Recently, an official from the Government Accountability Office (GAO), Director Jessica Lucas-Judy, testified about IRS oversight of private tax-exempt hospitals before the House of Representatives Ways and Means Committee. There are over 2,500 hospitals that are classified as private tax-exempt medical facilities and they have a combined tax exemption value of over $28 billion.

As with other § 501(c)(3) nonprofit organizations, in order to qualify for tax exempt status, hospitals must be organized and operated exclusively for a charitable purpose. However, hospitals must also maintain a written financial assistance policy, conduct a community health needs assessment and set limits on charges, billings, and collections in order to qualify. These heightened requirements for hospitals were added in 2010 through the Patient Protection and Affordable Care Act, yet a far older requirement mandating hospitals to provide community benefits was the focus of Director Lucas-Judy’s testimony. In 1956 a tax-exempt hospital was required to provide charity care only “to the extent of its financial ability,” this meant that the hospital had to provide healthcare services at or below their cost for indigent patients.  This limit to the requirement lasted for only 13 years.

At the time of the aforementioned limit, another revenue ruling, Rev. Rul. 69-545, introduced the possibility of benefiting the community as a substitute for the charity care requirement. Instead of defining an articulable standard for what constitutes benefiting the community, the IRS gave 6 possible measures of meeting the requirement, those measures include such things as such as providing emergency room services to all, regardless of ability to pay. In the recent testimony, the GAO observed that this factor is obsolete because all hospitals have been legally required to offer emergency care services to all since 1986, and this is not the only of the 6 factors that is no longer relevant.

Tax-exempt hospitals are generally required to file Schedule H, a form that details how much of their activities should be considered as community benefit, with their annual IRS filings. At least 30 hospitals in 2016 reported the absence of any expenditure for community benefit activities to the IRS. In 2020, the IRS reported to GAO that it had not revoked a single hospital’s exempt status because of insufficient community benefit activities within the prior 10 years. According to GAO, the IRS was unable to cite even a single instance of reviewing a hospital for inadequate community benefit activities despite the statutory requirement to review the community benefit activities for each private nonprofit hospital at least once every 3 years. Chairman David Schweikert appeared receptive to GAO’s critical findings regarding the IRS’s conduct in this area. Chairman Schweikert cited a study from the Kaiser Family Foundation indicating that hospital expenditure toward charity care ranges between 0.1% to over 7% of operating expenses, and attributing this disparity to the absence of a clear IRS standard for required community benefits. This places the blame squarely on the IRS, and effectively puts them on notice that their conduct in this area is subject to ongoing scrutiny.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The IRS told a tale:

A Taxpayer creates a secure Business Online Account at IRS.gov and lets us know which communications methods they prefer – email, paper mail or phone. The taxpayer selects email. They later receive an email explaining tax credits and deductions for which they may be eligible. Their online account gives them access to easy-to-read data to start this year’s tax return. They have questions about how to file employment tax returns. A chatbot provides initial answers, and if they have specific questions, they can request a call from an agent. An agent calls them back, reviews their account history with them, and answers their questions. The taxpayers then prepare their own return. When they submit a return online, taxpayers get a real-time alert that shows easy-to-fix errors. They correct the errors and re-submit the return. After they file, they use their online account to track refund status and adjust preferences. They opt to receive their refund via direct deposit.

This vision of the tax filing process is not quite as ambitious in its simplicity as a taxpayer replying “Yes” to a text sent by the government (as some Swedes do), and at this time even this more mundane plan the IRS put out remains science fiction. However,  the IRS recently released the “Internal Revenue Service Inflation Reduction Act Strategic Operating Plan.” This plan lays out explicit goals, as well as how they will be achieved. Even though it was a month and a half late for the Secretary of the Treasury’s six-month deadline, it serves as proof that there is some movement towards making paying taxes a simpler process for the taxpayer in the US.  

In the plan, the IRS gave itself 5 primary objectives:[1]

1. “Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.” ($4.3 billion).
2. “Quickly resolve taxpayer issues when they arise.” ($3.2 billion).
3. “Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.” ($47.4 billion).
4. “Deliver cutting-edge technology, data, and analytics to operate more effectively.” ($12.4 billion).
5. “Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.” ($8.2 billion).

