June 4, 2021
Biden Administration's budget and Green Book focuses on increased tax compliance and enforcement measures
The Biden Administration's FY2022 budget and Treasury Green Book propose several ways to address tax compliance by, among other things, increasing IRS funding, enhancing financial account reporting and expanding electronic filing.
Under the Administration's proposal, the IRS would receive an additional $417 million in FY 2022 for new enforcement and compliance initiatives, part of a proposed $6.7 billion "program integrity" adjustment proposed for FYs 2022 through 2031. In addition, the IRS would also receive $72.5 billion in mandatory funding for FYs 2022 through 2031 for enforcement, compliance, enhanced information technology capabilities, implementing the proposed financial information reporting regime and improving taxpayer service. Additional resources would be directed toward enforcement against those with incomes over $400,000.
These additional investments are projected to raise over $316 billion in revenue over 10 years.
Enhanced financial account reporting
Financial institutions would be required to report gross inflows and outflows from customer accounts on annual information returns. The information returns would provide breakdowns of (1) physical cash, (2) transactions with a foreign account and (3) transfers to and from another account with the same owner. This requirement would apply to all business and personal accounts (including bank, loan and investment accounts) except for those below a gross flow threshold of $600 or fair market value of $600.
The new information reporting requirements would also apply to accounts similar to financial institution accounts. For instance, payment settlement entities would be required to collect taxpayer identification numbers (TINs) and file a revised Form 1099-K (subject to the same $600 threshold) to report (1) gross receipts, (2) gross purchases, (3) physical cash, (4) payments to and from foreign accounts and (5) transfer inflows and outflows.
The expanded financial reporting regime would also apply to crypto asset exchanges and custodians. In addition, taxpayers would have to report transactions in which they buy crypto assets from one broker and then transfer the crypto assets to another broker, and businesses would have to report transactions in which they receive crypto assets with a fair market value of more than $10,000.
Together, these new reporting requirements, which would take effect for tax years beginning in 2023, are projected to raise an additional $462.6 billion over 10 years.
Improved reporting for backup withholding
Payors of certain reportable payments must withhold tax (backup withholding) from all such payments in the event the recipient does not properly provide a TIN. Currently, the IRS may only require TINs to be provided under penalties of perjury for certain reportable payments; for all other payments to which backup withholding applies, TINs may be provided in other ways, including orally, and are not required to be provided under penalties of perjury.
Effective for payments made beginning in 2022, recipients of all reportable payments would be required to provide a TIN under penalties of perjury.
This requirement is projected to raise $1.8 billion in revenue over 10 years.
Increased oversight of tax return preparers
In 2014, the D.C. Court of Appeals, in Loving v. Commissioner (742 F.3d 1013 (D.C. Cir.)), held that the preparation of tax returns did not constitute "practice before the IRS," so the IRS did not have the authority to regulate return preparers in their capacity as such. Since that time, the IRS has sought legislative intervention that would grant the agency the specific authority to regulate return preparers.
The Administration's proposal would amend the US Code to authorize the Treasury Secretary to regulate all paid federal tax return preparers, including establishing mandatory minimum competency standards, effective for tax returns required to be filed in 2022 or later. In addition, the penalty for "ghost" preparers (those who prepare taxes without identifying themselves on the return) would increase to the greater of $500 per return or 100% of the income derived per return by a ghost preparer (from the current $50 per return, not to exceed $25,000 per preparer per year). The proposal would also increase the limitations period during which the penalty may be assessed from three years to six years from the date the return is filed.
These measures are projected to raise $817 million in revenue over 10 years.
Expanded mandatory electronic filing
Electronic filing would be required for the following types of returns:
Electronic filing would also be required for the following forms:
Further, return preparers who expect to file more than 10 partnership or corporate income tax returns would be required to file such returns electronically.
Enhanced listed transaction enforcement
Listed transactions are those that are the same as, or substantially similar to, certain transactions identified by the IRS as tax avoidance transactions. Information regarding listed transactions must be disclosed to the IRS; if the required information is not disclosed, an extended statute of limitations on the assessment of tax may apply.
