The NTA Reimagines the IRS with a Dramatically Improved Taxpayer Experience

The National Taxpayer Advocate Erin Collins recently posted two blogs on specific ways the IRS can improve taxpayer services and modernize IRS technology with its 10-year $80 billion supplemental funding provided in the Inflation Reduction Act of 2022. We are sharing the NTA’s lists below, but you can read (or listen to) the detail in her posts.

Before the IRS moves forward in improving its overall operations, it is imperative that it fulfill its core filing season mission by eliminating the backlog of unprocessed original and amended paper-filed tax returns. The NTA strongly recommends that the IRS maintain the momentum of reducing backlog by concentrating in these areas:

1. Hire or re-assign employees to process the backlog of paper-filed tax returns and correspondence.
2. Hire enough employees to answer 85% of taxpayer telephone calls and institute “customer callback” technology on all toll-free phone lines.
3. Improve service for tax professionals, who often call with complex issues or cases and cannot obtain timely and accurate assistance.
4. Continue to suspend automated collection notices until the backlog is eliminated.
5. Hire enough employees to fully staff Taxpayer Assistance Centers (TACs) and extend walk-in capabilities.

Further, the NTA strongly recommends the IRS include these initiatives in the operational plan it will submit to the Treasury Secretary within six months to detail how the Act’s funding will be spent:

1. Hire and train more human resources employees to manage hiring all IRS employees.
2. Ensure all IRS employees – particularly customer-facing employees – are well-trained to do their jobs.
3. Create robust and accessible online accounts with functionality rivaling the best financial institutions and through which taxpayers and practitioners can assess, download and upload all relevant information.
4. Temporarily expand uses of the Documentation Upload Tool (DUT) or a similar technology.
5. Improve the readability of tax transcripts.
6. Enable all taxpayers to e-file their tax returns.
7. Automate the paper filing process and implement scanning technology to machine read paper-filed tax returns and correspondence.
8. Digitalize all paper, upload the data and implement an integrated case management system so all taxpayer information is accessible in a single database.
9. Overhaul the gov website to make it more user-friendly.
10. Continue to develop and improve voicebots and chatbots.
11. Improve transparency.
12. Issue clear notices and IRS guidance.
13. Increase Taxpayer Advocate Service funding.

The NTA indicates that with proper oversight, there is a lot the IRS can do with the additional funds to significantly improve and revamp the taxpayer experience while protecting taxpayer rights.

The NTA Reimagines the IRS with a Dramatically Improved Taxpayer Experience: Part One - TAS

The NTA Reimagines the IRS with a Dramatically Improved Taxpayer Experience: Part Two - TAS

AICPA Releases SSTS Exposure Draft and Invitation to Comment

AICPA has released its long-awaited Exposure Draft on Statements on Standards for Tax Services (SSTS) to better align and reflect the current state of the tax profession and to address the emerging needs of today’s practitioners. Many state boards of accountancy, including Texas, incorporate the SSTS as part of their professional rules of conduct for CPAs. If adopted, the proposed revisions to the SSTS will become effective on Jan. 1, 2024.

The proposed updates to the standards include:

• Reorganization of the SSTS by type of tax work performed, and
• Promulgation of three new standards surrounding data protection, reliance on tools and the representation of tax clients before taxing authorities.

There is a separate and independent Invitation to Comment on potential approaches to effectively introduce quality management in tax. There is no draft standard on quality management in tax and no timeline. AICPA is looking for feedback, more of an information-gathering process to see if they should develop a standard, and if so, what it would entail.

TXCPA’s Federal Tax Policy Committee will review and consider commenting. Members may provide an individual response using AICPA’s comments form or by sending an email to SSTScomments@aicpa-cima.com. The comments period ends Dec. 31.

AICPA Releases Exposure Draft and Invitation to Comment | News | AICPA

Tax Standards (SSTS) Exposure Draft and Invitation to Comment | Resources | AICPA

IRS Guidance to Avoid Tax Scams

By Tom Ochsenschlager, J.D., CPA

With IRS Fact Sheet FS-2022-33, the IRS recognized that taxpayers have been subjected to phone and in-person scams that allege to be from the IRS. The Fact Sheet provides guidance to enable taxpayers to recognize a scam.

FS-2022-33 clarifies the following.

Text or Email Messages

If a taxpayer receives an email message reportedly from the IRS, they should not respond but forward it as an attachment to phising@irs.gov. For text messages, the IRS requests that they take a screenshot of the message, include the date, time and phone number that received the message, and send it to phising@irs.gov.

Contacting Taxpayers by Phone

The IRS will never call a taxpayer or leave an urgent or threatening voice message that threatens the taxpayer and demands payment with a prepaid debit, gift or credit card. Taxpayers receiving such a call should merely hang up immediately.