Each of the 5 objectives is accompanied by several “initiatives” with multiple milestones and “key projects,” ultimately culminating in a 150-page report. While there are many listed initiatives, here are some that appear to be most relevant:

• Initiative 1.2 seeks complete digitalization for all forms by Fiscal Year 2027.
• Initiatives 1.4, 1.6, 1.10, and 1.12 anticipate online access and management for taxpayers’ affairs comparable to that of a bank customer beginning in Fiscal Year 2023 and fully enhanced by Fiscal Year 2026.
• Initiative 1.7 promises “to provide as much certainty on tax issues as possible.” This would be accomplished through more human resources and unspecified “additional guidance tools” for informal guidance. Completion of this initiative is projected to occur in Fiscal Year 2024.
• Initiatives 2.1-2.5 seek by Fiscal Year 2027 to timely notify taxpayers of errors and missed opportunities for credits/deductions and proactively guide the resolution of such issues. Notices will be written in plain English (rather than legalese that requires special knowledge of law or accounting) and at a similar level of linguistic accessibility for the other 7 most common languages in the U.S.
• Initiatives 3.1-3.4 purportedly reorganize the structure for IRS enforcement into a centralized process reliant on analytic models to detect noncompliance by Fiscal Year 2025, resulting in higher audit rates. The target for the audit rates, if there is one, is not explicitly given. However, it was noted that the audit rate for large corporations dropped from 10.5% to 1.7% from 2010 to 2019. The audit rate for partnerships in 2019 was 0.05%, down from 0.48% in 2011, and it was also recognized that individuals earning $1 million or more had an audit rate of 7.2% in 2011 and 0.7% in 2019.
• The report also stated that full modernization of IRS computer technology is anticipated to be achieved in Fiscal Year 2028.

The plan claimed that the number of auditors currently employed represents a record low, unseen since the Second World War. They seek to change this, and estimate that an additional 10,021 full-time equivalents (FTEs) will be hired during Fiscal Year 2023, of whom 1,543 will be allocated to enforcement. For Fiscal Year 2024, 19,545 FTEs total would be employed, with 7,239 of them working specifically in enforcement.

The plan also gave some interesting statistics related to taxpaying in the US, it states that:

• 260 million tax returns are processed each year.
• The average length of a tax return for a large corporation is 6,000 pages.
• The average individual income tax return requires 13 hours.
• The IRS sent almost 13 million notices regarding mathematical errors in Fiscal Year 2021.
• Of those eligible for the Earned Income Tax Credit, 21% did not claim it in 2019.
• “Several years may go by after filing before the IRS contacts a taxpayer about an issue.”
• Within the last decade, the number of IRS revenue agents decreased by nearly 35% while the amount collected in annual tax returns increased by more than 15 million.
• Individual taxpayer returns reporting more than half a million have grown by over 70%.
• The audit rate has decreased by 76% from 2011-2019.
• “IRS employees and taxpayers currently use over 600 applications to conduct the business of the IRS, many of which are custom-built and run on-premises in IRS data centers.”

Plans change, and at the moment, the IRS plan is entirely aspirational. However, sufficient funds have been allocated for the IRS to make the program a reality. The project promises to refrain from auditing individuals with income of $400,000 or less at a rate higher than “historic levels,” but “historic levels” for those specific taxpayers were conspicuously absent from the report. Moreover, a major thrust of the plan is to return the audit rates for the wealthy taxpayers, again to “historic levels,” which appears to sit at about 10-times the current rate for some levels of income. If the “wealthy taxpayer” definition is applied to any taxpayers with income of $400,000 or less their audit rate could be up to triple the current rate. Due to the IRS failing to disclose the specific “historic levels” that they are referring to, the poorest taxpayers could have an audit rate nearly 20 times the current rate without technically violating the “historic level” ceiling.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

[1] The IRS seeks reallocation of Inflation Reduction Act funds to devote $3.9 billion to “Energy Security” rather than the prescribed half billion for implementing Inflation Reduction Act energy tax incentives.

