WASHINGTON – As the Internal Revenue Service continues combatting abusive syndicated conservation easements, the agency today released additional information to help address questions related to the ongoing settlement initiative.

Today the Internal Revenue Service Chief Counsel released Chief Counsel Notice 2021-001 (CC Notice), which contains information regarding Chief Counsel’s settlement initiative for certain pending Tax Court cases involving abusive syndicated conservation easement transactions described in IRS Notice 2017-10 (“SCE transactions. Prior coverage of the settlement initiative can be found in IRS news release IR-2020-196.

The IRS encourages investors to seek independent professional assistance with understanding the settlement terms and CC Notice, and to help them assess their hazards of litigation. Investors would be well advised to obtain counsel from competent, independent advisers not related to or recommended by the SCE transaction promoter.

As previously noted in IR-2020-196 the IRS has been very successful in litigating SCE transactions.  While some promoters have attempted to distinguish the decided cases, claiming that their transactions are “different” and do not suffer the same flaws, the IRS has many grounds for disallowing the tax benefits claimed from these abusive transactions. The IRS will soon publish updates to the Conservation Easement Audit Technique Guide, which will set out new arguments that taxpayers can expect the IRS to make in cases involving SCE transactions.

The CC Notice reflects the IRS’s continuing efforts to combat abusive SCE transactions.  Notably, the newly established Office of Fraud Enforcement and the National Fraud Counsel are coordinating with examining agents and Chief Counsel attorneys to canvas cases for additional fraud considerations, which might include assertion of the 75% civil fraud penalty, or where applicable, referrals to Criminal Investigation.   

The CC Notice also responds to a recurring question raised by several groups of partners that have approached IRS Chief Counsel seeking to resolve their cases. The Chief Counsel settlement initiative requires that the partnership that engaged in the SCE transaction and all its partners agree to settle on the offered terms. Those terms include a complete disallowance of the claimed charitable contribution deductions and penalties, although some partners may deduct their cost of investing in the partnership. The CC Notice explains that, in rare cases, Chief Counsel may permit less than all the partners to settle on these terms.

In most cases, however, the IRS will require settling groups of less than all partners to pay an additional 5% penalty, reflecting the lost efficiencies of the IRS having to proceed with the partnership case. The IRS and Chief Counsel encourage partners who want to settle to work with the other partners to reach a full resolution of the case. The CC Notice also indicates that the IRS will settle with individual partners (or groups of individual partners) only when they own a significant percentage of the partnership and they cooperate with Chief Counsel, which may include providing evidence that Chief Counsel might use to support its contentions in the litigation. The CC Notice provides that partners or groups of partners interested in resolving their cases on these terms have 30 days from the date of this Notice to elect to settle.

The CC Notice also explains that Chief Counsel may consider making the same offer to newly filed cases in Tax Court. Chief Counsel will consider a variety of factors in deciding whether to extend the offer, including whether the partnership fully cooperated with the IRS during the audit.

Finally, the CC Notice answers numerous procedural questions related to the settlement terms.  

WASHINGTON — The Internal Revenue Service posted to IRS.gov final regulations today for Achieving a Better Life Experience (ABLE) accounts.

The regulations issued today finalize two previously issued proposed regulations. The first proposed regulation was published in 2015 after the enactment of the ABLE Act. The second proposed regulation was published in 2019 in response to the Tax Cuts and Jobs Act, which made significant changes to ABLE accounts. 

Eligible individuals may now put more money into their ABLE account and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. Also, certain contributions made to ABLE accounts by low- and moderate-income workers may now qualify for the Saver's Credit.

ABLE accounts are designed to help people with disabilities and their families save and pay for disability-related expenses. Though contributions are not deductible, distributions, including earnings, are tax-free to the designated beneficiary if used to pay qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other disability-related expenses.

The final regulation addresses many comments received on the 2015 and 2019 proposed regulations. Specifically, they provide guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account. 

Also, before Jan. 1, 2026, funds are allowed to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit.

Finally, these regulations provide guidance on the recordkeeping and reporting requirements of a qualified ABLE program.

For more information about ABLE accounts and other tax reform changes visit the Tax Reform page of IRS.gov.

WASHINGTON – With the Oct. 15th filing deadline quickly approaching, the Internal Revenue Service today encouraged taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction.

The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or Chief Counsel on terms more favorable than previously announced settlement offers and that any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.

