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The Commissioner of the IRS, noted that although the full moratorium on processing claims will end by April or May, they are only processing about 1000-2000 claims per week. That is just a small number given the growing backlog at the IRS. At that rate, the problem is growing each day that goes by and based on current numbers it may be likely that all claims are never processed. It is noted in various sources that there may well be over 1 million claims or more pending. No one at the IRS seems to have an exact count.

Lawsuits have already been filed on processing the claims over the long and excessive delays. What can taxpayers do? Call their Congressional Representatives which have been inundated with calls or bring a refund suit? How about the Taxpayer Advocate? It is still not clear, what the best course of action should be.

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In a recent turn of events, the Internal Revenue Service (IRS) has issued an apology for sending out millions of erroneous bills or notices to taxpayers. It seems that a computer mishap is responsible for this situation, affecting taxpayers who filed a tax return in 2022 and had an outstanding balance. However, this event is more than just an error. It has brought to light the plight of many taxpayers residing in counties affected by natural disasters. These taxpayers have additional time to pay their taxes, a change in schedule that has resulted in significant confusion.

The Extension of Deadlines

Due to the severe winter storms, flooding, and mudslides that occurred at the start of 2023, the IRS announced tax relief for affected individuals and businesses in California. This announcement extended the deadline for filing individual and business tax returns and making tax payments to October 16, 2023. This extension applies to taxpayers across most counties in California.

Well, sort of and only for  late filing penalties  for 2019 and 2020 tax returns and for a very limited time; until September 30, 2022 to be exact.  On August 24th the IRS released Notice 2022-36 “Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020.”  In essence, as long as you file your 2019 and/or 2020 personal or business income tax return by September 30, 2022, the IRS will automatically abate (remove) failure-to-file penalties for those two years.  There is nothing else you need to do in order to receive this penalty relief.  That’s a surprise coming from the IRS!

What is a Failure-to-File Penalty?

A failure-to-file penalty is assessed when your return is filed after the due date (usually April 15th for personal income tax returns) or extended due date (when you request a filing extension).  It is calculated at 5 percent per month up to a maximum of 25 percent of the tax liability.  So, the higher your tax liability, the higher the dollar amount of the penalty.  This can add up to thousands of dollars, plus the interest charged on the penalty.

In my post earlier today I quoted from IRS Notice 2021-83 issued on April 9th, which stated that the FBAR filing requirement deadline is still April 15, 2021, and that the Notice made no reference to the automatic extension. However, later that day the IRS quietly updated it to indicate that the automatic extension was still available. There was no acknowledgment that they made an error, they just tried to sneak it in.

The bottom line is Taxpayers still have until October 15th to file their FBAR.

Most, if not all, Payroll Protection Program (PPP) borrowers are focused on the question of whether they will be able to have their PPP loan forgiven.  Many questions have arisen, and some but not all, have been answered by the Loan Forgiveness Application and instructions   released by the SBA on Friday, May 15, 2020.  Here are some of the highlights.

  • Annual “cash” payroll costs are capped at $100,000 per employee. While this is not news, the SBA calculates that this amount on a pro-rata basis for the 8 week “Covered Period” is $15,385. If you do the math, that is equal to 8 weeks per year divided by 52 weeks multiplied by $100,000. Some were hoping that those on a semi-monthly pay schedule could use a larger amount based upon 24 pay periods per year. Apparently not.
  • Alternative Payroll Covered Period. The Covered Period is generally eight weeks (actually 56 days) beginning on the date the loan is first funded. The Alternative Payroll Covered Period is only for employers with bi-weekly or more frequent payroll schedules. Therefore, it doesn’t appear to apply to employers who pay semi-monthly. It begins on the on the first day of the first payroll period following the PPP Loan Disbursement Date and ends 56 days later.  The following example is provided:  Alternative Payroll Covered Period: “… if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the  Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”  This suggests that one cannot include payments for a payroll period that begins before the PPP Loan Disbursement Date but is paid after that date. However, that is inconsistent with the Press Release issued concurrently by the SBA which states that the form and instructions provide “Flexibility to include eligible payroll and non-payroll expenses paid OR incurred during the eight-week period after receiving their PPP loan.” (emphasis supplied).  See more below.

