IRS to Remove Regulations on Basis Shifting Transactions

By Bill Wilson, CPA-Dallas

In Notice 2024-54, the IRS announced its intention to publish two sets of proposed regulations that would address certain basis-shifting transactions involving partnerships and related parties. These transactions involve partners in a partnership and their related parties that result in increases to the basis of property under Section 732, Section 734(b), or Section 743(b) of the Internal Revenue Code and generate increased cost recovery allowances, reduced gain, or increased loss upon the sale or other disposition of the basis adjusted property. According to the notice, the purpose of the regulations was to target partnership transactions in which basis adjustments were created to generate tax savings without a corresponding economic outlay.

Final regulations were issued on Jan. 10, 2025, and included modifications to address concerns by commentators that the proposed regulations were overly broad and would capture nonabusive transactions. The regulations required taxpayers to disclose such transactions.

In Notice 2025-23, the IRS announced that it will remove the basis shifting regulations and will provide relief for any failure by participants or material advisers to file disclosure statements or maintain lists required by the regulations. The IRS cited a February 2025 Executive Order from President Trump that directs agencies to identify, review and rescind certain regulations and other guidance that “undermine the national interest.”

 

Basis-shifting transaction-of-interest regulations to be removed

In-House Tax Professionals Must Comply with Circular 230

William Stromsem, CPA, J.D., Department of Accountancy, George Washington University School of Business

The IRS Office of Professional Responsibility recently issued a bulletin that provides answers to five frequently asked questions about whether and to what extent a company’s in-house tax professional falls under the disciplinary jurisdiction of OPR and is required to meet the standards in Circular 230.

The CPA employee must “practice before the IRS,” and this is broadly defined as “all matters connected with a presentation to the IRS relating to a taxpayer’s rights, privileges, and liabilities” under the Internal Revenue Code and Treasury Regulations. Such a presentation includes but is not limited to: “[P]reparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings and meetings.” This does not include routinely preparing or reviewing a prepared return but would include the preparation of an amended tax return in representing the taxpayer in an IRS examination.   

The bulletin concludes, “Every attorney, CPA, EA or other tax professional who practices before the IRS is subject to Circular 230 regardless of whether they operate on their own as a solo practitioner, are with a firm, or are an employee or officer of an entity taxpayer. The precise application of the Circular’s standards to the professional will depend on the facts of each unique situation.”

Requirement to File BE-10 with the Bureau of Economic Analysis

By John Kelleher, CPA-Fort Worth

Most U.S. multinationals are quite aware of the various foreign information reports required to be included in their federal income tax return (Forms 5471, 5472, 8858, etc.). However, there is another reporting requirement from the Department of Commerce's Bureau of Economic Analysis (BEA) that is less well known. The Form BE-10 is required every five years and compliance with this reporting requirement is essential to avoid penalties and to fulfill obligations under federal law.

Purpose of the BE-10 Form

Form BE-10 is a mandatory survey conducted by the BEA to collect comprehensive data on U.S. direct investment abroad. The information gathered is used to analyze economic trends, formulate policy and produce statistical reports on the activities of U.S. multinational enterprises (MNEs). The data collected contributes to the assessment of the U.S. economy’s global position and investment flow patterns.

Who is Required to File?

Any U.S. persons, including corporations, partnerships and individuals, that had a foreign affiliate at the end of the reporting year (a foreign affiliate is any foreign business enterprise in which the U.S. person owns, directly or indirectly, at least 10%) is required to file Form BE-10. Even if a company has not received a notice from the BEA, it must still submit a BE-10 report if it meets the filing criteria.

Summary of BE-10 Forms

The BE-10 report consists of several different forms that companies must file depending on their structure and investment activities:

• BE-10A: Filed by the U.S. parent company providing financial and operational details for the consolidated U.S. domestic entity.
• BE-10B: Filed for majority-owned foreign affiliates (more than 50% U.S. ownership) that meet the reporting thresholds.
• BE-10C: Filed for minority-owned foreign affiliates (between 10% and 50% U.S. ownership) or majority-owned affiliates that do not meet BE-10B thresholds.
• BE-10D: Filed for foreign affiliates that have less than $25 million in total assets, sales or net income and do not meet the more detailed filing requirements.

Filing Deadlines

The BE-10 report is due at different times depending on the number of foreign affiliates. Extensions may be requested if made prior to the filing deadline.

• May 30, 2025: For U.S. reporters with fewer than 50 foreign affiliates.
• June 30, 2025: For U.S. reporters with 50 or more foreign affiliates.

Penalties for Non-Compliance

Failure to file Form BE-10 may result in significant penalties. Noncompliance can lead to civil penalties ranging from $5,911 to $59,114 (adjusted for inflation). Willful failure to report may also result in criminal penalties, including fines up to $10,000 and imprisonment for individuals responsible for the noncompliance.

