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2024 Post-Filing Season Update (Proposed) Tax Relief for American Families and Workers Act of 2024 (Passed by House, January 31, 20 2023 Tax Year-in-Review

Guidance Provided on Early Retirement Distributions for Emergencies and Domestic Abuse Victims, Notice 2024-55; IR-2024-170

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

Distributions for Emergency Personal Expenses

Code Sec. 72(t)(2)(I) provides an exception to the 10 percent additional tax for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. The term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The IRS specifically noted that emergency expenses could be related to: medical care; accident or loss of property due to casualty; imminent foreclosure or eviction from a primary residence; the need to pay for burial or funeral expenses; auto repairs; or any other necessary emergency personal expenses.

The IRS provides that a plan administrator or IRA custodian may rely on a written certification from the employee or IRA owner that they are eligible for an emergency personal expense distribution. Furthermore, the IRS provides that an emergency personal expense distribution is not treated as a rollover distribution and thus is not subject to mandatory 20% withholding. However, the distribution is subject to withholding, the IRS said. If the emergency personal expense distribution is repaid, it is treated as if the individual received the distribution and transferred it to an eligible retirement plan within 60 days of distribution.

If an otherwise eligible retirement plan does not offer emergency personal expense distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is an emergency personal expense distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Distributions to Domestic Abuse Victims

Code Sec. 72(t)(2)(K) provides an exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). The guidance defines a"domesticabusevictimdistribution" as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. "Domesticabuse" is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.

As with distributions for emergency personal expenses, a retirement plan may rely on an employee’s written certification that they qualify for a domestic abuse victim distribution. Similarly, if an otherwise eligible retirement plan does not offer domestic abuse victim distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is a domestic abuse victim distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Request for Comments

The Treasury Department and the IRS invite comments on the guidance, and specifically on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.

Treasury, IRS Announce Tax Loophole and Abusive Partnership Transaction Enforcement Initiative

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

Specifically targeted by this new tax compliance effort are partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities (related parties) enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These basis shifting transactions allow closely related parties to avoid taxes.

The use of these abusive transactions grew during a period of severe underfunding for the IRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period, according to an IRS News Release.

"Using Inflation Reduction Act funding, we are working to reverse more than a decade of declining audits among the highest income taxpayers, as well as complex partnerships and corporations," IRS Commissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.

"This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long," said IRS Commissioner Danny Werfel. "We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here".

This multi-stage regulatory effort announced by the Treasury and IRS includes the following guidance designed to stop the use of basis shifting transactions that use related-party partnerships to avoid taxes:

proposed regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold;
proposed regulation to require taxpayers and their material advisers to report if they and their clients are participating in abusive partnership basis shifting transactions; and
a Revenue Rulingproviding that certain related-party partnership transactions involving basis shifting lack economic substance.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," said U.S. Secretary of the Treasury Janet L. Yellen.

In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of large partnerships with average assets over $10 billion dollars and larger organizational changes taking place to support compliance efforts, including the creation of a new associate office that will focus exclusively on partnerships, S corporations, trusts, and estates.

By Catherine S. Agdeppa, Content Management Analyst

Senate Finance Committee Hears Push for Universal Savings Accounts

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

The concept was promoted by multiple witnesses testifying during a recent Senate Finance Committee hearing on the subject of child savings accounts and other tax advantaged accounts that would benefit children. It also is the subject of a recently released report from The Tax Foundation.

Rather than push new limited-use savings accounts, "policymakers may want to consider enacting a more comprehensive savings program such as a universalsavingsaccount," Veronique de Rugy, a research fellow at George Mason University, testified before the committee during the May 21, 2024, hearing. "Universalsavingsaccounts will allow workers to save in one simple account from which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."

She noted that, like other more focused savings accounts, like health savings accounts, it would have "the benefit of sheltering some income from the punishing double taxation that our code imposes."

De Rugy added that universal savings accounts "have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawals would stop them from addressing an emergency in their family."

