would be a rebuttable presumption against intentional disregard if the taxpayer makes the penalty payments before receiving a notice of an examination.
As with theprevailingwagerequirements, theproposedregulationswould provide that a penalty payment would remain the responsibility of the eligible taxpayer that transfers the increased credit underCode Sec. 6418. The obligation to meet theApprenticeshipRequirementswould not be binding until the eligible taxpayer files its return for the year the credit is determined or, if earlier, the transferee taxpayer files its return taking the transferred credit into account.
Theproposedregulationswould require taxpayers to establish compliance with thePrevailingWageRequirementsat the time a return claiming the increased credit is filed. Theserequirementsare generally consistent with the recordkeepingrequirementsunder the DBA regime. Taxpayers would also have to maintain and preserve sufficient payroll records to establish compliance.
Similarly, theproposedregulationswould require taxpayers subject to theApprenticeshipRequirementsto maintain sufficient records to establish compliance with the Labor Hours, Ratio and ParticipationRequirements. It would be the responsibility of the taxpayer to maintain the relevant records for each apprentice engaged in the construction, alteration, or repair on the qualified facility, regardless of whether the apprentice is employed by the taxpayer, a contractor, or a subcontractor.
Finally, if an eligible taxpayer transfers any portion of a credit that includes the increased amount for satisfying the PWArequirements, these recordkeepingrequirementswould remain with an eligible taxpayer.
Effect on Other Documents
The provisions of sections 3 and 4 ofNotice 2022-61would be obsoleted for facilities, property, projects, or equipment the construction, or installation of which begins after the date theseregulationsare published as final.
Theregulationsareproposedto apply to facilities, property, projects, or equipment placed in service in tax years ending after the date they are published as final, and the construction or installation of which begins after hat date. However, taxpayers may rely on theproposedregulationswith respect to construction or installation of a facility, property, project, or equipment beginning on or after January 29, 2023, and on or before the date theregulationsare published as final, provided that beginning after October 30, 2023, the taxpayer follows theproposedregulationsin their entirety and in a consistent manner.
The IRS requests comments on theproposedregs, and a public hearing is scheduled for November 21, 2023, at 10 am EST. Comments and requests to speak at the hearing must be received by October 30, 2023, and requests to attend the hearing must be received by November 17, 2023. Comments and requests may be mailed to the IRS, or they may be submitted electronically via the Federal eRulemaking Portal at https://www.regulations(indicate IRS andREG-100908-23).
The IRS has provided guidance on the income taxtreatment of payments made by states in 2023 and later years. In IRS News Release 2023-23, February 10, 2023, the IRS clarified the federal tax status of special payments made by 21 states in 2022 that were mainly related to the COVID-19 pandemic, with varying terms in the types of payments, payment amounts, and eligibility rules.
The IRS has provided guidance on the incometaxtreatmentofpaymentsmade bystatesin 2023 and later years. InIRS News Release 2023-23, February 10, 2023, the IRSclarifiedthe federaltaxstatus of specialpaymentsmade by 21statesin 2022 that were mainly related to the COVID-19 pandemic, with varying terms in the types ofpayments,paymentamounts, and eligibility rules.
The exclusion ofstateincometaxrefunds is largely dependent on whether an individual itemized deductions and deducted the amount ofstateincometaxpaid. Astateincometaxrefund will be excluded from an individual's gross income if the person claimed the standard deduction for thetaxyear in which thestateincometaxwaspaid. On the other hand, an individual who itemized deductions and deducted the amount ofstateincometaxpaidwill include astateincometaxrefund to the extent that the individual received a federal incometaxbenefit from the prior federal incometaxdeduction.
A similar rule applies tostatepropertytaxrefunds.
2022PaymentsCovered by IR-2023-23
IR-2023-23 described some 2022 programs that intended to makepaymentsin early 2023. To the extent an individual could exclude such apaymentreceived in 2022 pursuant to the news release, an individual may exclude astatepaymentreceived in 2023 under a 2022 program from federal incometax.
Paymentsthat are made under astateprogram for the promotion of the general welfare are not includible in federal incometax. To be excluded as apaymentfor the general welfare, thepaymentmust: (1) be made from a governmental fund; (2) be for the promotion of the general welfare, meaning based on individual or family need; and (3) not represent compensation for services.
The IRS requests comments on the application of these rules and on specific aspects ofstatepaymentprograms or additional situations where federal guidance would be helpful. Comments should be submitted on or before October 16, 2023. Comments may be mailed to the IRS or submitted electronically via the Federal eRulemaking Portal athttps://www.regulations.gov.
