Procedural Fights, Enforcement Among Tax Issues to Watch in 2023

Increased audits of big companies and high wealth taxpayers, developments on several tax disputes before the US Supreme Court, an $80 billion boost in IRS funding, and more procedural fights against IRS rulemaking are among some of the big issues in tax for 2023.

Here’s what to watch for next year.

US Supreme Court

The Supreme Court is expected to rule in Bittner v. United States by the end of June, after having held arguments in November. The court will decide whether the IRS can impose foreign bank account reporting penalties on a per-account basis, as the IRS claims, or only once per year of non-reporting, as argued by petitioner Alexandru Bittner.

The court also has agreed to hold arguments in two other tax-related cases. The scope of attorney-client privilege will be examined Jan. 9 in In re Grand Jury to determine if business communications, specifically tax advice shared by an unnamed law firm, are shielded from government investigators.

The case “could change the way law firms do business to make sure to isolate what’s tax advice and what isn’t,” said Frank Agostino, a former federal prosecutor who heads the tax law firm Agostino & Associates PC.

In Polselli v. IRS, bank account holders are disputing the IRS’s seizure of their records without notice in order to collect on someone else’s tax liabilities. Oral argument has not yet been scheduled.

Charles and Kathleen Moore face a February deadline to petition the Supreme Court in their constitutional challenge to the 2017 tax law’s transition tax, which targeted US shareholders’ unrealized foreign earnings. The case could impact proposals such as Sen. Ron Wyden’s (D-Ore.) push for a “billionaire tax” on the unrealized gains of high-net-worth individuals, according to Andy Grewal, a University of Iowa law professor.

Other tax cases pending at the high court include United States v. Toth, dealing with foreign account reporting penalties; Oakbrook Land Holdings, LLC v. Commissioner, dealing with a conservation easement tax break; and Missouri v. Yellen, testing state spending restrictions on Covid-19 relief.

International Tax Disputes and Multinationals

The new year includes the planned implementation of Pillar One, the first part of the OECD-led global tax deal. Pillar One will tax companies in countries they do business in, even if they don’t have a physical presence. Elizabeth Stevens, who practices in international tax issues at Caplin & Drysdale, is bearish on the implementation of Pillar One in 2023.

“The OECD has devoted colossal energy and technical effort to developing proposed rules and all of these discussion drafts, but 2023 is really when the implementation was expected to happen, and I really don’t see that happening,” said Stevens, noting a resurgence in digital service taxes by some jurisdictions in lieu of the framework.

Legal battles will continue for companies fighting tax bills for business done in other countries.

US pharmaceutical manufacturer Amgen Inc. is fighting a $7.1 billion tax bill for entities held in Puerto Rico. Medical device manufacturer Medtronic is disputing a $1.4 billion tax bill from the IRS after licensing intangible assets to a Puerto Rican subsidiary. In 2016, the Tax Court determined the company instead owed $14 million in taxes, but the final total is expected to rise after an appeals court sent the case back and the Tax Court issued a new ruling in August, which utilized an “unspecified method” to determine the company’s liabilities.

More developments are expected in the long-running Facebook tax dispute that could leave the company on the hook for billions after transferring intangible assets to an Irish subsidiary. Testimony was heard from researchers last May into the company’s early business tactics and valuation.

Procedural Challenges

Taxpayers have been emboldened by recent taxpayer-favorable rulings on the invalidity of IRS notices under the Administrative Procedure Act, which requires a notice-and-comment period before issuing certain new rules. That could mean an increase in challenges to IRS procedures.

Challenges already have been mounting following the Supreme Court’s 2021 ruling in CIC Services v. IRS, holding that the Anti-Injunction Act, which blocks lawsuits aimed at restraining the assessment or collection of tax, didn’t bar a taxpayer’s challenge to an IRS reporting requirement. CIC Services prevailed in its fight last March, with a Tennessee federal court ruling that IRS Notice 2016-66 was invalid.

Other taxpayer wins on IRS notices include Mann Construction, Inc. v. IRS last March, and Green Valley Investors, LLC v. Commissioner and GBX Associates, LLC v. United States in November.

“You’re going to see further challenges to matters in which a taxpayer can make an APA argument to try to get out of a regulatory rule,” said Gil Rothenberg, who previously headed the Justice Department Tax Division’s appellate section and now holds positions at multiple law schools.

“It’s been a winning argument for many taxpayers—why would you decline to raise it?” Rothenberg asked.

IRS Enforcement

Tax pros have noticed the IRS becoming more aggressive toward enforcement, a posture they expect to continue.

“Issues that a year ago a revenue agent might have taken a pass on because of lack of resources, now, with funding guaranteed, that revenue agent may decide to pursue,” said Robert Kovacev, a federal tax attorney at Miller & Chevalier.

He said the new funding would augment the IRS’s ability to use AI and data to analyze returns, creating a “force multiplier” for the agency to step up its investigations, determine tax trends, and increase enforcement efforts.

The IRS has signaled it will bring challenges on multiple fronts against syndicated conservation easements. Courts will face various questions, including over the validity of IRS easement reporting requirements, the appropriateness of easement deeds, and whether easement participants committed fraud.

Meanwhile, IRS criminal investigators will be prioritizing investigations into fraudulent activity around Covid relief programs, according to Dec. 13 comments from IRS Criminal Investigation Chief Jim Lee. Lee noted the government already has brought 390 indictments and secured a nearly 99% conviction rate.

Agostino said he expects prosecutions against people who submitted false documents, reported they had employees even though the business had already shut down, or claimed they were unemployed despite getting another job or working in another state.

“Not everyone’s going to get caught, but you’re going to see some high profile prosecutions,” Agostino said.