Tax News & Views ERC Deficit, Sausage Surplus Roundup

ERC Claims Among Likely Causes for Worse Deficit Figure, CBO Says - Doug Sword, Tax Notes ($):

While spending was down $141 billion for the year, outlays were up by $108 billion in the federal budget’s “other” category. That includes a $22 billion increase in refundable credits from legislation passed during the COVID-19 pandemic. While the category includes tax credits related to sick and family leave and some healthcare coverage, “much of that increase stems from claims of the Employee Retention Tax Credit made on amended quarterly payroll tax forms this year,” the report says.

Earlier this year, the IRS estimated that as of March 3, $152.6 billion had been paid out in ERC claims, double the Joint Committee on Taxation scores on ERC legislation. Last month, investment banking firm Piper Sandler Cos. confirmed to Tax Notes that it estimated that that figure had since risen to $230 billion. In an October 9 article, The Wall Street Journal attributed

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The IRS halted the processing of new ERC claims as of September 14 amid what IRS Commissioner Daniel Werfel termed “a tsunami” of claims.

 

AICPA Seeks Employee Retention Credit Guidance for S Corporations - Tax Notes. "The American Institute of CPAs, in comments on the employee retention credit as it relates to S corporations, has asked the IRS for guidance clarifying the interaction of the wage deduction disallowance on the federal income tax return in the amount of the ERC and an S corporation’s accumulated adjustment account."

From the letter: "The AICPA recommends that Treasury and the IRS issue guidance clarifying that an S Corporation's AAA is not reduced by the wage deduction disallowance equal to the amount of ERC claimed."

 

EV Buyers Can Get Instant $7,500 Tax Credit Starting in 2024 - Ashlea Ebeling, Wall Street Journal. "Starting in January, EV buyers get up to $7,500 off the purchase right at the dealership, rather than wait months until filing their tax return to get the credit, the Internal Revenue Service said Friday. Accelerating the benefits will help boost adoption of the new technology, industry advocates say."

Clean-vehicle buyers can transfer tax credits to reduce purchase price - Martha Waggoner, The Tax Adviser. "The IRS expects to issue advance payments to dealers in the amount of the transferred credit within 72 hours of the purchase and the dealer's submission of required information including in a 'time of sale' report, the news release said."

 

TIGTA: IRS Needs to Improve Electric Vehicle Credit Auditing - Tax Notes. "The IRS should review erroneous claims for plug-in electric motor vehicle credits and make several changes to filters that identify returns for potential audits, the Treasury Inspector General for Tax Administration said in a partially redacted report released October 10."

From the report:

In response to TIGTA's recommendations in a prior audit, the IRS developed filters to identify returns with potentially erroneous Qualified Plug-In Electric Drive Motor Vehicle Credit claims. While the IRS has taken steps to address past recommendations, problems with the implementation of some of the filters have made existing issues worse.

TIGTA's analysis found that 74 percent of the tax returns flagged by the filter to identify non-qualifying vehicle models flagged qualifying vehicle models in error, resulting in taxpayer burden and unproductive examinations. In addition, due to issues with the filter, many claims for non-qualified vehicles were not examined. TIGTA identified 13,518 unexamined returns totaling approximately $63 million in credits potentially paid for unqualified vehicles.

I wonder how many people claim credits for "plug in" vehicles because they use a block heater.

 

Wyden, Crapo Call For Trade Measures Over Canada's DST - Kevin Pinner, Law360 Tax Authority ($):

USTR Katherine Tai's office doesn't need to study Canada's DST because it has concluded that U.S. businesses were unfairly targeted by nearly identical measures with global revenue thresholds that target the online service sector, where the U.S. dominates, Wyden and Crapo said in a letter. Canada's government is poised to tax 3% of revenues large companies earn from Canadian users in digital services such as social media, advertising and marketplaces, provided those revenues are over CA$20 million ($14.7 million) and the companies gross over €750 million ($795 million) globally.

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Katherine Cuplinskas, press secretary for Chrystia Freeland, Canada's finance minister and deputy prime minister, told Law360 on Tuesday that the government would keep its 2021 pledge to refrain from imposing the DST only until January 2024.

