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IRS Makes Huge Strides in Paper Processing Pace – Jonathan Curry, Tax Notes ($):
The pace of tax return processing has surged in recent weeks and could make good on IRS Commissioner Charles Rettig’s promise to restore the agency’s inventories to a manageable level by the end of the year.
An August 29 IRS update on the status of the backlog suggests that its paper processing pace has nearly tripled from earlier this spring. As of August 19, the agency said it still had 8.7 million unprocessed individual tax returns that were received this year, comprising tax year 2021 returns and late-filed returns for prior years. About 1.7 million of those are returns with errors or that require special handling, while 7 million are paper returns awaiting review and processing.
Further down the article:
The new data suggest the IRS is processing roughly 600,000 paper Forms 1040 per week, which would be more than enough to clear the backlog, although the agency may still be flooded with additional tax returns ahead of the October 15 extended filing deadline. Rettig has urged taxpayers to file electronically, and to file as soon as possible.
IRS Snags Win on TIGTA’s Annual Taxpayer Interactions Checkup – Jonathan Curry, Tax Notes ($):
For the first time in several years, the Treasury Inspector General for Tax Administration found that IRS employees stuck to the rules when it came to contacting taxpayers with representatives.
A new report, the latest in a two-decade run of annual TIGTA evaluations of the IRS’s compliance with the direct contact provisions of the Taxpayer Bill of Rights, came up empty in its hunt for violations of taxpayers’ rights to representation.
Debunked: If the IRS implements Free File for everyone, tax preparers will no longer be needed - National Association of Tax Professionals:
The Inflation Reduction Act (IRA) President Biden signed into law Aug. 16 has been causing concern among some in the tax prep industry due to the act’s designated funding for studying the feasibility of a Free File-like system for all taxpayers. The concern is that if free filing happens, tax pros will no longer be needed. However, we’re here to tell those concerned tax preparers they can rest easy.
Regardless of whether there is a Free File system in place for all taxpayers, many will still need the assistance of a qualified tax preparer. The Tax Code is extremely complex and the fear of the IRS punishing them for their mistakes results in a great deal of taxpayer anxiety. Many taxpayers also believe that without the assistance of a trained professional, they may pay more tax than is required or miss out on valuable deductions or credits. Taxpayers facing more complicated tax issues, such as those with small businesses, rental activities and investments, will continue to benefit from the expertise of an experienced tax professional who has a keen understanding of the relevant rules and regulations.
This bill requires a study to be done on this subject. Similar efforts have previously been done with little to show for it. Here is a perfect example:
Prefilled Individual Income Tax Return Filing: What It Is and Policy Issues - Gary Guenther, Congressional Research Service (bolded add):
Filing federal income taxes imposes costs on taxpayers, the Internal Revenue Service (IRS), and employers and other payers. According to the IRS, the average individual taxpayer with business and nonbusiness income in 2021 spent a total of 13 hours to prepare and file their income tax return. For those who purchased tax software or paid someone to prepare and file their returns, the average out-of-pocket cost was $240. There is considerable variation among taxpayers in these compliance costs.
U.S. policymakers have been looking for feasible ways to reduce filing costs for some time. The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) directed the IRS to develop a return-free filing system that eligible taxpayers could use to file their returns, starting in 2008. The IRS never produced such a system.
CBO’s Projections of Federal Receipts and Expenditures as Measured by the National Income and Product Accounts: 2022 to 2032 – Congressional Budget Office.
Each year, the Congressional Budget Office publishes projections of federal revenues and outlays for the current fiscal year and the next 10 years.
The report shows that revenue from personal taxes jumps by over $1 trillion between 2025 and 2032 ($2.504 trillion collected in 2025 versus $ 3.534 trillion collected in 2032). The culprit: The 2025 expiration of individual tax reductions in the 2017 tax bill.
Revenue from corporate income taxes increase roughly $70 billion between 2025 and 2032 ($421 billion to $499 billion, respectively). Corporate tax breaks in the 2017 tax reform bill do not expire in 2025.