Adam Michel, director of tax policy studies at the Cato Institute, who also promoted the idea of universal savings accounts. He said these accounts "would allow families to save for their kids or any of life’s other priorities. The flexibility of these accounts make them best suited for lower and middle income Americans."

He also noted that they are promoting savings in countries that have implemented them, including Canada and United Kingdom.

"For example, almost 60 percent of Canadians own tax-free savingsaccounts," Michel said. "And more than half of those account holders earned the equivalent of about $37,000 a year. These accounts have helped increase savings and support the rest of the Canadian savings ecosystem."

De Rugy noted that in countries that have implemented it, they function like a Roth account in that money that has already been taxed can be put into it and not penalized or taxed upon withdrawal.

Michel also noted that the if the tax benefits extend to corporations as they do with deposits to employee health savings accounts, "to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment into savings by those entities."

Simulating The Universal Savings Account Impact

The Tax Foundation in its report simulated how a universal savings account could work, based on how they are implemented in Canada. The simulation assumed the accounts could go active in 2025 for adults aged 18 years or older.

On a post-tax basis, individuals would be allowed to contribute up to $9,100 on a post-tax basis annually, with that cap indexed for inflation. Any unused "contribution room" would be allowed to be carried forward. Earnings would be allowed to grow tax-free and withdrawals would be allowed for any purpose without penalty or further taxation. Any withdrawal would be added back to that year’s contribution room and that would be eligible for carryover as well.

"The fiscal cost of this USA policy would be offset by ending the tax advantage of contributions to HSAs beginning in 2025," the report states. "As such, future contributions to HSAs would be given normal tax treatment, i.e. included in taxable income and subject to payroll tax with subsequent returns on contributions also included in taxable income."

In this scenario, the Tax Foundation report estimates that "this policy change would on net raise tax revenue by about $110 billion over the 10-year budget window."

As for the impact on taxpayers, the "after-tax income would fall by about 0.1 percent in 2025 and by a smaller amount in 2034, reflecting the net tax increase in those years," the report states. "Over the long run, and accounting for economic impacts, taxpayers across every quintile would see a small increase in after-tax income on average, but the top 5 percent of earners would continue to see a small decrease in after-tax income on average."

By Gregory Twachtman, Washington News Editor

AI Used In Audit Selection For Tax Gap Estimation Needs More Transparency – GAO

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

Yellen Offers Little Insight on Administration’s Post-TCJA Plan

Department of the Treasury Secretary Janet Yellen offered members of the House Ways and Means Committee limited insight as to how the Biden Administration will handle the provisions of the Tax Cuts and Jobs Act that are expiring in 2025.

Change of Accounting Method Procedures Updated, Rev. Proc. 2024-23

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015-5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2023-24, I.R.B. 2023-28, 1207.

Significant changes to the list of automatic changes in Rev. Proc. 2023-24 include:

