Archive for the ‘IRS’ Category

Depressing

Thursday, May 5th, 2022

TIGTA (the Treasury Inspector General for Tax Administration) came out this morning with its interim report on the 2022 Tax Filing Season.  I would love to report statistics that make me feel warm and fuzzy; instead, we’re left with more of the same: lots and lots of items sitting around in bins (both virtual and real).

One of the major issues the IRS has faced is hiring.  TIGTA allows us to give numbers to the IRS issues.  On the good side, the IRS has “onboarded” (aka hired) 3,827 Accounts Management employees out of a goal of 5,000 (76.5% of the goal).  However, the IRS hired just 521 Submission Processing employees out of its goal of 5,473 (9.5%).

The backlogs of returns remain.  Here is Figure 3 from the TIGTA report (click on the figure for a larger version):

Work Remaining to be Processed

This is depressing, and I am not changing my estimates of how long paper will take to be processed by the IRS.  If you submit a paper-filed tax return, expect it to take one year to be processed.  If you submit a paper-filed amended return, expect it to take 18 months (1.5 years) to be processed.  If your electronically filed return is unlucky enough to go through Error Resolution, Rejects, or Unpostables (which does not mean you did anything wrong), you’re looking at an average delay of four months.

The report briefly touches on the delays with IRS Account Management functions.  I’m telling clients that when a response is sent to an IRS notice, expect it to take six months to receive the response back from the IRS.  My oldest case is going on three years–it involves a C-Corporation return incorrectly processed as an S-Corporation.  The client owes tax but cannot pay it because it will be sent back to the corporation until the IRS fixes the problem!  (Yes, that has already happened.)  The file has been sent back and forth two times between the IRS offices in Ogden and Cincinnati, and I have no idea when this will be resolved.  We think this case is getting closer–the last two “we need more time” notices have noted the corporation is a C-Corporation (but I’m not holding my breath).  But I digress….

The IRS’s ability to answer telephone calls also remains poor.  The IRS says they answered 19.5% of net calls with a 24 minute average wait.  Recently, the Taxpayer Advocate said that it was about 5% of calls that were answered.  No matter, neither statistic is good, and improvement is desperately needed.

There was one bright spot: The IRS is finding more Identity Theft returns (confirmed fraudulent returns); so far in 2022, they have found 9,626 versus 2,499 found in 2021.  The IRS stopped $807.9 million of fraudulent returns this year versus $12.6 million in 2021.

The conclusions of this report are obvious.  If at all possible, efile your return.  If you do have to mail something to the IRS, bring patience (a whole lot of patience).  And if you’re Commissioner Rettig and you’re stating “everything will be cleared up by year-end,” let’s just say I hope you’re right but I really, really doubt it.

2022 Tax Season: The Tax Season From Hell (Part 2)

Wednesday, May 4th, 2022

In Part 1 of this series we looked at what went wrong with the IRS.  (That post might have been shorter if I had written what went right.)  Today, let’s look at what should be done by Congress and the IRS to fix this mess.

1. Simplify the Tax Code.  Our Tax Code is a mess.  It is far, far too complex.  Most tax professionals now prepare returns for the proverbial husband, wife, 2.2 children living a relatively simple, straightforward life because they cannot do their own taxes due to the complexity!  Congress should (a) pass simplification, not complexity and (b) stop making the IRS a benefits agency (which it isn’t).  Unfortunately, there is no chance of anything like this coming from this Administration.

2. IRS Needs to Stop Stupid Make-Work.  As I noted in Part 1, the Schedule K-2/K-3 regulations on purely domestic partnerships with no foreign operations are a perfect example of this.  There’s no reason for this.  Unfortunately, I have seen no signs of the IRS understanding tax professionals’ needs over the past few years and I have significant doubts of anything like this happening in the near future.

3. Get IRS Employees Back in the Office. One of the things that has led to the massive amounts of paperwork sitting in bins is that IRS employees are still not fully back at their offices.  The IRS announced that all employees will be back in their offices by June 30th.  Here, it’s time for me to give kudos to the IRS for resolving one of the factors that has led to issues.

