Tax Articles and Resources

July 22, 2024

Katy Giesecke|[email protected]

Illinois Estate Tax
Illinois is one of the twelve states and the District of Columbia that impose an estate tax on a portion of a person’s assets upon death. The Illinois estate tax has a significantly lower exemption and broader reach than the federal estate tax system.

The exemption threshold for Illinois estate tax has been set at $4 million since 2013, which is notably lower than the 2024 federal estate tax exemption of $13.61 million. This means that if the gross adjusted value of an estate exceeds $4 million, the Illinois resident estate will owe Illinois estate tax even if no federal estate tax is due. Illinois estate tax rates range from 0.8 percent to 16 percent.

It is important to note that the Illinois exemption is not portable between spouses, unlike the federal exemption, which means careful estate planning is crucial to minimize potential estate tax liabilities for Illinois residents. Even nonresidents with Illinois assets may get hit with Illinois estate taxes. This article examines the Illinois estate tax structure for both residents and nonresidents.

Residents
For residents, Illinois estate taxes are calculated on the net value of the decedent’s assets after permitted deductions. Unlike federal regulations, Illinois mandates the inclusion of lifetime taxable gifts—those surpassing the annual exclusion limit—when determining the full taxable estate. So substantial gifts to minimize federal estate taxes could still come back to haunt you under the Illinois rules.

However, real estate and tangible personal property located outside Illinois are exempt from state estate tax for decedents who were Illinois residents.

Nonresidents
When it comes to nonresidents with Illinois property, the rules differ. If a nonresident’s estate includes real estate or tangible personal property in Illinois, the estate could be subject to Illinois estate tax based on the value of that property. Notably, intangible assets like stocks or business interests are exempt from this state tax.

Illinois estate tax is applicable if the nonresident’s entire estate exceeds the $4 million exemption. The tax due is proportionally based on the value of the Illinois assets relative to the entire estate. For instance, if a Florida resident owned a home in Illinois
and passed away with an estate valued over $4 million, the Illinois property could trigger state estate tax obligations. Nonresident decedents with Illinois property need to be aware of the potential Illinois estate tax implications and should plan accordingly to ensure that their heirs are not burdened with unexpected tax liabilities.

Minimizing Illinois Estate Tax
Gifts within the annual exclusion limits can reduce both federal and Illinois estate sizes. The 2024 annual gift tax exclusion is $18,000 per recipient.

For those considering relocation out of Illinois while maintaining Illinois property, transferring real estate to a limited liability company can convert ownership to intangible property, potentially circumventing Illinois estate taxes.

Illinois QTIP Election
Married couples in Illinois can defer state estate taxes at their spouse’s death by placing assets into a qualifying terminable interest property (QTIP) trust and making the proper Illinois QTIP election on the estate tax return. An Illinois QTIP trust has specific requirements, which are generally similar to the federal QTIP requirements. This deferral persists until the surviving spouse, if an Illinois resident at the time of death, passes away. If the surviving spouse relocates outside of Illinois, the deferred Illinois estate tax may not be applicable.

As with the federal estate tax system, careful planning is necessary to minimize Illinois estate taxes for residents and non-residents with property in Illinois.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

January 25, 2023

Michael Chandler - George Bagley & Company L.L.C.

Eligible Partners/Shareholders that qualify for Form 1116 exemption exception can make life easier for closely held Partnerships and S Corporations that have little or no foreign activity

The Internal Revenue Service released updated filing instructions in December 2022 on the “Domestic Filing Exception” and “Form 1116 Exemption Exception” which are exceptions to filing the Schedules K-2/K-3 for the 2022 tax year. Please begin by referencing pages 3-4 of the attached partnership and S Corporation instructions along with this article.

In short, if the domestic partnership or S Corporation meets all of 4 requirements they do not need to file Schedules K-2/K-3 for this year. Those requirements are

1. No (or limited) foreign activity as defined in the instructions;
2. Only U.S. citizen/resident alien owners {automatically met by S Corporations because of eligible shareholder rules};
3. Notification is made to each owner; and
4. No 2022 Schedule K-3 requests are made by owners to the entity 1 month prior to filing the entity return.

Note, for those that do not qualify for the above domestic filing exception, there also is a Form 1116 exemption exception as explained on page 10 of the attached partnership version of the instructions and page 9 of the attached S Corporation version of the instructions.

Thus, if you’re an individual owner of closely held domestic partnerships or S Corporations, and you are certain that you’ll only have passive foreign income reported to you on a payee statement such as a 1099-DIV or 1099-INT and total foreign taxes not more than $300 or $600 for the 2022 year (single and married filing joint, respectively) please consider notifying your closely held domestic businesses as soon as possible to help them avoid needing to prepare a Schedule K-3 for your ownership interest. Your notification could look similar to the basic template suggested below. The Partnership/S Corporation is only spared from having to file your specific Schedule K-3 if they receive your notification by the “1-month date” which is defined as 1 month prior to the date the Partnership or S Corporation files its 2022 tax return. Since both Partnerships and S Corporations are due March 15, 2023 this year, consider sending your notification to them as soon as possible before February 15, 2023 if the entity may be able to file without filing an extension. Further, if the Partnership/S Corporation receives such notifications from all owners by the 1-month date they wouldn’t have to prepare any Schedules K-2 or K-3 for the 2022 year.