Next Steps

Companies should begin gathering the necessary data as soon as possible to ensure timely and accurate filing. If assistance is needed, consult with legal, tax or financial advisors familiar with BE-10 requirements. For additional information, please visit the BEA website at www.bea.gov.

https://www.bea.gov/sites/default/files/2025-02/be10-instructions.pdf

Using IRS Online Communications to Avoid or Resolve Erroneous Late Response Notices

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

TXCPA’s Federal Tax Policy Committee is concerned with increased delays in USPS mail deliveries exacerbating the timeliness of IRS submissions to and from practitioners and their clients. We have heard of instances where first-class mail is taking two weeks or more to deliver. When dealing with an IRS response deadline, mail delays can result in the IRS sending out incorrect penalty and interest statements, or worse, for failure to timely respond to the notices.

In addition to USPS delivery delays, the committee has received increasing reports of delays in IRS processing responses from taxpayers and practitioners, sending follow-up notices despite the practitioner receiving date-stamped certified mail receipts showing timely delivery. These internal IRS delays will likely get worse with current budget cuts and personnel reductions. 

When a notice response is not delivered and/or recorded timely by the IRS, it causes a domino effect of erroneous follow-up notices, added penalty and interest, client distress, and duplicative work by the practitioner to avoid punitive action against the taxpayer.  

The committee is drafting a letter to the IRS describing specific scenarios with recommendations to reduce these problems. One recommendation is that the IRS include a three-week pause after a response due date before sending follow-up notices so that it can receive and properly record the timely submission. The letter also includes suggestions for better communications channels with the IRS, like better email procedures and possibly a practitioner document-submission hotline. 

In the meantime, practitioners should consider alternatives to paper submissions, using IRS accounts, secure faxes, secure email and other options. The IRS has been making improvements to its online communication systems, but their procedures often require some extra steps to protect taxpayer information and prevent identity theft. Some means of online communications may require use of ID.me to verify the practitioner’s identity with a dual-authentication code for a submission. One alternative system is to use the IRS Online Account; this link will take you to a slide deck from the IRS Stakeholder Liaison Office that explains how the system is used. The 44-slide presentation may seem like a lot, but it may help you save time in resolving erroneous notices and other account issues. 

TXCPA’s committee will continue to engage and provide feedback to the IRS on ways to improve tax administration and the taxpayer experience.

Postal Service overhaul could expose communities to slower mail

USPS sets lower targets for on-time mail, drawing ire from lawmakers

New IRS Must-Have Tools for Taxpayers and CPAs - TXCPA Federal Tax Policy Blog

Online account for individuals | Internal Revenue Service

Tax documents added to IRS Individual Online Account tool, enhancing services and convenience for taxpayers | Internal Revenue Service

It is Time to Plan for QOF Deferred Gain Recognition

By Janet C. Hagy, CPA-Austin

It is hard to believe that Dec. 31, 2026, is soon upon us. That is the date that the taxes on capital and Section 1231 gains that were deferred in prior years by investing in Qualified Opportunity Zone Property (QOZP) and Opportunity Zone Funds (QOF) must be reported if no inclusion event has previously occurred. Congressional intent was to encourage development in economically distressed locations known as Qualified Opportunity Zones (QOZ) and it appears to have been successful in many areas. However, so far, some investments have not performed as expected. Tax planning is needed to prepare taxpayers for the 2026 gain recognition and possible early dispositions of investments in QOF.

Beginning in April 2018, many taxpayers took advantage of the opportunity to defer tax to 2026 by investing their gains in QOZF. The rules were quite simple. Invest the amount of any capital or Section 1231 gain in qualified property, make the election to defer and the tax on the gain is deferred until Dec. 31, 2026. And, if certain holding periods are met, basis would be increased by 10% of the deferred gain if held at least five years, plus an additional 5% if held at least seven years. After recognizing the deferred gain in 2026, permanent exclusion from tax of any additional gain is awarded for property held at least 10 years by making an election to increase the basis in the property to the fair market value (FMV) on the date of sale or disposition. Most investors probably originally intended to hold the investment for at least 10 years to maximize the tax benefits. However, with the passing of time, early disposition or transfer may be desired.

Reasons for early disposition of the QOZP or QOF could include liquidity needs, gifts, divorce, pre-mortem planning, fluctuations in taxable income between 2025 and 2026, and, of course, projected further erosion of invested capital.

