IRS Lawyers

2022 Fourth Quarter IRS Interest Rates (Underpayment & Overpayment)

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On August 15, 2022, the IRS announced that the 2022 Fourth Quarter IRS interest rates will again increase for both underpayment and overpayment cases. This increase closely follows the Federal Reserve’s recent increases in interest rates.

This means that, the 2022 Fourth Quarter IRS interest rates will be as follows:

Six (6) percent for overpayments (five (5) percent in the case of a corporation);
Six (6) percent for underpayments;
eight (8) percent for large corporate underpayments; and
three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. This means that the next change in the IRS underpayment and overpayment interest rates may occur only for the 1st Quarter of 2023.

The the 2022 Fourth Quarter IRS interest rates are important for many reasons. These are the rates that the IRS uses to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2022 Fourth Quarter IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. Surprisingly, we sometimes see this scenario arise in the context of offshore voluntary disclosures.

Sherayzen Law Office continues to track any changes the IRS makes to its overpayment and underpayment interest rates.

First Quarter 2022 IRS Interest Rates on Overpayment & Underpayment of Tax

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On November 23, 2021, the IRS announced that the First Quarter 2022 IRS interest rates on overpayment and underpayment of tax will not change from the Fourth Quarter of 2021.

This means that, the First Quarter 2022 IRS interest rates will be as follows:

three (3) percent for overpayments (two (2) percent in the case of a corporation);
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) of a percent for the portion of a corporate overpayment exceeding $10,000.

Internal Revenue Code (“IRC”) §6621 establishes the IRS interest rates on overpayments and underpayments of tax. Under §6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points for individuals and 2 percentage points in cases of a corporation. There is an exception to this rule: with respect to a corporate overpayment of tax exceeding $10,000 for a taxable period of time, the rate is the sum of the federal short-term rate plus one-half of a percentage point.

Under §6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Again, there is an exception for a large corporate underpayment: in such cases, §6621(c) requires the underpayment rate to be the sum of the relevant federal short-term rate plus 5 percentage points. The readers should see §6621(c) and §301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

Pursuant to the IRC §6621(b)(1), the First Quarter 2022 IRS interest rates were computed based on federal short-term rates for October 2021 to take effect on November 1, 2021, based on daily compounding. The IRS determined that the federal short-term rate for October of 2021, rounded to the nearest full percent, was zero.

It is important to note that the First Quarter 2022 IRS interest rates are relevant for a great variety of purposes. Let’s highlight three of its most important uses. First, these rates will determine the interest a taxpayer will get on any IRS refunds.

Second ,the rates will also be used to establish the interest to be added to any additional US tax liability on amended or audited tax returns. This also applies to the tax returns that were amended under the Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Finally, the First Quarter 2022 IRS interest rates will be used to calculate PFIC interest on any relevant §1291 PFIC tax. This PFIC interest will be reported on the relevant Form 8621 and ultimately Form 1040.

We at Sherayzen Law Office constantly deal with the IRS interest rates on overpayments and underpayments of tax. This is why we closely follow any changes in these IRS interest rates, including the First Quarter 2022 IRS interest rates.

IRS Acquires Phone-Hacking Software | IRS Lawyer News

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It seems that the IRS audit powers are increasing more and more at the expense of taxpayers’ privacy rights. In June of 2019, the IRS posted a procurement notice on its website to award a contract to a company Cellebrite, an Israeli company that specializes in smartphone decryption software and equipment. In other words, the IRS is about to acquire phone-hacking software from this company.

IRS Phone-Hacking Software: Primary Targets

What exactly does the IRS want to be able to hack? It appears pretty much everything that is used by taxpayers on a daily basis. Cellebrite software is capable to hacking both Android and Apple phones. Moreover, it can extract data from programs such as WhatsApp, Instagram and Facebook. This data-extraction ability covers encrypted messages.

According to Cellebrite’s website, its software would allow the IRS to “go beyond texts, call logs and photos with a comprehensive toolset that effectively accesses data from the widest variety of digital sources.” Furthermore, “advanced capabilities help you bypass passwords, overcome locks and encryption challenges to extract and decode complete data from the most devices, operating systems and applications. You can also extract and preserve public and private data from social media and other cloud-based sources, providing an unparalleled amount of forensically sound digital evidence.”

