TXCPA Committee Offers Recommendations to Reduce IRS Correspondence Issues

 

The TXCPA Federal Tax Policy Committee issued a letter to the IRS highlighting concerns over significant delays in the processing and exchange of time-sensitive IRS correspondence. These delays—caused by both slow postal service and the IRS’s inefficient internal processes—create confusion, taxpayer stress and additional workload for all parties involved.

The letter outlines several real-life examples of communication problems, including delayed or unprocessed payments, missing mail despite timely delivery, and poor functionality or lack of access to secure communication tools. It also highlights how outdated or overly complex technology contributes to the problem.

To address these issues, the committee recommends:

• A three-week delay before issuing notices (e.g., Notices of Deficiency) after deadlines to allow for mail delivery and IRS processing time.
• Improved and simplified secure communication systems (e.g., fax, email, document uploads).
• Better tracking of incoming IRS mail, potentially using barcodes or QR codes.
• Enhanced training for IRS personnel on new communication tools.
• Consistency in allowing full response periods, considering postal delays.
• Continued use of legacy tools, like fax, until digital options are truly accessible.

While the committee supports IRS modernization efforts, immediate procedural changes—like delayed mail triggers and better internal communication—would greatly improve efficiency, reduce erroneous notices, and better serve taxpayers, practitioners and the IRS in the interim.

Read the letter.

TXCPA FTP letter to IRS on correspondence issues 6.3.2025

Court Ruling Opens Door for Employers to Claim Refunds on ACA Employer Shared Responsibility Payments

Leo Unzeitig, JD, CPA-San Antonio, Chamberlain Hrdlicka

In a significant decision out of the Northern District of Texas, Faulk Company, Inc. v. Becerra, the district court ruled that the IRS lacked authority to assess Employer Shared Responsibility Payments (ESRPs) under the Affordable Care Act (ACA) without first receiving a proper certification from the Department of Health and Human Services (HHS).

Faulk Company had paid over $200,000 in ESRPs for tax year 2019. Faulk challenged the assessment, arguing that the required employer certification under ACA Section 1411 must come from HHS, not the IRS. The court agreed, emphasizing that the ACA places exclusive authority for such certifications with HHS and does not permit delegation of that responsibility to the IRS. As a result, the court ordered the IRS to refund the full ESRP to Faulk and declared the related HHS regulation void and unenforceable.  

What This Means for Employers

This ruling could have broad implications for other employers who paid ESRPs in the past two years based on IRS Letters 226-J. If those assessments were issued without proper certification from HHS (as the court found), the payments may be invalid. The case is likely to be appealed, but there is no telling who will prevail.

What Employers Should Do

Employers that paid ESRPs recently, particularly within the last two years, should consider filing a protective claim for refund with the IRS. A protective claim preserves your right to a refund while legal uncertainties are resolved and can be especially important given the potential appeal or broader application of the Faulk decision. Think of it as saying to the IRS, “Hey, in case the courts keep going in this ‘Faulk was right’ direction, I would like to reserve my spot in line.” It does not mean you will get paid tomorrow. Or next month. Or, you know, before the national debt gets paid off by accident. But it does keep your case alive.

Claims should clearly state that the ESRP assessment was invalid due to lack of certification under ACA Section 1411, as clarified in Faulk Company, Inc. v. Becerra, and include all relevant documentation. You might also want to include the alternative arguments raised by the taxpayer in the Faulk case that the court never reached.

Advocacy that Counts – TXCPA on Capitol Hill to Discuss the Accounting Profession’s Agenda

 

Last week, a delegation from TXCPA – including AICPA Council representatives, federal key persons and staff – participated in 29 Capitol Hill meetings with our congressional offices in Washington, D.C. We met with key legislators of the House of Representatives and both Senate offices. These visits allow TXCPA to foster important existing Hill relationships, forge new relationships, tell our stories, make crucial asks and use our collective voices to be heard on issues key to the CPA profession.