The Administration proposes to extend the general IRC Section 6501(a) statute of limitations from three years to six years for returns reporting benefits from listed transactions. The special statute of limitations for listed transactions under IRC Section 6501(c)(10) would similarly be increased from one year to three years to allow the IRS additional time to examine those transactions.
In addition, the proposal would impose secondary liability on certain shareholders who sell the stock of a corporation in connection with listed transactions identified by the IRS as "Intermediary Transaction Tax Shelters." This change would apply to sales of controlling interests in such corporations occurring on or after April 10, 2013.
These two provisions are projected to result in additional revenue of $5.4 billion over 10 years.
Amended centralized partnership audit regime
Under current law, a partnership subject to audit can either chose to pay any imputed underpayment of tax at the partnership level or elect to "push out" the audit adjustments to its reviewed-year partners. Currently, if those adjustments result in a net tax decrease for the reviewed year, the reviewed-year partners may use the decrease to reduce their reporting-year income tax liabilities. These adjustments may not, however, reduce the partner's reporting-year tax liability below zero and may not be carried over to future years. Accordingly, any excess amount not offset with income tax due in the reporting year appears to be permanently lost. The same rules apply when a partnership files an Administrative Adjustment Request (AAR) to make corrections to an originally filed partnership return. Indeed, the potential for a permanent loss of a partner-level overpayment is more likely to occur in the AAR context, as partnerships must "push out" favorable AAR adjustments.
IRC Sections 6226 and 6401 would be amended to treat a net negative change in tax that exceeds the income tax liability of a reviewed-year partner in the reporting year as an overpayment under IRC Section 6401 that may be refunded.
This provision is expected to cost $60 million over 10 years.
Changed requirements for penalty assessment
With the exception of certain automatically imposed penalties (e.g., those imposed for the failure to timely file or pay, or to pay estimated income tax), most civil tax penalties may only be assessed after obtaining the written approval of the immediate supervisor of the IRS employee imposing the penalty (or a designated higher-level official). Recent court cases have created conflicting standards regarding when and from whom such approval must be obtained.
Under the Administration's proposal, a penalty could be approved at any time before the IRS issues a notice reviewable by the Tax Court. If the taxpayer petitions the court, the IRS could raise a penalty in the court if there was supervisory approval before doing so. For any penalty not subject to Tax Court review prior to assessment, supervisory approval would need to be obtained before the assessment is issued.
In addition, approval authority would be extended to any supervisory official, including those at higher levels in IRS management or others responsible for review of a potential penalty. Finally, this proposal would eliminate the written approval requirement for penalties assessed under IRC Sections 6662 (for underpayments of tax), 6662A (for understatements with respect to reportable transactions) and 6663 (for fraud penalties).
These changes are projected to generate $1.9 billion in revenue over 10 years.
The proposals included in the Green Book are consistent with the Biden Administration's focus on increased enforcement and compliance activities, as well as significant, long-term increases to IRS funding. While the budget would infuse the agency with almost $80 billion in additional funding over the 10-year period beginning with FY 2022 and ending with FY 2031, these proposed changes summarized above are projected to generate more than 10 times that amount in additional revenue.
Some of the most controversial elements of the proposal are the significant increases in reporting requirements related to financial institutions, which would go into effect for the 2023 tax year. In light of the government's recent loss in CIC Services LLC v. IRS, in which the Supreme Court held that an advisor's challenge to an IRS reporting requirement related to micro-captive insurance companies was not prohibited under the Anti-Injunction Act, those who oppose such increased reporting requirements may look to the courts for relief.
Though several of the proposals could be viewed by some as taxpayer-unfavorable, the proposed change to the centralized partnership audit regime has been applauded by many in the taxpayer and tax practitioner community who have raised this issue with the government since the implementation of the new audit rules several years ago. Likewise, the increased availability of electronic filing of returns is something for which the tax community has long advocated, as it streamlines the filing process for both the IRS and taxpayers.