The White House released the FY 2023 Budget and General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals that is commonly referred to as the “Green Book.” The Green Book summarizes the Administration’s tax proposals contained in the budget. Here are highlights and key takeaways from the Administration’s proposals.
Extend statute of limitations for listed transactions
The Green Book proposal would extend the statute of limitations in section 6501(a) on assessment for returns reporting benefits from listed transactions from three years to six years from the date that the tax return was filed. With respect to taxpayers who fail to include a statement with the tax return with respect to a listed transaction or fail to send the statement to the Office of Tax Shelter Analysis, the statute of limitations under section 6501(c)(10) for such listed transactions would be increased from one year to three years after such information is provided.
The proposals reflect the priority that the Internal Revenue Service has given in the past few years to audits of listed transactions engaged in by taxpayers. Considering, recent case law that may reduce the number of listed transactions for which reporting will be required in the near future, the significance of this proposal may not be as great as the Service might hope. See Mann Construction Inc. v. United States, Docket No. 21-1500, (6th Cir. March 3, 2022) and CIC Services LLC v United States, Case No. 3:17-cv-110 (E.D. Tenn. March 21, 2022).
Impose liability on shareholders to collect unpaid income taxes of applicable corporations
The Green Book proposal would add a new section to the Internal Revenue Code that would impose on shareholders who sell the stock of an “applicable C corporation” secondary liability (without resort to any State law) for payment of the applicable C corporation’s income taxes, interest, additions to tax and penalties to the extent of the sales proceeds received by the shareholders. The proposal applies to shareholders who, directly or indirectly, dispose of a controlling interest (at least 50%) in the stock of an applicable C corporation within a 12-month period in exchange for consideration other than stock issued by the acquirer of the applicable C corporation stock. The secondary liability would arise only after the applicable C corporation was assessed income taxes, interest, additions to tax and penalties with respect to any taxable year within the 12-month period before or after the date that its stock was disposed of and the applicable C corporation did not pay such amounts within 180 days after assessment. For purposes of the proposal, an applicable C corporation is any C corporation (or successor) two thirds or more of whose assets consist of cash, passive investment assets or assets that are the subject of a contract of sale or whose sale has been substantially negotiated on the date that a controlling interest in its stock is sold.
The proposal would not apply with respect to dispositions of a controlling interest (a) in the stock of a C corporation or real estate investment trust with shares traded on an established securities market in the United States, (b) in the shares of a regulated investment company that offers shares to the public or (c) to an acquirer whose stock or securities are publicly traded on an established market in the United States, or is consolidated for financial reporting purposes with such a public issuer of stock or securities.
The proposal addresses difficulties the Internal Revenue Service has encountered in collecting liabilities from closely held corporations that are dissolved or cease operations. It has implications for choice of entity planning, as traditionally a major benefit of the corporate form was the shielding of the shareholders from individual liability for corporate debts. If the proposal passes, the traditional benefits of asset protection are reduced.
Extend statute of limitations for assessment of tax for certain Qualified Opportunity Fund investors
The proposal would allow the Internal Revenue Service to assess any deficiency resulting from a taxpayer’s failure to recognize an inclusion event from an investment in a Qualified Opportunity Fund (QOF) on their income tax return until the date that is three years after the date on which the IRS is furnished with all the information that it needs to assess a deficiency due to such failure. An inclusion event may require a taxpayer to recognize deferred eligible gain.
The proposal would provide an exception to the general rule of IRC 6501, which allows the Internal Revenue Service three years from the filing of a tax return to assess a tax with respect to the year of the return. The proposal reflects the Service’s view that inclusion events are not readily discoverable on most QOF returns. Without this safeguard, the IRS runs the risk of being barred from assessing a deficiency when the general statute of limitation expires.
The proposal has implications for tax provisions in financial statements. With an open statute of limitations, any reserves recorded for a failure to report the income from an inclusion event would not be removable until the inclusion event is properly reported on an amended return.
Expand the Secretary’s authority to require electronic filing of forms and returns
The Green Book proposes to expand the Secretary’s authority and require that more forms and returns be filed electronically as opposed to paper filing.
