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Saturday July 13, 2024

Washington News

Washington Hotline

Top Security Tips for Tax Preparers

The Internal Revenue Service (IRS) announced a new campaign aimed at tax preparer security. The campaign is called "Protect Your Clients; Protect Yourself."

IRS Commissioner Danny Werfel stated, "Security threats against tax professionals and their sensitive taxpayer information continue to evolve, and it is critical to stay on top of the latest developments to protect their business and their clients. The Security Summit effort between the IRS, states and the nation's tax industry has worked to protect taxpayers and tax returns from identity thieves, and tax professionals form a key part of these security defenses."

The IRS reports it received nearly 200 incident reports from tax professionals that could potentially affect up to 180,000 clients. Sharonne Bonardi is Executive Director of the Federation of Tax Administrators. She stated "There are special steps that tax professionals need to take to protect themselves from scammers trying to obtain sensitive information in attempts to file fraudulent state and federal tax returns."

Taylor Rodier is Legislative Affairs Director at Taxwell and a member of the Security Summit. She stated, "We continue to educate tax professionals on security measures to prevent data breaches that expose taxpayers' private information and jeopardize their business.

The IRS urges tax preparers to take basic steps to foil the "relentless efforts" of identity thieves. Tax professionals are targets of scammers who continue to grow in sophistication. They attempt to gain access to the tax preparers' computer systems. If the fraudsters steal data, they will be able to file fraudulent tax returns. Since the returns are for actual individuals who are clients of the tax professional, it is more difficult for the IRS to detect these fraudulent returns.

There are several specific steps the IRS recommends that tax preparers take in order to protect their clients.

  1. Security Plan - A Written Information Security Plan, or WISP, is a document that is designed to keep customer information safe and secure. There are five IRS Nationwide Tax Forums this year for professionals that will assist in developing a WISP.
  2. Emerging Scams Target Tax Preparers - The Security Summit continues to uncover new and creative scams targeting the tax community. The Security Summit's news releases will continue to highlight and inform tax preparers about these scams.
  3. Phishing, Spear-phishing and Whaling - These are not recreational activities. They are specific strategies by scammers to target tax preparers. The fraudster attempts to acquire passwords, bank account numbers, credit card numbers or Social Security numbers.
  4. Identity Protection PINs - The IRS offers an IP PIN to taxpayers to increase security. You must identify yourself online, on a phone call with an IRS employee or in person at an IRS center to obtain an IP PIN.
  5. Signs of Identity Theft - Tax preparers often are not aware that an identity theft has occurred. Tax preparers should watch for multiple clients who receive suspicious IRS letters, e-file acknowledgments from the IRS for more tax returns than they filed or computer cursors that move on their own.
  6. Security Six Protections - Tax preparers should know and implement the six different security protections which are anti-virus software, a computer firewall, multi-factor authentication, hard drive encryption, virtual private networks (VPNs) and critical file backups.

Supreme Court Overrules Chevron Decision

In Loper Bright Enterprises Inc. et al. v. Gina Raimondo et al.; No. 22-451; No. 22-1219, the U.S. Supreme Court held, "The Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous; Chevron is overruled." See Chevron U.S.A., Inc. v. NRDC , 467 U.S. 837 (1984).

Article III of the Constitution states the Federal judiciary shall adjudicate "Cases" and "Controversies." The right of the courts to interpret laws and statutes has been in effect since the foundational decision of Marbury v. Madison, 5 U.S. 137 (1803).

The courts have given "respectful consideration" to Executive Branch interpretations of laws because the staff often are "masters of the subject." However, since the New Deal growth of government back in the 1930s, the administrative law has grown voluminous. Nevertheless, the courts have been entrusted with the "interpretation of the meaning of statutes, as applied to justiciable controversies."

Historically, the Court has deferred to agencies, particularly when the statute empowers the agency to issue regulations. However, in Chevron , the court created a two-step standard for examining regulations by the Executive Branch. First, if the intent of Congress is clear, the courts may "reject administrative constructions which are contrary to clear congressional intent." Second, if the statute is ambiguous, under Chevron the interpretation of the Executive Branch is "entitled to deference."