With this in mind, the IRS encourages taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction. These taxpayers should seriously consider exiting the transaction and not claiming deductions associated with abusive micro-captive insurance transactions, just like many other taxpayers did who were contacted by the IRS in March and July 2020.

For those taxpayers that do not exit the transaction and continue taking such deductions, the IRS will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability related to foreign captives. The IRS will also assert penalties, as appropriate, including the strict liability penalty that applies to transactions that lack economic substance under sections 7701(o) and 6662(i).  The IRS Office of Chief Counsel will continue to litigate these abusive transactions in Tax Court. 

"The IRS enforcement efforts will continue on these abusive transactions,” IRS Commissioner Chuck Rettig said. “Any future settlement terms will only get worse, not better. The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities. Taxpayers are strongly encouraged to use this opportunity to put this behind them and get into compliance.”

Abusive micro-captives have been a concern to the IRS for several years. The transactions first appeared on the IRS "Dirty Dozen" list of tax scams in 2014 and remain a priority enforcement issue for the IRS. In 2016, the Department of Treasury and IRS issued Notice 2016-66 (PDF), which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.  In March and July 2020, IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly and providing them with the opportunity to tell the IRS if they’ve discontinued their participation in this transaction before the IRS initiates examinations.  Early responses indicate that a significant number of taxpayers who participated in these transactions have exited the transaction. 

This summer, the IRS issued a new round of section 6112 letters to material advisors who filed with the IRS pursuant to Notice 2016-66. In addition, the IRS has deployed 12 newly formed micro-captive examination teams to substantially increase the examinations of ongoing abusive micro-captive insurance transactions.

Also, as part of IRS’s continued focus in this area, the IRS has become aware of variations of the abusive micro-captive insurance transactions.  Examples of these variations include certain Puerto Rico and offshore captive insurance arrangements that do not involve section 831(b) elections.

These variations appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions.  The IRS is aware of these abusive transactions and is actively working to counter their proliferation.  The IRS cautions taxpayers that, to the extent they engage in variations of abusive micro-captive transactions that are substantially similar to Notice 2016-66, they must be disclosed.  Otherwise, the IRS will impose penalties for the failure to disclose.

Notice 2020-70 modifies Notice 2011-26 (2011-17 I.R.B. 720) to generally remove Form 1040-NR, U.S. Nonresident Alien Income Tax Return, from the list of returns that are administratively exempt from the electronic filing requirement imposed on specified tax return preparers by section 6011(e)(3) and to provide the circumstances under which the Form 1040-NR remains subject to the exemption.  This notice also provides that future updates to the list of returns in Notice 2011-26 that are administratively exempt from the electronic filing requirement due to IRS e-file limitations will be set forth in IRS Publication 4164, Modernized e-File (MeF) Guide for Software Developers and Transmitters.  This notice applies to taxable years ending on or after December 31, 2020.

Notice 2020-70 will be in IRB:  2020-43, dated 10/19/2020.

WASHINGTON — The Internal Revenue Service issued final regulations on the business expense deduction for meals and entertainment following changes made by the Tax Cuts and Jobs Act (TCJA).

The 2017 TCJA generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. However, taxpayers may still deduct business expenses related to food and beverages if certain requirements are met.

These final regulations address the disallowance of the deduction for expenditures related to entertainment, amusement or recreation activities, including the applicability of certain exceptions to this disallowance.  They also provide guidance to determine whether an activity is considered entertainment.  The final regulations also address the limitation on the deduction of food and beverage expenses.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

TD 9925 contains final regulations that provide guidance under section 274 of the Internal Revenue Code (Code) regarding certain recent amendments
made to that section. Specifically, the final regulations address the elimination of the deduction under section 274 for expenditures related to entertainment, amusement, or recreation activities, and provide guidance to determine whether an activity is of a type generally considered to be entertainment. The final regulations also address the limitation on the deduction of food and beverage expenses under section 274(k) and
(n), including the applicability of the exceptions under section 274(e)(2), (3), (4), (7), (8), and (9). The final regulations affect taxpayers who pay or incur expenses for meals or entertainment.

WASHINGTON – The Internal Revenue Service today launched a redesigned page on IRS.gov to help business owners navigate the federal tax steps when closing a business.

During this difficult and challenging time, the IRS streamlined the “Closing a Business” page into simple steps, so business owners and self-employed individuals can quickly find the information they need.