The IRS regularly makes rulings on situations that taxpayers face, and then publishes those rulings to give guidance to other taxpayers to follow when they find themselves facing similar situations. The recently published Revenue Ruling 2023-02 gives helpful guidance for estate planning. This ruling found that property “acquired from or to have passed from the decedent” usually has its fair market value as its adjusted basis. (IRC § 1014). This phenomenon is known as “step-up basis.” This rule is quite favorable for taxpayers, in fact at nearly $44 billion per year, it is one of the most significant tax expenditures the federal government engages in. A tax expenditure is an amount of money that the federal government forbears through favorable treatment in the tax code.  

Revenue Ruling 2023-02 evaluated the possibility of a step-up basis for a trust with the following characteristics:

• The grantor is taxed on the trust’s income.
• The transfer to the trust was a completed gift.
• The trust is irrevocable.
• The trust’s assets would not be included in the grantor’s estate.
• The trust’s assets are appreciated.
• The trust’s liabilities did not exceed the basis of trust assets.
• Neither the trust nor the grantor held a note obliging the other.

The ruling held that the trust’s assets would not benefit from a step-up basis. The fact that the gift was completed disqualified it from § 1014 treatment, §1014 being the section that defines what will qualify for a step up in basis by listing several sets of circumstances that qualify by being “acquired from or to have passed from the decedent.” The only applicable one for this type of trust is the most general: “Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent.” Ultimately, Revenue Ruling 2023-02 held that assets must be included in the estate for estate tax purposes to qualify for this clause.

Assets spared from the estate tax burden usually do not enjoy the benefits of a step-up basis and Revenue Ruling 2023-02 strengthened this general rule of estate planning even further.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

Taxpayers and practitioners who interact closely with the IRS always have a multitude of suggestions and ideas regarding improvement of the IRS services. Because they are aware of this, the IRS allows individuals to provide suggestions through the Taxpayer Advocate Service and the Office of Taxpayer Reduction. One may think that IRS employees have more significant opportunities to give their thoughts on avenues for improvement, but as it stands that assumption is incorrect. At one time, the IRS had an Employee Suggestion Program (ESP—not extra-sensory perception), but that program was eliminated on October 1, 2021, and there have been no plans to replace it. The Inspector General for the IRS (TIGTA) investigated the situation and released their report on it.

 The report found that the IRS employed 85,230 people as of January 2023, and until October 1, 2021, they could proffer their recommendations for improvement through ESP and be rewarded through a portion of the savings attributable to accepted suggestions. From fiscal years 2017 through 2021, 162 out of 4,672 ideas were adopted, with the total tangible savings for the first year of implementation amounting to $86,714 net of the awards. The IRS claimed that ESP was too expensive to operate and cost-ineffective as the total cost came to over $4 million annually. Yet, in TIGTA’s words: “If the IRS is going to make decisions about eliminating the ESP based almost exclusively on costs related to coordinators, it should make some effort to control those costs.” Most of the reported costs were due to the business unit coordinators, whose duties were purely administrative, and they were not subject matter experts. Those coordinators would conduct the initial review of the suggestions and coordinate with subject matter experts so that they would identify and manage the timeliness of the case.

The 207 coordinators did not work full-time on the ESP. Still, they spent an average of 31 hours per submission (after dismissing those that failed the “threshold criteria (i.e., statement of problem, proposed solution, and possible benefits)” each coordinator would handle fewer than three submissions per year. Nearly a third of the tips from fiscal years 2018-2021 were “over-aged,” despite the extension of the processing time from 75 days to 180 calendar days in September 2020 to allow coordinators more time to get to the suggestions. The delinquency was partially due to the coordinators’ tendencies to mislabel and misroute suggestions. The ESP was an automated digital program with a unique identification number attached to each suggestion. Yet they were not automatically tracked, and so all the tracing required manual attention.

 The report found that most suggestions were rejected early for failing to provide sufficient benefits that would outweigh the cost of adequately reviewing them, even if they did meet the base threshold for consideration. This is puzzling as formally  it was the subject expert evaluator’s job to evaluate the cost-efficiency of the proposal rather than the coordinator’s. The TIGTA observed that the suggestions’ utility cannot always be effectively monetized, making it hard to evaluate recommendations that purported to lead to things like better protections for taxpayer rights or more efficient enforcement tax law.

