We hope your February is going well.  This week, we have several updates from the IRS, the Pennsylvania DOR shares ways to avoid the deceptive "Final Demand for Payment" letters, Texas issues a field guide for taxpayers, and more.

Have a happy and safe Presidents Day on Monday (and hopefully a three-day weekend).  Please enjoy this week's e-briefing!

IRS Nominee Werfel Appears Before Senate Confirmation Committee 

Senators given until today for additional questions, to vote on advancing to full Senate 

IRS Commissioner nominee Daniel Werfel answered questions for nearly three hours during a Senate Finance Committee confirmation hearing on Wednesday. Much of the hearing's focus was spent on how $80 billion in Inflation Reduction Act funding provided to the IRS over the next 10 years would be spent - Werfel’s foremost task if confirmed.

Werfel said in his opening statement he would meet Treasury Secretary Janet Yellen's directive to not increase audit rates “relative to historic levels” for small businesses and households making less than $400,000. He insisted rebuilding the nation’s trust and improving taxpayer service would be his priorities.

“Americans rightfully expect a more modern and high-performing IRS,” Werfel said, speaking to concerns about service at the IRS and implementing upgrades such as new scanning technology for paper returns. He also addressed the need to change computer algorithms to address a recent study showing a higher rate of tax audits of Black taxpayers related to EITC and earlier studies showing higher audit rates for lower-income taxpayers. He committed to investigating the matter and reporting back to the committee within 60 days of being confirmed.

The White House nominated Werfel, a longtime federal budget official who briefly served as acting IRS commissioner in 2013, to lead the agency. Senators were given until today to ask additional questions in writing and will need to meet afterward to vote on advancing the nomination to the full Senate.

Since leaving the IRS in late 2013, Mr. Werfel has been a managing director and partner at Boston Consulting Group, working on its public-sector team to help governments modernize their agencies.

Taxpayers can now upload more documents to IRS 

More than 500,000 expected to benefit this year from new online submission option 

Taxpayers who receive certain notices requiring them to send information to the IRS now have the option of submitting their documentation online through IRS.gov.

This new secure step will allow taxpayers or their tax professional to electronically upload documents rather than mailing them in, helping reduce time and effort resolving tax issues.

This potentially can help more than 500,000 taxpayers each year who receive these notices, which include military personnel serving in combat zone areas and recipients of important credits like the Earned Income Tax Credit and Child Tax Credit.

Initially, the online correspondence feature will be available to taxpayers who receive one of nine IRS notices. For the most part, the IRS sends these notices to individual tax filers claiming various tax benefits, such as:

Taxpayers receiving these notices can respond securely to IRS online, regardless of whether they have an IRS Online Account.

Language on the notice informs the taxpayer to, “Send us your documents using the Documentation Upload Tool within 30 days from the date of this notice.” It includes the link and a unique access code.

The taxpayer opens the link in any browser and input their unique code, their first and last name and Social Security, Individual Taxpayer Identification or Employee Identification number. They then securely upload scans, photos or digital copies of documents (maximum of 15MB per file, up to 40 files). They will then receive confirmation that the IRS received their documents, and the IRS employee assigned the case can manage the transmitted documents.

Taxpayers who receive one of the following notices with the link and access code can choose to upload their documents:

In the coming months and years, the IRS plans to expand this capability to dozens of other notices. In addition, the IRS will offer digital correspondence on a variety of other taxpayer interactions. During live interactions such as phone calls with taxpayers, IRS employees will be able to grant upload access by providing the link and unique access code.

For more information, see the fact sheet Resolving cases with secure digital correspondence for taxpayers on IRS.gov.

IRS Announces New Pilot Phase for Compliance Assurance Process Program

Acceptance to the pilot program will be based on input from multiple IRS Large Business & International practice areas

The IRS announced this week changes to the Bridge phase of the Compliance Assurance Process (CAP) program. CAP is a cooperative pre-filing program for large corporate taxpayers.  

The CAP program began in 2005 to resolve tax issues through open, cooperative, and transparent interactions between the IRS and taxpayers before the filing of a return.  

The IRS made significant changes to the program in 2019 to improve its operation and to ensure the best use of limited government resources. One outcome of this change was the development of the Bridge phase in CAP, which is reserved for taxpayers whose risk of noncompliance does not support the continued use of IRS compliance resources.   

During the Bridge phase, the IRS will not accept any disclosures, conduct any reviews, or provide any assurances. In the three years since its inception, the IRS has received consistent feedback from taxpayers that participation in the Bridge phase deprives them of the most important aspect of CAP – the review by the IRS.  

Due to this feedback, the IRS developed a new pilot phase called “Bridge Plus.” Taxpayers will be required to provide book-to-tax reconciliations, credit utilization, and other supporting documentation shortly after their audited financial statement is finalized. An IRS team will risk-assess the documents to determine if the taxpayer is suitable for the Bridge Plus phase.  

