Top Tax Developments of 2023

(Parker Tax Publishing January 2024)

In 2023, the IRS issued a wealth of highly anticipated guidance on the changes to the various clean energy credit provisions under the Inflation Reduction Act of 2022, including the credits for the purchase of clean vehicles. The IRS also continued to issue guidance relating to the SECURE 2.0 Act of 2022. In addition, some important court decisions came down in 2023 on issues including FBAR penalties, third-party summonses, and the deadline for filing a Tax Court petition.

The following are some of the top tax developments of 2023.

Clean Vehicle Credit Proposed Regulations Implement Inflation Reduction Act Provisions

In April, the IRS issued proposed regulations (REG-120080-22) that implement the critical minerals and battery components requirements enacted by the Inflation Reduction Act of 2022, and provide that these new requirements apply to vehicles placed in service on or after April 18, 2023. Along with the proposed regulations, the Department of Energy rolled out a new website (https://fueleconomy.gov/feg/tax2023.shtml) that provides a list of eligible clean vehicles that meet the requirements for the Code Sec. 30D credit.

In October, the IRS issued proposed regulations (REG-113064-23) that provide guidance on transfers of new and previously owned clean vehicle credits from taxpayers to dealers in exchange for a financial benefit from the dealer, whether in cash, in the form of a partial payment, or down payment for the purchase of the vehicle. The transfer provision applies for purchases of new clean vehicles or previously-owned cleaned vehicles after December 31, 2023.

IRS Provides Guidance on Digital Asset Transactions

Digital asset transactions were an area of focus for the IRS in 2023. In August, the IRS issued proposed regulations (REG-122793-19) relating to information reporting by brokers, the determination of amount realized and basis, and backup withholding for certain digital asset sales and exchanges. Under the proposed regulations, for sales and exchanges of digital assets that take place on or after January 1, 2025, brokers (defined to include digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallet providers) will be required to report gross proceeds on a newly developed Form 1099-DA and to provide payee statements to customers. In November, the IRS rescheduled a hearing on these proposed regulations after being flooded with thousands of comments from stakeholders.

In addition to the proposed regulations, the IRS issued Rev. Rul. 2023-14 which provides that taxpayers who stake cryptocurrency native to a proof-of-stake blockchain and receive additional units of cryptocurrency as rewards upon validation must include in income the fair market value of the rewards received in the year the taxpayer gains dominion and control over the rewards. The IRS also issued Notice 2023-27 to announce that it intends to issue guidance relating to the treatment of certain non-fungible tokens (NFTs) as collectibles under Code Sec. 408(m).

IRS Clamps Down on Employee Retention Credit Claims

In September, the IRS announced in IR-2023-169 that it ordered an immediate moratorium through at least the end of the year on processing new claims for the employee retention credit (ERC) amid rising concerns about a flood of improper claims. In October, the IRS rolled out a withdrawal process in IR-2023-193 for employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest and penalties. The IRS noted that the withdrawal option was created to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn are treated as if they were never filed, and no penalties or interest will be imposed.

Supreme Court Resolves Split on Application of Nonwillful FBAR Penalties

Under 31 U.S.C. Section 5321, the penalty for a non-willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) is $10,000 per violation. A split arose among the circuit courts as to whether the $10,000 penalty applied for each FBAR not filed or for each foreign bank or financial account not reported. This difference in interpretation led to very different outcomes, with taxpayers in some jurisdictions being hit with millions of dollars in FBAR penalties based on the per-account interpretation, while in others the maximum penalty a taxpayer could face for a non-willful violation, regardless of the number of accounts, was $10,000. In Bittner v. U.S., 2023 PTC 42 (S. Ct. 2023), the Supreme Court resolved this dispute in taxpayers' favor, holding that the $10,000 maximum penalty for the nonwillful failure to file a compliant report accrues on a per-report, not a per-account, basis. The Court reasoned that the statute does not speak of accounts or their number but rather the legal duty to file reports which must include various kinds of information about an individual's foreign transactions or relationships. Thus, the "violation" to which the $10,000 penalty applies is the failure to file a report consistent with the statute's demands.

