Authored by Mark Heroux, Colin Walsh, Otis Damron and Manny Muriel
COVID-19 has drastically changed how tax practitioners represent their clients in dealing with the IRS. Working remotely creates a host of challenges for resource-constrained IRS professionals. Moreover, the IRS released several initiatives and programs designed to provide relief to taxpayers. These programs include the People First Initiative, various revenue procedures and frequently asked questions (FAQ) on irs.gov. In light of these developments, we recommend that clients consider the following.
Partnerships subject to the centralized partnership audit regime (CPAR) generally must file an administrative adjustment request (AAR), rather than file an amended return. However, Rev. Proc. 2020-23 gives CPAR partnerships the option to file amended returns before Sept. 30, 2020. In most cases, CPAR partnerships should utilize this revenue procedure. AARs are complex and, perhaps most importantly, we have confirmed the IRS Office of Chief Counsel takes the position that AARs create nonrefundable credits. A nonrefundable credit could produce a disastrous result for clients, whereby some partners could lose the benefit from their share of the additional deductions.
Under the People First Initiative, the IRS stopped nearly all collection efforts. The IRS will currently not issue levies or liens, and will not send cases to third-party collection agencies. However, IRS revenue officers are still working. Taxpayers with large outstanding liabilities should view this as an opportunity to establish favorable installment agreements or offers in compromise. At a minimum, taxpayers should begin to gather the documentation (e.g., personal financial statements and supporting documentation) that IRS revenue officers will demand post-July 15.
Coronavirus Aid, Relief, and Economic Security (CARES) Act Section 1100, the Paycheck Protection Program (PPP), provided $349 billion in relief in the form of forgivable loans to small businesses for job retention and certain other expenses. The PPP requires loan proceeds be used to pay payroll costs, interest on mortgages, rent and utilities. The PPP allows the potential for interest and principal to be fully forgiven if businesses spend the proceeds on these expenses within the earlier of 24 weeks from receipt or Dec. 31, 2020, and use at least 60% of the forgiven amount for payroll. This relief was intended for eligible borrowers with fewer than 500 employees; however, after the implementation of the PPP, it was revealed that many businesses had found loopholes in the law. Treasury Secretary Mnuchin stated the IRS and Small Business Administration will audit loans in excess of $2 million and will be prosecuting any instances of fraud. It is estimated there are 26,000 PPP loans in excess of $2 million. Upon request, companies will have to demonstrate the basis for its PPP loan eligibility certification. The Treasury Department is scheduled to issue guidance on the criteria the government will use to determine need for the loans.
IRS-CI special agents continue to investigate allegations of criminal tax fraud and related financial crimes, which include PPP or Economic Impact Payment (EIP) related fraud. The IRS-CI, Federal Bureau of Investigation and other federal law enforcement agencies have already started pursuing those bad actors who have taken advantage of the PPP system. IRS special agents are still conducting limited field interviews and enforcement operations. If contacted for an interview or receive a subpoena, please reach out to Baker Tilly for assistance.
IRS revenue agents continue to conduct examinations. However, IRS revenue agents are unable to conduct in-person interviews. IRS revenue agents are also unable to receive physical documentation from taxpayers. Many responses to Information Document Requests are too voluminous to transmit via facsimile, and most IRS revenue agents cannot accept responses via email. We have seen delays in IRS examinations, resulting in requests for extensions of the assessment statute of limitations.
COVID-19 has caused significant delays at all levels of the IRS. These delays affect refund claims, EIN applications, processing of amended returns and many more submissions. TAS is an independent organization within the IRS that can help with procedural difficulties. We recommend filing Form 911 to solicit help from TAS for pressing matters, e.g., a corporation that faxed IRS Form 1139 to claim a quick refund. Nonetheless, Baker Tilly has been able to utilize its network of contacts within the IRS to overcome many of these obstacles.
In speaking with high-level IRS professionals, we have some insight into what issues the IRS will focus on as activity returns to normal. For the IRS’ Small Business/Self-Employed Division, these issues include, but are not limited to, CPAR examinations, PPP audits, taxpayers that cannot afford to repay the employer’s deferred employment tax liability, examinations of carryback claims filed pursuant to the CARES Act, and taxpayers that file for bankruptcy. IRS-CI will look at PPP, EIP, bankruptcy and related fraud in addition to its 2020 investigative priorities.
On April 30, 2020, Bank Hapoalim, Israel’s largest bank, and Bank Hapoalim Ltd., its Swiss subsidiary, pleaded guilty to conspiring with U.S. taxpayers and others to hide more than $7.6 billion in over 5,500 secret Swiss and Israel accounts and the income generated from these accounts. The banks have agreed to pay more than $874 million to the U.S. Treasury. The IRS will now begin to examine the records from the thousands of accounts with an eye toward compliance with the Report of Foreign Bank and Financial Accounts (FBAR) and to ensure all income was reported. An uptick in civil examinations and investigations related to these accounts should be expected. Now may be the time for some taxpayers to avail themselves to the IRS’ revised voluntary disclosure program to avoid criminal prosecution if the failures to report were willful.
Much of the IRS’ workforce is working remotely and recently the agency recalled more than 10,000 employees to perform “mission-critical duties” such as processing paper tax returns, check payments, opening mail and operating taxpayer assistance services. As a result of the shutdown, the IRS was unable to process mail and was forced to divert much of the mail to storage trailers. Taxpayers can anticipate lengthy delays for any paper-filed submissions. As such, taxpayers should use electronic resources if possible. For instance, amended returns that can be electronically submitted should be used when they can. However, if paper filing is required, taxpayers are encouraged to send correspondence using the U.S. Postal Service’s certified mail with return receipt requested.
View more insights from our guide to tax planning during and after COVID-19
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.