IRS Phone-Hacking Software: IRS Is Not the Only Federal Agency to Use It

The IRS is not alone in its usage of phone-hacking software. US Secret Service, US Immigration and Customs Enforcement, Federal Bureau of Investigation and other government agencies have acquired phone-hacking abilities, including from Cellebrite. One of the most famous examples of a government agency using phone-hacking software occurred with respect to a mass shooter’s iPhone. After Apple refused to cooperate with the FBI, the Bureau reportedly used an “outside party” to unlock the iPhone used by the San Bernardino shooter (the FBI has denied it, but it appears that the rumors are true).

Also, this is not the first time that the IRS used Cellebrite software. It appears the IRS has had contracts with the firm all the way back to 2009. In those instances, the IRS simply paid Cellebrite for its services to unlock a specific phone. This time, however, the IRS wants the software license, equipment and maintenance support.

IRS Phone-Hacking Software: Privacy Invasion Concerns

The fact that the IRS will acquire the capability to directly hack into taxpayers’ phones raises all kinds of privacy concerns. When will the IRS use it – only in criminal investigations or also in civil ones? Will there be a judicial review of the IRS usage of this software? Who will authorize the hacking and under what circumstances? How will the privacy rights of innocent taxpayers be protected? Will the information obtained by the IRS be shared with other federal agencies? What about state agencies? What kind of safeguards are in place to prevent the usage of the discovered data (especially when it is not relevant to tax compliance) for political vendetta purposes?

All of these questions are highly-important concerns in our world of rapidly-disappearing privacy rights. This is a concern that should be shared by all members of our society.

Sherayzen Law Office will continue to follow these recent developments with respect to expanding IRS capabilities to investigate US taxpayers.

IRS Appeals Video Conference | IRS Tax Lawyer & Attorney

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In May of 2019, Mr. Andrew Keyso, a deputy chief of the IRS Office of Appeals, stated that the Appeals Office is in the early stages of rolling out the technology to conduct video conferences as an option for Appeals conferences. This is great news for tax practitioners – an IRS Appeals video conference is a very convenient option for doing business with the IRS.

IRS Appeals Video Conference: WebEx Platform and Early Testing

The IRS Appeals video conference option will be based on WebEx video conferencing software developed by Cisco. It is secure and convenient, but some training is necessary to use it efficiently.

The IRS has already successfully tested WebEx software for appeals video conferences in early 2018. In October of 2018, IRS made the software more broadly available to its employees so that they can offer video conferences.

IRS Appeals Video Conference: IRS Wants Employees to Use It More

Unfortunately, not all IRS employees at the Appeals Office offer video conferences. Neither do many taxpayers seek them (undoubtedly due to lack of knowledge about them). Those who do so, however, find this option very attractive.

The IRS definitely wants its employees to use the IRS Appeals video conference option more. Speaking at the American Bar Association Section of Taxation conference in May of 2019, Diane Ogawa, an IRS appeals officer in Honolulu, stated: “We are trying to get more appeals officers training and on board with WebEx”. Sherayzen Law Office believes that, as more Appeals employees, taxpayers and tax practitioners become familiar with WebEx, the usage of the IRS Appeals video conference option should greatly increase.

IRS Appeals Video Conference: Positive Reaction from Tax Lawyers

The tax lawyers are generally in favor of using the IRS Appeals video conference option. They find it a convenient and effective way to conduct a hearing conference. There is also an additional benefit of reduced costs: there is no need to waste time and money on traveling to the IRS office.

IRS Appeals Video Conference: Potential Problems

This option, however, is not without potential problems. Besides the potential technical issues, the biggest problem is privacy. An unrepresented taxpayer may try to hold a video conference in a public place (like Starbucks) and the IRS will simply not agree to it. A represented taxpayer will not likely run into this problem, because his representative should know about these privacy issues.

The bigger privacy concern, though, comes from tax lawyers. They need to make sure that the prying eye of WebEx technology does not catch the other clients’ files, names and so on in the background of the WebEx video. Lawyers should strive to protect the attorney-client privileged information to the maximum extent possible.

