Carlson and Associates CPAs, Inc.

The Senate Finance Committee (SFC) advanced President Donald Trump’s nomination of Charles Rettig for IRS Commissioner. The SFC approved the nomination on July 19 by a 14-to-13 party line vote.

Qualified Nominee

Several SFC Democrats and Republicans praised Rettig’s qualifications to serve as the next IRS Commissioner. SFC ranking member Ron Wyden, D-Ore., said that he is a "qualified nominee."

However, Democrats voted against his nomination in protest of new IRS guidance ( Rev. Proc. 2018-38, discussed later in this Issue) that limits donor reporting for certain tax-exempt organizations.

"The Trump administration has taken a qualified nominee and dumped him right into the middle of a dark money political firestorm of their own creation," Wyden said. Wyden announced the day before the vote that he would not support Rettig’s nomination unless Rettig committed to reversing the IRS’s new rules on certain Schedule B donor disclosures.

However, SFC Chairman Orrin G. Hatch, R-Utah, noted during the markup that the IRS reporting rules are unrelated to Rettig’s nomination. "I know that some of my colleagues have expressed dissatisfaction with new IRS reporting rules released recently and want to oppose the important appointment of an IRS commissioner because of these new rules, over which he had no control,"Hatch said. Hatch, praising Rettig’s qualifications, expressed confidence that Rettig, if confirmed, would "lead the IRS with integrity."

Next Steps

Rettig’s nomination now heads to the full Senate. If confirmed, Rettig will oversee the implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Rettig previously told the committee that restoring taxpayer trust in the IRS would be a top goal as IRS Commissioner. "If I am privileged to serve as Commissioner, my overriding goal will be to strengthen and rebuild trust between the IRS, the American people, and their representatives in Congress," Rettig said. "That trust is critical to all that the IRS does."

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President Donald Trump and House GOP tax writers discussed "Tax Cuts 2.0" in a July 17 meeting at the White House. The next round of tax cuts will focus primarily on the individual side of the tax code, both Trump and House Ways and Means Chair Kevin Brady, R-Tex., reiterated to reporters at the White House before the meeting.

Individual Tax Cuts

The discussion between Trump and several top House GOP tax writers was set to focus, in particular, on how to further strengthen the economy post-tax reform, Brady said. "We think the best place to start is with America’s middle class families and our small businesses," he added. Brady has said that making permanent the individual tax cuts that are set to expire in 2026 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) is a top priority for Republicans.

Corporate Tax Rate

Trump is also calling for lowering the corporate tax rate to 20 percent. The corporate tax rate was lowered last December from 35 percent to 21 percent by the TCJA.

Brady told reporters earlier in the week of July 16 that discussions between House GOP tax writers and the White House were continuing on the possible proposal. While Brady did not openly commit to the notion of further lowering the corporate tax rate, he did tell reporters that he thinks the president is right that global competitors will likely respond in kind to last year’s tax reform.

Tax Cuts 2.0 Timeline

The House is expected to vote on the Tax Cuts 2.0 package in September, Brady told reporters at the White House on July 17. Additionally, Brady stated that he anticipates the "Senate setting a timetable, as well."

Brady’s estimated timeline for votes on the tax cuts package is in line with his statements in June that House GOP members will receive a legislative outline of the proposal this month. Further, a draft of the tax package is expected to be released publicly in August.

Senate

At this time, the Tax Cuts 2.0 package is not expected on Capitol Hill to fare well in the Senate. The package would need at least nine Democratic votes to clear the chamber.

"The GOP tax scam was a huge tax break for big corporations," Sen. Tammy Baldwin, D-Wis., said in a July 17 tweet. "We should reward work, not just wealth," she added. While Democrats remain outspoken against the TCJA for primarily benefiting corporations, Republicans are hopeful for Democratic support, just prior to midterm elections, on a measure that focuses on individual tax cuts.

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House Republicans and the Trump Administration are working together to craft a tax cut "2.0"outline, the House’s top tax writer has said. House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters during the week that House tax writers and the White House are currently working to finalize the "framework."