In a 2019 U.S. Tax Court case, Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4, (2019) (Palmolive II), the Tax Court held that both penalties determined by the Revenue Agent in a tax audit and additional penalties later determined  by an Appeals Officer in the IRS Independent Office of Appeals met the written approval requirements of I.R.C. § 6751; thus making Palmolive Building Investors, LLC (Palmolive) a two-time loser. Palmolive was initially in Tax Court in 2017 (Palmolive I) over a disallowed charitable deduction for a façade easement.  As the owner of a historical building in Chicago, it had donated a façade easement to a conservation organization and took a large charitable deduction for the easement. In addition to questioning the $33,410,000 valuation of the easement, the IRS argued that the mortgages on the building limited the easement’s protection in perpetuity. The Tax Court agreed and concluded that the façade easement was not protected in perpetuity and therefore failed to qualify for a charitable deduction under I.R.C. § 170(h)(5)(A).

Following the disallowance in Palmolive I, the taxpayer returned to the Tax Court to dispute whether the penalties assessed by the IRS complied with the provisions of IRC Section 6751(b)(1).  During a tax audit, a Revenue Agent had asserted in a 30-day letter that Palmolive was responsible for a 40% penalty for a gross valuation misstatement and a 20% negligence penalty. These two penalties were approved on Form 5701 by the Revenue Agent’s supervisor. Subsequently, a 60-day letter was issued. The taxpayer took its case to the IRS Office of Appeals. The Appeals Officer assigned to the case proposed four penalties: the two assessed by the Revenue Agent and the Substantial Understatement and Substantial Valuation Misstatement penalties. The Appeals Officer’s immediate supervisor approved all of these penalties on Form 5402-c. In Tax Court, Palmolive argued that the initial determination of penalties was made by the Revenue Agent who did not assert the Substantial Understatement and Substantial Valuation Misstatement penalties; therefore the penalties asserted by the Appeals Officer were not approved as part of the first determination of the penalties.

In examining the validity of the penalty assessments, the court cited I.R.C. § 6751(b)(1) which states that penalties can only be assessed when the initial determination of such penalties are approved in writing by the immediate supervisor of the person making the determination. The court also pointed out that the Congressional motive behind enacting this provision was to make sure penalties were not used as bargaining chips. The court first noted that all penalties were approved in writing. The next issue was what defines an “initial determination” for the purposes if I.R.C. § 6751(b)(1). The court held that the initial determination is when the penalties were first communicated to the taxpayer. The court stated that the Revenue Agent’s 2008 mailing of the 30-day letter was the date of the initial determination and the Appeals Officer’s 2014 issuance of the Notice of Final Partnership Administrate Adjustment are both initial determinations. Since the IRS forms were signed by the respective supervisors prior to the time of the initial determinations, the penalties met the requirements of Section 6751(b) (1).

In a recent tax case, the U.S. Tax Court concluded that the IRS statutory Notice of Deficiency (a.k.a. “90-day letter”) issued more than three years after the tax return was filed was invalid, despite the omission of income from foreign assets. The taxpayer had timely filed his federal income tax returns for the years at issue, but he did not report income earned on a foreign account he held. The years at issue were 2006, 2007, 2008, and 2009. To obtain information related to the account of the taxpayer, and other similarly situated persons, the IRS had served a John Doe summons. The John Doe summons was resolved on November 16, 2010. However, the IRS did not issue a statutory Notice of Deficiency until December 8, 2014.

The taxpayer in this case timely filed his returns, which started the statute of limitations period. Absent circumstances that would toll or fail to initiate the statute of limitations, the IRS does not have an indefinite amount of time to assess tax. The IRS must issue timely Notices of Deficiencies and failure to do so can benefit the taxpayer.

When is a Notice of Deficiency Timely?

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