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IRS Written Advice Defense: Reasonable Reliance | International Tax Lawyer

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In a previous article, I outlined the three-prong legal test of the IRS Written Advice Defense. This article aims to explore the first prong of that test: the IRS written advice was reasonably relied upon by the taxpayer. In particular, I would like to explain two important concepts of this part of the test: “advice”and “reasonable reliance”.

IRS Written Advice Defense: Advice

In the context of the IRS Written Advice Defense, “advice” is not just any written response provided by the IRS. Rather, for purposes of the IRC section 6404(f), a written response issued to a taxpayer by the IRS “shall constitute ‘advice’ if, and only if, the response applies the tax laws to the specific facts submitted in writing by the taxpayer and provides a conclusion regarding the tax treatment to be accorded the taxpayer upon the application of the tax law to those facts.” Treas. Reg. § 301.6404-3(c)(1).

IRS Written Advice Defense: Reasonably Relied Upon

The IRS Written Advice Defense can only work if the taxpayer actually reasonably relied upon the advice furnished by the IRS – i.e. the taxpayer took an action or failed to act in response to the advice. One of the main issues here is the timing of the taxpayer’s reliance.

In situations related to an item on a taxpayer’s federal tax return, if an IRS advice was received after the taxpayer already filed his original return, the IRS Written Advice Defense is likely to fail because the IRS will not consider the taxpayer’s post factum reliance on its advice as reasonable.

There is an exception, however, with respect to situations where the taxpayer took action in response to the IRS advice and filed an amended tax return. As long as the amended return conforms with the IRS written advice, “the taxpayer will be considered to have reasonably relied upon the advice for purposes of the position set forth in the amended return.” Treas. Reg. §301.6404-3(b)(2)(iii).

Similarly, in cases where an IRS written advice is furnished with respect to an item unrelated to a federal tax return (e.g. estimated tax payments) and it is furnished before the taxpayer acted or failed to act on the item that caused the imposition of IRS penalties, the IRS will again not consider the taxpayer’s reliance as reasonable or timely.

IRS Written Advice Defense: Duration of the Period of Reliance

It is also important to remember that a period of reliance on the IRS written advice only lasts until the taxpayer is put on notice that the advice no longer corresponds to the IRS position. The question is: what does being “put on notice” mean?

There are five situations which will end the taxpayer’s period of reasonable reliance on the IRS advice as long as they occur subsequent to the issuance of the advice by the IRS:

(a) the taxpayer receives a letter from the IRS stating that the advice no longer reflects the IRS position;

(b) a tax treaty is enacted or a new tax law was passed and both of these events concern the item with respect to which the IRS advice was issued;

(c) A decision of the United States Supreme Court;

(d) The issuance of temporary or final regulations by the IRS ; or

(e) The issuance of a revenue ruling, a revenue procedure, or other statement by the IRS that was published in the Internal Revenue Bulletin.

Contact Sherayzen Law Office for Professional Help With Your IRS Written Advice Defense And Any Other Reasonable Cause Defense

If the IRS imposed penalties as a result of a tax return or FBAR audit, contact Sherayzen Law Office for professional help. Taxpayers around the world have learned to trust Sherayzen Law Office to bring their US tax affairs in order and rigorously defend them against the imposition of FBAR and other penalties related to the US international information returns. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

4th Quarter 2017 Underpayment, Overpayment & PFIC Interest Rates

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On September 8, 2017, the IRS announced that the 4th Quarter 2017 underpayment and overpayment interest rates will remain the same as they were in the third quarter of 2017. The IRS underpayment interests also govern the PFIC interest rates under the default Section 1291 method of calculation. PFIC interest rates are very important not only to taxpayers who currently hold PFICs, but also to the US taxpayers who are participating in the Streamlined Domestic Offshore Procedures and, to a lesser extent, the IRS Offshore Voluntary Disclosure Program (“OVDP”).

Recent History of the IRS Underpayment, Overpayment and PFIC Interest Rates

Following the global financial meltdown, the Federal Reserve quickly dropped its interest rates to almost zero. The IRS underpayment, overpayment and PFIC interest rates are set to follow the Federal Reserve short-term rates on a quarterly basis.

For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Hence, from the 4th quarter of 2011 through the first quarter of 2016, the IRS underpayment, overpayment and PFIC interest rates remained at 3%. Once the Federal Reserve started to raise its short-term rates, however, the IRS raised the interest rates in the second quarter of 2016, from 3% to 4%. Since then, the rates remained the same.

4th Quarter 2017 IRS Underpayment, Overpayment and PFIC Interest Rates

4th quarter 2017 IRS underpayment, overpayment and PFIC interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

These interest rates were computed based on the federal short-term rate determined during July of 2017 to take effect on August 1, 2017, plus daily compounding. The 4th Quarter IRS underpayment, overpayment and PFIC interest rates will apply during the period of October 1, 2017, through December 31, 2017.