During these visits, our members encouraged Texas lawmakers to cosponsor, support or preserve several very important issues to the profession:

• Pass-Through Entity Tax (PTET) SALT Deduction - Under the House Ways and Means Committee's budget package, specified service trades or businesses (SSTBs) – accountants, veterinarians, dentists, doctors, lawyers, nurses – are subject to the individual state and local tax deduction limits regardless of partners’/owners’ income level or the state in which they live. The bill unfairly excludes these SSTBs from deducting SALT at the partnership level, as currently permitted, while leaving their competitor corporations’ deduction ability untouched. Although the profession vigorously opposed this additional tax on small businesses, it was included in the House’s final budget reconciliation package that passed Thursday.

• 529 Savings Plan - H.R. 1151, S. 756, Freedom to Invest in Tomorrow's Workforce Act, is a bipartisan bill to amend the Internal Revenue Code to broaden the use of 529 savings plans to cover the cost of certain workforce training, credentialing programs, certification exams, maintenance of certificate credentials and testing review courses. It would allow greater flexibility for accounting professionals to gain and maintain professional certifications, including the CPA licenses. It benefits many professions and industries. We appreciate early cosponsors Reps. Henry Cuellar (D-28), Pat Fallon (R-4), Lance Gooden (R-5), Keith Self (R-3), Michael McCaul (R-10), Nathaniel Moran (R-1), Pete Sessions (R-17), Beth Van Duyne (R-24), Marc Veasey (D-33) and, after our visit, Rep. Monica De La Cruz (R-15). The 529 bill was in the House’s approved budget reconciliation package that now goes to the Senate for consideration.

• STEM - H.R. 2911, Accounting STEM Pursuit Act, is a step toward expanding accounting into the Science, Technology, Engineering and Math (STEM) curriculum, specifically in the technology field. The legislation allows the use of federal funds to develop and enhance accounting programs in K-12 grades. We believe that designating accounting as STEM will increase student engagement with the accounting profession, which will help to build the CPA pipeline. This has been a talking point for several years; we had 60 cosponsors in 2024 and are hoping for 100 cosponsors this year. We urged House members to cosponsor and encouraged our senators’ support once their bill is reintroduced.

• Disaster Relief - We thanked our House members for passing two disaster relief bills in March aimed at streamlining the relief for taxpayers affected by natural disasters. H.R. 517, the Filing Relief for Natural Disasters Act, will give the IRS authority to grant tax relief when a governor declares either a disaster or a state of emergency. H.R. 1491, the Disaster Related Extension of Deadlines Act, extends the amount of time disaster victims have to file for a tax refund or credit. We asked our senators for support in this area.

• Good Tax Policy – As Congress contemplates tax policy changes as part of the 2025 reconciliation bill, we shared a framework of AICPA Guiding Principles of Good Tax Policy to help analyze proposals and change tax rules.

A piece of legislation we presented in previous years to congressional offices is in a very good position to move forward.

• SAFE Act – H.R. 990, Simplify Automatic Filing Extensions (SAFE Act), would allow taxpayers the ability to calculate and rely on a safe harbor of 125% of the prior year tax to be paid in by the original due date to avoid penalties when filing an extension. It would reduce burdens on practitioners and individuals preparing their own returns, minimize the processing of penalties by the IRS and simplify the work surrounding the filing of federal tax extensions.

Capitol Hill visits are the lifeblood of our federal advocacy. TXCPA members provide insight on legislation, serve as a resource to Capitol offices and ensure that the voice of the accounting profession is heard loud and clear. We appreciate the work of all those who participated in these meetings.

If you have not had an opportunity to advocate on behalf of the profession, reach out to TXCPA and we will get you involved in our Key Person program to participate on the federal or state level.

(L to R: Tim Pike, CPA-Dallas; Patty Wyatt, TXCPA; Rep. Beth Van Duyne (R-24); and Bill Sims, CPA-Dallas) 

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