[Individual Owner Name & Social Security Number]
[Partnership/S Corporation Name & Employer Identification Number]
Notification of Form 1116 Exemption Exception

Dear [Partnership/S Corporation appropriate representative]:

Under IRC §904(j) certain partners are not required to file a Form 1116. I assert that I have determined with my [Certified Public Accountant/Tax Return Preparer/Advisor, etc.] that I am eligible for the Form 1116 exemption in 2022. I am providing this notification to you so you are relieved from completing a Schedule K-3 for my ownership interest.

Please contact me with any questions.

Sincerely,

[Owner name]

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

November 1, 2023

By: Michael Chandler II, CPA, George Bagley & Company L.L.C., [email protected]

In a press release on October 17th, the Governor announced that taxpayers may request to waive penalties and interest with the Illinois Department of Revenue if they cannot timely file or remit payments for income, withholding, sales, specialty and excise taxes that are due between October 7, 2023 and October 7, 2024. The due date for those filings or payments can be requested to be October 7, 2024.

Here's the link to the press release and important provisions are copied below as well. https://tax.illinois.gov/research/press-releases-archive/press-release.27156.html Who Qualifies for Relief?

• Any individual whose principal residence is in Israel, the West Bank, or Gaza (the covered area), or a business entity or sole proprietor whose primary place of business is in the covered area.
• Any individual, business or sole proprietor, or estate or trust whose books, records or tax preparer is located in the covered area.
• Anyone killed, injured, or taken hostage due to the conflict.
• Any individual affiliated with a recognized government or philanthropic organization and who is assisting in the covered area, such as a relief worker.

Taxpayers seeking waivers of penalties and interest for taxes should send a brief written explanation of why they cannot timely file or pay to IDOR. Taxpayers should provide their full name, account number (if using a Social Security number, include only the last four digits), mailing address, and an estimate of when they believe they can file or pay their taxes.

Requests may be sent electronically to [email protected] or via postal mail using the address on the return. Taxpayers who mail their request to IDOR should write "Israeli-Palestinian Conflict 2023" on the top of the return in red and include their explanation for penalties and interest abatement request.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

November 1, 2023

By: Deborah L. Kurtzke, CPA, MST, DK Tax & Accounting Inc., [email protected]

Illinois PTE a way to eliminate SALT Cap for Individuals
The pass-through entity (PTE) tax is an income tax that certain partnerships and subchapter S corporations can elect to pay on behalf of their partners and shareholders. This tax is effective in Illinois starting for tax years after December 31, 2021, and before January 1, 2026. An entity making the election is subject to the 4.95% Illinois tax on its net income. The partners or shareholders of the PTE may claim a credit on their Illinois personal income tax return for their share of the PTE’s tax paid.

Why Elect to Pay the PTE Tax?
The 2017 Tax Cut and Jobs Act limited the itemized deduction on the individual federal tax return for state and local income tax (SALT) to $10,000 per year. This limitation negatively impacted many individual taxpayers, including those who receive income from pass-through entities. As a workaround for this deduction, states started allowing certain pass-through entities to pay tax at the entity level on behalf of their members.

The tax paid by the entity is a deduction against the income from the business, allowing the entity to report less business income to its members, which may result in less income tax on their individual federal income tax returns if their SALT itemized deduction was limited. Since the tax paid is an entity-level deduction passed on to the members, the individual members still benefit from a state income tax deduction not limited by the $10,000 SALT cap. Additionally, non-itemizers can receive a state income tax deduction on their federal income tax returns that they otherwise were unable to deduct.

Required Estimated Tax Payments
Partnerships or S corporations electing to pay the PTE tax may need to make quarterly estimated tax payments. The estimated tax payments are required if the reasonably expected PTE tax and replacement tax due is greater than $500. The estimated payments must equal at least 90 percent of the current year’s tax liability or 100 percent of the prior year’s tax liability. The current year threshold applies if in the previous tax year, there was no tax liability reported or it was a short taxable year. These estimated payments are generally due April 15, June 15, September 15, and December 15 in the applicable year for which the PTE tax is elected, with the payment due on the following business day if the due date is on a weekend or holiday. Illinois assesses late payment penalties if the entity does not pay the entire quarterly installment amount by the applicable due date. Payments are applied to the earliest
due date until the entire estimated liability is paid unless the entity provides specific instructions to apply an amount to another period.

Shareholders or partners can claim a credit for the PTE tax paid against their individual income tax liability to the extent of their share of the PTE tax liability. If the PTE tax is overpaid, the entity should request a refund.