The following sections are removed because these sections are obsolete:
(1) The following sections are removed because these sections are obsolete:
(a) Section 7.01, relating to changes to a different method or different amortization period for research and experimental expenditures;
(b) Section 12.18, relating to late revocation of elections under Code Sec. 263A(d)(3); and;
(c) Section 20.13, relating to an accrual method taxpayer that wants to change its method of accounting for one or more inventory costs to treat such costs as incurred in accordance with Reg. §§1.461-1(a)(2) and 1.461-4(d)(4);
(2) Section 3.12, relating to a taxpayer that wants to change its treatment of natural gas transmission and distribution property costs to use the natural gas transmission and distribution property safe harbor method of accounting (NGSH Method) under Rev. Proc. 2023-15, is clarified as follows. First, by adding new paragraph 3.12(8) to allow a taxpayer changing to the NGSH Method to choose to treat a method change filed for the taxpayer’s second taxable year ending after May 1, 2023, as filed for the taxpayer’s first taxable year ending after May 1, 2023, solely for purposes of the special rule under section 5.08(3)(a) of Rev. Proc. 2023-15. Second, section 3.12(3)(c)(ii) is clarified to provide that if the taxpayer’s change to the NGSH Method described in Rev. Proc. 2023-15 applies to any asset that is public utility property within the meaning of Code Sec. 168(i)(1), then the taxpayer will adjust its deferred tax reserve account or similar account in the taxpayer’s regulatory books of account by the amount of the deferral of federal income tax liability associated with the Code Sec. 481(a) adjustment applicable to the public utility property subject to the Form 3115 if such amount is no longer being normalized for regulatory purposes by the taxpayer;
(3) Section 6.01, relating to changing from an impermissible to a permissible method of accounting for depreciation or amortization, is modified to remove the second sentence of section 6.01(1)(c)(xx), providing that the change in method of accounting under section 6.21 could be filed under section 6.01 if the duplicate copy was properly filed under section 6.01 before May 11, 2021, because this language is obsolete;
(4) Section 6.18, relating to changing from an impermissible to a permissible method of accounting for an item of qualified improvement property placed in service after December 31, 2017, is modified by removing paragraph (2), providing a temporary waiver of the eligibility rule in sections 5.01(1)(d) and 5.01(1)(f) of Rev. Proc. 2015-13, because this language is obsolete;
(5) Section 6.19, relating to certain late elections under §§ 168 and 1502 or revocation of certain elections under Code Sec. 168, is modified to remove all references to Rev. Proc. 2020-25, I.R.B. 2020-19, 785, because these references as used in section 6.19 are obsolete;
(6) Section 6.21, relating to depreciation of tangible property under Code Sec. 168(g) by controlled foreign corporations, is modified by removing the sunset provision in paragraph (3) to permit CFCs to continue to change their depreciation method to the alternative depreciation system (ADS) in Code Sec. 168(g) under the automatic change procedures of Rev. Proc. 2015-13 (regardless of whether the CFC’s historic depreciation method was permissible or impermissible);
(7) Section 7.01, relating to a changing the method of accounting for SRE expenditures, is modified and clarified as follows. First, new section 7.01(2)(c) is added to clarify that section 7.01(1)(a) of this revenue procedure does not apply to a change to rely on interim guidance provided in sections 8 and 9 of Notice 2023-63, as modified by Notice 2024-12. Second, section 7.01(5)(a) is modified to provide that the eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13 (relating to changes in the final year of a trade or business) does not apply to a change described in section 7.01(1)(a) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021. Third, section 7.01(5)(b) is clarified to provide that a taxpayer may make a change described in section 7.01(1)(a) of this revenue procedure for its second taxable year beginning after December 31, 2021, regardless of whether the taxpayer made a change for the same item for its first taxable year beginning after December 31, 2021. Fourth, section 7.01(6) is clarified to provide that a taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 for a change under section 7.01(1)(a) of this revenue procedure in the second taxable year beginning after December 31, 2021, with respect to expenditures paid or incurred in the first taxable year beginning after December 31, 2021, if the taxpayer did not change its method of accounting under section 7.01(1)(a) in an effort to comply with § 174 for the first taxable year beginning after December 31, 2021. Fifth, section 7.01(7) is modified to provide that the designated automatic accounting method change number for all changes under section 7.01 of this revenue procedure is “265;"
(8) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified as follows. First, section 12.01(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, is removed because this language is obsolete. Second, to add section 12.01(1)(b)(vi) to provide that the change under section 12.01 does not apply to a taxpayer changing to or from the direct reallocation method or the step-allocation method. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13. Third, to add new section 12.01(1)(b)(vii) to provide that the change under section 12.01 does not apply to a taxpayer using the direct reallocation method or step-allocation method that wishes to either make an election or revoke an election to use the 90-10 de minimis rule to allocate a mixed service department’s costs to resale activities. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13;
(9) Section 12.02, relating to certain uniform capitalization (UNICAP) methods used by producers and reseller-producers, is modified as follows. First, section 12.02(4)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, is removed because this language is obsolete. Second, section 12.02(1)(b)(vi) is added to provide that the change under section 12.02 does not apply to a taxpayer changing to or from the direct reallocation method or the step-allocation method. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13. Third, new section 12.02(1)(b)(vii) is added to provide that the change under section 12.02 does not apply to a taxpayer using the direct reallocation method or step-allocation method that wishes to either make an election or revoke an election to use the 90-10 de minimis rule to allocate a mixed service department’s costs to production or resale activities. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13;