The TIGTA took a “judgmental sample” for review. In that review it found that 34 out of 40 suggestions were “not properly evaluated.” One suggestion proposed a computer program matching Forms W-2 with Forms 941. If a Form W-2 reported wages, yet the IRS lacked the parallel Form 941, reporting withheld payroll taxes, mischief was afoot.  The suggestion was rejected without evaluation because “the ESP is meant to suggest ideas that save the government money.” This was meant to combat taxpayers that IRS agents called “ghost employers” who would keep the withholdings for themselves. IRS Criminal Investigation independently created this automated verification almost eight years later.

The TIGTA was critical of the ESP officials’ competence stating in their report, “The ESP coordinators did not have the expertise to determine if certain suggestions should have been accepted or rejected.” For example, they were unaware of tutorial videos for ESP users. Coordinators “lacked the knowledge and experience necessary to determine whether a suggestion warranted further evaluation,” while evaluators “did not consider the overall concept of a suggestion. Instead, they made their determinations based on whether a suggestion could be adopted verbatim as described in the submission.” Finally, “ESP, while in existence, received minimal support from the individual business units’ leadership.” A 2021 survey ranked the IRS at “271 out of 432 total Federal subcomponent agencies in engagement and satisfaction.” The reasons do not appear to be due to the subject matter—the Tax Division of the Department of Justice was tied for 9th place. As a result of the report, the IRS agreed to “develop a service-wide employee feedback process to support the agency’s transformation efforts under the Inflation Reduction Act” with an “implementation date” of November 15, 2024.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The IRS Inspector General reviewed federal employee tax compliance and their report is out. The report’s frustration with the lack of enforcement is palpable even in the title “The IRS Has Not Adequately Prioritized Federal Civilian Employee Nonfilers”. A total of $1.5 billion was owed by 149,000 federal civilian employees in FY 2021. The number of delinquent employees increased by nearly a third from FY 2015 to FY 2021, although the total number of federal civilian employees  increased by 6%.

Tax compliance issues can result in disciplinary measures for federal employees. However, the IRS is prohibited from sharing federal employee tax returns with federal agencies outside of the Treasury Department. The report credited the ability to discipline those employees as a reason why IRS employees have a 1.35% delinquency rate compared to the general 4.93% federal civilian delinquency rate. The IRS created a program in 1993 called the “Federal Employee/Retiree Delinquency Initiative” (FERDI) in an attempt to better monitor federal employees and their missed filings. These FERDI taxpayers include “anyone currently receiving a salary or pension from the Federal Government and who either fails to file tax returns or pay taxes owed.” The categorization of FERDI taxpayers apart from other taxpayers may have been intended to subject them to greater scrutiny, yet the effect has been the opposite. Although the Inspector General claimed federal employees “have a higher duty to file tax returns,” the report concluded: “The time the IRS dedicates to Federal employee nonfilers is minimal.”

In conducting their investigation the Inspector General discovered some shocking information. They discovered that the IRS knew of 42,047 federal employees between FYs 2016 and 2020 who failed to file for at least 2 years. Over 41% of this number did not file for 3 years or more years, and 19 did not file for at least 9 years. About 19% of repeat nonfilers had a minimum of $100,000 in income, and despite all of this, only10 employees received a fraudulent failure to file (civil) penalty from FYs 2016 through 2021. There is at least 1 FERDI taxpayer with a delinquency file that has not been resolved in 36 years.

The IRS rejected the proposal to refer all nonfilers who are delinquent for a set number of years to the Justice Department for potential criminal investigation. On the civil side, over 22,000 FERDI cases were referred to auditing in Examination in FY 2020. Examination worked on less than 1% of those cases. These files suffered such low priority that they did not even appear on the list of priorities because “inventory selection was limited to only eight priority buckets” as a result of “legacy programming limitations.” After some pressure from the Inspector General, such files are now third in priority “behind refund hold and high-income nonfiler cases.”

Apart from FERDI matters, the report gave an interesting summary of criminal tax investigations in general:

CI receives, evaluates, and investigates fraud referrals from the civil divisions after there have been established affirmative acts or firm indicators, or ‘badges,’ of fraud. CI then uses the results of those investigations to make referrals to the DOJ. When choosing whether to refer a case to the DOJ, CI will refer to each district’s unique process for case referral. This would include referrals pertaining to Federal employee nonfilers with multiple years of unfiled tax returns. The DOJ does not accept or deny cases for prosecution based on generalized sets of referral criteria. Rather, the process for determining which cases CI will refer to the DOJ requires [judicial] district-level collaboration and the exercise of experience-informed professional judgment.