Abatement of Penalties
The Illinois Department of Revenue (IDOR) will abate late fourth quarter estimated tax penalties for the 2022 PTE tax if the entity paid their entire required fourth quarter payment on or before January 17, 2023. The department is assessing penalties on unpaid fourth-quarter amounts starting on January 18, 2023. IDOR announced this in a bulletin released in August 2023.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

May 23, 2023

By: David Kipp and Barbara Brown

$7,500 New Vehicle Clean Energy Credit

For New Vehicles placed in service on or after April 18, 2023, the credit is up to $7,500 but is based on two factors (can receive half the credit if doesn’t qualify for both requirements):

1. Domestic critical materials in the battery ($3,750)
2. Battery’s sourcing requirements ($3,750)

You can see which vehicles qualify at: https://fueleconomy.gov/feg/taxcenter.shtml

Additional Requirements:

MSRP of vehicle (MSRP can be found at the above website or on the vehicle information label at the dealer)
- Vans - $80,000
- Sport Utility Vehicles - $80,000
- Pickup Trucks - $80,000
- Other - $55,000

The taxpayers MAGI limits (no phaseout):
- $300,000 for MFJ
- $225,000 for HH
- $150,000 for all others

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

March 28, 2023

Patrick Lawler - RSM US, LLP - [email protected]

Jacob Seitz - Andersen - [email protected]

As many taxpayers are already aware, the Tax Cuts and Jobs Act introduced the $10,000 state and local tax (“SALT cap”) deduction limitation for individual, trust, and estate filers. In response, states were quick to establish “workarounds” in the form of pass-through entity (“PTE”) level taxes (generally assessed against a Partnership or S-Corp). Connecticut became the first state to respond, enacting a mandatory PTE level tax applicable for the 2018 tax year. The IRS released Notice 2020-75, which provides that both elective and mandatory state entity level income tax laws will be respected for purposes of allowing the full deduction for PTE level tax payments made on or after November 9, 2020. Since this first enactment, many states have established their own elective PTE level taxes. To date, 32 jurisdictions (31 states and 1 locality) have enacted PTE level taxes, leaving 11 states with an owner-level personal income tax (as of March 25, 2023, 4 of these 11 states have proposed PTE bills).

These workarounds provide significant opportunities for taxpayers looking to mitigate the impact of the SALT cap. Though the common theme among these states is to combat the SALT deduction limitation, each use varying methodologies, including differing requirements and limitations for both PTE and individual taxpayers. The following focuses on several areas to watch for when considering elections in the various jurisdictions.

Timing of Elections and Payments
One of the most important considerations when considering PTE level tax elections is to understand when elections and payments are due. While many states require the election to be made on the pass-through entity’s income tax return (either original or extended due date), there are a few notable exceptions. The state of Utah, which enacted a PTE workaround effective for the 2022 tax year, requires taxpayers to make such election before the last day of the PTE’s taxable year. The state of New York imposed a similar requirement with elections due no later than March 15th of the tax year for which the election is effective (i.e., March 15th, 2023 due date for the 2023 PTE level tax election). Though many states may agree on when elections must be made, some differ in terms of when payments are required. For example, California requires a timely estimated tax payment by June 15th of the tax year ($1,000 or 50% of the elective tax paid in prior period, whichever is greater). Even in situations where elections and/or payments are not due until extensions/returns are filed, taxpayers should consider the impact of federal deductibility for payments made after year-end.

Election Considerations
Understanding when elections and payments are due is just a small component in the decision-making process. Taxpayers should also consider the implications of making a PTE tax election which can vary by state. For instance, states like Alabama, Louisiana and Oklahoma require one-time elections, with these remaining in effect until revoked. This could result in unintended consequences for PTEs with frequent owner changes or partner residency changes, forcing taxpayers to proactively consider the future benefits/risks of having such elections in place. Taxpayers must also be aware of the various restrictions imposed by these states – this includes restrictions not only on the PTEs ability to make such elections, but also the eligibility to participate based on the character of owners involved. States like North Carolina and Oregon, for example, require PTEs to be 100% owned by only individuals, trusts or estates. Other states impose restrictions on the owners eligible for inclusion in such PTE level tax calculations, with some only allowing individual owners (i.e., Arizona) or excluding specific owner types like C-Corporations (i.e., Colorado – if unitary with the PTE). With the various limitations put on taxpayers making these elections, it is important for taxpayers to understand how every owner would be impacted – with some states requiring majority owner consent, one negatively impacted owner could make the difference in pursuing such elections.

Credit Limitations
Having now determined when elections/payments are due and confirming your entity and owners are eligible to make an election – was it all worth it? Unfortunately, the next hurdle is also one of the most challenging – will everyone benefit from the election? It’s important to note that in many situations, not all owners will benefit from these PTE level tax elections. With these elections still being relatively new, not all states have commented on how such taxes will be treated for resident credit calculations. As a result, some nonresident owners may not receive a credit on their resident tax return for these taxes, resulting in higher liability on their individual returns. Taxpayers should also be cautious of state-imposed credit limitations – this is the case in states like Massachusetts that limit the credit amount for qualified members (90% limitation), as well in states like Pennsylvania that restrict which credits can be claimed (credit can be claimed for those reported through S-Corporations, not partnerships). Not all states allow for the credit to be refunded, providing a carry forward period for utilization which may result in credits going unused (i.e., Arizona & California provide a 5 year carry forward of the PTE credit). Unless properly vetted, taxpayers and owners may find that the additional tax/burden associated with these limitations far outweigh any expected benefit from the SALT cap workaround.