In-person Visits

Although the IRS will occasionally do an in-person visit to a taxpayer’s home or business, generally they will do so only after the taxpayer has been notified by mail of a balance due or a missing return or that there will be an audit of the taxpayer’s return.

An exception to the requirement of an advance notification by mail is the so-called “alert” situation where a taxpayer is in danger of falling behind on withheld employment taxes. Before such a visit commences, the taxpayer should request the visitor’s HSPD-12 federal employee card and IRS-issued credentials (also called a pocket commission).

Significant Issues Not Addressed

The Fact Sheet does not provide any guidance related to taxpayers’ representatives. Specifically, it should address when the IRS should first contact the taxpayer’s representative, especially a representative who holds a Power of Attorney, before corresponding with the taxpayer by mail, email, phone or in-person visit. And, if the IRS’ initial contact is with the taxpayer, the IRS should be required to suggest/encourage the taxpayer to contact their tax representative before responding to the IRS inquiry.  

Resolving Tax Issues

There are several payment alternatives available for taxpayers to pay their federal tax liabilities. Payments can be made on the IRS Online Account utilizing IRS Direct Pay or pay by debit card, credit card or digital wallet. Taxpayers unable to make a payment should apply for a payment plan on IRS.gov. The IRS recently expanded voice bot options that enable taxpayers to avoid long wait times to verify their identity when setting up or modifying a payment plan.

Understanding how the IRS contacts taxpayers; Avoiding scams and how to know it’s really the IRS reaching out | Internal Revenue Service

Fiscal Year 2022 Statutory Review of Restrictions on Directly Contacting Represented Taxpayers (treasury.gov)

Check Your Clients’ IRA Form 990-T

By Janet C. Hagy, CPA-Austin

Master limited partnerships (MLP) owned within IRA accounts are problematic. Many investors were unaware of the possible tax consequences when the MLP was purchased. Even the IRS did not get interested in the unrelated business taxable income (UBTI) issue until about 2015 when it ruled that the fiduciary and not the account holder was responsible for filing tax returns for the IRA account. Up until then, most fiduciaries expected the IRA holder to file any necessary tax return reporting UBTI.

With outright sales and the recent conversion of many MLPs to corporate status, individuals holding MLP interests within their IRAs are receiving shockingly high tax bills for UBTI on Form 990-T, Exempt Organization Business Income Tax Return, for the sale of the MLPs. Most of the institutional investment firms are using a Big 4 firm to prepare the Forms 990-T. The problem is that prior year UBTI losses are routinely missed in the calculation of gain and tax due on the sale of the MLPs. 

Usually, the clients are not specifically asked for the old Schedules K-1 before the 990-T is prepared. If the client has not retained copies of the prior year Forms K-1, those prior year K-1s are difficult to obtain. Tax Package Support and other silos only keep three years of K-1s. The investor relations department of the MLP is usually unable to provide older K-1s, as well.

In addition to the lack of prior year K-1 information, a critical piece of information needed to check the calculation of the taxable capital gain is also hard to find. The UBTI rules only tax capital gains to the extent the company is debt financed. The taxable percentage to apply to the UBTI gain can be verified by obtaining the workpapers from the tax preparer and talking with investor relations of the MLP.

A third complication is the fiduciary status of an IRA. The fiduciary is the client of the tax preparer, not the IRA holder. Only the fiduciary is allowed to sign the Form 990-T. Therefore, it is not a matter of simply preparing an amended Form 990-T if one has already been filed. The IRA holder must provide supporting documentation to the fiduciary for them to submit to the tax preparer. This makes it a very cumbersome process to change the 990-T. In one case, the fiduciary agreed to assign the IRA holder the tax return filing responsibility. That may be a way to help a client rectify a problematic 990-T.

The IRS does not seem to care who signs the return at filing time, but that could be a problem if the return is audited. The IRS could take the position that no return was filed if the IRA holder signs it and penalize the IRA account for failure to file. However, if the proper tax was paid, failure to file penalties might be a moot point.

Consistently, the tax owed by the IRA is paid late, thereby generating penalties and interest that are charged to the IRA holder’s account. Late filing and payment penalties and interest can be avoided if the client is aware of a sale of the MLP and pays any tax by the original due date of the Form 990-T, usually May 15. If we are advised of a sale during the year, we may be able to estimate the tax owed and avoid penalties and interest.

We can also be of assistance by advising clients to retain copies of all Forms K-1 and to obtain any missing years’ K-1 forms before selling the investment. Providing those copies to the CPA and investment advisor can also help avoid erroneous 990-T filings. 

Alert for IRAs holding master limited partnerships (thetaxadviser.com)

Streamlining the Section 754 Election – No Signature Required

By Tom Ochsenschlager, J.D., CPA

The IRS recently issued final regulations regarding the requirements for partnerships to make a section 754 election. The major change from the proposed regulations is that the final regulations remove from regulation 1.754-1(b) the requirement that a partner had to sign the election statement in order to implement the 754 election. This change is effective for tax years ending on or after the Aug. 5, 2022.