When the IRS audits a tax return, the case file for the audit is stored in the Enterprise Case Management (ECM) system. The ECM system is used by the IRS “to modernize and consolidate legacy case management systems [there are at least 60], across the Internal Revenue Service (IRS), into an end-to-end enterprise solution in the cloud.” The U.S. Treasury Inspector General for Tax Administration (TIGTA) recently reviewed the security of the ECM system and issued a report containing their findings.         

The details that when notified of a security risk by the office of Security Risk Management, the responsible official must write a report within 60 days to identify the system weakness when the system has “a moderate security classification.” In compiling the report the TIGTA looked at one official and their response to receiving reports. The ECM Authorizing Official was notified of 9 “system security risks” on February 10, 2021. Three of the nine reports were timely created, four were 20 days late, and only two of the nine reports were complete. The initial resolution dates were projected to range from April 30, 2022, to May 2, 2022. Three risks remain unresolved, with varying completion schedules as late as October 31, 2023.

One of the issues TIGTA found on February 10, 2021, was the lack of malicious code protection for Linux. This has not been resolved and they still lack protection. In August 2022, the TIGTA convinced the IRS that malicious code protection is necessary even for Linux servers. Nevertheless, “the planned corrective action does not fully address the recommendation. After the IRS completes the development and testing of an automated malicious code protection solution for Linux servers, it should implement the solution on all applicable Linux servers.” There are two Linux servers in the cloud and two “residing on IRS premises.” Instead of protecting all Linux servers, only “on-premises Linux servers” are planned to be protected and then only beginning on February 15, 2024.

A July 2022 scan of the ECM system revealed 44 high-risk vulnerabilities and 50 medium-risk vulnerabilities. A “vulnerability” is defined as: “A weakness in an information system, system security procedure, internal control, or implementation that could be exploited or triggered by a threat source.”  The required remediation time for high-risk vulnerabilities is 30 days. For medium-risk vulnerabilities, the allotted time is 90 days. Of the high-risk vulnerabilities, 24 were unresolved for 166 to 201 days, and two of the 50 medium-risk vulnerabilities were unresolved for 132 days.

As of July 8, 2022, there were 917 user accounts for the ECM system. Of these, 401 had not signed in for at least 90 days, requiring deactivation. The IRS failed to disable 315 of the 401 user accounts. In October 2022, 4 “privileged user accounts” were not used since November or December 2021. The IRS did not monitor privileged user accounts until the Inspector General intervened in October 2022.

The IRS Chief Information Officer, Nancy A. Sieger, does not seem to believe the deficiencies this report discovered are severe. Instead, she claimed, “there is no evidence in this report that indicates the ECM system failed to adequately protect data from unauthorized access.”

The Supreme Court released an interesting labor law opinion, Helix Energy Solutions Group, Inc. v. Hewitt. The Fair Labor Standards Act of 1938 (FLSA) requires “covered employees” to receive overtime pay for work over 40 hours a week. Employees who work “in a bona fide executive, administrative, or professional capacity” are not covered. Unfortunately, those words do not shed much light on the status of the employee, and so their status is determined through regulations requiring the putatively uncovered employee to meet three tests: The Salary Basis Test, the Salary Level Test, and the Duties Test. The Duties Test is different for individuals with income of less than $100,000. The others, “highly compensated employees,” need only meet one of the three listed responsibilities rather than all three.

One illustrative example of how these tests are applied is the case of Michael Hewitt. Mr. Michael Hewitt worked for Helix Energy Solutions Group from 2014 to 2017 as a “tool-pusher.” In this capacity, he supervised a dozen or more workers. He worked in intense 28-day shifts—for one 28-day period known as a “hitch,” he would work an average of 84 hours a week but then have leave for the following 28-day period. He was paid biweekly throughout this time at a daily rate for each day he actually worked. Ultimately, “Helix paid Hewitt over $200,000 annually” without overtime.