IRS Further Delays $600 Threshold for Reporting on Form 1099-K

In Notice 2023-74, the IRS announced a delay of the new $600 Form 1099-K reporting threshold for third-party settlement organizations (TPSOs) under Code Sec. 6050W(e) for calendar year 2023. As originally enacted, the statute requires TPSOs to file Form 1099-K to report third party network transactions if the gross amount exceeded $20,000 and the number of transactions exceeded 200. In 2021, Congress enacted the American Rescue Plan Act of 2021 (ARP), which amended Code Sec. 6050W(e) to require TPSOs to report payments in settlement of third party network transactions that exceed a minimum threshold of $600 in aggregate payments, regardless of the aggregate number of such transactions.

In January of 2023, the IRS delayed implementation of the $600 reporting threshold for calendar years beginning before January 1, 2023, with the issuance of Notice 2023-10. Similar transition relief was provided in Notice 2023-74, which provides that for calendar year 2023, the pre-ARP threshold applies. Thus, for calendar year 2023 the IRS will not assert penalties for a TPSO for failing to file or furnish a Form 1099-K unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with respect to that participating payee exceed 200. The IRS also noted that it is planning a threshold of $5,000 for 2024 to phase in the new law.

Proposed Regulations Issued on Elective Payments and Transfers of Energy Credits

The Inflation Reduction Act enacted Code Sec. 6417 to allow certain taxpayers that qualify for a clean-energy investment tax credit to elect on their tax return to receive a payment for the full value of the credit. The IRA also enacted Code Sec. 6418, which permits entities that qualify for a tax credit but are not eligible to use elective pay to transfer all or a portion of the credit to a third-party buyer in exchange for cash.

In June, the IRS issued proposed regulations (REG-101607-23) concerning the elective payment provision and proposed regulations (REG-101610-23) on making a transfer election. In addition, the IRS provided proposed regulations (REG-15595-23) to provide rules for elective payments of the advanced manufacturing investment credit under Code Sec. 48D. In temporary regulations (T.D. 9975), the IRS provided mandatory information and registration requirements for taxpayers planning to make elective payment and transfer elections.

Eleventh Circuit: Taxpayers Cannot Rely on Return Preparers to E-File Returns

In U.S. v. Boyle, 469 U.S. 241 (1985), the Supreme Court ruled that reliance on a return preparer for the ministerial task of filing a tax return does not constitute reasonable cause for filing an untimely tax return under Code Sec. 6651(a)(1). Thus, taxpayers generally have a nondelegable duty to file their tax returns.

Prior to the Eleventh Circuit's decision in Lee v. U.S., 2023 PTC 272 (11th Cir. 2023), no circuit court had decided whether the Boyle rule applies to electronically filed returns. In Lee, the Eleventh Circuit held that it does. In Lee, a taxpayer hired a CPA to prepare and file his tax returns. The CPA was required to file all returns electronically, but its software was incapable of handle the taxpayer's returns due to their complexity, so his returns were never filed. In a lawsuit for a refund of penalties, the taxpayer argued that he had reasonable cause due to his CPA's failure to file. The court disagreed, finding that nothing relieved the taxpayer of his duty to supervise his CPA and to ensure that his return had been submitted. In the court's view, the taxpayer retained full control over the process and was in no way forced to work with his agent. The court observed that the taxpayer could have either prepared and filed his returns himself, or taking the returns prepared by his CPA and filing them in paper format directly with the IRS. The court also found that complex tax situations and tortuous e-filing procedures are not disabilities that divest a taxpayer of the faculties needed for ordinary care or prudence and thus a limited exception in Boyle for circumstances beyond a taxpayer's control did not apply.

IRS Provides Transitional Relief for Required Minimum Distributions in 2023

Section 107 of the SECURE 2.0 Act of 2022 amended Code Sec. 401(a)(9) to change the required beginning date for distributions from 401(k) plans and individual retirement accounts (IRAs). Rather than defining the required beginning date by reference to April 1 of the calendar year following the calendar year in which an individual attains age 72, the new required beginning date for an employee or IRA owner is defined by reference to April 1 of the calendar year after the calendar year in which the individual attains the "applicable age" (which is either age 73 or age 75, depending on the individual's date of birth). In Notice 2023-54, the IRS granted relief for distributions made in 2023 that were characterized as required minimum distributions (RMDs) but were not actually RMDs as a result of the enactment of Section 107 of the SECURE 2.0 Act. The notice extended the 60-day rollover period for distributions made between January 1, 2023, and July 31, 2023, to an individual born in 1951 that would have been required before the enactment of the SECURE 2.0 Act. The rollover deadline for these distributions was extended to September 30, 2023.