4. Hire More IRS Employees.  To the IRS’s credit, they are trying to hire more employees but the current environment and the federal government’s pay scale makes this difficult.  I do expect this to resolve over time.

5. Congress Needs to Increase the IRS’s Budget to Allow Multi-Year IT Projects.  Congress did increase the IRS’s budget for the current year, but IRS management has (rightly) complained about the budgetary process.  The main IRS computer system is older than I am (it dates to 1959).  Do you, in your office, use 63-year old computers?  To be fair to Congress, one of the reasons the IRS’s budget got cut was the Lois Lerner/IRS nonprofit scandal from a few years ago: The only tool Republicans had to protest was cutting the IRS’s budget.  While I see the IRS’s budget being increased, I think Congress will do it incrementally rather than significantly because Republicans still don’t trust the IRS.  A factor that impacts this is the ProPublica release of taxpayer information–which the current Administration appears to be ignoring.

6. Change the Tax Filing Deadline to May or June 15th.  I hated writing this, but the reality is that Tax Season is far too compressed and tax returns have gotten more complicated with more busy work.  It’s just impossible for most tax professionals to set a mid-March deadline and get all the returns filed.  (Indeed, as I’ll mention in Part 4 we plan on changing our deadline for receiving paperwork.)  Many of our clients didn’t receive their brokerage 1099s until late March.  Many of our clients still haven’t received their K-1s.

7. Go to the California System Where Extensions Are Automatic (But You Need to Pay the Tax).  I’m not a fan of how California taxes residents, but the California system where extensions are automatic as long as you pay 90% of the tax due is an excellent one.  Filing extensions is more make-work.  This would also cause more individuals to make estimated payments–an added benefit to our tax system.  Unfortunately, this change likely requires legislation, and getting this through Congress is unlikely.

I would love to be an optimist and see these seven solutions implemented.  The reality is that other than seeing IRS employees in their offices, only small incremental change at the IRS is likely.  Who suffers from this?  All of us: taxpayers, tax professionals, and the IRS.  But I promised to be realistic in this series, and we have to deal with the world as it is, not as we want it to be.

In Part 3 of this series (next week) we’ll look at the failures of my business.

2022 Tax Season: The Tax Season From Hell (Part 1)

Tuesday, April 26th, 2022

Mr. Murphy says, what can go wrong will go wrong.  This was definitely the case for the 2022 Tax Season.  In this four-part series, we’re going to cover IRS and government (Congress and the President) failures, our failures, and what we can do to get this right–or at least better–in the future.  As for the prognosis, well, it’s not pretty.

For this series:

Part 1 covers IRS and government issues.  In Part 2, we’ll look at government solutions and the possibility that any of them will occur.  In Part 3, I’ll take a look at taxpayer and tax professional issues this year (including the failures of my company).  In Part 4, we’ll look at solutions for taxpayers and tax professionals, and an overall conclusion.  So onward into the Tax Season From Hell!


This year began with the promise of a “normal” Tax Season.  The pandemic was going to be in the rear-view mirror, we would have the IRS and state tax agencies back to normal, and we could play “Oh What a Beautiful Morning” every day.  Let’s see what went wrong with that picture–starting with the failures of the IRS.

1. The Internal Revenue Service misplaced the word “service.”  In actuality, this could be points 1 to 5.  The failures of the IRS this year were legion.  First, there is some large number of tax returns sitting in bins at IRS Service Centers.  As the National Taxpayer Advocate has said, paper is the IRS’s Achilles heal.  Well, there are (we think) 20-30 million tax returns and an unknown amount of correspondence that are taking forever (or something akin to that) to be processed.  Tax refund processing is 90% of the time excellent.  Unfortunately, if you are in the 10% that has to be manually processed it makes the DMV look good.  And if you want to make that 10% look good, pity those of you who get an IRS Identity Protection verification notice.  It’s close to impossible for you to reach that group.  When you make the DMV look good….