However, put these numbers in the context of percentages and it looks like corporations are getting fleeced:
Corporate Tax Growth Seen Outpacing Individuals Over Next Decade – Doug Sword, Tax Notes ($):
The Congressional Budget Office estimated August 29 that corporate income tax collections over the next decade will grow to $499 billion, 54 percent more than receipts projected for this year.
That compares with the CBO’s estimate that individual income tax receipts will grow 48 percent to $3.53 trillion over the coming decade.
The CBO report is here.
Speaking of the 2017 tax reform bill:
Tougher Interest Deduction Sets Off Hunt for Year-End Relief – Michael Rapoport, Bloomberg ($). “Companies have been unsuccessful this far in their attempts to roll back or soften the change, but they’re now setting their sights on doing so as part of a year-end ‘tax extenders’ package in Congress, after the November elections.”
‘This is very likely to be in the mix for that package,’ said Chris Netram, managing vice president of tax and domestic economic policy at the National Association of Manufacturers.
The issue: The 2017 tax reform bill narrowed the tax code’s Section 163(j). Before this bill became law, all company’s interest was basically tax deductible. After enactment, the deduction narrowed:
[T]he law capped those deductions at 30% of EBITDA—earnings before interest, taxes, depreciation, and amortization. Any interest costs over 30% of a company’s EBITDA would be taxable.
It then narrowed again:
The 2017 law also provided that starting in 2022, depreciation and amortization costs would no longer be excluded from the calculation of the earnings base—so the limit became 30% of EBIT, earnings before interest and taxes. EBIT is lower than EBITDA, so 30% of EBIT is also lower, and more of a company’s interest became taxable.
Worth noting:
Companies can carry forward to future years the nondeductible part of their interest, thus softening the cap’s impact somewhat.
Passing a year-end tax bill after the November elections is not a sure thing. Elections have consequences and one of them might be that the political parties will not agree on what should be included in the legislation.
Case in point: The Child Tax Credit. One party wants to use a year-end tax bill to expand it. The other party, not so much:
McConnell Sees Recession as Likely, Vows GOP Will Curb Biden – Steven Dennis, Bloomberg ($):
Asked the potential for federal help for child care, [Senate Republican leader Mitch] McConnell said state governments are ‘awash in money’ and could tackle the issue if they choose to do so."
‘I don’t think we need to do any more spending at the federal level,’ he said.
McConnell is basing this statement on the assumption that Republicans win control of the House or the Senate after the November elections, which is a big unknown right now.
In case you’re wondering, yes, we’re in Election Season:
Parties See Midterm Messaging Opportunities in New Inflation Law - Kenneth Doyle, Bloomberg ($):
Democrats are readying a fall campaign ad blitz in Senate battleground states focused on the drug pricing provisions of a new health care, tax, and spending law. Republicans see opportunity in the same measure and are running ads attacking the provisions raising taxes and increasing IRS funding.
The parties’ divergent takes on the same law reflect their priorities in a fierce fight for the Senate majority. For Democrats, it’s the latest in a list of legislative accomplishments their candidates can crow about heading into midterm elections. Republicans see only more spending they say will fuel inflation and won’t help most Americans.
AICPA proposes revisions to tax standards and 1040 crypto question – Michael Cohn, Accounting Today. “The American Institute of CPAs proposed a set of revisions Monday to its Statements on Standards for Tax Services and separately sent the Internal Revenue Service its recommendations for revising the virtual currency question and instructions on the Form 1040, asking it not to switch the term to ‘digital asset.’”
O-Zone Design Flaw Driving Real Estate Investment, Study Finds – Lauren Loricchio, Tax Notes ($). “Research has found that Opportunity Zone tax breaks are helping to spur real estate investment, but not necessarily in the economically distressed areas that start-up businesses were encouraged to aid under the program.”
Lawyers Fight Bill Forcing Them to Report Suspicious Client Acts - Sam Skolnik, Bloomberg ($):
Lawyers are pushing back against anti-money laundering legislation that would require them to report suspicious transactions by clients, as banks already must do.
