2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

Amid a shifting tax landscape, 2023 proved to be a landmark year for taxpayers as federal courts handed down significant rulings in their favor, challenging the IRS’s stance on various issues. The judiciary set new precedents, from limiting penalties for Foreign Bank Account Reports to refining the process of challenging deficiency notices. Yet, the implications of these decisions raise questions on their broader applicability and the future direction of tax litigation. COURTS CHALLENGE IRS IN 2023: WHAT COULD THIS MEAN FOR TAXPAYERS IN 2024? BY DAVE SHUSTER

During 2023, federal courts issued the following significant decisions favorable to taxpayers in their controversies with the IRS: • In February, the US Supreme Court in Bittner v. United States held that the non-willful Foreign Bank Account Report (FBAR) penalty is limited to $10,000 per year. The government had argued $10,000 per account per year. (The $10,000 is adjusted annually for inflation and is currently $15,611.) • In April, the US Tax Court in Farhy v. Commissioner of Internal Revenue held that the IRS could not use its vast administrative enforcement powers to collect certain penalties. Instead, the IRS must have the US Justice Department sue to recover such penalties. • In July, the US Third Circuit

Revenue held that the time limit for filing a petition in the US Tax Court for challenging a deficiency notice is not jurisdictional, meaning that, instead of dismissing a late petition merely because it’s late, the Tax Court may consider such petition if the taxpayer can establish equitable tolling. More plainly, the Tax Court has the discretion to extend the deadline if the taxpayer can give a sufficient reason for missing the deadline. As these rulings currently stand (the decision in Bittner is final, the government has appealed the decision in Farhy , and, as of this writing, the government has not (yet) sought a Supreme Court review of the decision in Culp), they are favorable to the taxpayers litigating them. But are they necessarily advantageous to other taxpayers?

For example, after Bittner , will the IRS seek to impose the more onerous willful FBAR penalty in cases where it previously might have settled on imposing a non willful penalty? The relevant statute authorizes a penalty equal to the greater of $100,000 (approximately $156,000, adjusted for inflation) or 50% of the account balance for willful FBAR violations. Does Farhy mean that the IRS is now necessarily required to refund certain penalties it collected administratively (through levies, for example) that the IRS was not, under Farhy , entitled to collect administratively? The government is likely to argue, under well‑settled precedent, that it is entitled to keep amounts it has already collected where the merits of its claim are not in dispute. In other words, if the penalty is valid, a taxpayer might not be entitled to a refund merely because the government wrongfully collected it administratively.

Court of Appeal in Culp v. Commissioner of Internal