2. The IRS issued nonsensical regulations impacting Tax Season, further condensing Tax Season.  A perfect example are the new K-2/K-3 regulations.  The IRS believed (almost certainly correctly) that they weren’t getting enough information to accurately assess partnerships with foreign operations.  So they issued the new Schedule K-2 and K-3 regulations last summer.  I looked at them when the rules were issued, but believed (wrongly) that they had little impact on my practice.

Au, contraire!  In January (2022), the IRS issued new instructions that (a) causes a circular problem and (b) forced K-2/K-3s onto purely domestic partnerships with no foreign operations and no foreign partners.  The instructions state if a partnership has an owner who must file Form 1116 (foreign tax credit), the partnership must issue these Schedules.  Assume Acme Manufacturers LLC makes widgets here in Las Vegas.  Russ and Scott are the active owners, but there’s a third owner: Martin.  Martin is a passive investor, and invests in all sorts of businesses.  He and his wife file Form 1116 every year.  Thus, under the new instructions Acme must file Schedules K-2 and K-3.

As an experiment, I prepared K-2s and K-3s for my own business.  It added about 20 minutes of work, but for a completely domestic entity wasn’t difficult.  However, there is no reason that this needs to be done.  If Martin is audited, the IRS from the already prepared Schedule K-1 has all the information needed to accurately assess Martin’s liability for his investment in Acme.  The IRS doesn’t need the K-2/K-3–it’s useless make-work.

But that’s not all.  Let’s assume Martin doesn’t have a Form 1116 filing requirement each year, but occasionally does.  What should Debbie, who prepares Acme’s returns do?  Include the useless K-2/K-3s which most of the time aren’t needed or wait until September when she might know for certain?  Neither answer helps in tax preparation for obvious reasons.

But there are other “make-work” items thrust on tax professionals.  We must record IRS Submission ID Numbers (the number assigned by the IRS to each submission of a tax return) on either the signature document or in some other method.  It doesn’t take long–but the minute spent on this (and our tax software automatically notes this for posterity) is a waste of time.  Consider a tax practice with 500 clients.  That’s 500 minutes wasted, or about a day’s worth of work that I must pay someone for.  (Yes, that cost is passed on to you, the tax professional’s customer.)  There are needless interviews we are required to do with clients regarding various tax credits or I can be fined.  And these are just two of many examples.

3. Like all businesses, tax professionals must deal with an array of regulations–many of which are at cross-purposes.  And you, the tax professional’s clients, pay for them all.  We, like most tax professionals, have an Engagement Letter we require all clients to sign. When I started it was one page.  It’s now just over four pages.  Why has it grown?  Regulations and our litigious society.

The IRS requires I engage in best practices (it’s part of Circular 230, how I’m regulated).  I think it’s a good idea to use best practices as much as realistically possible.  But we’re not just regulated by the IRS.  Other regulatory agencies that have jurisdiction over me include:

  • City of Las Vegas Business Licensing
  • Clark County (Nevada) Health Department
  • State of Nevada Health & Safety
  • OSHA
  • Federal Trade Commission (FTC)

The above is not an exhaustive list.  When I started my office here in Las Vegas the regulatory notices fit on a single poster.  They now take two.  You, the tax professional’s customer, pay for this.  I, the regulated, also pay for this in having to do many things that are not useful but are required by law and regulation.

Please don’t misunderstand me: I do not believe in violating the law.  Most regulations and laws are in place for good reasons.  However, it’s like mandatory ethics training for two hours every year (and yes, I am required to take that).  I listen, and every so often learn something (usually something I must now implement to cover myself, not something that helps taxpayers).  I have in the past taught ethics to tax professionals.  But consider if I were an unethical tax professional.  Couldn’t I just goof off during those two hours since just being in the audience gets me the required continuing education hours?  I leave that for you, the reader, to decide.