(10) Section 12.07, relating to a change not to apply Code Sec. 263A to one or more plants removed from the list of plants that have a preproductive period in excess of two years, is modified to remove section 12.07(2), providing audit protection that applies to blackberry, raspberry, and papaya plants for taxable years that end on or before February 15, 2013, because this language is obsolete;
(11) Section 12.16, relating to the small taxpayer exception from the requirement to capitalize costs under Code Sec. 263A, is modified to remove section 12.16(3)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain taxpayers, because this language is obsolete;
(12) Section 15.01, relating to changes in overall method from the cash receipts and disbursements method (cash method) to an accrual method is modified to remove section 15.01(5)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(e) of Rev. Proc. 2015-13 for changes to comply with Code Sec. 451(b), because this language is obsolete;
(13) Section 15.17, relating to small business taxpayers changing the overall method of accounting to the cash method or to a method of accounting in which the small business taxpayer uses an accrual method for purchases and sales of inventories and uses the cash method of accounting for computing all other items of income and expense, is modified to remove section 15.17(6)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(e) of Rev. Proc. 2015-13 for certain taxpayers, because this language is obsolete;
14) Section 16.08, relating to changes in the timing of income recognition under Code Sec. 451(b) and (c), is modified and clarified as follows. First, section 16.08(3)(a) is added, to clarify that a change under section 16.02 does not apply to a change to comply with the all events test in Reg. §1.451-1(a). Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13. Second, section 16.08 is modified to remove section 16.08(4)(a), relating to short Form 3115, because it is obsolete. Third, section 16.08 is modified to remove section 16.08(4)(c), relating to streamlined method change procedures for certain taxpayers, because it is obsolete. Fourth, section 16.08 is modified to remove section 16.08(5)(c), relating to certain changes with a Code Sec. 481(a) adjustment of zero being disregarded for eligibility rules, because it is obsolete. Fifth, section 16.08 is modified to remove section 16.08(6)(a), relating to audit protection for taxpayers using the streamlined method change procedures, because it is obsolete. Sixth, section 16.08 is modified to remove section 16.08(6)(b)(i), relating to audit protection for taxpayers under examination, because it is obsolete. Seventh, section 16.08(7)(b), which provides an ordering rule for concurrent cost-offset related inventory method changes and changes to apply a cost offset method, is modified to require a taxpayer making a cost-offset related inventory method change(s) and a change to the AFS cost offset method or advance payment cost offset method in the same year of change to make the cost-offset related inventory method change(s) first. Sections 16.08(2)(a)(i)(E), 16.08(2)(a)(ii)(F) and 16.08(2)(b)(v), which provide corresponding changes to a cost offset method as a result of cost-offset related inventory method changes, have been modified to apply only to taxpayers presently using a cost offset method, consistent with the new ordering rule. Eighth, the ordering rule for concurrent cost-offset related inventory method changes and corresponding changes to a cost offset method in section 16.08(7)(b) has been moved to a new section 16.08(7)(c); section 16.08(7)(c) is also clarified to provide that a taxpayer may file a single Form 3115 that includes both the cost-offset related inventory method change and the corresponding cost offset change. Ninth, section 16.08(7)(d) is added to provide examples to illustrate the operation of the ordering rules which require a taxpayer to make a cost-offset related inventory method change before a change to apply a cost offset method and a cost-offset related inventory method change before a corresponding change to a cost offset method;
(15) Section 19.02, regarding changes in method of accounting under Code Sec. 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, I.R.B. 2023-39, 919, is modified as follows. Section 19.02(4) is modified to provide that the eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13 (relating to changes in the final year of a trade or business) does not apply to a change described in section 19.02(1) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021;
(16) Section 22.04, relating to a taxpayer that wants to change from an impermissible method of identifying or valuing inventories to a permissible method of identifying or valuing inventories, is modified to remove section 22.04(1)(d), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes related to a cost offset method, because this language is obsolete;
(17) Section 22.10, relating to changes to permissible methods of identification and valuation of inventories, is modified by removing section 22.10(1)(d), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes related to a cost offset method, because this language is obsolete;
(18) Section 22.17, relating to changes from currently deducting inventories to permissible methods of identification and valuation of inventories, is modified by removing section 22.10(1)(d), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes related to a cost offset method, because this language is obsolete;
(19) Section 22.18, relating to a change by a small business taxpayer to certain Code Sec. 471 methods of accounting, is modified as follows. First, section 22.18(5)(b) and (c), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes, is removed because the language is obsolete. Second, section 22.18 (6)(b), providing streamlined method change procedures for certain taxpayers, is removed because this language is obsolete;
(20) Section 23.01, relating to certain changes from the LIFO inventory method, is modified as follows. First, section 23.01(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes, is removed because the language is obsolete. Second, section 23.01(8), denying ruling protection in certain cases, is removed because this language is obsolete; and
(21) Section 24.02, relating to taxpayers requesting to change their method of accounting from the mark-to-market method of accounting described in Code Sec. 475 to a realization method, is clarified to provide that a dealer in securities making such change under the non-automatic change procedures in Rev. Proc. 2015-13 must also file a Notification Statement that satisfies all applicable requirements of section 24.02(7) of this revenue procedure, including the timely filing requirements.