IRS International Tax Campaigns | International Tax Attorney Houston

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Five of the thirteen new IRS Campaigns directly target US international tax noncompliance. In this essay, I would like to provide a brief overview of these five IRS International Tax Campaigns. In the future articles, I will explain each of these campaigns in more detail.

IRS International Tax Campaigns: Background Information

After multiple years of preparation and reorganization, the IRS Large Business and International Division announced a new way to enforce US corporate and international tax laws – issue-focused IRS campaigns. An IRS campaign is basically an approach to tax enforcement which allows the IRS to allocate its scarce resources to a specific issue that the IRS believes to be a major noncompliance concern. This is very different from the previous IRS approaches which focused more on specific types of taxpayers.

On January 31, 2017, the IRS outlined the first thirteen campaigns and claimed that many more campaigns are in the process of being developed and finalized. Five of the first thirteen campaigns focus on international tax compliance issues.

IRS International Tax Campaigns: General Description

These five IRS International Tax Campaigns are: Offshore Voluntary Disclosure Program (“OVDP”) (closed 2018). Declines-Withdrawals Campaign, Repatriation Campaign, Form 1120-F Non-Filer Campaign, Inbound Distributor Campaign and Related Party Transactions Campaign.

The international focus of the OVDP, Repatriation, Form 1120-F and Inbound Distribution Campaigns is fairly obvious. The Related-Party Transactions is listed among the IRS International Tax Campaigns because of the IRS focus on the transfer of funds from a controlled foreign corporation to its related pass-through entities (US or foreign) or shareholders.

IRS International Tax Campaigns: What Taxpayers are at Risk

Among the IRS International Tax Campaigns, the OVDP Declines-Withdrawal Campaign and Form 1120-F Non-Filer Campaign can apply to small, mid-market and high net-worth taxpayers. It appears that the Inbound Distributor Campaign is likely to apply to any mid-market to large taxpayers. The rest of the IRS International Tax Campaigns, the Repatriation Campaign and the Related Party Transactions Campaign, specifically identify “mid-market taxpayers” as a targeted group. It should be stated, however, that the Repatriation Campaign will also indiscriminately target failures to state taxable transactions on US tax returns.

From the description above, it is obvious that the IRS is increasing its focus on mid-market taxpayers. Who is considered to be a “mid-market” taxpayer? The IRS defined this category during its first webinar on March 7, 2017 as taxpayers with assets between $10 million and $250 million. If you or your company fall within this category, you are at a high risk of IRS examination.

What Should Taxpayers Exposed to the IRS International Tax Campaigns Do?

If you are taxpayer with tax issues identified in the IRS International Tax Campaigns, you should contact Sherayzen Law Office as soon as possible. Our team of tax professionals, headed by an international tax attorney, Mr. Eugene Sherayzen, will: thoroughly analyze your case to determine if you are currently in compliance with US tax laws, determine the options for proceeding forward with bringing your tax affairs into full compliance and preparing for an issue-based examination, and implement the preferred option (including the preparation of all legal documents and tax forms).

Contact Us Today to Schedule Your Confidential Consultation!

IRS Compliance Campaigns | US International Tax Attorney and Lawyer

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On January 31, 2017, the IRS announced a complete new approach to tax enforcement – Issue-Focused IRS Compliance Campaigns. A total of thirteen IRS compliance campaigns were announced; all of them will be administered by the LB&I (Large Business and International) division of the IRS. Let’s explore in more detail this highly important IRS announcement.

Background Information: IRS Compliance Campaigns is the Second Phase of the LB&I Restructuring

The announcement of the IRS Compliance Campaigns does not come as a surprise. The IRS has been talking about the LB&I division restructuring for a long while and the first details of the new campaigns already appeared as early as September of 2015.

In fact, the IRS Compliance Campaigns represent the second phase of this restructuring. Already in the fall of 2015, the LB&I completed the first phase – the administrative re-organization of the LB&I into nine units, including four geographic practice areas and five issue-based practice areas.

The first phase of the LB&I reorganization focused on the administrative structure of the Division. The IRS Compliance Campaigns are meant to reorganize the Division’s tax enforcement process in a way that fits best the new administrative structure.

IRS Compliance Campaigns are Focused on Specific Tax Issues

On January 31, 2017, during a conference call announcing the new IRS Compliance Campaigns, the IRS stated that each campaign is meant to provide “a holistic response to an item of either known or potential compliance risks.” In other words, each Campaign is focused on a specific tax issue which carries a heightened noncompliance risk.

This focus on specific issues fits perfectly with the new organizational structure of the LB&I which we already discussed above. Again, this is all part of a large IRS plan to devote its scarce resources towards the areas which have significant noncompliance risk and, hence, require a more intense level of IRS scrutiny.

Issue-Focused IRS Compliance Campaigns: What Areas Will the Campaigns Affect?