National Taxpayer Advocate Erin Collins is calling on the Internal Revenue Service to alter how it deals with supervisoryreview of penalties.
National Taxpayer Advocate Erin Collins is calling on the Internal Revenue Service to alter how it deals withsupervisoryreviewofpenalties.
"The IRS’sapproachtosupervisoryreviewofpenaltiesis heavy-handed and burdensome on taxpayers,"Collins wrote in an August 29, 2023, blog post.
She noted that the while somepenaltiesrequiresupervisoryapproval before they can be assessed, the statue providing authority"is vague regarding the point at which this approval must occur,"which has led to conflicting decisions in tax court about how they should be treated.
Collins noted that the IRS is currently working on the problem and has issued proposed regulations on the subject. A public hearing on this issue will be held on September 11, 2023.
"The proposed regulations succeeded in providing clarity, but it would be nice if they did so in a way that helps taxpayers rather than harming them."
According to Collins, the proposed regulations set up a process by which asupervisoryapproval can be obtained anytime before the statutory notice of deficiency is issued for pre-assessmentpenaltiessubject to Tax Courtreview. For thosepenaltiesnot subject to pre-assessment Tax Courtreview, they can be approved up until the time of assessment itself.
"The IRS’s proposedapproachis problematic because the ability to raise potentialpenaltieswith taxpayers in the absence of oversight could lend itself to the improper assertion ofpenalties,"Collins wrote."Practitioners and Congress expressed concerns that some IRS examiners may be tempted to propose apenaltywith no real intention of actually imposing it. Rather, thepenaltyis put forth as a bargaining chip to be negotiated away as part of the case resolution process. The IRS is quick to point out that this practice is unauthorized and is strongly discouraged. Nevertheless, the structure perpetuated in the proposed regulations does nothing to protect taxpayers from potential abuse."
Collins stated thatsupervisoryreview"should occur before applicablepenaltiesare communicated to the taxpayer in writing,"adding that the proposed regulations"provide the IRS with an excellent chance to reconsider itsapproachtosupervisoryreview. This is an opportunity that the IRS has so far declined to embrace, but there is still time. I urge the IRS to reexamine its policy and I request that Congress consider clarifying the law to protect taxpayers’ rights."
Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.
Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as theInternal Revenue Servicehas beguncompliancework on those who own and trade in cryptocurrencies.
"A CPA needs to advise their clients that theIRSis looking into this,"Paul Miller, CPA and managing partner at Queens, N.Y.-based Miller and Company LLP, said in interview. He recalled that one of his clients was recently audited for hiscryptotransactions going all the way back to 2018.
Miller suggested that the tip off that the agency would be more closely examining taxpayers’cryptotransactions was the simple question added to Form 1040 asking whether the taxpayer engaged in any transactions.
He also suggested that theIRScould be showing some level of leniency for these early taxpayers who are getting theircryptotransactions audited.
"TheIRSwas pretty reasonable with this man,"Miller said."He wasn’t assessed the fraud penalty. He wasn’t assessed the 25 percent penalty. He just had to amend three or four years of his tax returns for failing to reportcrypto."
Miller also pointed out that theIRSgave the taxpayer"the benefit of the doubt,"recognizing both that he might night have thought about the tax ramifications of hiscryptotransactions as well as recognizing the fact that he was unable to recover transaction data from 2018.
To that end, Miller stressed that it is very important to keep accurate records and to not necessarily rely on transaction platforms for providing that information.
"If you use Coinbase, Coinbase is pretty good because they give you a 1099,"he said, adding that other trading platforms might not provide that information."Regardless, we tell all our of our clients to keep records, keep track of it"just like they would keep track of information about money in foreign bank accounts.
On theIRSside, Miller suggested thatcryptocompliancecould be a part of the agency’s push to utilizing artificial intelligence as part of thecomplianceprocess, noting that with everything else on the agency’s plate, theIRS"literally doesn’t have the manpower."This could make AI a tool forcryptocompliance.
Miller also recommended that CPAs be sure to include very specific questions oncryptoin their engagement letters.
"It’s all about getting the client to take responsibility off of me and putting it on them,"he said."Because at the end of the day, I’m justpreparingthe tax return."
He stressed that it does not mean the goal of a CPA is not to give their clients the best advice.
"The goal is that you have a responsibility to pay your taxes,"he said."You have a responsibility to report the information, If you disagree or if you deviate from that, you have to deal with the consequences, not me."