Takeaways
With the $10,000 SALT cap in effect through at least 2025, state PTE level taxes are here to stay for the foreseeable future. As states continue to evolve and expand these workarounds, it is essential for taxpayers to understand how each differs in terms of applicability/limitations/etc. Detailed analysis is necessary to evaluate not only the benefits, but also the risks associated with these workarounds. Otherwise, taxpayers may find themselves “working around” the clock to fix unintended consequences.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

January 22, 2025

By: Frances L. Wallace, CPA - Tax Practice & Procedures Committee |[email protected]

Try TAS when the IRS Service Center gives you the runaround with your client’s problem.

Do you have an Internal Revenue Service (IRS) issue causing your client a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS (in practice for at least 30 days), or you believe an IRS system, process or procedure just isn’t working as it should? Then Taxpayer Advocate Service (TAS) is there for you. IRS Pub 1546 describes the functions of TAS.

Per the TAS website https://www.taxpayeradvocate.irs.gov/contact-us/submit-a-request-for-assistance:

(1) Your client must have a problem causing financial difficulties for themselves, their family or their business.
(2) Your client (or their business) faces an immediate threat of adverse action.
(3) An IRS office does not grant the tax assistance requested or does not do so in time.

To get help from TAS, you may be required to complete a Form 911 Request for Taxpayer Advocate Service Assistance. You can find the Form 911 with instructions at https://www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/

The quickest method is to fax your request to your local Taxpayer Advocate. The fax number can be found in your local telephone directory or the Taxpayer Advocate web site.

Cases may be accepted via telephone. The telephone contact is (877)777-4778 and is a toll free number. If you are sending the form from overseas, use fax number (304)707-9793 (not a toll free number for US taxpayers.)

If you are the taxpayers representative, be sure to provide a copy of your Power of Attorney (form 2848) with your request. A frivolous request or one whose only purpose is to delay collection action, may be subject to a $5,000 penalty.

There is a qualifier tool there as well.

Some practitioners think “my client is having serious problems resolving an issue but aren’t they too wealthy to be seeking help from TAS?” Nope! There is no income limit for seeking TAS assistance, so don’t be afraid to ask for help even for your wealthiest clients.

I have sought TAS assistance in the following cases:

(1) Taxpayer was a British athlete who had played a few matches in the US and was due a large refund for the 2016 year. Not having a Social Security number, he filed a W-7 for an Individual Taxpayer Identification Number (ITIN). In 2021 the IRS still had not issued his refund.

First the IRS said they never received the return, then they said they had sent him notices that he needed to prove his identity. The address on the return was that of his team in London because he played matches all over the world. He said he never received anything from the IRS.

I contacted TAS and they were able to get his ITIN processed, and more importantly his refund. The ITIN was processed and he did not need to further prove his identity. The client ended up receiving a check from the IRS which included over $10,000 in interest alone.

(2) Taxpayer carried on a pet care business through a corporation (Corp 1). She ran into financial difficulties and Corp 1 went out of business. Years later, she and a friend decided to enter a business similar to the old business. They formed a new corporation (Corp 2) with a name similar to that of the old business and hired staff in Corp 2. Somehow, they made payroll tax payments using the FEIN of the old corporation. As payroll returns were filed, penalties and interest accrued under the new corporation. For over a year the client’s old accountant tried to get the IRS to transfer the payments to the new corporation. The client contacted me, I got in touch with TAS. In a matter of weeks TAS was able to get the payments credited to the correct corporation.

Another practitioner had the following experiences with TAS. His view is that finding a way to align the interest of the IRS with that of the client is a big help in obtaining TAS assistance.

In addition, TAS offers experienced IRS personnel and that may compensate for less experienced IRS staff who may be unsure of their authority or plain unwilling to extend a helping hand to a taxpayer.

(1) A client owed the IRS almost $100,000. She was willing to full pay by refinancing her home under a special program from her lender. But the lender’s program was about to end, and the client needed to expedite the processing of her paper income tax filing to satisfy the lender’s requirements. TAS was able to get the return processed so the taxpayer could satisfy the lender and get the funds. The practitioner attributed this TAS intervention to the interest of the IRS lining up with that of the client’s, in other words a win for both parties.

(2) An insurance salesman owed money to the IRS. The practice in the insurance industry is for the insurance company to give their salespersons advances on expected income. If the income does not materialize the advances are clawed back.

The IRS garnished the advances. The insurance company stopped paying the advances, because if the income never materialized, they would have nothing to claw back. Now the client had no income, and the IRS couldn’t collect anyway. The client was under threat of eviction from his home.