Taxpayers accepted into this new phase will be required to submit a draft return 30 days before filing. The IRS team will review the return for consistency with the taxpayer’s prior submission. If the draft return is consistent, the taxpayer will be instructed to file a return. If the filed return is consistent with prior submissions, the taxpayer will be issued a full acceptance letter.  

The pilot will be offered only to CAP participants that were in the Bridge phase for 2022 and have been recommended to participate in Bridge again in 2023. Acceptance into the program will be based on input from multiple IRS Large Business & International practice areas as well as the low-risk determination.  

Consistent with its original purpose, CAP is a voluntary process where eligible taxpayers agree to engage in open, transparent, and cooperative relations with the government. The shortened timeline of Bridge Plus is contingent on the framework of timely responses, cooperation and full transparency. The IRS will notify CAP taxpayers if they are eligible to participate in the pilot. 

IRS, Treasury Provide Guidance on Qualifying Advanced Energy Project Credit

Notice 2023-18 establishes program to allocate $10 billion in credits

Notice 2023-18 establishes the section 48C(e) program to allocate $10 billion in credits ($4 billion of which may only be allocated to projects located in certain energy communities census tracts). The notice also provides initial program guidance.   

The Treasury Department and IRS anticipate allocating $4 billion of section 48C credits in the first allocation round, with approximately $1.6 billion of these credits to be allocated to projects located in certain energy communities.  Treasury and IRS will allocate the remaining credits in future allocation rounds. This notice also provides the general rules for determining the section 48C credit, definitions of qualifying advanced energy projects, and the procedures for allocating the credits.  

Treasury and IRS will issue additional guidance by May 31, 2023, to provide more details regarding information applicants will be required to submit to request a credit allocation.   

More information may be found on the Inflation Reduction Act of 2022 page on IRS.gov. 

Taxes of Texas: A Field Guide Reference for State Taxpayers

Publication explains state's tax system using plain language, clear data visualizations

Pennsylvania DOR Shares Warning of Deceptive 'Final Demand for Payment' Letters

Phony letters focus on public records anyone can access

The Pennsylvania DOR recently alerted the public of phony letters sent to taxpayers. While the warning was specific to Pennsylvania, this scam could potentially be more widespread, so state tax agencies nationwide and the taxpayers they serve need to be aware and cautious. 

The scam involves phony "Final Demand for Payment" letters mailed to taxpayers threatening wage garnishment and seizure of property or assets unless the recipient calls a phone number to satisfy a lien. 

The scam notices are sent through the mail from phony entities closely resembling the name of a collection agency or a state taxing agency.

Keep an eye out for dubious claims or suspicious details. The following are specific to the Pennsylvania scam, but similar suspicious details may show up in potential scams targeting other states:  

Anyone concerned about a potentially fraudulent notice should contact their state tax agency using contact information found on their official website. Pennsylvania DOR has a Verifying contact by the Department of Revenue page, allowing taxpayers to verify contact information. 

VSP Fee Case Remanded to State Forum

Appellate panel held DirecTV failed to establish federal subject matter jurisdiction

The U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s decision to remand a Missouri municipality's class action suit seeking local video service (VSP) fees to state court. The appellate panel held that DirecTV failed to establish federal subject matter jurisdiction. 

Missouri's Video Services Providers Act (VSPA) allows municipalities to impose a 5% fee on gross revenues of VSPs. The act predated the popularity of video streaming services that provide content to subscribers over the internet, rather than through cable facilities physically installed in public rights of way. The City initially filed the class action in the St. Louis County Circuit Court in July 2018 and in August 2019 the federal district court consolidated the matter with another of the city’s class actions, seeking damages for allegedly unpaid VSP fees from Netflix and Hulu. The case has a complicated procedural history and the current matter is a second attempt by DirectTV to remove the case to federal court. 

Article originally ran in “FTA State Tax Highlights.” Subscribe 

Court Denies Review of Franchise Tax Case

Appeals Court agreed with Xerox Corp. regarding its cost of goods sold deduction 

After an audit, the Comptroller in 2017 assessed additional franchise tax against Xerox for report years 2008 and 2009, determining the applicable tax rate for both years was 1%, rather than the 0.5% used by Xerox, and assessed franchise tax and interest. The company paid the assessment under protest and filed suit in state district court, arguing that it could use the lower rate because it was primarily engaged in wholesale trade under Texas Tax Code.

The district court sided with Xerox, finding that the company was eligible for the lower franchise tax rate and ordering a refund of the disputed funds plus interest. The Texas Court of Appeals, Fourteenth District, upheld the district court's ruling in 2021, finding that Xerox’s activities constituted wholesale trade for franchise tax purposes. The appeals court agreed with Xerox regarding its cost of goods sold deduction, determining that the state did not conclusively prove that the company included improper costs in calculating its cost of goods sold deduction. 

