FinCEN Proposing a No-Action Letter Process

By Tom Ochsenschlager, J.D., CPA

On June 3, 2022, the Financial Crimes Enforcement Network (FinCEN) released an Advance Notice of Proposed Rulemaking stating that it would be developing a “No-Action Letter” process for financial institutions to utilize to ensure they were in compliance with the Bank Secrecy Act and rules, laws and regulations covering activities such as money laundering and financing terrorism. This only relates to the enforcement of financial crimes and is not directly relevant to taxation.

A no-action letter is provided by staff of a government agency that is requested by an entity subject to the regulation of that agency that concludes the agency will not take action against the entity if the entity complies with the terms of the no-action letter.

The FinCEN no-action letters will be applicable to the following institutions:

  • Casinos,
  • Depository institutions,
  • Insurance industry,
  • Money services businesses,
  • Mortgage companies/broker,
  • Precious metals/jewelry industry,
  • Securities and futures.

FinCEN is seeking written comments through Aug. 5, 2022.


Micro-captive Insurance Company Found to Be a Scam

By Tom Ochsenschlager, J.D. CPA

In May, the U.S. Court of Appeals for the Tenth Circuit agreed with the IRS argument that micro-captive insurance transactions lacked economic substance and accordingly, the premiums paid to that entity were not deductible.

A micro insurance company is roughly defined as an insurance company with $2.45 million or less of gross premiums that can elect to be taxed only on its investment income and can exclude from its income the insurance premiums it receives while the insured entity can deduct the premiums.

The Court decision in Reserve Mechanical Corporation v. Commissioner (No. 81-9011 10th Cir. May 13, 2022) determined that Reserve Mechanical had established what it claimed was an insurance company but that the facts did not support that it was an insurance company. Although the “insurance” company did insure some unrelated entities, those premiums were relatively minimal and virtually all the insured risk was related to Reserve Mechanical. Additionally, due to the common ownership of Reserve Mechanical and the insurance company, the premiums paid were not attributable to an “arm’s length” transaction – a rough definition of “captive insurance company.”

Accordingly, the Court decided that the premiums paid lacked economic substance and were not deductible and that a 20% penalty applied to Reserve Mechanical.

Abusive micro-captive insurance arrangements made the list of the IRS’ 2022 “Dirty Dozen” transactions because of their potential for tax evasion.

IRS wraps up 2022 "Dirty Dozen" scams list; agency urges taxpayers to watch out for tax avoidance strategies | Internal Revenue Service

Taxpayer Loses in Micro-captive Case - Baker Tilly


IRS Commissioner Questions Backlogged Return Numbers in Taxpayer Advocate Report

By William R. Stromsem, J.D., CPA, Assistant Professor, Department of Accountancy, George Washington University School of Business

The IRS generally takes comments from the National Taxpayer Advocate as constructive criticisms. Recently, however, in her “Fiscal Year 2023 Objectives Report to Congress” NTA Erin Collins criticized the continuing backlog of unprocessed returns, saying, “Unfortunately, at this point the backlog is still crushing the IRS, its employees and most importantly, taxpayers.”

The Commissioner took strong issue with this backlog comment, saying, “The inventory numbers presented in the National Taxpayer Advocate report are neither the most accurate nor the most recent figures.”

In this unusual pushback in IR-2022-128, the Commissioner provided a much more positive report, defending the extraordinary efforts of the IRS and its employees over the last several months. To overcome the backlog, the IRS has taken several measures, including authorizing significant and ongoing overtime, creating special teams to focus solely on the aged inventory and hiring thousands of new workers and contractors. It has also streamlined its error resolution process.

As a result of these efforts, originally filed Form 1040 paper returns (without errors) filed during 2021 will be completed by the “end of the (June 17) week” with business paper returns to follow “shortly after.” As of June 10, the IRS had processed more than 4.5 million of the more than 4.7 million individual paper tax returns received in 2021. The IRS has also successfully processed the “vast majority” of tax returns filed this year (143 million returns). The streamlining of the error resolution process has resulted in a reduction in the backlog from 8.9 million on June 12, 2021 to 360,000 on June 10, 2022. The IRS news release mentions correspondence backlogs but does not give any details of progress.