Despite the desperate situation the client was in, the IRS agent refused to stop the collection process. He insisted that the client was required to file all missing years before the agent would consider currently non collectible (CNC) status. This was in violation of the Vinatieri case (Vinatieri v. Commissioner, 133 T.C. 392 (2009)) which held that where there is economic hardship, a collection alternative should be considered even if the taxpayer was not in full compliance with filings.

TAS was able to get the agent to stop the collection action. The insurance company resumed payments, the client could pay his rent and not get evicted. He got CNC status after he filed the returns, but the stay of collection action gave the taxpayer the helping hand and the breathing room he needed. Again, a win for both the client and possibly the IRS which could still collect if the taxpayer’s income increased sufficiently.

So, there you have it. TAS can be helpful in solving thorny taxpayer issues when you just can’t seem to get the IRS to do what makes sense for all concerned.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

July 10, 2024

By: Mark Heroux |[email protected]

Introduction

I have been fortunate to work on administrative tax appeals for almost 40 years. Whether the tax is state, federal, or local, the approach will be the same. I say “I” in this document, but every decision is made by the client. I could have written “we” instead of “I”; but we all know, most of our clients follow our advice.

Step 1. Conduct an exemplary exam. This means responding timely and completely to all inquiries.

Step 2. What’s your approach to issue development, Notices of Proposed Adjustment (NOPAs), and the Agreement on Facts (AOF) Information Document Request (IDR)? You have to develop an approach. Your approach may be flexible. Mine is not; although there’s always an exception to every rule. I work with the Revenue Agent to develop the issues. I timely respond to IDRs. I do not provide analysis of the authorities in writing. I only respond to the requests made. I only provide responses to document requests by providing documents. Rarely do I provide any discussion in writing that goes beyond, “Attached as Exhibit A are documents responsive to IDR 1-1. Attached as Exhibit B are documents responsive to IDR 1-2,” and so forth.

As I work with the agent there comes a point in the exam timeline where I recognize that the client is not going to be able to resolve the issue with the Revenue Agent. While I may have previously provided a short discussion of the application of authorities (one of those exceptions to every rule), at this point I make the decision that I will not provide any written (or any further written) discussion of the application of the law to the facts until I file the written Protest to Appeals.

Step 3. The AOF IDR.
I respond by stating that the AOF IDR is not an enforceable document request and that I will provide the client’s statement of facts in the written protest. I’ve had some Revenue Agents push back a little. Some practitioners have concerns about appearing uncooperative if they don’t respond to the AOF IDR. I submit that practitioners should consider the legal effect of submitting a statement of facts under penalties of perjury multiple times. The whole point of the AOF IDR was to prohibit the client from introducing additional facts at Appeals or at trial. I don’t want to have to explain to my client why the client cannot submit additional information at a subsequent trial because I submitted a response to an unenforceable document
request. Or explain the impact on a case when facts develop post-exam, but I said something different in an AOF IDR. I think the government is on dangerous grounds if they suggest that protecting my clients’ rights to not submit facts under penalties of perjury multiple times is uncooperative. Facts develop all the time including up to the date of a prospective trial. The fact that the client is willing to go to Appeals suggests that the client is willing to go to trial. I caution against committing to a set of facts multiple times.

By responding to the AOF IDR other than as I do, taxpayers submit their arguments prematurely to the government. Your client’s case is unresolved because the issue is grey. By providing the IRS with a detailed analysis in the AOF IDR response, the Revenue Agent can now send this response to Exam technical experts, Chief Counsel, Treasury thought leaders. If you’re responding to an AOF IDR, you’re moving on! Why give the IRS two bites at the apple? One when you respond to the AOF IDR and one when you file your Appeals Protest.

I also don’t want to increase the cost of the dispute to my client. While yes, if I were to respond to the AOF IDR, my subsequent Appeals Protest would largely be a block and copy job, the drafting and filing of an Appeals Protest is not simply block and copy. There will be additional costs to the client, and they can easily rise to the thousands of dollars. Revenue Agents and their technical supporters like to respond to the AOF IDR response, so now I have to review the IRS’s response and adjust my Appeals Protest accordingly.

Step 4. The Protest.
What’s your approach? Slap something together that meets the Revenue Procedure and go argue? Or draft the equivalent of a trial brief and win the issue through outstanding but expensive persuasive writing? I always choose the latter and never choose the former. I can do the former, but my hope with a client that wants to save costs on the Appeals Protest is to convince the client to file a most robust Protest with what I know: The written Protest is the most important document in the Appeals file. Appeals Officers consider themselves as Special Trial Judges. Judges rely on the written briefs. So do Appeals Officers. I strongly recommend that your written Appeals Protest look like a trial brief. It should be thorough and comprehensive.

