HIco was an accrual method taxpayer. In 2022, HIco spent $260 million acquiring leases to explore and develop geothermal energy on thousands of acres on the Big Island (Hawaii) and produce electricity. HIco did not, however, actually drill in that year. Nor did it pay someone to drill. Nor did HIco acquire drilling property. Nor did it sell any geothermal energy in those years. HIco reported $20 million in gross receipts from solar energy in 2022. HIco claimed $50 million in COGS (cost of goods sold). That $50 million reflected HIcos anticipated costs of drilling and extracting the geothermal energy it intended to selljust as soon as HIco could find and extract it.

Each year HIcos tax return included over 50 information return forms. HIcos CPA omitted one of those forms from HIcos return for 2022. The missing Form 1099-MISC, Miscellaneous Income, reported nearly $5.2 million in income. HIcos CPAs position was that the since the $5.2 million was received in NFTs (non-fungible tokens), HIco would not have income until the company eventually sold the NFTs.

The omission of the one information return resulted in the IRS imposing an accuracy-related penalty of more than $300,000. HIco has contested this penalty on the claimed grounds of reasonable cause and good faith by showing that HIco relied on an outside CPA and that HIcos return was complete.

Use the information provided above to write three sophisticated tax issues for THE CLIENT: the most important issue, a penalty issue given the IRS actions, and one other important non-penalty issue. Each issue must include relevant critical facts and precisely where in the code each issue arises.