However, under the Administrative Procedure Act (APA), the courts are responsible for determining "all relevant questions of law." Therefore, the Court is not able to delegate this responsibility to an agency. In addition, "Chevron's presumption is misguided because agencies have no special competence in resolving statutory ambiguities."

The Government notes it is appropriate to allow deference to agencies because they have subject matter expertise. However, the interpretive issues "may fall more naturally into a judge's bailiwick" than that of the agency.

In addition, the Chevron rules have been difficult to interpret. They force courts to pretend that ambiguities are essentially a delegation of authority from Congress to the Executive Branch.

The courts have spent four decades trying to impose various limitations on Chevron. Therefore, "Chevron has proved to be fundamentally misguided" according to the Opinion. While the Court continues to follow the doctrine of stare decisis, it concluded that Chevron is unworkable. With the multiple exceptions to the Chevron rule, "it is hard to see how anyone could reasonably expect a court to rely on Chevron in any particular case or expect it to produce readily foreseeable outcomes."

Finally, the Court overruled Chevron, but did not change the result in prior cases.

Editor's Note: The IRS is a prolific publisher of Federal regulations. The repeal of Chevron could lead to more challenges of IRS regulations. The courts will no longer defer to the IRS but will need to determine whether a regulation is consistent with the statute. The 1787 Constitutional Convention involved many debates over the balance of power between the executive, the legislature and the courts. The repeal of Chevron may move some of that balance of power from the executive to the courts.

Supreme Court Extends Time to Challenge Regulations

In Corner Post Inc. v. Board of Governors of the Federal Reserve System; No. 22-1008 (Corner Post), the U.S. Supreme Court determined that the statute of limitations for facial challenges to regulations enacted under the Administrative Procedure Act (APA) would not start until the injury to an individual occurred instead of when the rule was published. Justice Barrett wrote, "A claim accrues when the plaintiff has the right to assert it in court - and in the case of the APA, that is when the plaintiff is injured by final agency action."

Corner Post involved an APA challenge of a Federal Reserve Board regulation. The regulation caused harm to Corner Post, Inc., a North Dakota truckstop which was open for business in 2018. The Federal Reserve board published a regulation in 2011 that set a maximum interchange fee pursuant to a 2010 consumer protection act. After the rule was published, there were court challenges filed.

Corner Post filed a facial challenge to the Federal Reserve Board regulation, but the Eighth Circuit determined that there was a six-year statute of limitations that expired in 2017. The Eighth Circuit stated, "When plaintiffs bring a facial challenge to a final agency action, the right of action accrues, and the limitations period begins to run, upon publication of the regulation." The regulation was published in 2011, the statute of limitations expired in 2017, and Corner Post opened business the next year.

The Supreme Court rejected the Eighth Circuit decision. It stated the rule should be "the plaintiff-centric traditional rule that a statute of limitations begins to run only when the plaintiff has a complete and present cause of action."

The Government noted that there were cases in which the courts had determined that the right should mature upon issuance of the final regulation. However, the Court stated, "The Court did not suggest that the same words 'right of action first accrues' in a single statute should mean different things in different contexts." Even though the new rule will lead to administrative inconvenience, that does not justify a departure from the clear text of the statute.

Justice Jackson wrote a strong dissent opinion that indicated the majority was engaged in "misguided reasoning about statutory limitations periods." She noted this new law creates virtually no limitation for lawsuits that challenge agency regulations on their face. As a result, this change will be "profoundly destabilizing for both Government and businesses."

Editor's Note: The combination of Loper's repeal of Chevron and the Corner Post decision may open up new attacks of IRS regulations. Loper states that courts do not need to defer to the IRS interpretation of a statute with respect to their regulations. Corner Post indicates the attack may occur decades after the initial regulation was published. This is a significant change in the tax system that could give rise to new attacks on regulations.

Applicable Federal Rate of 5.4% for July: Rev. Rul. 2024-13; 2024-28 IRB 1 (17 June 2024)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2024. The AFR under Sec. 7520 for the month of July is 5.4%. The rates for June of 5.6% or May of 5.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."

Published July 5, 2024
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