The first step in tax planning for a disposition is to determine the FMV of the investment. QOFs are not publicly traded, and most have restrictive covenants regarding sales and redemptions by investors. Therefore, the taxpayer will need to provide the operating agreement and the FMV. The amount invested as a deferred gain has a beginning basis of zero. Other statutory basis adjustments over the holding period, including the five- and seven-year holding period basis increases, must be considered in computing the adjusted basis. The taxable gain upon disposition or inclusion event is the difference between the lower of the deferred gain or the FMV of the QOF, and the adjusted basis.

Liquidity needs and gifting are less likely to occur given the known restrictive nature at the time of the original investment. Any sale, transfer or redemption causes income to be recognized in the year of disposition.

Unlike other Section 1041 transfers of property between spouses or incident to divorce, transfers of QOFs are inclusion events requiring recognition of gain by the transferor. In addition, the transferee’s property is no longer a qualifying QOF investment. In community property states, ownership status must be considered under state law.

Pre-mortem planning is essential. Death is not an event requiring inclusion of the deferred gain by the decedent. If the property transfers by bequest, the gain is considered income in respect of decedent to be recognized by the beneficiary. There is no step-up in basis. Sale of the QOF prior to death may be desirable if the investment has dramatically changed in value and/or the owner does not wish to burden the beneficiary with tax on the deferred gain. If there are multiple beneficiaries and some would not share in the QOF bequest, valuation of the QOF for purposes of equitable distributions to the beneficiaries seems problematic and subject to dispute. Special attention should be given if the owner has a charitable organization as a residual beneficiary.

Due to the political climate in Washington, tax planning for 2025-2026 and beyond is a challenge. But a case can be made to accelerate recognition of the deferred gain to 2025 if income in 2026 is expected to be significantly higher or there are passive activity losses that could be recognized in 2025 to offset significant passive income in 2025. Consideration must also be given to the acquisition dates and the opportunity for basis increases due to holding the QOF for at least five or at least seven years.

Failure to properly elect gain deferral can be corrected by filing amended returns for applicable years and including a completed election on Form 8997. Forms 8997 and 8949 are used to report dispositions and transfers.

After Dec. 31, 2025, it will be too late to use multiple year planning techniques. Now is the time to talk to your clients about their deferred gains and planning opportunities.

Elections and Gain Inclusion

 

 

 

TXCPA Committee Responds to Proposed Circular 230 Regulations

TXCPA’s Federal Tax Policy Committee recently issued comments on proposed rulemaking regarding regulations governing practice before the IRS (REG-11610-20). While the committee supports Treasury’s efforts to balance effective taxpayer representation with enforcement, it has concerns regarding certain provisions, including the proposal that the practitioner is required to ensure corrective actions are taken on an incorrect tax return and the broad restrictions on contingent fees. The committee urges Treasury to provide necessary clarifications and modifications to ensure taxpayer rights and access to competent representation remain protected.

 

Read comments letter: Regulations Governing Practice Before the IRS

IRS First Friday Hot Issues Summary - February 2025

 

 

 

Sending Out an S.O.S. – IRS Form 911

By Torakichi Jesús Oba Pérez, EA, CPA

It can be challenging to resolve issues with the IRS nowadays. From delayed processing times for written correspondence, long wait times when trying to call and multiple transfers when you do speak to someone, it sometimes feels as though what is a straightforward issue in the practitioner’s mind amounts to a lot of extra time and effort in resolving IRS notices.

Enter the Taxpayer Advocate Service, which has proved to be this practitioner’s best friend. I can clearly recall the first time I referred a matter to the Advocate: I prepared my file as though I was inviting an audit. I could not have been more surprised, thankful and grateful for the case agent’s assistance in resolving an ongoing matter with the IRS. In a matter of three weeks, the issue I’d been corresponding with the IRS for over a year was resolved.

I then thought to myself that I might try to cut out the middleman and try to resolve all notices directly with the Advocate, but I got a few stern, though friendly, calls from the Advocate saying that I must first try to resolve the matter via correspondence with the IRS. In fact, there is a handy tool on the Advocate’s website that will help you determine whether the TAS can help you.

Here's a few tips that I have learned through a lot of trial and error in working with the Advocate:

1. When you get a notice from the IRS, send the initial response to the IRS address in the notice as quickly as possible, and keep the documentation of your response (including certified mail receipts and fax confirmations) in your file.

2. If you seem to not be making progress after 30-60 days, then the case should be eligible for the Advocate to assist you.

3. Make sure your IRS Power of Attorney covers the period and form for the tax matter you are trying to refer to the Advocate.

4. Fill out Form 911 on behalf of your client and fax it to the Advocate office closest to you.

5. Await your case to be assigned and be contacted by the Advocate representative to begin the resolution process.

Looking back at it, I wish I would have known that practitioners could submit IRS Form 911 on behalf of their clients (provided they have a Power of Attorney) much sooner, but I’m just thankful for the time and effort the fine folks of the Taxpayer Advocate Service will continue to save me in the future.