The district court initially ruled in favor of the employer, but that decision was reversed by the 5th Circuit sitting en banc. The sole issue that was ultimately determinative was whether Mr. Hewitt was paid on a “salary basis.” Salary-basis may be met through either 29 C.F.R. § 541.602(a) (§ 602(a)) or 29 C.F.R. § 541.604(b) (§ 604(b)). Section 602(a) requiring “that the employee will get at least part of his compensation through a preset weekly (or less frequent) salary, not subject to reduction because of exactly how many days he worked.” Section 602(b) offers an option for employees who are compensated on “an hourly, a daily or a shift basis” instead of a weekly (or less frequent) one. This requires the employer to guarantee a certain amount “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek” and that such an amount is at least $455 per week (the opinion varies between “at least” $455 and “more than” $455) “regardless of the number of hours, days or shifts worked.” The employer conceded that § 602(b) was not met (there was not a guarantee of at least $455 per week) but argued that § 602(a) was satisfied. The Court disagreed and stated that § 602(a) applied only to employees paid by the week or longer and found that Mr. Hewitt was paid by the day.

The Supreme Court decision was made 6 to 3, with Chief Justice Roberts, Justice Thomas, and Justice Barrett joining the 3 Democratic appointees for an opinion delivered by Justice Kagan. Justice Gorsuch dissented, arguing that the case should be dismissed as improvidently granted as beyond the question for which the Court granted certiorari. Justice Kavanaugh, joined by Justice Alito, dissented on more substantive grounds. He argued that the $963 daily rate sufficed as fulfilling the weekly (or less frequent) as working for one day would effectively grant Mr. Hewitt $963 for the week, which is more than the $455 per week requirement. Justice Kagan described this argument as “a non-sequitur to end all non-sequiturs.” Helix forfeited its argument that the regulations were contrary to the statute by failing to raise it in the lower courts. Nevertheless, Justice Kavanaugh found the argument persuasive because, in his words, “I am hard-pressed to understand why it would matter for assessing executive status whether an employee is paid by salary, wage, commission, bonus, or some combination thereof.”

Helix serves as a reminder of the importance of being aware of the regulations and planning consciously to operate within them. As the majority opinion observed, had Helix “convert[ed] Hewitt’s compensation to a straight weekly salary for time he spends on the rig,” it would not have needed to pay overtime.

 If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

Governor Newsom signed SBX1-2, the “Gas Price Gouging Law,” into law on March 28h. The law begins with a reflection  on the gasoline price history in 2022, and then the new law declares: “Fundamental change is necessary to prevent future extreme price spikes and price gouging by oil companies.”  SBX1-2 will expand current reporting requirements into a comprehensive reporting regime affecting every link in the petroleum supply chain. The recipient of these reports, the State Energy Resources Conservation and Development Commission (Commission), is then empowered to set a “maximum gross gasoline refining margin,” in effect, a price ceiling for gasoline. The penalty for exceeding this price will be a percentage of the amount over this price multiplied by all gallons sold for the month. A court injunction would also be possible to allow the state to prevent higher prices from continuing to be charged and fees simply paid. Collected penalties will be kept in the “Price Gouging Penalty Fund,” newly created “to address any consequences of price gouging on Californians” upon subsequent acts by the legislature.

SBX1-2 will take effect on the 91st day after the legislature’s special session ends, June 26, 2023. Exemptions are possible upon proving to the Commission that “the maximum gross gasoline refining margin would be unconstitutional as applied to the refiner.” Alternatively, the Commission may impose a different maximum margin or other conditions “upon a showing by the refiner of good cause.”

A notice and comment period of at least 30 days will be required before a public hearing to determine the maximum margin and penalty. The maximum margin and penalty would then come into effect on the 60th day after the establishment or adjustment. Before the maximum margin and penalty can be set, the Commission must find “that the likely benefits to consumers outweigh the potential costs to consumers.” All relevant factors must be considered, including the possibility of supply shortages and higher average prices. Although two advisory subagencies will be created, the Commission will be solely responsible for setting and enforcing the margin and its penalties. The Commission currently has about 30 attorneys and a few accountants, and SBX1-2 did not increase the funding for the Commission.