4. Government regulations cause the tax professional community to shrink.  There’s an excellent quote: “Whatever you tax you get less of.”  Regulations have the same impact.  My professional society, the National Association of Enrolled Agents (NAEA), strongly believes that the IRS should regulate all tax professionals because it would weed out bad preparers.  I disagree.  If someone wants to be a bad professional, it’s easy and no amount of regulation will stop it.  It’s “whack-a-mole.”  But regulations also make it harder for me to operate, with costs passed on to you (the taxpayer).

5. Covid regulations. One of my employees got Covid in March.  He was ill for one day, and he felt fine and ready to come back to work a couple of days later.  Well, one week later he was back in the office.  He was out three to five extra days because of regulations.  (No one else in our office got Covid, but you will see in Part 3 we weren’t very lucky on the illness side this year.)

For those who think I have just become a killer, well, I disagree.  We’ve always had the policy that if you’re ill you go home.  That’s common sense.  It’s also common sense that (a) Covid is now ubiquitous (if you haven’t had it, unfortunately you will), (b) that anyone who wants to can get vaccinated (now, up to four times), and (c) for almost everyone, Covid today is akin to the flu in the death rate (and the death rate for children without serious pre-existing conditions is 0% per the Wall Street Journal).

Overall, the biggest problems came from the IRS.  In Part 2, I look at how we can fix these issues and give you the odds of any of my solutions happening.

The Worst Written IRS Notice Ever?

Thursday, April 21st, 2022

A client, living in a foreign country but who receives his mail in New Jersey (because mail to New Jersey is far more reliable than where he resides) received an IRS notice on his 2021 tax return:

Your refund has been reduced
We’ve reduced your penalty for failing to pay estimated taxes

We reviewed your Form 1040 for the tax period ending 2021 and found that you miscalculated your estimated tax penalty.

If you were in a disaster area, you may have been granted additional time to file returns and pay taxes. We considered any such time when we computed your penalty. Our correction reduces the penalty to $2,000.00.  You are due a refund of $4,500.00.

The taxpayer, when we filed his return, made an EFTPS payment of $200,000 which included a $6,500 estimated tax penalty. He owed tax–substantial tax, as noted.  He paid it in full.  It wasn’t a refund being reduced; rather his estimated tax penalty was reduced causing him to receive a refund.

Additionally, he doesn’t deserve this refund.  He does not reside in North America and the last time I checked the President cannot declare a disaster area in Europe.

In any case, my client was baffled by the wording and I think we have a “winner” (or, at minimum, an early leader) in the worst written IRS notice of the year.

Bozo Tax Tip #1: No Tax Form, No Income!

Friday, April 15th, 2022

A new client was on the phone with me last week:

“Russ, I just found out that I don’t get a tax form for the income I earn.  That means I don’t have to report it, right?”

This individual is filing his first tax returns.  He just graduated college, and is self-employed.  He (thankfully) did keep good books and records, but no one sent him a 1099-NEC (several businesses should have) so his uncle told him he didn’t have to report anything.

Yes, the US has a ‘voluntary’ tax reporting system, but here voluntary doesn’t mean you can skip income without paperwork.  A better word than voluntary is “self-reporting.”  We self-report our income, and the fact that tax paperwork isn’t sent for everything is one of the causes of the tax gap.  As I explained to my client, all income is taxable unless Congress exempts it.  Congress didn’t exempt his self-employment income (indeed, it’s over $100,000).  I asked him if he might want to buy a home in the next two years (which I already knew he did want to do).  I asked him how he was going to qualify for a mortgage without tax returns filed showing income.

I explained to him that his uncle was correct in that many individuals do receive income ‘under the table’ and don’t report it.  I also explained to him that not filing a tax return when you have income is a crime, and you can go to ClubFed for it.  It’s a lot easier to file and pay your taxes and sleep peacefully at night then to do the opposite.  My client agreed, and his return was filed.

