IRS focus on improper refund claims relating to domestic production activities deduction

IRS focus on improper refund claims

The IRS today issued a release concerning amended returns and claims for the domestic production activities deduction (DPAD) under section 199—a provision that was repealed for most taxpayers for tax years beginning after December 31, 2017, by the 2017 tax law (Pub. L. No. 115-97) (that is often referred to as the “Tax Cuts and Jobs Act” (TCJA)).

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According to the IRS release—IR-2021-45 (February 25, 2021)—following repeal of the DPAD under section 199, the IRS received what it describes as “a wave of questionable amended returns and claims for tax benefits in the billions of dollars.”

  • The IRS reported that “a large majority” of the filings involve taxpayers that claimed the DPAD for the first time based on after-the-fact studies that contain unreasonable assumptions of facts and law.
  • In September 2018, the IRS Large Business and International (LB&I) division announced a compliance campaign to risk assess claims or amended returns under the repealed law.  The IRS stated that it will continue to audit this issue even though the section was repealed.
  • The IRS stated that IRS examiners are auditing these claims with the support of IRS Chief Counsel, engineer specialists, and the Corporate Income and Losses Practice Network.
  • In July 2020, the IRS issued a General Legal Advice Memorandum AM 2020-007 [PDF 150 KB] addressing examples of meritless section 199 online software activity. The IRS stated that in many examination cases, once challenged, taxpayers have conceded 100% of the claim; the IRS further observed that it continues to litigate section 199 issues.
  • Examiners have been advised to consider imposing penalties under section 6676 for erroneous claims for refund or credit as well as other applicable penalties, and to make referrals to the Office of Professional Responsibility (OPR), when appropriate. Taxpayers and their advisors are cautioned to have documentation to support their position and to expect that the IRS may impose appropriate penalties unless taxpayers establish that they have reasonable cause, and that a study does not necessarily provide reasonable cause.

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