May 2024 / United States

May 22 2024

US, Streamlined Sales Tax Governing Board Adopts Best Practice on Sales Tax Registration, Fails to Pass Nexus Threshold Proposal

The Streamlined Sales Tax Governing Board has adopted a best practice for states to give remote sellers 30 days to register and start collecting and remitting sales tax after meeting the economic nexus threshold. However, the Board failed to pass its proposal for US states to use gross sales as basis in gauging whether remote sellers meet a state's monetary economic nexus threshold.

The proposal to adopt the best practice to use gross sales in determining whether a remote seller meets a US state's economic nexus threshold got 15 votes. However, it failed to meet the required three-fourths supermajority of the 22 full member US states (i.e. 17 votes). As a result, the Board would not update the Streamlined Sales and Use Tax Agreement to include the gross sales basis proposal.

While best practices are not binding on the compact's 24 member states, supporters of the proposal said adopting it could encourage US states to be uniform in measuring economic nexus thresholds.

Note: The SST is a membership organization, comprising 24 member states currently, with the goal of simplifying and modernizing sales and use tax administration in order to substantially reduce the burden of tax compliance.

Source: IBFD Tax Research Platform News

May 7 2024

US, IRS and Treasury Issue Final Regulations on Clean Vehicle Credits

The US Treasury Department and the Internal Revenue Service (IRS) have finalized regulations for clean vehicle credits under the Inflation Reduction Act of 2022 providing taxpayers with long-awaited guidance. The final regulations will come into effect on 5 July 2024.

While closely aligned with previously proposed drafts, the final regulations provide key clarifications on the rules for taxpayers intending to transfer the new and previously owned clean vehicle credits to dealers who are eligible to receive advance payments, as well as provide rules regarding the process for dealers to become eligible entities to receive advance payments of the transferred credits. The final regulations also provide guidance regarding the IRS compliance process in case of a taxpayer's omission of a correct vehicle identification number. In addition to this guidance, taxpayers will now be able to avail themselves of the credit at point of sale rather than waiting for the refund on their federal income tax return.

The regulations also finalize the rules for qualified manufacturers of new clean vehicles to determine if the battery components and applicable critical minerals contained in a vehicle battery are foreign-entity-of-concern (FEOC) compliant with the newly created "traced qualifying value add test."

The test will require manufacturers to account for the value added at each step of the supply chain — extraction, processing and recycling — to assess the amount of minerals in the battery that meet the domestic content requirements for the critical minerals portion of the credit. The test is a departure from an earlier draft proposing the 50% Value Added Test which critics held to lack precision.

The new test will become mandatory in 2027 and manufacturers may continue to use the 50% Value Added Test until then with the caveat that they must submit a report demonstrating how they will comply with the FEOC restrictions once the transition rule is no longer in effect. Taxpayers will be able to rely on vehicle eligibility information provided by manufacturers so that taxpayers are not penalized for manufacturers mistakes.

In the interim period, and until 2027, small amounts of graphite and other minerals used in batteries would be exempt from FEOC restrictions. Officials state that the carve-out for graphite and similar minerals used in batteries was intentional as "their country of origin is nearly impossible to trace." Furthermore, according to the Treasury official, "without the exemption, some vehicles that met nearly all of the requirements could get knocked out of tax credit eligibility due to tiny amounts that couldn't be traced."

The final regulations provide for a program to review compliance with both critical mineral and battery component requirements and the FEOC restrictions starting this summer. The IRS, with assistance from Department of Energy (DOE), will conduct upfront review of documentation and certifications addressing materials sourcing requirements to ensure that qualified manufacturers are accurately representing their battery contents.

Source: IBFD Tax Research Platform News

May 6 2024

US, IRS Can Assess Penalties for Failing to File International Information Returns, Court of Appeals Reverses Tax Court

The DC Circuit Court of Appeals has ruled unanimously that the IRS has the authority to directly assess penalties for failure to file international information returns. In so doing, the court reversed the decision of the Tax Court that had held the IRS lacked that power.

Issue on Appeal

The issue on appeal before the D.C. Circuit Court was whether the penalty for failure to file could be assessed by the IRS, or whether the Department of Justice had to sue and obtain a judgment from a federal district court before it could enforce a taxpayer penalty assessment. Ruling in favor of the IRS, and overturning the US Tax Court decision, the D.C. Circuit Court held that "based on the statute's text, structure, and function, that penalties imposed under § 6038(b), like the related penalties under § 6038(c), are assessable."

The holding centered on four primary conclusions:

  • first, the Court reasoned that the amended code in 1982 intended for § 6038 (b) to be assessable based on a reading of the section's legislative history noting that it was amended with the goal of streamlining the penalty recovery process;
  • second, requiring a federal court's entry of judgement prior to penalty collection would run contrary to the Congressional intent of streamlining the collection process outlined in the legislative history;
  • third, the penalties under § 6038(b) and (c) are subject to a "reasonable cause" affirmative defense which requires the taxpayer to establish that she "exercised ordinary business care and prudence" in attempting to adhere to her reporting obligations. § 6038(c)(4)(B) empowers the IRS, not a court, to grant or deny a defense by requiring reasonable cause to be "shown to the satisfaction of the (IRS) Secretary."; and
  • fourth, the court declined to adopt a reading of § 6038(b) which would create a potential bifurcation of the review of penalties arising from the same violation. Such a view would produce parallel and substantively overlapping judicial tracks for determination of twinned penalties for the same noncompliance: federal district court for the subsection (b) penalties, and Tax Court for the subsection (c) penalties. Based on the legislative history, such a reading of § 6038 (b) would be both ineffective and counterproductive to the Congressional intent.
Background of Appeal

The case on appeal centered around Alon Farhy, who, during tax years 2003 to 2010, had failed to file IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations detailing his foreign corporation ownership interests as required under IRS § 6038(a).

In response to the failure to file, the IRS imposed USD 10,000 per year in initial penalties under § 6038(b) and USD 50,000 per year in continuation penalties with a total assessment of well over USD 500,000 in failure to file penalties.

Upon receipt of the IRS levy notice, Fahry submitted a request for a collection due process hearing arguing that the issued assessment was unlawful as the IRS did not have the legal authority as § 6038(b) did not have a provision authorizing assessment. Rejecting Fahry's argument, the IRS issued a notice of determination and continued its proposed collection action upon which Farhy filed a petition with the US Tax Court for review. Siding with Fahry, the US Tax Court agreed that § 6038(b), unlike many other penalty sections, did not include a provision authorizing assessment of the penalty and found that the § 6038(b) penalty is not an assessable penalty. The IRS appealed the decision to the D.C. Circuit Court.

IRS Assessment of Penalties

The IRS computer system has been programmed to systematically assess penalties under § 6038(b) when it receives delinquent income tax returns with Forms 5471 attached. In the last decade alone, the IRS has assessed nearly 10,000 § 6038 penalties per year, with an average abatement rate of 69% per year.

In light of this, taxpayer advocates argue that a Congressional fix as matter of resource management and efficiency is needed to make international information returns subject to deficiency procedures. Legislation subjecting these reporting penalties to deficiency procedures rather than assessments would additionally allow for situations where taxpayers have reasonable cause for non-filing. The current ruling leaves open the remote possibility for such forthcoming legislation.

Source: IBFD Tax Research Platform News