Tax Cuts 2.0

Additionally, Brady reiterated to reporters that he plans to hold listening sessions with other House Republicans to gather ideas for the tax package. The legislative outline is expected to be circulated among House lawmakers this month and released generally in August. A House floor vote on the package is anticipated this fall.

Individual Tax Cuts

The tax reform "phase two" package will focus on making permanent the individual tax cuts enacted temporarily through 2025 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Extending the individual tax cuts will be the " centerpiece" of the next package, Brady has said.

Impact. "Making the TCJA’s expiring individual tax code changes permanent would result in a larger economy in the long run," the Tax Foundation said in a report released on July 10. According to the report, a "small, positive" economic impact is expected during 2019 through 2028. "In the long run, making all individual tax provisions permanent will lead to 2.2 percent higher long-run GDP, 0.9 percent higher wages, and 1.5 million more full-time equivalent jobs," the report said.

However, the economic boost would not arrive without being accompanied by an increased federal deficit, according to the report. "Making these provisions permanent will also increase the deficit, reducing federal revenues by $638 billion ($575 billion on a dynamic basis) over the 10-year budget window and in the long run, reduce federal revenue on an annual basis by $165 billion ($112 billion on a dynamic basis)."

Corporate Tax Cuts

Additionally, Republicans are "thinking about bringing the 21 percent [corporate tax rate] down to 20," President Trump said in a recent interview. The corporate tax rate was permanently lowered from 35 to 21 percent under the TCJA.

Senate

At this time, the prospect of the House’s tax cut 2.0 package clearing the Senate remains unlikely. Currently, the phase two measure would need at least nine Democratic votes to clear the chamber. Democrats have remained critical of the TCJA and are not expected on Capitol Hill to support legislative efforts to extend the new law’s provisions.

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The Senate Finance Committee’s (SFC) leading Democrat has released a report critiquing Republicans’ 2017 overhaul of the tax code. The report, focusing primarily on international tax reform, was released by SFC ranking member Ron Wyden, D-Ore., on July 18.

Criticism of GOP Tax Reform

The Democratic SFC report, "Trump’s Tax Law and International Tax: More Complexity, Loopholes and Incentives to Ship Jobs Overseas," criticizes a number of provisions enacted in last year’s tax reform. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law by President Donald Trump last December.

"Donald Trump and Congressional Republicans continue to peddle the false promises outlined in this tax scam report," Wyden said in a July 18 press release. "Their new international tax regime instead rewards companies for investing overseas while hardworking Americans watch their wages fall."

The report focuses on five areas of international tax reform. According to the report, the new tax law makes the tax code more complicated and incentivizes corporations to move jobs overseas.

Tax Cuts 2.0

Meanwhile, Republicans on the other side of the Capitol continue to tout the positive economic effects of tax reform as they prepare to unveil their next tax cuts package. "Tax Cuts 2.0" will focus on making permanent tax cuts for individuals and passthrough entities, which were enacted temporarily through 2025 under the TCJA.

"It wasn’t that long ago that our economy was sluggish, paychecks were going nowhere, jobs were going overseas -- all that has changed," House Ways and Means Committee Chair Kevin Brady, R-Tex., said in a July 18 televised interview in which he praised the TCJA. According to Brady, Congress and the White House are starting Tax Cuts 2.0 "right now."

"The President is all in," Brady said. Brady, along with several other House tax writers, met with Trump on the next round of tax reform in a July 17 meeting at the White House.

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Homeowners will be hurt financially by last year’s tax reform, according to a new House Democratic staff report. The report alleges that real estate developers will primarily benefit from the new tax law at the expense of homeowners.

The Democratic staff report was released by House Oversight and Government Reform Committee ranking member Elijah E. Cummings, D-Md., on July 5. The report highlights the effects of specific provisions of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) on homeowners across the United States.

Home Equity Interest Deduction

Prior to the TCJA, homeowners could deduct interest on home equity loans up to $100,000, as noted in the report. However, the TCJA, enacted last December, retroactively prohibits homeowners from deducting interest on loans of any amount if used for any purpose other than home improvement. According to Cummings’ staff, many homeowners use home equity loans for a variety of reasons, such as medical emergencies or college education.