US House lawmakers led by Tom Malinowski (D-N.J.) and Maxine Waters (D-Calif.) are behind the provision in that body’s version of the defense authorization bill. The requirement would also apply to accountants, payment service providers and trust companies.
There are worries that if the bill becomes law it will disrupt attorney-client privilege. You can also credit Putin and his flunkies for this bill, which may or may not pass Congress.
The House in July with broad bipartisan support approved the annual defense bill containing the anti-laundering language. The House Armed Services Committee in the previous month had inserted the provision into the bill.
The House is set for a showdown later this year with the Senate. The Senate Armed Services Committee didn’t include the anti-laundering language in its version of the bill the panel approved in June.
Tax Court Denies IRS Early Win In $15M Easement Fight – Theresa Schliep, Law360 Tax Authority ($). “An Eleventh Circuit decision invalidating a conservation easement regulation bars an effort by the Internal Revenue Service to prevail in a partnership's challenge to the agency's denial of an over $15 million deduction, the U.S. Tax Court said Monday.”
Penalties Approved Before IRS Appraisal Was Completed Pass Muster – Kristen Parillo, Tax Notes ($). “The Tax Court rejected a partnership’s argument in an easement case that overvaluation penalties should be tossed because the agent’s supervisor approved them two weeks before an IRS engineer submitted his appraisal.”
Ore. Judge Allows Business Deductions For Cash Renovations – Michael Nunes, Law360 Tax Authority ($). “The owner of a commercial property in Oregon can claim an income tax deduction on cash payments to repair the building after presenting evidence and testimony showing the cost of the repairs, the state tax court ruled.”
Beer, beer everywhere – and every drop gets taxed:
Comparing Beer Taxes by State, 2022 – Janelle Fritts, Tax Foundation:
The United States collects an excise tax on beer at the federal level (ranging from $0.11 to $0.58 per gallon based on production, location, and quantity), but all 50 states and the District of Columbia also collect their own taxes on fermented malt beverages. While general sales taxes are tacked on after the price of goods is subtotaled, most states go straight to the retailer for beer excise taxes, collecting according to the quantity of beer sold (usually expressed as a rate of dollars per gallon). Although you can’t see the taxes on your receipt, vendors pass along those costs to consumers in the form of higher prices.
New Yorkers Won’t Be Taxed on Biden Student Loan Forgiveness – Donna Borak, Bloomberg ($). “New Yorkers eligible to receive student loan debt forgiveness under the Biden administration’s relief plan will not have to pay states taxes, according to a department spokesman Monday.”
California Bill Offers New SALT Cap Tweak for Multistate Firms – Laura Mahoney, Bloomberg ($):
A last-minute California bill would smooth a wrinkle in the state’s workaround to the $10,000 federal cap on state and local tax deductions for business partners or shareholders that also want to claim credits for income taxes paid to other states.
The bill (S.B. 851) is the second in less than a year to fix technicalities that make the elective program more difficult to use for accounting firms, law firms, and other partnerships or pass-through entities. Even with another fix coming, far more taxpayers than expected are using California’s SALT cap workaround.
The bill was introduced Aug. 25, will be heard in the Assembly Revenue and Taxation Committee Aug. 30, and must pass both the Assembly and Senate before lawmakers adjourn for the year Aug. 31 to reach Gov. Gavin Newsom’s (D) desk. Newsom hasn’t taken a position on the measure.
Dallas, Other Texas Cities Mull Workarounds of Property Tax Cap - Angélica Serrano-Román, Bloomberg ($). “Dallas, San Antonio, and other Texas metro areas are seeking higher property tax rates than a state-imposed cap, prompting a series of public hearings in coming weeks.”
Oregon Couple May Deduct Renovation Expenses for Rental Property – Perry Cooper, Bloomberg ($). “An Oregon couple may deduct over $18,000 they spent renovating a commercial property for lease during tax year 2018 even though their records were incomplete, a state tax court magistrate ruled.”