As in the proposed regulation, once the election is made, it is applicable to the beginning of the year in which it is filed and all subsequent years until the partnership revokes the election.

The 754 election is particularly important where a partnership has a low basis in its assets that have appreciated to a high value when a new partner enters the partnership.

For example, let’s say five partners each contribute $100,000 for their partnership interest and that the $500,000 is used to acquire land. After several years, the land appreciates in value to $1 million. If a new partner acquires one of the five partners’ interest in the partnership for $200,000 (1/5 of the $1 million value) without a 754 election, the new partner acquires the selling partner’s share of the partnership’s basis in the property - $100,000. The new partner steps literally in the shoes of the partner who sold his/her interest. And therefore, if the property is sold for $1 million, all the partners, including the new partner who acquired his/her interest for $200,000, would have a gain of $100,000. A 754 election enables the partnership to increase its “inside” basis for the property as $200,000 for just the new partner and, accordingly, the partnership would report no gain from the sale for the new partner. In effect, the 754 election equates the partnership’s inside basis for the partner’s “outside” basis.

The revised regulations make this fairness result more efficient by making the 754 election easier.

https://www.govinfo.gov/content/pkg/FR-2022-08-05/pdf/2022-16271.pdf

TXCPA Committee Recommends Congress Direct the IRS to Implement Scanning Technology

In a letter this week to U.S. House Ways and Means Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX), TXCPA’s Federal Tax Policy Committee urges Congress to require the implementation of more modern technology for processing federal income tax returns. The technical tools the committee discussed are the same tools that the National Taxpayer Advocate advised the IRS to implement in her 2023 Objectives Report to Congress and includes use of bar coding and optical character recognition. This technology should alleviate the reported 20% error rate due to manually processing the estimated 8 million paper returns that the IRS receives annually.

irs_scanning_tech.pdf (tx.cpa)

IRS is Aware of Sending Some Erroneous CP14 Notices

TXCPA received this alert from an IRS senior stakeholder liaison.

Statement on balance due notices (CP-14)

The IRS is aware that some payments made for 2021 tax returns have not been correctly applied to joint taxpayer accounts, causing these taxpayers to receive erroneous balance due notices (CP14 notices) or notices showing the incorrect amount.

Who is affected:

Generally, these are payments made by the spouse (second taxpayer listed) on a married filed joint (MFJ) return submitted through their Online Account. Some other taxpayers may also be affected outside of this group. 

No immediate action or phone call needed: 

Taxpayers who receive a notice but paid the tax they owed in full and on time, electronically or by check, should not respond to the notice at this time. The IRS is researching the matter and will provide an update as soon as possible. Taxpayers who paid only part of the tax reported due on their 2021 joint return should pay the remaining balance or follow instructions on the notice to enter into an installment agreement or request additional collection alternatives. The IRS indicates that taxpayers can ensure that their payment is on their account by checking Online Account under the Social Security number that made the payment. Any assessed penalties and interest should be automatically adjusted when the payment(s) are applied correctly.

Additional information for tax professionals

In general, when certain payments are processed, programming does not move the payment to the MFJ account when the payment is:

• not electronic and is made by the secondary spouse,

• electronic made by the secondary spouse and posts before the joint return indictor is present to identify the primary taxpayer, or
• made by the secondary spouse using the Online Account (OLA) Make a Payment functionality.

This alert has been updated on the IRS’ website in the following places, IRS Statement on CP14s:

• IRS Operations During COVID-19: Mission-critical functions continue | Internal Revenue Service

• Help for taxpayers and tax pros: Tax season alerts and planning ahead for 2023 | Internal Revenue Service (irs.gov)

Circuit Split Could Have Substantial Implications on ’Proceeds’ Regulations

By Leo Unzeitig, JD, CPA-San Antonio

The Sixth Circuit denied a taxpayer’s rehearing in Oakbrook Land Holdings LLC v. Commissioner earlier this month. The result is that there is now a split between the Sixth and Eleventh Circuits on the validity of certain conservation easement regulations. See Hewitt v. Commissioner, 21 F.4^th 1336 (11^th Cir. 2021). The more important result is the extent to which Treasury is required to consider comments by the public in drafting rules that have the force of law. If you are a taxpayer in the Sixth Circuit, Treasury regulations are more likely to have the force of law even though they ignore comments. In the Eleventh Circuit, the same regulations may not be enforceable if they ignore material comments made by the public. Until the Supreme Court addresses the issue, it is unclear where taxpayers in the rest of the country fall and whether comments made to Treasury are significant and require consideration.