"The IRS realizes small businesses and self-employed individuals are facing challenges in their personal and business lives during these uncertain times,” said Eric Hylton, Commissioner, Small Business/Self-Employed Division. “Closing a business is a difficult decision and we want to help ease the burden for people making this tough choice. We redesigned the closing a business page on IRS.gov to help businesses comply with final tax responsibilities.”

The information includes what forms to file and how to report revenue received in the final year of business and expenses incurred before closure.

• File a Final Return and Related Forms. The type of return to file depends on whether the business is a sole proprietorship, partnership or corporation. The page features a section for each business type. Business owners can click on the section that applies to them to get the returns and forms they need.

• Take Care of Employees. Business owners with one or more employees must make final federal tax deposits and report employment taxes.

• Pay the Taxes Owed. Even if the business closes now, tax payments may be due next filing season.

• Report Payments to Contract Workers. Businesses that pay contractors at least $600 for services (including parts and materials) during the calendar year in which they go out of business, must report those payments.

• Cancel EIN and Close IRS Business Account. The IRS cannot close out an account until the business has filed all necessary returns and paid all taxes owed.

• Keep Business Records. How long a business needs to keep records depends on what’s recorded in each document.

The page also has information to help business owners who are declaring bankruptcy, selling their business and terminating retirement plans. For easy access, they can reach the page at IRS.gov/closingabiz.

More information
How to close a sole proprietorship: fact sheet and e-poster, (Spanish version)
How to close a partnership: fact sheet and e-poster, (Spanish version)
How to close a corporation: fact sheet and e-poster, (Spanish version)

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service today issued final regulations updating the federal income tax withholding rules for certain periodic retirement and annuity payments made after Dec. 31, 2020.   

Prior to the Tax Cuts and Jobs Act (TCJA), if no withholding certificate was in effect for a taxpayer’s periodic payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions. 

The TCJA amended this rule to provide that the rate of withholding on periodic payments when no withholding certificate is in effect (the default rate of withholding) would instead be determined under rules prescribed by the Secretary of the Treasury.

The final regulation issued today provides guidance for 2021 and future calendar years.  This guidance specifies that the Treasury Department and the IRS will provide the rules and procedures for determining the default rate of withholding on periodic payments in applicable forms, instructions, publications and other guidance. 

In July 2020, the IRS released a draft of a redesigned 2021 Form W-4P and instructions intended to align with the redesigned Form W-4, “Employee’s Withholding Certificate.” 

The draft 2021 Form W-4P also proposed a new default rate of withholding on periodic payments that begin after Dec. 31, 2020.  Based on comments received on the draft Form W-4P, regarding the time required by payors to implement the new form and a new default rate of withholding, the IRS will postpone issuance of the redesigned form. Instead, the 2021 Form W-4P will be similar to the 2020 Form W-4P.

The IRS also intends to provide in the instructions to the 2021 Form W-4P and related publications that the default rate of withholding on periodic payments will continue to be determined by treating the taxpayer as a married individual claiming three withholding allowances.

The Treasury and IRS will continue working closely with the tax community on the redesign of Form W 4P, with the intention of making the withholding system more accurate and transparent for taxpayers.

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

WASHINGTON — Victims of Hurricane Sally that began on Sept. 14 now have until Jan. 15, 2021 to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Currently this includes Baldwin, Escambia and Mobile counties in Alabama, but taxpayers in localities qualifying for individual assistance added later to the disaster area, elsewhere in the state and in neighboring states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 14, 2020. As a result, affected individuals and businesses will have until Jan. 15, 2021, to file returns and pay any taxes that were originally due during this period. This means individuals who had a valid extension to file their 2019 return due to run out on Oct. 15, 2020, will now have until Jan. 15, 2021, to file. The IRS noted, however, that because tax payments related to these 2019 returns were due on July 15, 2020, those payments are not eligible for this relief.

The Jan. 15, 2021, deadline also applies to quarterly estimated income tax payments due on Sept. 15, 2020, and the quarterly payroll and excise tax returns normally due on Nov. 2, 2020. It also applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on Nov. 16, 2020. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2019 extensions run out on Oct. 15, 2020.    

In addition, penalties on payroll and excise tax deposits due on or after Sept. 14 and before Sept. 29, will be abated as long as the deposits are made by Sept. 29, 2020.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2020 return normally filed next year), or the return for the prior year (2019). Be sure to write the FEMA declaration number – 4563 − for Hurricane Sally in Alabama on any return claiming a loss. See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by Hurricane Sally and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.