The CalCPA Committee on Taxation recently met with the IRS to hear from the Criminal Investigations Division, Large Business & International Division, Office of Chief Counsel and Communications and Stakeholder Liaison. We had a solid six hours of presentations and lively discussions and finally the clock forced us to shut down. It was a very good meeting, and we were sorry to see the day end. Here are some highlights. 

Criminal Investigations: Tax Crimes and Fraud Issues

The IRS Criminal Investigations (CI) Division is the only federal law enforcement agency that can investigate violations of the Internal Revenue Code, Title 26. Assistant Special Agent in Charge Jose Gonzalez talked about how cases get to CI and the successes they are having.

In the last year, their investigations have encompassed issues such as international tax fraud (data analytics is allowing them to identify leads from FBAR filings), refund crimes, tax preparer criminals and sales suppression software (Zapper programs), and stolen identity crimes.

Resulting from the COVID chaos, CI has investigated 1,644 tax and money laundering schemes related to CARES Act fraud and has convicted 795 people with 373 people sentenced to federal prison for an average stay of 34 months. Additionally, there have been 409 investigations of Employee Retention Credit (ERC) fraud involving potentially more than $3 billion in potentially bad claims with the most egregious claims coming from fake businesses set up to make false ERC claims. 

At the time of our meeting, the IRS had stopped processing ERC claims, but it has started to process the oldest claims with the least risk. They are still holding off processing claims they view as high risk.

CI handles such high-profile activities as cybercrimes and cryptocurrency thefts as criminals are increasingly targeting virtual currency exchanges to steal crypto. At the same time, it handles employment tax fraud crimes from employee leasing companies and PEOs receiving company withholding, but never paying the government to employers who are short of cash, so they don’t pay their employment taxes to employers paying in cash.

Crime is happening and any of us can be a target. The IRS wants to be notified if you receive phishing emails. You can forward a copy of the email to phishing@irs.gov. Also, if any tax professional has a data loss, after they contact their IT professional for steps to shut it down, they need to report the loss to dataloss@irs.gov.

Large Business & International

Our speakers were Racheal Jaeckel, program manager for the Pass-through Entities Practice Network, and Jackie Mobley, program manager for BBA Operations (Centralized Partnership Audit regime).

The number of pass-through entity returns being filed is growing significantly each year while the audits of these returns are decreasing due to the IRS losing key experienced employees to retirement or being reassigned to other critical areas.

A key focus area is tiered partnerships because of schemes to issue form K-1s under false EINS and Social Security numbers. Since 2021 the compliance program has focused on entities with $10 billion or more in assets in key industries of insurance, real estate and private equity.

The pass-through teams have four current campaigns:

1. Inappropriate claims of income not being subject to self-employment (SECA) taxes by LLC members and limited partners.

2. Sale of partnership interest not allocating income to ordinary income hot assets (IRC Sec. 754)

3. Distributions in excess of basis with a lot of scrutiny of the basis schedules

4. Losses in excess of basis with a lot of scrutiny of the basis schedules

The IRS is sending balance sheet discrepancy letters when the beginning balance sheet doesn’t match the prior year ending balance sheet. Make sure to match these, then show a reconciliation if a change is needed in the current year.

The IRS is excited about a new Pass-through Organization within LB&I that will bring small entity pass-through entities under the same umbrella as the large entities. As a practical matter we as practitioners should be seeing examiners with a higher level of expertise examining small pass-through entities which I believe will make life easier for our clients and us.

We asked if the IRS would ease up on the requirement disallowing partnerships and LLCs with grantor trust partners to elect out of Centralized Audit Regime (CAR). As practitioners our focus is making it easier to file amended returns with corrections. However, CAR is for the benefit of the IRS and the election out of CAR was meant to be very narrow.

Office of Chief Counsel

Our speaker from the Office of Chief Counsel, Special Counsel Hans Famularo, also spoke at length on the importance of increasing the number of large partnership exams. He gave a high-level overview of the allocation of the $80 billion in additional IRS funding; $45.6 billion to hire more agents and acquire investigative technology, $25.3 billion to cover routine operating costs, $4.8 billion to upgrade customer services operations, and the balance to business modernization. The amount of funding was cut back, and he didn’t know which areas would get cut.

He highlighted a publication that practitioners are encouraged to read, Pub 5800 SBSE Partnership Job Aid. This is a new partnership audit technique guide helping agents to know what to look for and why. A copy can be found at irs.gov/pub/irs-pdf/p5800.pdf. The current version was updated in April 2023 and will be updated to reflect changes due to the Tax Court ruling in Soroban Capital Partners, LP vs. Commissioner. (See Page 22).

Communications and Liaison

The day ended with Derek Ganter, Director, IRS Communication & Stakeholder Liaison, who oversees the national outreach and education program with tax practitioners as the primary stakeholders.

He also reminded us that tax practitioners are primary targets for identity theft and emphasized that if we even suspect there may have been a breach we report and follow breach protocols. We cannot afford to wait until we know.

Beware of ERC scams and if we hear of new scams, please alert the IRS.

The IRS is planning to increase the availability of electronic services and said that, overall, ID.me has been a success.

There will be more IRS campus restructuring, so before mailing anything, check to make sure the address you have is the address to use.

The focus of the new IRS commissioner is hiring more agents and implementing technology changes.

Finally, the IRS stakeholder liaisons want to get back in the field to meet with practitioners. If you have a tax committee or discussion group that meets, please invite the local stakeholder liaison to present or attend one of your meetings.