Subject to a transition rule, this revenue procedure is effective for a Form 3115 filed on or after April 30, 2024, for a year of change ending on or after September 30, 2023, that is filed under the automatic change procedures.

Rev. Proc. 2024-23 amplifies and modifies Rev. Proc. 2023-24, I.R.B. 2023-28, 1207. Rev. Proc. 2011-46, I.R.B. 2011-42, 518, is modified. Rev. Proc. 2024-23 also modifies Rev. Rul. 2004-62, 2004-1 CB 1072; Rev. Rul. 2000-7, 2000-9 CB 712; Rev. Rul. 2000-4, 2000-1 CB 331; Rev. Proc. 2007-48, 2007-2 CB 110; Rev. Proc. 2007-16, C.B. 2007-1, 358; and Rev. Proc. 2000-50, I.R.B. 2000-52, 601.

Rev. Proc. 2024-23

Qualified Derivative Payment Reporting Under BEAT Rules Deferred Until 2027, Notice 2024-43

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2027. Until these reporting rules apply, the current transition period rules for QDP reporting will continue to apply.

Background

Final BEAT regulations adopted with T.D. 9885 include rules under Code Secs. 59A and 6038A addressing the reporting of QDPs, which are not treated as base erosion payments for BEAT purposes. The final regulations generally apply to tax years ending on or after December 17, 2018.

In general, a payment qualifies for the QDP exception if the taxpayer satisfies certain reporting requirements. Reg. §1.6038A-2(b)(7)(ix) requires a taxpayer subject to the BEAT to report on Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts, the aggregate amount of QDPs for the tax year and make a representation that all payments satisfy the requirements of Reg. §1.59A-6(b)(2). If a taxpayer fails to satisfy these reporting requirements, those payments are not eligible for the QDP exception and are treated as base erosion payments, unless another exception applies.

The QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) apply to tax years beginning on or after June 7, 2021. Before these rules are applicable, there is a transition period during which a taxpayer is treated as satisfying the QDP reporting requirements to the extent that the taxpayer reports, in good faith, the aggregate amount of QDPs on Form 8991, Schedule A (Reg. §1.59A-6(b)(2)(iv) and Reg. §1.6038A-2(g)).