Electronic filing would be required for returns filed by taxpayers reporting larger amounts or that are complex business entities, including: (a) income tax returns of individuals with gross income of $400,000 or more; (b) income, estate, or gift tax returns of all related individuals, estates and trusts with assets or gross income of $400,000 or more in any of the three preceding years; (c) partnership returns for partnerships with assets or any item of income of more than $10 million in any of the three preceding years; (d) partnership returns for partnerships with more than 10 partners; (e) returns of real estate investment trusts (REITs), real estate mortgage investment conduits (REMICs), regulated investment companies (RICs), and all insurance companies; and (f) corporate returns for corporations with $10 million or more in assets or more than 10 shareholders.
Further, electronic filing would be required for the following forms: (a) Form 8918, Material Advisor Disclosure Statement; (b) Form 8886, Reportable Transaction Disclosure Statement; (c) Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; (d) Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds; and (e) Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Return preparers that expect to prepare more than 10 corporation income tax returns or partnership returns would be required to file such returns electronically
The Commissioner has declared paper to be “the enemy of the IRS,” and this proposal will facilitate more accurate tax reporting while enhancing and modernizing tax administration. Electronic filing is not currently available for gift and estate tax returns. The proposal would reduce errors in the processing of tax returns by providing tax return information to the IRS in a more uniform electronic form, eliminating the human element involved with the processing of paper returns. The proposal would also enhance the ability of the IRS to better target its audit activities using data analytics.
Improve information reporting for reportable payments subject to backup withholding
Information reporting for backup withholding
The proposal would permit the IRS to require payees of any reportable payments to furnish their Taxpayer Identification Numbers (TINs) under penalty of perjury. The proposal would be effective for payments made after Dec. 31, 2022.
The goal of the proposal is to enhance the accuracy of the information for reportable payments subject to backup withholding provided to the IRS. Such accuracy would permit the use of the information returns in enforcement actions against payees who underreport their income.
Currently, due to the volume of incorrect TINs reported to the IRS on Forms 1099 and 1098, the IRS expends significant resources on letters to payors informing them of the discrepancies found within their information returns and on evaluating requests for the abatement of penalties assessed with respect to the information returns under IRC 6721. Many of these penalties are later abated due to reasonable cause. The entire regime drains substantial IRS resources without significantly improving the accuracy of the reporting. The purpose of the proposal is to increase the accuracy of the information returns and improve compliance.
Amend the centralized partnership audit regime to permit the carryover of a reduction in tax that exceeds a partner’s tax liability
As with last year’s Green Book, this year’s edition proposes a technical fix to the new partnership procedural rules (the BBA rules, from the Bipartisan Budget Act of 2015). Under current law, situations can arise where the tax benefit of favorable adjustments, either those arising from an examination or a taxpayer-initiated Administrative Adjustment Request (AAR), can be lost if the taxpayer does not have sufficient tax liability in a relevant subsequent year to absorb the adjustment. The Green Book’s proposal would amend IRC sections 6226 and 6401 to provide that the amount of the net negative change in tax that exceeds the income tax liability of a partner in the reporting year is considered an overpayment under section 6401 and may be refunded. In addition, the Green Book proposes to expand the BBA to encompass additional tax liabilities, namely self-employment and net investment income taxes (Chapter 2/2A taxes).
BBA proceedings require the IRS to address adjustments impacting the Chapter 1 liability of any person at the partnership level, meaning the IRS must follow centralized BBA rules and generally assess and collect from the partnership an imputed underpayment amount with respect to such adjustments that would increase the taxable income of its partners. In contrast, with respect to Chapters 2/2A taxes such as self-employment taxes that result from a BBA proceeding, the IRS was required to separately assess and collect these taxes from individual partners, rather than the partnership. The proposal furthers the intent of Congress that the BBA regime streamline tax administration of partnership examinations.
Extend to six years the statute of limitations for certain tax assessments
The Green Book proposes to amend section 6501 to provide a six-year statute of limitations if a taxpayer omits from gross income more than $100 million on a return.
Current law already provides for a six-year statute of limitations for a substantial omission of gross income. The proposal will extend the statute for cases where the omission exceeds a certain high dollar threshold. Since the threshold is so high, it is most likely to apply to business entities, rather than individuals. Cases involving cross-border issues such as transfer pricing, where adjustments often exceed $100 million, are cases likely to be impacted by the change.
The proposal would also have an impact on financial statement reporting. With an extended statute of limitations, any tax reserves recorded in amounts greater than $100 million for potential income items would generally not be removable until six years after the relevant tax return is filed.