Real Estate Tax Breaks

The staff report highlights several TCJA provisions that could benefit real estate developers. Among these tax breaks includes the 20-percent deduction for passthrough business income for certain qualifying real estate companies. Additionally, the report notes that under the TCJA, real estate developers are exempt from the new 30-percent limitation on interest deducted by large businesses. Further, the report notes that TCJA exempts real estate from the repeal of favorable tax treatment of like-kind exchanges of business assets and provides a 20-percent deduction for dividends from qualified real estate investment trusts.

"For the first time, this new report shows how big the payoffs were to wealthy real estate developers – more than $66 billion over the next ten years, according to the Joint Committee on Taxation," Cummings said in a statement. "They [Republicans] chose to take away a longstanding tax deduction that American families have relied on for decades while at the same time creating $66 billion in new tax breaks for real estate developers," he added.

In response to an inquiry about the report, a House Ways and Means Committee majority spokesperson told Wolters Kluwer on July 6 that the Democratic staff report is a "partisan exercise." "Multiple reports from nonpartisan organizations show strong housing numbers for this year...tax reform allows families to keep more of their hard-earned money to spend on what is important to them. This all is good news for homeowners and those seeking to buy a home," the spokesperson told Wolters Kluwer.

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The IRS has issued final regulations that target tax-motivated inversion transactions and certain post-inversion tax avoidance transactions. The final regulations retain the thresholds and substantiation requirements of the 2016 final, temporary and proposed regulations (the 2016 regulations), but make limited changes to the 2016 regulations to improve clarity and reduce unnecessary complexity and burdens on taxpayers. These changes also ensure that the final regulations do not impact cross-border transactions that are economically beneficial and not tax-motivated.

Background

Generally, in an inversion transaction, a U.S.-based multinational expatriates by changing its tax residence from the United States to another country in an effort to avoid or reduce U.S. taxes.

Comment. Subject to certain limitations, the transaction allows the inverted company to reduce future taxes on U.S.-source earnings, such as by deducting interest paid on loans from the new foreign parent. In addition to U.S. tax base erosion, inversions may have other effects on the U.S. economy, such as reduced employment when the headquarters are moved overseas.

Code Sec. 7874 limits inversions that are tax-motivated, by generally targeting transactions in which the following occur:

a foreign corporation acquires substantially all of the properties of a domestic corporation (domestic entity acquisition);
immediately after the transaction, the former shareholders of the domestic corporation make up a significant portion of the shareholders of the acquiring foreign corporation; and
after the domestic entity acquisition, the expanded affiliated group (EAG) that includes the foreign acquiring corporation does not have substantial business activities in the foreign country in which, or under the law of which, the foreign acquiring corporation is created or organized when compared to the total business activities of the EAG.

Under (2) above, if the former shareholders of the domestic corporation hold 80 percent or more of the stock of the foreign corporation after the transaction, the foreign corporation is treated as a domestic corporation for U.S. tax purposes. If the former shareholders hold at least 60 percent but less than 80 percent of the stock of the foreign acquiring corporation after the transaction, then the transaction is respected but use of tax attributes is limited. Transactions where the former shareholders of the domestic corporation hold less than 60 percent of the stock of the foreign acquiring corporation are generally not limited. The percentage of stock is referred to as the ownership percentage, and the fraction used to calculate the ownership percentage is referred to as the ownership fraction.

The Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97) reduced, but did not completely eliminate, the incentives for tax-motivated inversions.

Changes Made by the Final Regulations in General

Similar to the 2016 regulations, the final regulations under Code Sec. 7874 provide rules for:

identifying domestic entity acquisitions and foreign acquiring corporations in certain multiple-step transactions;
calculating the ownership percentage and, more specifically, disregarding certain stock of the foreign acquiring corporation for purposes of computing the denominator of the ownership fraction and, in addition, taking into account certain non-ordinary course distributions (NOCDs) made by a domestic entity for purposes of computing the numerator of the ownership fraction;
determining when certain stock of a foreign acquiring corporation is treated as held by a member of the EAG; and
determining when an EAG has substantial business activities in a relevant foreign country.