Step 5. One Month before the Appeals Conference
Conduct a meeting to discuss the process, assign roles, refine plans. One-half hour should do. Lay-out the plan to have a call two weeks before the Appeals conference, and another call two to three days before the conference. Also, plan to submit a written document to the Appeals Officer that will be short (2 pages) and will summarize and update the previously filed protest and hopefully identify new facts or a new argument. This written document will be supplied to the Appeals Officer 1 to 2 weeks prior to the date of the Appeals conference.

Now we know of the IRS rule that “Taxpayers cannot raise new facts at Appeals; that if new facts are presented, the Appeals Officer MUST send the case back to the Exam function.” I submit that a best practice REQUIRES the discussion of new facts; otherwise, why would Appeals resolve the case any differently from the Exam function? The new facts should not be so significant such as to trigger the return of the case to IRS Exam; but I submit you must raise new facts. For example, in a dispute that involves a valuation or interest rate, provide updated facts that impact the valuation or the interest rate. These facts may have developed after the date that you filed the Appeals Protest. I have had an experience where I provided volumes of documents to the Appeals Officer that had not been provided to the Exam function and the Appeals Officer resolved the case. He did not send the case back to the Exam function.

Step 6. Two Weeks before the Appeals Conference
Schedule a meeting for an hour. Try to keep the meeting to a half hour. But take as much time as necessary to make sure that all involved are very comfortable with the process and expectations. Discuss and finalize roles, expectations, and the written submission soon to be filed with the Appeals Officer. Schedule a meeting for two or three days before the Appeals conference.

Step 7. Two to Three Days before the Appeals Conference
Conduct a half-hour meeting to review the plan one more time and give everyone an opportunity to discuss any items. Try to instill confidence in your attendees. The Appeals conference is a unique experience where you can see the tax system at work; an opportunity to debate with the IRS. Enjoy the process. Provide a cell phone number for all involved to call at any time with any questions or concerns.

Step 8. Day of the Appeals Conference
Meet one hour before the conference in an office or coffee shop or lobby…somewhere where you can have a discussion that reviews the plan and allows time for attendees to ask last minute questions; try to get calm and gain confidence.

Step 9. The Appeals Conference Be courteous.
No extraneous discussions. As the leader of the conference for the client, you must orchestrate the conference in a way that does not infringe on the Appeals Officer’s leadership, and make sure that all of your points are made by the professionals who were pre-determined to make the points. Thank the Appeal Officer and her colleagues for their time and consideration. Be prepared to respond to additional information requests from the Appeals Officer.

Step 10. Respond timely to the Appeals Officer’s information requests.
Call the Appeals Officer shortly after sending the requests to discuss them. Whenever I call the Appeals Officer, I always have a 30-60 second message that says, “The taxpayer acted correctly; the taxpayer should not have to suffer any further. You have ability to provide relief to the taxpayer.”

Step 11. Generally, 30 days after your last submission you WILL reach an agreement with the IRS Appeals Officer.

And if you follow the steps outlined above, I think that you will like the results.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

John and Jane Doe were subject to a recent examination in which they chose not to have professional representation. The exam resulted in significant assessments that are still unpaid with the appeal window now closed. They now have come to see you and you have determined that if certain other information was provided, the assessments would have been reduced. Audit Reconsideration may be an available resource.

Overview of Audit Reconsideration

Audit Reconsideration is a process used by the IRS when a taxpayer disagrees with the results of an IRS audit or when the IRS creates a return on their behalf (Substitute for Return, or SFR). This process provides an opportunity to submit new evidence or correct errors after the standard appeals window has closed.

Reconsideration requests will result in either a full adjustment, where the IRS agrees to reduce or eliminate the additional tax, a partial adjustment, where the IRS makes some changes but not all requested adjustments, or no adjustment, where the IRS maintains the original findings.

Eligibility for Audit Reconsideration

• Final Determination: The amount of tax you owe is the result of a final determination on your tax liability. If the taxpayer did not sign a final agreement with the IRS (Form 906, Closing Agreement on Final Determination Covering Specific Matters; Form 866, Agreement As to Final Determination of Tax Liability; Form 870-ADOffer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment), reconsideration may be available.
• New Information: Evidence that was not available or considered during the initial audit.
• Computation or Processing Errors: Errors in the application of tax law or in calculating the amount of tax due.
• Unpaid Assessments: Reconsideration applies only if the tax remains unpaid. If the tax has already been paid, the taxpayer must file a refund claim (subject to the statute of limitations).

Requirements for Submission

• Include a copy of the original audit report (Form 4549) and the taxpayer’s tax return (Form 1040).
• Include copies (not originals) of supporting documents, such as receipts or records substantiating deductions or credits.
• Provide a clear and concise explanation of the changes being requested and how the new information affects the assessment.
• Although not required, Form 12661, Disputed Issue Verification, is recommended to explain the issues you disagree with
• Send the reconsideration request to the address listed on the audit report. If unclear, call the IRS Practitioner Priority Service (1-866-860-4529) for guidance or the exam manager where the examination was initiated if in the field.