The California State Auditor will be responsible for reviewing the efficacy of SBX1-2 in 2033. By operation of law, absent action from the Legislature, the margin and its penalty will be terminated within 180 days of the State Auditor’s report if the State Auditor determines that they should be terminated.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The Income Verification Express Service (IVES) is the program that authorized third parties use to receive a copy of a tax transcript from the IRS. The IRS Inspector General reviewed the tax transcript request process and found that request volumes fluctuate considerably. In FY 2020, there were 12.4 million transcript requests which increased to 15.4 million in FY 2021 and then decreased to 8.3 million in FY 2022.

Section 2201 of the Taxpayer First Act, enacted in 2019, required the IRS to modernize the process of disclosing tax transcripts by January 1, 2023. The cost of this modernization would be paid for through user fees. The Inspector General faulted the IRS for having unduly low user fees for IVES and at the same time failing to modernize the processing of business transcript requests, missing the January 1, 2023, deadline. “Although Information Technology (IT) organization management indicated that this capability was delayed due to technical complexities, we found it was delayed due to a lack of planning by the IT organization.” The IRS now promises it will be implemented by July 2023.

Skepticism of IRS technological aptitude across the tax preparation industry raises issues with the prospect of requiring all transcript requesters to participate in the modernized system. The IRS has yet to make use of the new system mandatory, but promised to do so by January 15, 2025 based on a study they plan on beginning in January 2024. This leaves efaxing as an option for the time being.

The report continued with the Inspector General’s concerns about the sufficiency of signature validation for efaxing: “[T]he IRS has no way of verifying the signature is the true taxpayer before releasing important tax return information.” The report suggested requiring notarization. It was noted in the Inspector General’s report that this problem would not arise if IVES was fully operational and mandatory. It was also suggested that the IRS notify taxpayers when a transcript request form is processed. This would afford taxpayers the opportunity to object to unauthorized requests. The IRS protested that “a secondary confirmation of taxpayer intent” would ruin the goal of processing the requests within 72 hours. The Inspector General, in effect, responded that it was not requesting a secondary confirmation, but a primary confirmation.

Although “IVES employees work 22 hours out of a 24-hour period,” some transcripts have taken more than 7x the anticipated processing time at 22 days. This was the result of intermittent outages of the relevant software, the cause of which took nearly 6 months to diagnose “after a ‘priority one’ ticket was submitted.” “The IRS defines a priority one ticket as any issue causing severe, mission-critical work stoppage. The impact may be on multiple internal or external customers and service to taxpayers. Immediate action is required (i.e., the ticket should be resolved in four hours).”

IVES could be useful to nonlending participants, including attorneys. Although such participants have been admitted to the IVES Program, the IRS expressed concerns that large nonlending participants (such as tax preparation companies) would overwhelm IVES. The administration of the IVES Program requested a policy decision from IRS management for the matter on May 19, 2021. On June 14, 2022, the Inspector General warned the IRS that many applications from nonlending participants have been waiting for over a year. There were 282 such pending applications by July 2022. The IRS promised to make a decision by June 2023.

If you have questions or concerns about how changes to tax reporting systems may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The 9th Circuit decided, en banc, Seaview Trading, LLC v. Commissioner, vacating a decision the court previously made in 2022. For the purposes of this article the 2022 decision will be referred to as Seaview (2022) and the decision overturning that decision will be referred to as Seaview (2023).

Seaview (2022) concerned the filing requirements of a partnership tax return for the 2001 tax year. It was a debate of the extent technicalities should control all else, and the reliability of IRS guidance. This is an area that typically does not lead to much infighting on the 9^th circuit, yet this decision was uncommonly contentious. According to the dissent, “in addition to being deeply implausible and contrary to law, the majority’s analysis and conclusions are logically absurd and should not be the holding of this court.”[1]

Representatives of Seaview Trading, LLC faxed its 2001 Form 1065 in 2005 to a revenue agent and mailed it to an IRS attorney in July 2007. The IRS then disallowed a $35.5 million loss associated with a tax shelter in October 2010. If either Form 1065 transmission constituted a filing, the statute of limitations would bar the reassessment. The court in Seaview (2022) ruled in favor of the taxpayer, relying on IRS guidance that seemingly contradicted regulations requiring returns to be filed in specific locations. Seaview (2023) focused on prior caselaw requiring “meticulous compliance by the taxpayer with all named conditions in order to secure the benefit of the limitation.”[2] As the taxpayer never filed Form 1065 to the designated location, it could not benefit from the statute of limitations. This all may seem rather technical, and ultimately it is, but in this case it was the deciding factor in determining if $35.5 million was owed or not.