As of March 21, 2017, the IRS identified thirteen such high-risk areas. A separate campaign was assigned to each of these areas. The campaigns can be grouped according to the IRS LB&I Practice Areas.

1. Cross Border Activities Practice Area

The following campaigns are included within the Cross Border Activities Practice Area of the LB&I Division: Form 1120-F Non-Filer Campaign and Repatriation Campaign.

2. Enterprise Activity Practice Area

The Enterprise Activity Practice Area of the LB&I Division contains more campaigns than any other area by a large margin. Seven different campaigns are launched within this Practice Area: IRC 48C Energy Credit; Domestic Production Activities Deduction, Multi-Channel Video Program Distributors (MVPD’s) and TV Broadcasters; Micro-Captive Insurance Campaign; Related Party Transactions; Deferred Variable Annuity Reserves & Life Insurance Reserves IIR Campaign; Basket Transactions Campaign; and Land Developers – Completed Contract Method (CCM) Campaign.

3. Pass-Through Entities Area

Two huge campaigns are launched in the Pass-Through Entities Area of the LB&I Division: TEFRA Linkage Plan Strategy Campaign and S Corporation Losses Claimed in Excess of Basis Campaign.

4. Treaty and Transfer Pricing Operations Practice Area

One campaign is launched within the Treaty and Transfer Pricing Operations Practice Area: the Inbound Distributor Campaign.

5. Withholding and International Individual Compliance Practice Area

Only one, but highly important campaign was launched within the Withholding and International Individual Compliance Practice Area – OVDP Declines-Withdrawals Campaign.

The taxpayers should remember that they may be subject to multiple IRS Compliance Campaigns at the same time.

IRS Compliance Campaigns: Treatment Streams

The goal of the campaigns is to promote tax compliance – even more fundamentally, to change the taxpayer behavior in general, replacing noncompliance with compliance.

In order to achieve this goal, the IRS may utilize a variety of “treatment streams” as part of a campaign. The first and most fundamental treatment stream is the traditional audit, which will remain the ultimate weapon in all IRS Compliance Campaigns.

Second, the IRS stated that it will also include “soft letters” to taxpayers. The idea behind the soft letters is to draw a taxpayer’s attention to a particular item or issue on the taxpayer’s return, explain the IRS position and give the taxpayer an opportunity to amend his return himself (i.e. without resorting to an audit). If the taxpayer does not do so after he receives the IRS letter, an audit will most likely follow.

Additionally, the IRS stated that it will pursue four additional strategies: guidance, new forms and instructions, published practice units, and practitioner and stakeholder outreach.

More IRS Compliance Campaigns Will Be Launched in the Future

The IRS has affirmatively stated that the number of the IRS Compliance Campaigns will increase in the future. At this point, it is not yet known what particular areas the new Campaigns will affect.

Contact Sherayzen Law Office for Professional Help If You Are Affected by One or More of the IRS Compliance Campaigns

If you are affected by any of the IRS campaigns or you have received a soft letter from the IRS, contact Sherayzen Law Office for professional help. Our team of tax professionals, headed by Attorney Eugene Sherayzen, will thoroughly analyze your case, create a plan to move forward to resolve the situation, implement the plan and defend your position against the IRS.

IRS AI Software to Analyze Tax Data | IRS Tax Lawyer Minneapolis

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On November 18, 2016, Mr. Benjamin Herndon, the current IRS director for research and analytics, confirmed the recent rumors that the IRS AI Software is being tested to help IRS agents find patterns of tax noncompliance.

The idea is to supplement human analysis of data with the IRS AI software that would analyze any piece of data not only by itself, but also in conjunction with the other data available to the IRS. This way, the IRS AI Software is expected to analyze a very large amount of various data to identify tax noncompliance patterns.

This means that the IRS currently plans to use artificial intelligence for pattern recognition and visualization of data that would help IRS revenue agents uncover tax noncompliance. It is possible that the IRS AI software will even analyze a particular taxpayer’s characteristics in the context of a taxpayer’s behavior to uncover any discrepancies and potential tax noncompliance.

I believe that this is just the first step that the conservative agency is making. In the near future, one can foresee that the IRS AI software will start taking on more and more tasks such as conducting correspondence audits, certain automatized communications with taxpayers, analysis of data during a field audit (the IRS AI Software can be used most effectively during the audits of large corporations which have huge amounts of data), IRS customer support, international tax compliance (particularly analysis of data collected through FATCA and FBARs) and other vital IRS functions. Most likely, the decisions associated with penalty imposition and the negotiation of offer in compromise will rest with human IRS agents for now.

Finally, the biggest immediate impact of the IRS AI software is likely to be felt in the ability of the IRS to more effectively implement US tax laws and conduct more audits due to the fact that the IRS revenue agents will now be able to devote less time to audit analysis and more time to enforcement of tax laws.

In sum, the US taxpayers should be ready for the impending improved ability of the IRS to identify tax noncompliance and conduct more audits due to increased efficiency which will be introduced by the IRS AI Software.