Article originally ran in “FTA State Tax Highlights.” Subscribe 

Denial of Injunction in Severance Tax Discount Suit Remanded

Appellate court ordered the district court to reconsider the denial of the preliminary injunction

The court found that a federal district court erred in concluding that an Illinois coal producer's constitutional challenge to the law was not likely to succeed on the merits and remanding the case for the trial court to consider the remaining factors for a preliminary injunction. The appellate court order the district court to reconsider the denial of a preliminary injunction. 

The court ruled the Illinois coal provider would likely be able to show that the Kentucky legislation discriminated against interstate commerce, remanding the case for the trial court to consider the remaining factors for a preliminary injunction. The Kentucky Public Service Commission (Commission) regulates the state utilities and allows utilities to account for fluctuating fuel costs by adjusting the rates charged to customers. The Commission conducts routine reviews of utilities, including looking at the price paid for raw materials, to determine if the charges are reasonable.

In 2019, the Commission issued a regulation stating that it would consider the cost of fuel less any severance tax paid to any jurisdiction when determining the reasonableness of the costs. Kentucky’s coal producers are subject to a 4.5% severance tax, but Illinois does not have a severance tax, and the taxpayer argued that the reg violated the commerce clause. The Kentucky attorney general said the regulation was legal because while it might benefit Kentucky coal relative to producers in some states, it might hurt Kentucky coal relative to others. 

The Commission agreed to rescind the regulation before the Sixth Circuit could hear the coal producer’s appeal of the district court’s denial of a preliminary injunction. However, in 2021 the state enacted legislation requiring the Commission to exclude severance taxes when evaluating the reasonableness of fuel costs, and the taxpayer challenged the law. Once again, the district court denied a preliminary injunction, concluding that the company was unlikely to succeed in establishing that the law discriminated against interstate commerce and the taxpayer filed this appeal. 

The Sixth Circuit said that a court must look at four factors when considering whether to grant a preliminary injunction: Does the movant have a strong likelihood of succeeding on the merits, would the movant suffer irreparable injury without the injunction, would issuing the injunction cause substantial harm to others, and would the public interest be served by issuing the injunction. The court concluded that the law benefits in-state companies and burdens out-of-state companies, finding that a law does not have to discriminate against every state or industry to violate the dormant commerce clause. 

The court said that because coal from non-severance tax states does not get the discount, the law makes such coal relatively more expensive and causes those companies to either lose market share or lower their price. The court found that the purpose of the law was itself discriminatory and the state had not justified the discrimination and determined that the taxpayer was likely to succeed on the merits. The court noted that the district court had declined to address the other three preliminary injunction factors after concluding that the coal producer was unlikely to succeed and remanded the matter to the district court to examine the other three factors. 

Article originally ran in “FTA State Tax Highlights.” Subscribe 

Save The Date: 2023 IRS Nationwide Tax Forum

General registration for this summer’s IRS Nationwide Tax Forum is set to open in March, but attendees can reserve their hotel accommodations now. 

Tax Forum locations and dates are: 

For more information and to reserve your accommodations, visit the IRS Nationwide Tax Forum website. 

FTA has just announced a number of dates for its 2023 conferences and symposia.  Be sure to mark your calendars!  Registration information is coming soon.  You can also visit the FTA website for the full calendar.

E-File and Refund Protection Symposium
May 1–3
Oklahoma City, OK

FTA Annual Meeting
June 11–14
Providence, RI

FTA Technology Conference and Expo
August 6–9
Boston, MA

Revenue Estimation and Tax Research Conference
September 30–October 4
Salt Lake City, UT

Compliance Conference
December 3–6
Tucson, AZ

Motor Fuel Midwest Region
April 2–4
Minneapolis, MN

Tobacco Central Region
April 5 and 6
Minneapolis, MN

Motor Fuel Pacific Region
April 23–25
Anaheim, CA

Tobacco Western Region
April 26 and 27
Anaheim, CA

Alcohol May Uniformity
May 8 and 9
St. Louis, MO

Tobacco June Uniformity
May 10 and 11
St. Louis, MO

Motor Fuel May Uniformity
May 12 and 13
St. Louis, MO

Motor Fuel Northeast Region
May 21–23
Salem, MA

Tobacco Northeast Region
May 24 and 25
Salem, MA

Motor Fuel Southern Region
June 25–27
Savannah, GA

Tobacco Southern Region
June 28 and 29
Savannah, GA

Motor Fuel Basic Training
July 30–August 3
Green Bay, WI

Tobacco August Uniformity
August 18 and 19
Tucson, AZ

Tobacco Tax Annual Meeting
August 20–23
Tucson, AZ

Motor Fuel September Uniformity
September 15 and 16
Orlando, FL

Motor Fuel Annual Meeting
September 17–20
Orlando, FL

SEATA Meeting
July 16–19
Little Rock, AR

MSATA Annual Conference
August 13–16
Madison, WI

NESTOA Annual Meeting
September 10–13
Wilmington, DE

WSATA Annual Meeting
October 8 – 11
Reno, NV