TXCPA Committee Suggests Reducing the Administrative Burden of K-2 and K-3 Filings

 

Recently, TXCPA’s Federal Tax Policy Committee issued a letter to the IRS on concerns with burdensome compliance requirements. The committee supports the IRS’s efforts to identify activity with high compliance risk and to make certain partners with international tax issues provide information needed to prepare accurate tax returns. However, the current requirements for Schedules K-2 and K-3 have not set the right balance between enforcement and administrative burden. The committee offered recommendations to assist the IRS in reducing the taxpayer burden associated with filing Schedules K-2 and K-3 without reducing the ability to identify returns with foreign activity tax compliance risk.

 

See letter.

Domestic Filing Exception Letter

New IRS Must-Have Tools for Taxpayers and CPAs

By Janet C. Hagy, CPA-Austin

 

Having issues working with the IRS? Stupid question, right? We now have some limited relief.

 

The IRS has rolled out new and improved tools for accessing taxpayer information, processing timely individual Forms 2848 Power of Attorney (POA), and business owner/officer access to corporation and S corporation tax accounts. Due to the current staffing issues within the IRS, access to the Practitioner Hotline, Taxpayer Advocacy Service and simple POA processing are time consuming, frustrating and often fruitless. Due to USPS delays, many IRS notices are being received without sufficient time to respond or, in some cases, after the required response due date.

 

Online Accounts for Individuals https://www.irs.gov/payments/online-account-for-individuals

 

This feature has been available for a couple of years. Transcripts, account balances and payment options are some of the popular features. Some of the features that may be underutilized are:

 

• Quick approval of Form 2848. The taxpayer can approve the POA for immediate access by the CPA.

• Access to all IRS notices and, if approved by the taxpayer, email notification to the taxpayer that a notice has been sent. The notice is posted to the account the same day it is sent. The email notification does not disclose any sensitive information. The email will not ask for money or a response.

• Retrieval of IPIN. How many times have your clients lost their IPINs? The IRS is encouraging all taxpayers to get an IPIN. So, having a quick way to provide us with that number can expedite filing the return.

• Information about Economic Impact and Child Tax Credit payments.

 

TAX PRO Accounts https://www.irs.gov/tax-professionals/tax-pro-account

 

If you are not already signed up for a Tax Pro account, do it now. Not only can you get POA forms processed in one day if the individual taxpayer approves it through their own individual account, if you link your CAF number to your Tax Pro account, you can easily review and withdraw POAs.

 

Once you have the POA, you can access that client’s tax information online, obtain transcripts and make payments or payment plans on behalf of the client.

 

What you cannot do now is obtain POAs through the Tax Pro account for any taxpayers other than individuals. This is reported to be in the works but is not available currently.

 

Business Tax Account https://www.irs.gov/businesses/business-tax-account

 

Currently eligible to set up a Business Tax account are corporations, S corporations and sole proprietors using an EIN who are not a single-member LLC. Authorized persons within the company can review tax records, make payments and set up payment plans. CPAs with or without POAs are not allowed to be designated persons.

 

An extra bonus is that individual partners and S corporation individual shareholders who have an SSN and get a K-1 can set up a business tax account and retrieve Forms K-1 (1065 K-1 and 1120S K-1) for the years 2006-2023. This feature can be invaluable in establishing basis if the client is missing prior year Forms K-1.

 

Due to issues within the IRS in determining authorized persons, partnerships (Form 1065) cannot set up a Business Tax account. The IRS expects to provide this in the future.

 

Document Upload Tool https://www.irs.gov/help/irs-document-upload-tool; https://www.irs.gov/newsroom/irs-expands-secure-digital-correspondence-for-taxpayers

 

Timely response to IRS notices can be challenging when using the U.S. mail service. Certified Mail with return receipt is time consuming and inefficient for the CPA and the IRS. The new Document Upload Tool (DUT) provides a way to securely send digital documentation for specific notices and receive confirmation of receipt. Responses to notices from the CP series, Premium Tax Credit, refund, EITC, and combat zone status are included.

 

Each notice contains a unique access code and a link. PDFs and certain photo formats are accepted. Max of 15 MB of information per file and up to 40 files can be sent.

 

Note that trusts cannot have an IRS business account at this time.

 

It is encouraging to see these improvements in taxpayer services and the future plans for expansion of these tools. Encourage all your clients to set up online accounts. A financial incentive is that our professional time will be more efficient if they need assistance resolving an issue or researching a notice.

 

More information is available to AICPA members at https://www.aicpa-cima.com/resources/article/irs-online-tools-guidance.