Special Considerations

• Combat Zone and Disaster Area Cases: Special rules apply for individuals serving in combat zones or affected by disaster areas, including extensions for providing documentation or submitting requests.
• Identity Theft: Taxpayers who have experienced identity theft may request audit consideration if the audit resulted from fraudulent returns filed in their name. The taxpayer must also submit documentation to prove the identity theft, such as an Identity Theft Affidavit (Form 14039).
• Collection Action: Filing an audit reconsideration may temporarily suspend collection actions, though this could toll the collection statute. Taxpayers on installment agreements must continue making payments during this process.

Appeal Rights

Even if the reconsideration request is denied, taxpayers have appeal rights. Practitioners can help their clients pursue further administrative review if necessary.

Before sending an appeal, you may find success in requesting to speak to a manager if the reconsideration is worked at the field level. If the case is being worked in a campus, a manager conference is generally not available.

Best Practices for Practitioners

• Accurate Documentation: Only submit clear and relevant new evidence, avoiding any redundant or extraneous information.
• Timely Submissions: While there’s no set deadline for submitting an audit reconsideration request, timely action is important to halt collection activities. Prompt submission or reconsideration requests also limits the potential for payments or offsets to be time barred.
• Clear Communication: Keep the client informed of the potential outcomes and the length of time the IRS may take to respond.

Additional Resources

You can read more about the process by reviewing IRS Publication 3598, What You Should Know About The Audit Reconsideration Process. This IRS publication provides a comprehensive guide on audit reconsideration. For a deeper understanding of reconsideration procedures, please refer to IRM 4.13.

If your case is not being worked timely, or if the taxpayer is facing an economic burden, the taxpayer can request assistance from the Taxpayer Advocate Service via Form 911, Request for Taxpayer Advocate Service Assistance.

*Written by Brian Daly and Andrew VanSingel for the Illinois CPA Society Tax Practice and Procedures Committee,
Revised November 2024.

This is a general discussion of this topic and is not meant to provide specific advice for any firm. Please consult with your attorney and/or professional insurance career to address the needs of your firm.

Internal Revenue Manual Part 20. Chapter 1. Section 1

Authored By: Illinois CPA Society – Taxation Practice & Procedures Committee
Magdalena D. Vervilos, Esq.
Friedman & Huey Associates, LLP
627 Landwehr Road, Northbrook, IL 60062

Tax Practitioner’s Letterhead
[ENTER CONTACT INFORMATION]

[Date]

VIA: [ENTER METHOD OF SUBMISSION]
Internal Revenue Service
[Address 1]
[Address 2]
[City, State ZIP]

Re: [Enter Taxpayer Name]
SSN/EIN: [Enter Taxpayer Identification Number]
Tax Form: [Enter Tax Form]
Tax Period: [Enter Tax Period]

To Whom It May Concern:

We are responding on behalf of the above-referenced Taxpayer to the enclosed notice (Enter Notice Number) dated [Enter Date]. Enclosed please find our Form 2848 authorizing our representation. Per this notice, the Internal Revenue Service (“IRS”) has assessed a [failure-to-file/failure-to-pay/failure-to-deposit] penalty totaling $X,XXX. We have reviewed this notice and request abatement of the [failure-to-file/failure-to-pay/failure-to-deposit] penalty under the IRS’ First-Time Penalty Abatement.

We request this one-time consideration in accordance with the administrative waiver procedures outlined in the Internal Revenue Manual 20.1.1.3.6.1. The IRS grants penalty relief for first time abatements if a Taxpayer meets certain criteria: (1) Taxpayer’s history of timely filing tax returns; (2) Taxpayer’s compliance with tax payment obligations; and Taxpayer did not have any penalties within the prior three years. In this matter, the Taxpayer has been compliant with all its tax return filings and payment obligations. The Taxpayer has not been assessed any penalties within the last three years. The attached IRS Account Transcripts substantiate that the Taxpayer has a good history of tax compliance with the IRS.

Therefore, the Taxpayer qualifies for penalty abatement under the First-Time Administrative Waiver. Thank you in advance for the consideration. In the interim, should the IRS require additional information, please do not hesitate to contact me.

Respectfully,

[Firm Name]

By: _____________________________________________
        [Partner/Owner Name], CPA, [Insert Other Credentials]
        [Title]

Enclosures: [Attach IRS [Enter Notice Number]
                         [Attach Form 2848]
                         [Attach IRS Account Transcripts]

Template Prepared By:
Illinois CPA Society – Taxation Practice & Procedures Committee
Magdalena D. Vervilos, Esq.
Friedman & Huey Associates, LLP
627 Landwehr Road, Northbrook, IL 60062

At exam or in collections, the IRS may not be willing to agree to an acceptable resolution for the taxpayer. Have no fear, because IRS Appeals is here!

When the IRS issues a notice that proposes certain actions—such as changes to a tax return or collection activity—the taxpayer may be entitled to request an Appeals conference. Although sometimes the taxpayer alternatively may seek a remedy in court, Appeals is a less formal and typically far less costly forum to resolve disputes between the taxpayer and the IRS. Moreover, a taxpayer does not relinquish the right to pursue a remedy in court by taking a case to Appeals.