In Notice 2022-30, I.R.B. 2022-28, 70, the IRS announced the intention to extend the transition period through tax years beginning before January 1, 2025, while it is studying the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(vi), and the QDP reporting requirements. The IRS has not yet issued regulations amending the applicability date of Reg. §1.6038A-2(g). Since the IRS continue to study these provisions, it has determined that it is appropriate to further extend the transition period.

Deferred Applicability Date of QDP Reporting and Taxpayer Reliance

The IRS intends to amend Reg. §1.6038A-2(g) to provide that the QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2027. Until these rules apply, the transition period rules described above will continue to apply. Taxpayers may rely on this Notice before the amendments to the final regulations are issued.

Notice 2022-30 is modified, and as so modified, is superseded.

Notice 2024-43

IRS Looks To Boost ADR Participation With New Office

In an effort to increase awareness of and participation in the alternative dispute resolution process, the Internal Revenue Service Independent Office of Appeals has formed an Alternative Dispute Resolution Program Management Office.

The ADR PMO launch comes in the wake of a U.S. Government Accountability Office report in 2023 that found a 65 percent decline in the use of various existing ADR programs. In fiscal year 2014, there were 429 ADR cases closed. That number dropped to 119 in fiscal year 2022.

"The GAO recommended that we have a more robust program around managing these [ADR] programs, collecting data, and having a neutral contact point within the IRS that taxpayers and their representatives could contact," IRS Acting Chief of Appeals Liz Askey said in an interview. "So, I think the Program Management Office serves a lot of those purposes, in addition to education and outreach, both internally and externally."

The new office is "partly in response to [the GAO report], and also in conjunction with ongoing transformation efforts within the IRS, and more specifically around Initiative 2.4 of the Strategic Operating Plan, which deals with reaching certainty sooner in disputes between the IRS and taxpayers," Askey said.

And the first step to getting greater participation is improving the awareness of the various ADR options, particularly within the IRS.

"I do think awareness was a factor" in the decreased ADR participation rates, Askey said. "There was a lot of buzz and emphasis on these programs when they were first rolled out. I think both awareness and emphasis on the programs within the IRS declined over the years."

She noted that as new people joined the agency, they just were not aware of the different programs and their benefits.

"We hired some new people and there just wasn’t as much training and emphasis" on ADR, Askey said. "Similarly, as a result, that public awareness of the programs waned a little bit. Awareness and education are some things that the Program Management Office will be focused on – both internal training as well as external education and outreach."

She also said the newly launched office will also look at providing more flexibility to ADR programs "to make them more attractive and user friendly to a wider group of people."

One example she offered was around fast track settlements, noting that current procedures make them available at the end of an audit and only if all issues of that audit are eligible to be fast tracked. Under current procedures, one could not fast track specific issues in an ADR program.

"There are things like that that we can tweak and that we think will make the existing programs more attractive or user friendly," she said.

Michael Baillif, who recently joined the IRS Office of Appeals and will serve as the director of the ADR PMO, added that another goal of the ADR PMO is to expand who uses ADR programs and the ease of use of them.

"What our changes are doing is to try to make ADR more easily accessible," he said, noting that it could have been a stumbling block to participation.

As far as who is being targeted for use of ADR, "one area where we see there’s some real potential benefit [and a] real possibility for growth is in the area of small dollar cases," Baillif said. "ADR is perfect in that situation. It’s less resource intensive and it’s really tailor-made for smaller cases. We see that as an audience in particular that could really benefit from our newer initiatives."

And when he talks about resources, he is talking both for the IRS and the taxpayer. ADR can resolve a case earlier, which saves money for the agency and for the taxpayer, especially those who have representation hired to help with their case, they might not need to pay as much for representation as the cases can get resolved quicker through ADR.