Md. Ad Tax Pass-Through Ban Restricts Speech, Biz Groups Say – Maria Koklanaris, Law360 Tax Authority ($). “Maryland's prohibition against companies directly passing the state's new digital advertising tax on to consumers regulates speech rather than acting as commercial conduct to advance the state government's interests, trade groups suing the state told a federal judge.”
The Devil Is in the Details When Handling NFTs and State Taxes – Joseph Bright, Cheryl Upham and Heide Schwartz, Bloomberg ($). “Few people have considered the state tax consequences of buying or selling non-fungible tokens. Pennsylvania recently became the first state to issue direct guidance on the taxability of NFTs, and other states are likely to follow.”
Treasury Still Looking to Tweak Its Crackdown on ‘Killer B’s’ – Michael Rapoport, Bloomberg ($):
After nearly a decade and a half, the Treasury Department and the IRS are still hoping to fend off “Killer B’s” once and for all.
Treasury and IRS are preparing regulations to clamp down on Killer B’s—triangular reorganizations involving foreign corporations, so named because they fall under tax code Section 368(a)(1)(B)—which the government says companies have used in the past to avoid taxes.
IRS Budget Boost May Increase Transfer Pricing Scrutiny – Natalie Olivo, Law360 Tax Authority ($). “The Internal Revenue Service may eventually use part of its $80 billion funding increase to examine more cross-border intercompany transactions than it has been able to in the past, potentially putting a new spotlight on long-standing transfer pricing issues.”
From the “Pool? What Pool?” file:
France uses AI to spot (and tax) undeclared swimming pools – Rachel Pannett, Washington Post.
Tax authorities in France are using artificial intelligence to find thousands of undeclared swimming pools, with a pilot program now set to be rolled out across the country just as it grapples with its worst drought on record.
Some 20,356 undeclared pools have been discovered since officials began using software developed by Google and consulting firm Capgemini in October last year. The system uses AI to pick out the outlines of pools in aerial images, which are then cross-checked against official property databases.
It has so far netted close to $10 million in additional tax revenue from nine French regions and will now be ‘generalized’ across France, tax officials announced Monday.
From the "Good-to-Know" file:
Can A Payroll Employee Disclose Tax Return Information? - Douglas Charnas, American Bar Association:
Generally, Section 6103 provides that tax returns and return information are confidential and may not be disclosed except as expressly authorized by the Internal Revenue Code. While this general prohibition against disclosure is straightforward, the exceptions in Section 6103 are extensive and complicated, and significantly curtail the broad application of the general rule. Among the exceptions for situations in which it is necessary for tax returns or return information to be disclosed are:
- disclosure with the consent of the taxpayer (Section 6103(c));
- disclosure to a person having a material interest (Section 6103(e), but not under Section 6103(e)(1)(D)(iii) relating to disclosures to certain shareholders); and
- disclosure for investigative purposes (Section 6103(k)(6)).
The Taxpayer First Act (TFA), enacted in 2019, amended Section 6103(a)(3) and (c) to limit redisclosures and uses of return information received pursuant to the taxpayer consent exception. Section 6103(c), as amended by the TFA, explicitly prohibits designees from using return information for any reason other than the express purpose for which the taxpayer granted consent and from redisclosing return information without the taxpayer’s express permission or request. Section 6103(a)(3), as amended by the TFA, imposes disclosure restrictions on all recipients of return information under the taxpayer consent exception (Section 6103(c)). The TFA did not amend the material interest exception (Section 6103(e)) or the investigative disclosure exception (Section 6103(k)(6)), or Section 6103(a) regarding disclosures under those subsections.
It is National Whale Shark Day!
Fun facts from National Day Calendar about these fish:
- Weighing over 20 tons, the whale shark is the largest fish in the sea
- These gentle giants are about the same size as a bus…
- Whale sharks are carnivores, but their teeth are only 6 mm long.
Luckily, it is also National Beach Day! Being near the water can be just as much fun as being in the water without the risk of bumping into a bus-sized fish that happens to be a carnivore.