IRS Delays SECURE 2.0 Act Roth Requirement for Certain Catch-Up Contributions

Section 603 of the SECURE 2.0 Act requires that, for certain higher-income participants in 401(k) and similar retirement plans, catch-up contributions under Code Sec. 414(v)(1) must be designated as Roth contributions pursuant to an employee election. This new Roth catch-up contribution rule was set to apply starting in 2024. However, in Notice 2023-62, the IRS provided an administrative transition period that extends until 2026 the Roth catch-up contribution rule. Specifically, until tax years beginning after December 31, 2025, (1) such catch-up contributions will be treated as satisfying the requirements of Code Sec. 414(v)(7)(A), even if they are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of Code Sec. 414(v)(7)(B).

Supreme Court Rejects Notice Requirement for Third Party Summonses

Under Code Sec. 7609(a), the IRS generally must give notice when it issues summonses as part of an investigation for the purpose of determining a taxpayer's liability for unpaid taxes. However, exceptions apply to this notice requirement. For instance, Code Sec. 7609(c)(2)(D)(i) provides that no notice is required when the IRS issues a summons issued in aid of collection of an assessment made or a judgment rendered against the person with respect to whose liability the summons is issued.

In Polselli v. IRS, 2023 PTC 132 (S. Ct. 2023), the IRS assessed a liability of over $2 million against a taxpayer and set out to collect the money. In doing so, the IRS issued summonses to three banks seeking financial records of several third parties, including the taxpayer's wife and the law firm where he had long been a client. It did not give notice to these third parties before issuing the summonses. Relying on the Ninth Circuit's ruling in Ip v. U.S., 205 F.3d 1168 (9th Cir. 2000), the third parties argued that the summonses should be quashed because the notice exception in Code Sec. 7609(c)(2)(D)(i) applies only if the taxpayer as a legal interest or title in the object of the summons. The Supreme Court rejected the Ninth Circuit's interpretation of the statute and held unanimously that the notice exception applied. The Court found that the statute does not mention legal interest, much less require that a taxpayer maintain such an interest for the exception to apply.

Tax Court Rules That the IRS Cannot Assess Certain Penalties

In April, the Tax Court handed down a decision that could make it more difficult for the IRS to collect some penalties against taxpayers in the future. In Farhy v. Comm'r, 160 T.C. No. 6 (2023), the Tax Court held that the IRS lacks the statutory authority under Code Sec. 6038(b) to assess penalties for failing to file Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The IRS was therefore not permitted to proceed with collection of the penalties from the taxpayer via a proposed levy. The court found that Code Sec. 6038(b), which imposes a penalty of $10,000 with respect to each annual accounting period for which a reporting failure exists, contains no provision specifically authorizing assessment of the penalty. Thus, the penalty must be collected through a civil action. Practitioners observed that the Farhy decision, if upheld on appeal, could open up challenges to other penalty provisions that do not expressly state that they are assessable penalties.

Courts Consider Whether the Deadline for Filing a Tax Court Petition Can Be Extended

In Culp v. Comm'r, 2023 PTC 198 (3d Cir. 2023), the Third Circuit held that the 90-day deadline in Code Sec. 6213(a) to petition the Tax Court to challenge a notice of deficiency is not jurisdictional and is subject to equitable tolling. The court found, based on the statutory language, that the Congress did not clearly mandate a jurisdictional interpretation because the there is no clear tie between the deadline and the jurisdictional grant. The Third Circuit's holding conflicted with the Tax Court's longstanding interpretation of Code Sec. 6213(a) as providing a jurisdictional deadline. In Sanders v. Comm'r, 160 T.C. No. 16 (2023), the Tax Court revisited the issue and concluded, in a divided opinion, that it will continue to treat the 90-day deficiency deadline as jurisdictional in cases appealable outside the Third Circuit.

Final Regulations Issued on Reduced Threshold for Electronic Filing of Returns

In T.D. 9972, the IRS issued final regulations on the lower thresholds for electronic return filing beginning in 2024. The final regulations reduce the 250-return threshold enacted in prior regulations to generally require electronic filing by filers of 10 or more returns in a calendar year. The final regulations also require filers to aggregate almost all information return types to determine whether a filer meets the 10-return threshold and is required to e-file their information returns. In addition, the final regulations eliminate the e-filing exception for income tax returns of corporations that report total assets under $10 million at the end of their tax year, and require partnerships with more than 100 partners to e-file information returns. The final regulations also require partnerships required to file at least 10 returns of any type during the calendar year to e-file their partnership return.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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