Of course, for those who want to live on the edge you can: Ignore income that doesn’t come with tax paperwork.  You may want to remember that if you’re ever audited the IRS might just do a bank account analysis and wonder where those deposits are coming from.


That’s it for this year’s Bozo Tax Tips. We’ll be back with some interesting (I hope) thoughts about Part I of the 2022 Tax Season in a couple of weeks.

Bozo Tax Tip #5: Procrastinate!

Monday, April 11th, 2022

Today is April 11th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 18, 2022, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.  If you make an extension payment on IRS Direct Pay (using “Extension” as  the reason for the payment), the IRS will file an extension for you.

But what do you do if you wait until April 19th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

(Note: If you reside in Massachusetts or Maine, your tax filing deadline for 2021 returns is Tuesday, April 19th.  Thanks to Patriot’s Day you get an extra day this year to file your tax returns and/or extensions.)

Bozo Tax Tip #6: The $0.58 Solution

Friday, April 8th, 2022

With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (on or before April 18th), and you’ve just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $3.75 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

About fourteen years ago one of my clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1,000 in penalties and interest…but he did save $2.42.

Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $3.75! And you can go all out and spend $3.05 and get a return receipt, too (though you can now track certified mail online). For another $1.85, you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

The IRS Is Broken, Example #786

Tuesday, March 29th, 2022

We received a letter for a client from the IRS on the 2016 tax year in yesterday’s mail:

We made an error and sent you an interim letter for the tax period listed above.  Please disregard the letter 2645C that was sent you on Jan. 20, 2022.

We apologize for our error….

There’s only one problem: We never received the letter 2645C that the IRS references, so we have no idea what’s going on.  (Nor am I going to call the IRS up in the height of Tax Season about an erroneous letter right now and find out.)  My best guess is that this letter is, too, erroneous.

Imagine if you were a taxpayer who did not have representation and received this letter in the mail. You would undoubtedly call the IRS up and try to find out what’s going on (given you never received the first letter).  And you’d likely stump the IRS employee you speak with…that is, if you can beat the 3% odds of reaching a human.

Yes, the IRS is broken.

IRS: On Third Thought, Let’s Grant “Relief” That Isn’t

Thursday, February 17th, 2022

Yesterday, I wrote a post stating the IRS was giving relief on the new Schedules K-2 and K-3.  I did that because I believed what the IRS wrote.  The IRS stated:

Coming relief from certain Schedule K-2 and K-3 reporting: The IRS intends to provide certain additional transition relief for this year from the Schedule K-2 and K-3 reporting for certain domestic partnerships and S corporations with no foreign activities, foreign partners or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance. For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules. We are taking this step in response to feedback we received from the tax community and our stakeholders. The IRS will provide full details of this relief soon.

Silly me, taking the IRS at their word.  The IRS did indeed add an FAQ on Schedules K-2 and K-3 detailing the relief.  That relief is noted in question 15, but if you read questions 10 – 12 that relief vanishes.  The IRS in question 10 states they won’t penalize taxpayers who make a “good faith” effort to comply, but in question 11 notes the same rules that can require domestic-only entities to file Schedules K-2 and K-3:

In many instances, a partnership or S corporation with no foreign partners, foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3. For example, if the partner or shareholder claims the foreign tax credit, the partner generally needs certain information from the partnership on Schedule K-3, Parts II and III, to complete Form 1116. This information should have been reported in prior years, including before the Tax Cuts and Jobs Act, on the Schedules K and K-1, and is information the partner or shareholder needs to compute the foreign tax credit limitation, which determines the amount of foreign tax credit available to the partner or shareholder.

So the reality is that nothing has changed from Monday–there is no real relief at this point.  I gave three examples of real relief yesterday: “There are three courses of action the IRS should choose among for the long-term resolution of the issue.  They could just use a de minimis threshold of somewhere between $1 million and $25 million of sales; entities with sales below that and no foreign partners and foreign operations would be exempt.  The IRS could base whether Schedules K-2 and K-3 need to be filed on the prior year’s requirements for filing Form 1116.  Or the IRS could just drop the requirement to file these forms for domestic entities with no foreign partners or operations.”  I would accept any of these (or something similar).