Here is Appeals’ mission statement:

To resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.

IRS Appeals proudly boasts independence as a core value. Appeals offers a fresh, objective, and impartial perspective, and provides taxpayers a fair hearing that would otherwise often inefficiently clog up a court’s and taxpayer’s time and resources.

To take a case to Appeals, the taxpayer must protest in writing the IRS’ proposed action. An effectively drafted protest sets the stage for obtaining a fair and desired result.

Over the last few years, the Appeals Judicial Approach and Culture (AJAC) project has implemented policy changes for IRS Appeals to more effectively bifurcate IRS compliance functions and the role of Appeals. The policies are aimed for IRS compliance functions to serve as finders of fact and for Appeals to not take investigative actions but instead resolve cases.

When drafting a protest, a taxpayer must be specific in his appeal of the tax items in dispute. The introduction of new information in Appeals may result in Appeals releasing jurisdiction on the case and returning the file to compliance.

The IRS website states to include all of the following in a written protest:

• Your name, address, and a daytime telephone number.
• A statement that you want to appeal the IRS findings to the Office of Appeals.
• A copy of the letter you received that shows the proposed change(s).
• The tax period(s) or year(s) involved.
• A list of each proposed item with which you disagree.
• The reason(s) you disagree with each item.
• The facts that support your position on each item.
• The law or authority, if any, that supports your position on each item.
• The penalties of perjury statement as follows: “Under the penalties of perjury, I declare that the facts stated in this protest and any accompanying documents are true, correct, and complete to the best of my knowledge and belief.”
• Your signature under the penalties of perjury statement.

Practice Tip: In general, the protest letter should reflect the writing style of the IRS. The goal is for the reader to have the impression the writer is seasoned and has command of the content. A few style tips:

Capitalize “T” for “Taxpayer when referring to the client”; cite authority according to the Bluebook; and use lowercase “s” for section unless it starts a sentence.

A protest letter should contain headings to address each of the items required, as listed above. We will focus on some of the important items through an example. Suppose an IRS examiner proposes to disallow a deduction for mortgage interest claimed on Schedule A.

A list of each proposed item with which you disagree

An effective protest should have a separate sentence for each item in dispute. Each sentence should state that the taxpayer protests the proposed action. For example:

The Taxpayer disagrees with the IRS proposal to disallow the paid mortgage interest claimed on the Taxpayer’s 2014 Form 1040, Schedule A.

The facts

This item represents the taxpayer’s opportunity to highlight favorable facts and downplay unfavorable facts, if any. This section should read like a story. The story should leave the reader with not only an understanding of the facts but also an initial impression that the taxpayer’s position is correct. For example:

The Taxpayer purchased property on [DD/MM/YYYY]. The taxpayer financed the purchase with a mortgage in the amount of $x, with payments of $y/month, beginning on [DD/MM/YYYY]. The taxpayer timely made the mortgage payments every month in 2014. The total mortgage interest paid during 2014 was $z.

Discuss the law

The protest should highlight favorable law. If there is unfavorable law, the protest may mention components of the law that are distinguishable from the issue under protest. Depending on the issues involved, the discussion of law could include a combination of statutes, regulations, case law, or secondary material. For example:

In general, section 163(a) of the Internal Revenue Code allows a taxpayer to deduct all interest paid or accrued within the taxable year of indebtedness.

Apply the law to the facts

After authority is discussed, the protest should analogize favorable authority to the taxpayer’s items in dispute. This section is the primary opportunity for the taxpayer to explain why the law, as applied to the taxpayer’s facts, clearly demonstrates the taxpayer’s position is correct and the IRS’ position is not. For example:

Here, the taxpayer is clearly entitled to deduct mortgage interest paid in 2014. During 2014, the taxpayer made total mortgage payments of $x, with total interest paid of $z. Section 163(a) clearly allows the taxpayer to deduct $z on Schedule A.

Practice Tip: When there are several items in dispute, it may be helpful to address the meatier sections of the protest letter first with an outline of the issues and arguments to generate an initial structure, followed by developing paragraphs for each issue. Save editing and proofreading for last.

Failure to exhaust administrative remedies

If a taxpayer bypasses Appeals and seeks to litigate in U.S. Tax Court, the court may nevertheless first reroute the case to Appeals in an effort to have the taxpayer and IRS resolve the case before going to
trial. The court is most grateful when docketed cases reach a resolution in Appeals. The court may not look favorably upon a taxpayer’s refusal to at least attempt to utilize Appeals. Additionally, taxpayers that bypass Appeals cannot recover costs of litigation.

Conclusion

Draft a strong conclusion in a short paragraph that states the relief sought and why the taxpayer is entitled to the relief.

IRS Appeals is a great forum for a taxpayer to resolve disputes. Drafting a persuasive protest letter is a critical step towards achieving the desired result.

We are often asked about how long specific records should be kept. Please refer to this article for more details. 

Here is a  sample-protest letter.