However, the final regulations clarify the prior rules, provide additional exceptions to their application, and reduce complexity and unnecessary burdens on taxpayers, including by providing guidance on how to apply particular mechanical rules. Specifically, the final regulations make clarifying changes to some of the stock exclusion rules: the passive assets rule, the serial acquisition rule, and the third country rule. Clarifying changes are also made to the substantial business activities test.

In addition, the final regulations add additional exceptions to the serial acquisition rule and the third country rule to narrow their scope. To reduce complexity and ambiguity, changes are made to the passive assets rule, the NOCD rule, and the rules coordinating the application of the stock exclusion rules with the EAG rules.

The final regulations further provide rules under Code Sec. 7874 and other provisions to reduce the tax benefits of certain post-inversion tax avoidance transactions. Such rules generally prevent the post-inversion dilution of U.S. shareholders’ interests in expatriated foreign subsidiaries.

Passive Assets Rule

The final regulations apply the passive assets rule only for purposes of determining the ownership percentage by value. The passive assets rule is also modified so that stock excluded under any of the stock exclusion rules is not taken into account. In addition, property that gives rise to stock excluded under any of the stock exclusion rules is not taken into account for purposes of this rule.

Serial Acquisitions of Domestic Entities

The final regulations retain the 36-month look-back period for the serial acquisition rule, but make three technical clarifications or modifications to this rule. Specifically, the final regulations:

clarify that the determination of the foreign acquiring corporation’s stock attributable to a prior domestic entity acquisition does not take into account stock of the foreign acquiring corporation deemed to have been received under the NOCD rule or Code Sec. 7874(c)(4) in the prior domestic entity acquisition;
provide an additional exception to the definition of the term "prior domestic entity acquisition" to exclude a domestic entity acquisition that occurs within a foreign-parented group and qualifies for the internal group restructuring exception; and
define a predecessor of a foreign acquiring corporation for purposes of the serial acquisition rule.

Other Matters

The final regulations also:

provide exceptions to the third-country rule in certain cases where transactions are not driven by tax planning;
include several clarifications or modifications to the NOCD rule;
modify one of the requirements of the de minimis exception applicable to the disqualified stock rule, the passive assets rule, and the NOCD rule;
broaden the coordination of the stock exclusion rules with the EAG rules; and
for purposes of the substantial business activities test, define a "tax resident" as a body corporate liable to tax under the laws of the country as a resident.

Applicability Dates

The applicability dates of the rules in the final regulations are generally the same as the applicability dates of the rules as set forth in the 2016 regulations. However, differences between the final regulations and the 2016 regulations generally apply on a prospective basis, with an option for taxpayers to apply the differences retroactively. Since taxpayers may have relied on the 2016 regulations, the modifications to the final regulations generally apply prospectively. However, domestic entity acquisitions completed before July 12, 2018, continue to be subject to those rules as set forth in the 2016 regulations, but generally with an option for taxpayers to apply the differences retroactively.

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The Fifth Circuit vacated a tax preparer’s conviction for obstructing tax administration. The conviction was no longer valid in light of C.J. Marinello, SCt., 2018-1 ustc ¶50,192.

Marinello

Under Code Sec. 7212, it is a crime to corruptly or by force or threats obstruct the due administration of the Internal Revenue Code. In Marinello, the U.S. Supreme Court determined that a conviction for this crime requires that:

a relationship ( "nexus") exists between the defendant’s conduct and a particular administrative proceeding; and
the proceeding was either pending when the defendant engaged in the conduct or reasonably foreseeable by the defendant.

A "particular administrative proceeding" includes an investigation, audit or other targeted administrative action. It does not include routine, day-to-day work carried out in the ordinary course by the IRS, such as the review of tax returns.

Obstruction Conviction

Here, a jury convicted the tax preparer on one count of obstructing the tax laws. One of the obstruction allegations was that the preparer had provided false testimony at a show cause hearing in federal court. This met the Marinello requirements, because the hearing was held to assess her compliance with an IRS tax records subpoena.