You can judge the success of the IRS efforts and side with the Commissioner or the Taxpayer Advocate. However, the IRS is making extraordinary efforts and the Commissioner is understandably displeased with the continuing criticism as evidenced by his comments in the IR-2022-128.

https://www.taxpayeradvocate.irs.gov/reports/2022-objectives-report-to-congress/


Are Declining IRS Audit Rates Providing a Credible Audit Deterrent?

By William R. Stromsem, J.D., CPA, Assistant Professor, Department of Accountancy, George Washington University School of Business

 

The average audit rate for all individual income tax returns has declined to 0.25% according to a GAO report to the House Ways and Means Oversight Committee. This is a continuing downward trend from 0.9% in 2010.

The IRS attributes this decline to staff and budget shortages. Things do not look much brighter for the future, with 15% of the IRS’ auditors expected to retire in the next three years.

Audit rates decreased the most for taxpayers with incomes of $200,000+ because those audits require more time and expertise for the more complex issues.

Also, there were fewer field and office audits because of the pandemic. Almost all audits were more-automated, less-intrusive correspondence audits. 

With such a low audit potential, the unspoken question is how low can it get before it loses credibility to the extent that otherwise honest taxpayers are tempted to take questionable positions on returns in the hope of not being singled out for an audit? For CPAs, the issue is whether their attention to compliance detail will be appreciated as much by taxpayers who are tempted to play the audit lottery.


The Senate Now Has a SECURE 2.0

On June 22, the Senate Finance Committee unanimously advanced the bipartisan Enhancing American Retirement Now (EARN) Act that was co-sponsored by Texas Senators John Cornyn and Ted Cruz. This bill will merge with the Senate Health, Education, Labor and Pensions Committee’s retirement bill to form the Senate’s SECURE 2.0 package (an anticipated title) for full Senate consideration.

This legislation has 70 provisions to help more taxpayers save, including:

  • that all employers will automatically enroll employees in 401(k) and 403(b) once they become eligible with an employee contribution of at least 3% for the first year, to increase by 1% up to at least 10% (but not more than 15%) effective after 2023 (unsure if there is an “opt out” option for employees who lack disposable income),
  • increasing the age of mandatory distribution to 75 effective after 2031,
  • a matching-payments credit that would be 50% of an IRA or retirement plan contribution, up to $2,000 per individual,
  • withdrawals for certain family or personal emergency expenses,
  • special use of retirement funds in connection with qualified federally declared disasters,
  • exemption for automatic portability transactions,
  • a higher catch-up limit at age 60 effective after 2023,
  • treatment of student loan payments as elective deferrals for purposes of matching contributions after 2023,
  • exception to early distribution penalty for individuals with terminal illness,
  • directs Treasury to create a new standardized form for the rollover process,
  • allows certain disabled first responders to no longer consider retirement funds at gross income and grants them earlier access,
  • modification of participation requirements for long-term, part-time workers (age 21) effective after 2022,
  • allows workers to take distributions to pay for long-term care premiums, and
  • penalty-free withdrawal (up to $10,000) for victims of domestic abuse with three years to replace the funds.

Several important steps still need to occur. Upon a full Senate vote, which is likely to pass, its SECURE 2.0 would go through the reconciliation process with the House’s SECURE 2.0 Act from March. Congressional leaders will craft a final bill to be voted on by both chambers before it could be signed into law by the president.

Proposed changes to retirement system approved by Senate committee (cnbc.com)

Senate Finance approves retirement tax legislation - KPMG United States (home.kpmg)


IRS Increases Mileage Rate for Remainder of 2022

For the final six months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022.

These new rates become effective July 1, 2022. The IRS provided legal guidance on the new rates in Announcement 2022-13.

Midyear IRS mileage rate increase follows precedent, recent pleas - Journal of Accountancy


IRS Mission-critical Updates on Tax Return Backlog

The IRS has updated its mission-critical function stats as of June 3, 2022:

Mail is being opened within normal timeframes. All paper and electronic individual refund returns received prior to April 2021 have been processed if the return had no errors or did not require further review.