The dissenting judge in Seaview (2023) was the majority opinion author of Seaview (2022), Circuit Judge Bumatay. He exclaimed: “Today, our court throws our tax system into disarray. Now taxpayers can no longer trust what the IRS has told them about how to file delinquent tax returns.”[3]

The taxpayer presented three pieces of IRS material in its defense:

1. A “2006 policy statement, provides that absent an indication of fraud, ‘[a]ll delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of a Service representative, will be accepted.’” [4]
2. The Internal Revenue Manual of 2005 instructing examiners to request delinquent returns and to forward those returns “to the appropriate campus.”[5]
3. The 1999 Chief Counsel Advice providing that a revenue agents could accept hand-carried returns and that “taxpayers may file their delinquent returns either with the applicable Service Center or with a revenue officer.”[6]

Seaview (2023) held that the Chief Counsel Advice was inapplicable because it was concerned with whether the taxpayers could be required to hand-file delinquent returns to revenue agents rather than mail them.[7]

Regarding the passage in the Internal Revenue Manual, Seaview (2023) remarked “even assuming the revenue agent in Seaview’s case was required to follow this guidance and failed to do so, that fact would not alter our analysis because the ‘Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers.’”[8]

The majority opinion dismissed the 2006 policy statement: “That statement does nothing more than confirm that delinquent returns submitted by taxpayers will be ‘accepted’ rather than rejected on the ground they are late. It does not purport to override the regulatory requirements that otherwise govern the manner in which, and the place at which, returns must be filed.”[9]

Seaview (2023) also highlighted the respect, if not deference, the 9th Circuit pays to Tax Court decisions: “The Tax Court has also repeatedly held that a return is not properly ‘filed’ unless it is submitted to, or eventually received by, the person or office specified in the applicable regulations as the designated place for filing. Although Tax Court decisions do not bind us, we have consistently recognized that court’s unique expertise in tax matters, and here we find its decisions persuasive.”[10]

The dissent to Seaview (2023) directly linked the case to the recent Supreme Court case Bittner v. United States, claiming that the majority in Seaview (2023) permitted the IRS to “speak out of both sides of its mouth” which the Supreme Court disallowed, using discrepancies in IRS statements in the taxpayer’s favor.[11] It seems that, all else being equal, IRS guidance at variance with its current litigation position is most persuasive when the legal interpretation is to be strictly construed against the government (as with penalties, i.e. rule of lenity) and least persuasive when the matter must be strictly construed against the taxpayer (as with the statute of limitations). Unfortunately for the taxpayer, perhaps most disputes (i.e. dealing with exclusions and deductions) in tax law require strict construction in favor of the government.[12]

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

[1] Seaview Trading, LLC v. Comm’r of Internal Revenue, 34 F.4th 666, 680 (9th Cir.), reh’g en banc granted, opinion vacated, 54 F.4th 608 (9th Cir. 2022), and on reh’g en banc, No. 20-72416, 2023 WL 2442606 (9th Cir. Mar. 10, 2023).

[2] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *4 (9th Cir. Mar. 10, 2023)(quoting Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930)).

[3] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).

[4] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).

[5] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).

[6] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).

[7] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023).

[8] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *6 (9th Cir. Mar. 10, 2023)(quoting Fargo v. Comm’r, 447 F.3d 706, 713 (9th Cir. 2006)).

[9] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *7 (9th Cir. Mar. 10, 2023).

[10] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *5 (9th Cir. Mar. 10, 2023)(omitting internal citation).

[11] Seaview Trading, LLC v. Comm’r of Internal Revenue, No. 20-72416, 2023 WL 2442606, at *8 (9th Cir. Mar. 10, 2023)

[12] “But allowance of deductions from gross income does not turn on general equitable considerations. It depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.” Deputy v. du Pont, 308 U.S. 488, 493 (1940)