However, most of the other alleged obstruction did not satisfy Marinello, because it focused on the preparer paying her employees in cash and on failing to keep adequate records.

The court vacated the obstruction conviction, because the jury believed it could consider all of the preparer’s conduct as part of the obstruction count. The court did not know which of the allegations the jury had found to be proven by the government.

False Returns Conviction

The jury also convicted the preparer for preparing false returns. The preparer claimed the improper obstruction count tainted the false return counts. However, the court rejected this "spill-over prejudice" claim, and did not vacate the false returns conviction. The invalid obstruction count did not allow the jury to consider evidence that would not have been allowed at a trial focused on just the false return counts.

On remand from SCt. Unpublished opinion vacating and remanding, per curiam, an unpublished DC Tex. decision. Related decision at CA-5 2017-1 ustc ¶50,241.

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National Taxpayer Advocate Nina E. Olson has released her mid-year report to Congress. The report contains a review of the 2018 filing season, and identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year. It also includes the IRS’s responses to each of the 100 administrative recommendations made in the 2017 Annual Report to Congress.

The report identifies and discusses 12 priority issues the TAS plans to focus on during the upcoming fiscal year. The top five include implementation of the Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97), the effectiveness of IRS service channels in meeting taxpayer needs, the development of an integrated case management system, the impact of high false-positive rates on legitimate taxpayers and the protection of taxpayers facing financial hardship from IRS and private debt collection activities. The most significant challenge the IRS faces in the upcoming year is implementing the TCJA, which, among other things, requires programming an estimated 140 systems, writing or revising some 450 forms and publications and issuing guidance on dozens of TCJA provisions. The TAS has launched a new website that lists key tax return items under current law (2017), shows which ones have been impacted by the TCJA and illustrates how the changes will be reflected on tax year 2018 returns filed in 2019.

In her preface to the report, Ms. Olson focuses on the IRS’s customer service challenges. The report says the IRS uses narrow performance measures that suggest the agency is performing well but do not reflect the taxpayer experience. Recommendations to improve customer service include: (1) adopting robust performance measures that more accurately reflect the taxpayer experience; (2) providing taxpayers with modernized "omnichannel"services so that taxpayers can obtain assistance online, by phone or in-person; (3) accelerating the development of an integrated case management system; and (4) using "big data" to help taxpayers as well as to bolster enforcement. Further, Ms. Olson reiterated her longstanding concern that IRS funding reductions have undermined the agency’s ability to provide high-quality taxpayer service and to modernize its aging information technology infrastructure.

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Q: After what period is my federal tax return safe from audit? A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

Q: After what period is my federal tax return safe from audit?

A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

There are exceptions and caveats to this general principle, however. If you file prior to April 15, the IRS still has until April 15 of the third year that follows to audit your return. This means that if you filed an income tax return on February 10, 2017, you still won't be out-of-the-woods until April 15, 2020. For taxpayers who file fraudulent returns, incorrect returns with the intent to evade tax, and those who do not file at all, the IRS may open an audit at any time.

(Don't confuse the deadline for IRS tax assessments with your right to file a refund claim for an amount that you overpaid, either on a filed return or through withholding or estimated tax payments. That deadline is the later of three years from the filing deadline or two years from your last tax payment.)

You may also find some comfort in the practical IRS audit-cycle rhythm. While you are never truly beyond an audit until the statute of limitations has properly run, there are some general standards to keep in mind. Office audits are usually done within 1 1/2 years of the time the return was filed, and field office audits are complete by 2 1/2 years. The rule of thumb is that if you haven't been contacted within this time frame, you're probably not going to be. Especially for small businesses, the IRS has promised to shorten its normal audit cycle so that those taxpayers are not "left hanging" on potential tax liabilities (with interest and penalties) until the three-year limitations period has expired. Whether this shortened period happens, however, is still open to speculation. Most businesses should continue to make it a practice to keep "tax reserves" to cover such audit liabilities.

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