As of May 20, the IRS inventory was 9.8 million unprocessed individual returns including those received before 2022 and new tax year 2021 returns. Of these, 2 million returns require error correction or special handling and 7.8 million are paper returns in the review pile. Special handling cases are taking 21-120 days. The IRS will send explanation letters for any corrections on the Recovery Rebate Credit, Child Tax Credit, Earned Income Tax Credit or Additional Child Tax Credit. Tax Season Refund Frequently Asked Questions.

How Long Taxpayer May Have to Wait

The IRS has processed all error-free returns received prior to October 2021 and they are manually reviewing the rest. They reroute returns and correspondence to sites with more available staff. Again, errors in the Recovery Rebate Credit and Child Tax Credit will cause delay or if missing information or flagged for identity theft or fraud. The resolution of these issues is taking 90-120 days.

What Taxpayer Should Do 

Taxpayers can check Where's my refund? or their online account. No further action is needed if an electronic return was acknowledged. For paper returns, if Where’s my refund? status shows received, processing or reviewing, the return may be under review. Do not file a second tax return.

Status of Processing Form 1040-X, Amended Individual Tax Return

As of May 21, there were 2.1 million unprocessed Forms 1040-X with a backlog of 20+ weeks. Taxpayers should continue to check Where's My Amended Return? for the most up to date processing status available.

Status of Unemployment Compensation Exclusion Corrections 

The IRS is still reviewing tax year 2020 returns and processing corrections for taxpayers who paid taxes on unemployment compensation, to exclude the compensation from income if eligible. More than 11.9 million refunds totaling $14.6 billion have been issued. Some taxpayers will receive refunds, while others will have the overpayment applied to taxes due or other debts. Affected taxpayers should receive a corrections letter, generally within 30 days from when the corrections were completed. See the 2020 Unemployment Compensation Exclusion FAQs.

Status of Processing Form 941, Employer’s Quarterly Federal Tax Return

As of May 25, inventory was at 3.7 million unprocessed Forms 941 and about 241,000 unprocessed Forms 941X. Some of the 941Xs cannot be processed until the related 941s go through. While not all these returns involve a COVID credit, trained COVID-credit staff in Cincinnati and Ogden are working them.

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


E-Services Sign-in to Migrate to ID.Me

By Kathy Ploch, CPA-Houston

The IRS sent an alert to tax professionals on May 4, 2022, stating its plans to migrate a set of online services to ID.me this summer despite the objections raised by Congress, AICPA, TXCPA and other tax professional organizations.

Some of the products and applications that will be impacted are the e-File Application, Transcript Delivery System (TDS) and the Secure Object Repository (SOR). The IRS is asking practitioners to prepare for this migration by setting up an ID.me account now using the Tax Pro Account. The IRS will no longer authenticate identity or establish accounts by phone effective June 15. If you are unable to register an account online after the cutoff, you must wait for the new e-Services’ ID.me to open this summer.

Commissioner Charles Rettig discussed at a Senate oversight hearing about the IRS’ plans to transition from ID.me to the federal government’s own Login.gov service. He stated that it does not yet have the capacity to handle all their online services’ activity, but the IRS is working to improve the range.

On an IRS Online Services webcast May 19, presenters mentioned the migration very briefly. They also wanted to remind practitioners that the e-Services and the Tax Pro Account are two separate online services, although you can utilize the same log-in information for both. Your clients can also sign up for their own online account. IRS Product Manager Kirk Crawford said that the IRS is continuing to add new features to the account such as certain notices and viewing payment history.

 

IRS e-Services migration 5-4-22 data

 

IRS to Stop Using ID.me Facial Recognition on IRS.gov After Complaints (businessinsider.com)

TXCPA Committee Asks the IRS to Engage with Tax Professionals on Third-Party Online Authentication Concern - TXCPA Federal Tax Policy Blog (typepad.com)

FAQs about e-Services and Secure Access | Internal Revenue Service (irs.gov)


IRS Averaging One Year on ID Theft Case Resolution

In a recent meeting with the IRS and other stakeholder liaisons, TXCPA received news that the IRS’ identity theft claims can take up to one year to resolve. Generally, responses to Form 14039 (or 14039-B), Identity Theft Affidavit, were at 120 days. However, the IRS Mission-critical Functions webpage indicates that due to inventory and pandemic-related delays, response time to taxpayers who filed affidavits is taking up to 350 days on average. The IRS asks that taxpayers not submit a duplicate form.