Additionally, "ADR, in many respects, can be a bit of a less formal process," Baillif said. "And it is very dialogue-based, so it’s also very helpful for taxpayers without representatives, who might have been kind of daunted by some of the non-ADR proceedings. ADR is a very taxpayer-friendly approach."

The agency announced that the Program Management Office will pilot changes to Fast Track Settlement – a program that allows Appeals to mediate disputes between a taxpayer and the IRS while the case is still in Exam’s jurisdiction – as well as remove barriers to post-appeals mediation, which introduces a new mediator if the parties are unable to reach agreement during traditional Appeals settlement negotiations. Other early plans by the office include testing ADR programs that allow Appeals to help resolve or mediate disputes earlier in the examination process; streamline and clarify existing guidance; and remove barriers to enable easier use and access to ADR.

By Gregory Twachtman, Washington News Editor

IRS Issues Proposed Regs on Information Reporting on Transactions with Foreign Trusts and Large Foreign Gifts, Proposed Regulations, NPRM REG-124850-08

The IRS has released proposed regulations that provide guidance regarding information reporting of transactions with foreign trusts and receipt of large foreign gifts and regarding loans from, and uses of property of, foreign trusts. Further, the IRS has issued proposed amendments to the regulations relating to foreign trusts having one or more U.S. beneficiaries. The proposed regulations affect U.S. persons who engage in transactions with, or are treated as the owners of, foreign trusts, and U.S. persons who receive large gifts or bequests from foreign persons.

The proposed regulations generally incorporate the Code Sec. 643(i) guidance that was provided in Notice 97-34, with certain modifications to provide procedural rules, such as how to determine a loan’s yield to maturity and how to extend the period of assessment for any income tax associated with the loan, and anti-abuse rules, such as requiring payments and information reporting to be timely. In addition, the proposed regulations provide guidance implementing the Hiring Incentives to Restore Employment (HIRE) Act amendments to Code Sec. 643(i).

Application of Code Sec.643(i) to loans by or uses of property of a foreign trust

Proposed Reg. §1.643(i)-1(b)(1) provides that, unless an exception applies, any loan of cash or marketable securities made from a foreign trust (whether from trust corpus or income) directly or indirectly to a U.S. grantor or beneficiary of the trust or to any U.S. person related to a U.S. grantor or beneficiary of the trust is treated as a Code Sec. 643(i) distribution to such U.S. grantor or beneficiary as of the date on which the loan is made. Indirect loans for purposes of Code Sec. 643(i) to include loans made through an intermediary, agent or nominee.

Exceptions

Proposed Reg. §1.643(i)-2(a) provides four exceptions to the general rule of Proposed Reg. §1.643(i)-1(b)(1):

The general rule will not apply to any loan of cash in exchange for a qualified obligation within the meaning of Proposed Reg. §1.643(i)-2(b)(2)(iii).
In the case of a use of trust property other than a loan of cash or marketable securities, the general rule will not apply to the extent that the foreign trust receives the fair market value of such use within a reasonable period (60 days or less) from the start of the use of the trust property.
The general rule will not apply to any de minimis use of trust property (aggregate use by members of a group consisting of the U.S. grantors and beneficiaries and the U.S. persons related to them for a total of 14 days or less during the taxable year), other than a loan of cash or marketable securities, by a U.S. grantor or beneficiary or a U.S. person related to a U.S. grantor or beneficiary
The general rule will not apply to a loan of cash that is made by a foreign corporation to a U.S. beneficiary of the foreign trust to the extent the aggregate amount of all such loans to the beneficiary does not exceed undistributed earnings and profits of the foreign corporation attributable to amounts that are, or have been, included in the beneficiary’s gross income under Code Secs. 951, 951A or 1293.