To read more, click here and here. 

TAS Has a Four-Week Delay in Initial Response Time

By Kathy Ploch, CPA-Houston

In a joint meeting last week with TXCPA, the IRS and other professional organizations, Local Taxpayer Advocate-Dallas Bill Roberts and Local Taxpayer Advocate-Houston Gina Smith stated that due to their workload, it is taking up to four weeks for TAS to return phone calls or to reply to initial contacts. This is unprecedented for the TAS office to have such a long delay.

The TAS website:

The Taxpayer Advocate Service is currently experiencing a high volume of assistance requests due to tax return processing delays. As a result, you may experience lengthy wait times while trying to connect with an advocate or while waiting for a return call. We ask for your patience as it may take up to four weeks before we will be able to return your call or reply to your request. We apologize for these delays and are taking steps to reduce hold and response times to better serve you.

TAS has always provided prompt service to taxpayers whose problems are causing financial difficulty. Please be understanding as their offices work through the backlog.

Tax Changes Effective for 2022 Returns

By Tom Ochsenschlager, JD, CPA

Several tax changes are effective in 2022. Some of the more significant changes are:

Child Tax Credits

• Child tax credit reverts back to $2,000 per child under the age of 17 and is only refundable up to $1,500 for low-income parents, and
• Child and dependent care credit for working parents reverts back to $1,050 (was $4,000 in 2021) if one child and $2,100 (was $8,000) if two or more children.

Charitable Contribution Limitations

• Taxpayers who do not itemize are no longer able to deduct up to $300 in cash donations to a charity,
• 60% of AGI limitation on charitable gifts of cash is back, effective in 2022, and
• C corporation’s charitable deductions are again limited to 10% taxable income.

 Health Savings Accounts

• Deduction increased to $3,650 for single and $7,300 for family coverage plus $1,000 for people born before 1968.

Expired Tax Benefits

• Itemized deduction for mortgage insurance premiums,
• Credit for energy efficient doors and windows,
• Tax incentives for qualified fuel-cell motor vehicles and two-wheel plug-ins, and
• Shorter depreciable lives for racehorses and business property located on Native American reservations.

Standard Deduction and Capital Gains Adjustments

• Standard deduction increases:
  • Joint return $25,900 plus $1,400 for each if 65 or older,
  • Single $12,950 plus $1,750 if 65 or older, and
  • Head of household $19,500 plus $1,750 if 65 or older.
• Capital gains thresholds increase:
  • 0% rate if taxable income is less than:
    • Single tax returns $41,675,
    • Head of household $55,800, and
    • Joint return $83,350.
  • 15% rate if taxable income is over the 0% limit but less than the relevant taxable income for the 20% rate,
  • 20% rate starts at taxable income in excess of:
    • Single $459,751,
    • Head of household $488,501, and
    • Joint return $517,201.
  • 3.8% surtax on net investment income is applicable if modified AGI is in excess of:
    • Single $200,000, and
    • Joint $250,000.

Retirement Matters

• Social Security annual wage base increases to $147,000,
• Dollar limits for contributions to retirement plans:
  • 401(k), 403(b) and 457 plans $20,500 plus $6,500 if born before 1973,
  • IRAs and Roth IRAs $6,000 plus $1,000 for “catch up” contributions for individuals 50 or older
• Phase out of IRA and Roth IRA benefits:
  • IRA deduction phases out for AGI between:
    • $109,000 - $129,000 couples, and
    • $68,000 - $78,000 singles.
  • Roth contributions phase out:
    • $204,000 - $214,000 couples, and
      • $129,000 - $144,000 singles.
    • Required minimum distributions of IRAs:
      • Based on new revised life expectancies that reduce the annual RMD.
    • Estate tax:
      • Exemption increased to $12,060,000 in 2022,
      • As much as $1,230,000 of farm or business real estate is eligible for a discount valuation based on its current use rather than fair market value, and
      • If more than 35% of estate value consists of closely held businesses, as much as $656,000 of the tax can be deferred with only 2% interest rate on the amount of the deferral.
    • Gift tax:
      • Annual exclusion increased to $16,000 per donee.

Business Matters

• Research and development expenses are no longer fully deductible – must be amortized over five years (15 years if accomplished outside the U.S.),
• 20% deduction for income from self employment and owners of pass-through entities:
  • Limitations applicable if taxable income exceeds $340,100 joint or $170,050 single,
• Expensing assets:
  • Increased to $1,080,000 but phased out if more than $2,700,000 acquired,
• Cash method availability increased:
  • C corporations and partnerships and LLCs that have C corporations as owners can use the cash method in 2022 if their average gross receipts are no more than $27 million, and
• Employees can deduct up to $280/month for reimbursements their employer provides for parking, mass transit passes and commuter vans.

Tax Changes for 2022 | Kiplinger