FED BAR ROUNDUP: Carried Interest, Debt Write-Off Rules Loom

This is a roundup of Bloomberg Tax’s two days of coverage from the Federal Bar Association tax conference in Washington. Our reporters were there to bring you news on forthcoming regulations and the agency’s audit strategy.

Read up on what you missed.

The IRS plans to clarify a key issue for manufacturers and oil refiners when it finalizes rules on the tax law’s debt interest write-off limit under tax code Section 163(J), Lydia O’Neal reports.

The law limited companies’ interest deductions to an amount equal to 30% of earnings with certain expenses and deductions added back into the income equation.

Proposed rules (REG-106089-18) barred businesses from adding back certain inventory costs, effectively shrinking their interest deduction cap, and spurring complaints.

The IRS may also need extra time to make changes to a proposed package of rules once the White House finishes its review. The IRS has said it will release the proposed and final packages together. Read more.

Paired Up: And the reason the two packages will come out together is because they cross-reference one another, Anthony McQuillen, an IRS attorney-adviser, told Bloomberg Tax. Lydia O’Neal has more.

Retirement Changes

Negotiations to boost retirement savings are underway between House and Senate lawmakers, an aide said on Friday. There’s interest in building on the changes added in the SECURE Act, which was included in the year-end funding package (Pub. L. No. 116-94).

Andrew Grossman, chief tax counsel at the House Ways and Means Committee, said the panel’s chairman Richard Neal (D-Mass.) is interested in revisiting the auto-IRA and auto-401(k) bills (H.R. 4523) he has proposed in the past.

Neal’s earlier bills would reward businesses that automatically enroll workers in employer-sponsored retirement plans rather than waiting for employees to voluntarily participate.

Warren Rojas has more.

Carried Interest Rules

Forthcoming carried interest rules aimed at partnerships won’t be retroactive—partnerships will need to rely on them in full, an IRS official said.

The tax law set a three-year holding period for fund managers to enjoy the beneficial tax treatment. Before the tax law, managers could have much of their income taxed at 23.8%, rather than at the top tax rate of 37%, if they held the investment for more than a year.

The guidance, which could come at any time, is expected to address a tax law loophole that exempted corporations from a longer holding period for the beneficial treatment. Some saw that as an opportunity to convert to an S corporation and avoid the new regime under tax code Section 1061.

Opportunity Zones

Investors pouring money into opportunity zones to take advantage of the 2017 tax law’s capital gains tax break should either adhere to the final rules fully or follow parts of proposed regulations and their own interpretation of the law, up to the effective date, an agency official said.

The final rules (T.D. 9889), issued in December, are effective for tax years starting after March 13, so they won’t go into effect for companies that operate on a calendar-year schedule until 2021.

When asked whether funds that choose to apply the final rules to prior years would have to amend their 2018 or 2019 returns, Sarah Hoyt, attorney adviser in the IRS Office of Associate Chief Counsel (Corporate), said: “I would think you’d have to go back and amend it.”

IRS Auditing Efforts

The IRS is planning a compliance campaign focused on issues arising from the 2017 tax law, said Nikole Flax, deputy commissioner for the agency’s Large Business & International Division.

Part of the campaign will involve real-time sharing of issues auditors are seeing in the field with other parts of the LB&I Division, she said.

Allyson Versprille has more.

Cryptocurrency: The IRS is collecting millions of dollars from cryptocurrency users who have amended their returns. Cryptocurrency is a top compliance focus for the agency.

Using Social Media: Monitoring Facebook and other social media platforms is useful for the IRS Criminal Investigation division as it tries to firm up leads, an official said. Read more.

Employment Tax Focus

The IRS Criminal Investigation Division is focusing primarily on employment tax issues, an official said.

“It now exceeds the amount of investigative time we spend on identity theft, refund crimes, bad return preparers, and questionable refund scams combined,” Don Fort, chief of IRS Criminal Investigations, said.

OECD Plan

Businesses are concerned that the OECD hasn’t solicited enough public feedback on its global minimum tax proposal, a tax official from Accenture said.

“I think on Pillar Two the business community concerns are around this idea that this is moving forward and there’s very little input, there’s no public consultation on it,” Karen Bowen, managing director, senior director of global tax policy at Accenture PLC, said Friday.

The Organization for Economic Cooperation and Development is trying to get nearly 140 countries to agree to an overhaul of how the digital economy is taxed—addressing concerns that multinationals, particularly tech giants, aren’t paying enough tax in the countries where they have users or consumers.

The first “pillar” of the plan would reallocate some corporate profits to the countries where companies do business, while the second pillar would ensure multinationals pay at least a minimum rate of tax. The OECD held separate consultations on both pillars late last year.

Offshore Trust Rules

The IRS will base proposed rules that grant reporting relief to some U.S. taxpayers with certain offshore trusts on a revenue procedure it issued Monday.

The revenue procedure (2020-17) grants exceptions to some U.S. taxpayers who would otherwise be required to provide the agency with information on certain tax-favored foreign retirement and non-retirement savings trusts.

Any comments from taxpayers will go into how the agency writes the proposed rules, said Lara Banjanin, senior counsel at the IRS office of associate chief counsel (International).

Speed Reads

House Ways and Means and Senate Finance Committee tax staffers said any stimulus package to boost the economy from coronavirus likely won’t involve taxes. Colin Wilhelm has more.
FAQs aren’t perfect, but the IRS has no plans to stop using them when it needs to get guidance out quickly, IRS Chief Counsel Michael Desmond said Friday.
An IRS official said Amazon’s win in a tax battle was a “good loss” for the agency because the court still affirmed some of the government’s arguments and validated its position for the future. Read more from Isabel Gottlieb.
Data analytics could help the agency target large partnerships that are most at risk of breaking tax rules, Allyson Versprille reports.
The agency has no plans to issue rules fixing a tax law error that is keeping restaurants and retailers from immediately writing off the cost of interior improvements. That’s up to Congress.
The IRS is finishing rules on how companies should value intercompany transactions. Isabel Gottlieb has more.
Two packages of accounting rule changes—one about revenue recognition—could be coming by the end of the fiscal year. Read more from Nicola M. White.