The problem is that I’ve dealt with the IRS in the past on “reasonable cause” issues with an international filing.  A few years ago, clients of mine timely filed (with an extension) Forms 3520 and 3520-A related to a foreign trust.  They mailed these forms using the equivalent of certified mail (neither of these forms can be electronically filed).  A year after filing, they each received a $10,000 penalty notice for late filing.  This made no sense; I had filed the extensions and had proof of that.  We wrote the IRS noting this.  One spouse had the penalties instantly removed.  The other spouse had to go to Appeals over the same exact issue, and it took 30 months before the penalties were finally removed.  (There was never an Appeals hearing–we just received a letter stating the penalties were removed.)  The clients were under stress during those 30 months from a possible $10,000 penalty and were not happy.

I do not want my clients to face draconian penalties.  Battling “reasonable cause” has been an adventure and I don’t think it will get better given that the IRS is drowning in paper.

The IRS also asked why tax professionals didn’t complain when the draft K-2 and K-3 forms and instructions were released last summer.  That’s simple: We did not think we would be impacted.  At that time, the instructions did not include any reference to a US-only entity with no foreign partners or operations needing to file these forms.  The instructions were not changed on this until late January 2022.  How do you expect tax professionals in July 2021 to know the IRS would change the rules in January 2022?

To the IRS: You need to offer real relief.  This is already an awful (likely disastrous) Tax Season.  Your actions on this matter do not inspire confidence.

IRS: “You Know That New K-2/K-3 Requirement: Well, We Had Second Thoughts.”

Wednesday, February 16th, 2022

UPDATE: Make sure you read the post of February 17, 2022 on this issue.

Every so often the IRS actually listens to the tax professional community.  Tax professionals were unanimous in stating that requiring a domestic partnership with no foreign partners and no foreign operations to complete the new Schedules K-2 and K-3 was stupid; it’s similarly stupid for an S-Corp with no foreign operations.  (I wrote about this requirement 11 days ago.)  The IRS added the following notice to a special page on the 2022 Tax Season:

Coming relief from certain Schedule K-2 and K-3 reporting: The IRS intends to provide certain additional transition relief for this year from the Schedule K-2 and K-3 reporting for certain domestic partnerships and S corporations with no foreign activities, foreign partners or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance. For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules. We are taking this step in response to feedback we received from the tax community and our stakeholders. The IRS will provide full details of this relief soon.

It;s great that the IRS realized the problems that these new schedules involve for tax professionals and taxpayers during what is sure to be a challenging Tax Season.  However, there’s still a long-term problem that needs to be resolved.

Consider Harry, a partner in a domestic partnership (call it Acme) with no foreign partners and no foreign operations.  He and his wife typically have about $400 of foreign tax paid through a different partnership he’s a partner in.  He tells the managing member of Acme that for 2022 (next year’s taxes filed in 2023) he doesn’t have a Form 1116 filing requirement.  Acme timely files its 2022 return and doesn’t include Schedules K-2 and K-3.  In September, Harry receives the other partnership’s K-1, K-2, and K-3 and discovers that this year there was $610 of foreign tax paid.  Does Acme now have to amend its 2022 returns?  Is Acme subject to draconian penalties even though the partner had no way of knowing about the Form 1116 requirement? 

There are three courses of action the IRS should choose among for the long-term resolution of the issue.  They could just use a de minimis threshold of somewhere between $1 million and $25 million of sales; entities with sales below that and no foreign partners and foreign operations would be exempt.  The IRS could base whether Schedules K-2 and K-3 need to be filed on the prior year’s requirements for filing Form 1116.  Or the IRS could just drop the requirement to file these forms for domestic entities with no foreign partners or operations.

Unfortunately, I suspect all that’s happened is the problem has been postponed one year.