Qualified Obligation

Under Proposed Reg. §1.643(i)-2(b)(2)(iii)(A), the term qualified obligation means an obligation that satisfies all of the following requirements:

First, the obligation must be in writing.
Second, the term of the obligation must not exceed five years.
Third, all payments on the obligation must be made in cash in U.S. dollars.
Fourth, the obligation must be issued at par and must provide for stated interest at a fixed rate or a qualified floating rate within the meaning of Reg. §1.1275-5(b).
Fifth, the yield to maturity must be not less than 100 percent and not greater than 130 percent of the applicable Federal rate in effect under Code Sec. 1274(d) on the day on which the obligation is issued.
Sixth, all stated interest on the obligation must be qualified stated interest within the meaning of Reg. §1.1273-1(c).

Reporting Requirements

Proposed Reg. §1.643(i)-2(d) provides that any loan of cash or marketable securities by a foreign trust to a U.S. person and any use by a U.S. person of property belonging to a foreign trust, without regard to whether such loan or use of property is treated as a Code Sec. 643(i) distribution, also is a distribution within the meaning of Proposed Reg. §1.6048-4(b) and subject to the information reporting described under Proposed Reg. §1.6048-4(a).

Tax consequences of a Code Sec. 643(i) distribution

Generally, a foreign trust must treat the Code Sec. 643(i) distribution as an amount properly paid, credited, or required to be distributed by the trust as described in Code Sec.661(a)(2) for which the trust may be allowed a distribution deduction in computing its taxable income. Further, a Code Sec. 643(i) distribution of marketable securities would cause a foreign trust to be deemed to have elected to have Code Sec. 643(e)(3) apply to such distribution, which would cause the trust to recognize gain or loss as if the marketable securities had been sold at fair market value.

Further, any capital gain recognized by the foreign trust would be included in the trust’s distributable net income (DNI) pursuant to Code Sec. 643(a)(6)(C). As a result of the deemed election, a U.S. grantor or beneficiary would be treated as including in gross income under Code Sec. 662(a)(2) the fair market value of the marketable securities, and in computing its taxable income, the foreign trust would be allowed to deduct the fair market value of the marketable securities to the extent allowed under Code Sec. 661(a)(2).

Proposed Reg. §1.6048-4(d) describes the rules that a U.S. person (other than a U.S. owner of the distributing trust) must use to determine the tax consequences of a distribution from a foreign trust other than a distribution that is a loan of cash or marketable securities or the use of other trust property that is not treated as a Code Sec. 643(i) distribution under Proposed Reg. §1.643(i)-1. Two methods to determine the tax consequences are provided: (i) the actual calculation method and (ii) the default calculation method. If the U.S. person who receives the distribution does not receive a copy of the relevant statement, the U.S. person must determine the tax consequences of the distribution under the default calculation method. A U.S. person who receives the relevant statement generally may compute the tax consequences of the distribution under either the actual calculation method or the default calculation method.

Penalty for failure to file information

Under Proposed Reg. §1.6039F-1(e)(1), a U.S. person who fails to furnish the required information is subject to a penalty equal to five percent of the amount of the foreign gift for each month (or portion thereof) for which the failure continues, but not to exceed 25 percent of the amount of the foreign gift.

Further, Proposed Reg. §1.6677-1 provides rules for civil penalties that may be assessed if any notice or return required to be filed under proposed Reg. §§1.6048-2 through 1.6048-4 is not timely filed or contains incomplete or incorrect information.

Applicability Dates

These regulations are proposed to apply to transactions with foreign trusts and the receipt of foreign gifts in taxable years beginning after the date on which the final regulations are published in the Federal Register. However, a taxpayer may rely on these proposed regulations for any taxable year ending after May 8,2024, and beginning on or before the date that final regulations are published in the Federal Register, provided that the taxpayer and all related persons apply the proposed regulations in their entirety and in a consistent manner for all taxable years beginning with the first taxable year of reliance until the applicability date of the final regulations.

Comments and Requests for a Public Hearing

A public hearing has been scheduled for August 21, 2024, at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington DC.

Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by July 7, 2024. Outlines must be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124850-08).