Sherayzen Law Office Supports the IRS Video Conference Option and Hopes the IRS Expands It to Audit Interviews

As an international tax law firm, Sherayzen Law Office has clients throughout the United States and, indeed, the world. Flying to a meeting with an IRS agent is sometimes inconvenient for both, the taxpayer and the attorney; it is also expensive. Video conferencing is a perfect solution to this issue, and Sherayzen Law Office fully supports the current IRS video conferencing efforts.

Moreover, we encourage the IRS to apply video conferencing to other areas, such as IRS audit meetings.

May 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On May 21, 2018, the IRS announced the creation of another six compliance campaigns. Let’s explore these May 2018 IRS Compliance Campaigns in more detail.

May 2018 IRS Compliance Campaigns: Background Information

After a long period of planning, the IRS Large Business and International division (“LB&I”) finalized its new restructuring plan in 2017. Under the new plan, LB&I decided to switch to issue-based examinations and IRS campaigns.

The idea behind the IRS compliance campaigns is to concentrate the LB&I limited resources where they are most needed – i.e. where there is the highest risk of noncompliance. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS introduced additional campaigns in November of 2017 and March of 2018. As of March 13, 2018, there were a total of twenty-nine campaigns outstanding.

Six New May 2018 IRS Compliance Campaigns

On May 21, 2018, the LB&I introduced the following new campaigns: Interest Capitalization for Self-Constructed Assets; Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties; Forms 1042/1042-S Compliance; Nonresident Alien Tax Treaty Exemptions; Nonresident Alien Schedule A and Other Deductions; and NRA Tax Credits. Each of these campaigns was selected by the IRS through the analysis of the LB&I data as well as from suggestions made by IRS employees.

It is also important to point out that each of these campaigns as well as the twenty-nine previous campaigns were reviewed by the IRS in light of the 2017 Tax Reform (which was enacted on December 22, 2017).

May 2018 IRS Compliance Campaigns: Interest Capitalization for Self-Constructed Assets

The first campaign focused on the Internal Revenue Code (“IRC”) Section 263A. Under this provision if a taxpayer engaged in certain production activities with respect to “designated property”, he is required to capitalize the interest that he incurs or pays during the production period with respect to this property.

IRC Section 263A(f) defined “designated property” as: (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The IRS created this campaign with the goal of ensuring taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. Construction companies are likely to be the most immediate target of this campaign. Given the fact that Section 263A is not well-known, the IRS adopted varous treatment streams for this campaign, including issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance.

May 2018 IRS Compliance Campaigns: Form 3520/3520-A Non-Compliance and Campus Assessed Penalties

This campaign reflects the increasing attention of the IRS to foreign trusts. This is a highly complex area of law. In order to deal with this complexity, the IRS stated that it will adopt a multifaceted approach to improving Form 3520 and Form 3520-A compliance. The treatment streams will include (but not limited to) examinations and penalties assessed by the campus when the forms are received late or are incomplete. The IRS will also use Letter 6076 to inform the trusts about their potential Form 3520-A obligations.

May 2018 IRS Compliance Campaigns: Form 1042/1042-S Compliance

Taxpayers who make payments of certain US-source income to foreign persons must comply with the related withholding, deposit and reporting requirements. This campaign targets Withholding Agents who make such payments but do not meet all of their compliance duties. The IRS will address noncompliance and errors through a variety of treatment streams, including examination.

May 2018 IRS Compliance Campaigns: Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical (“FDAP”) income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by US payors to improperly claim treaty benefits and exempt US-source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: Nonresident Alien Schedule A and Other Deductions

This is another campaign that targets NRAs. In this case, the IRS focuses on the Form 1040NR Schedule A itemized deductions. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new IRC provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: NRA Tax Credits

This is yet another (third) campaign that targets NRAs; this time it concerns tax credits claimed by the NRAs. The IRS here targets NRAs who erroneously claim a dependent tax credit and who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents. Furthermore, the IRS also wants to target NRAs who claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, please contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!