"The Canadian government has been clear for several years that it would move forward with its own digital services tax if a global agreement is not reached," Cuplinskas said. "We are committed to protecting Canada's national economic interest."

If this plays out, Canada will punish Canadian consumers with a 3% tax on digital goods, while the U.S. will punish American consumers with tariffs on Canadian imports. 

 

This Country Won the Global Tax Game, and Is Swimming in Money - Paul Hannon, Wall Street Journal:

Ireland on Tuesday created its own rainy-day fund thanks to outsize profits from an unusual and controversial source of income: U.S. technology and pharmaceutical giants seeking to lower their tax bills. 

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Ireland became a hot spot for U.S. companies by slashing its corporate tax rate from 40% to 12.5% starting in the late 90s, and offering a well-educated workforce and a tariff-free way into the European Union. By last year, there were 950 U.S. businesses operating in the country, employing just under 10% of all Irish workers, according to the American Chamber of Commerce Ireland.

Related: Eide Bailly International Tax Services.

 

Pharma Company Owner Can’t Avoid S Corp Income in Bankruptcy - Nathan Richman, Tax Notes ($):

A federal bankruptcy court rejected a motion by the owner of a pharmaceutical company for relief from the company’s S corporation election after the company sold its assets for $370 million.

The S corporation election is property of the company’s bankruptcy estate, and even if the bankruptcy stay were lifted, the disempowered owner wouldn’t be able to revoke the election, Judge Peter D. Russin of the U.S. Bankruptcy Court for the Southern District of Florida determined October 6 in In re Vital Pharmaceuticals Inc.

From the bankruptcy court order:

The Court concludes the harm to Mr. Owoc from the $3.4 million tax liability is far outweighed by the harm that would be caused by granting stay relief so he could avoid it. First, although Mr. Owoc will incur a $3.4 million tax liability from the sale, that harm is mitigated by the fact that he will also receive significant tax benefits. Mr. Owoc would be able to carry forward $49 million in net capital losses and $23 million in net operating losses, which could yield $19 million in tax benefits in future years ($11 million from the net capital losses and $8 million from the net operating losses)....  Granting Mr. Owoc stay relief will effectively allow him to avoid a $3.4 million tax liability at the expense of Vital's unsecured and administrative creditors, running afoul of this fundamental principle. Because any harm Mr. Owoc will suffer if stay relief is not granted is far outweighed by the harm to Vital's unsecured and administrative creditors if stay relief is granted, Mr. Owoc has failed to demonstrate “cause” for lifting the stay...

Even in bankruptcy, taxes matter.

 

8 filing tips for Oct. 16 tax extension filers - Kay Bell, Don't Mess With Taxes. "If you just can't locate the tax material by now, you're going to have to file on the 16th using the best information available and then, when you do track down the final data, file a correct amended Form 1040-X. Yes, that could cost you a few more dollars, but probably not as much as a non-filing penalty."

Tax And Other Considerations For Charitable Giving Abroad In Times Of Crisis - Kelly Phillips Erb, Forbes. "You should check out the credentials of a potential charitable organization before you donate. An easy way to check charitable status is to click over to the Tax Exempt Organization Search Tool on the IRS website or call the IRS (toll-free) at 1.877.829.5500. Keep in mind that churches, synagogues, temples, and mosques in the U.S. are considered de facto charitable organizations and are eligible to receive deductible donations even if they're not on the list (some exceptions apply, so be sure and ask if you're not sure)."

 

LLCs, entity classification and tax reporting: a rundown - NATP Blog:

Q: Can sole proprietors who become a single-member LLC (SMLLC) or an LLC taxed as an S corporation give themselves wages on Form W-2, Wage and Tax Statement?

A: They cannot give themselves a W-2 if the LLC is taxed as a sole proprietor on Schedule C. On the other hand, if the LLC is taxed as an S corporation, they must receive reasonable compensation on Form W-2.

 

Juror In Criminal Tax Case Sympathizing With The Rich, White And Entitled - Peter Reilly, Forbes. "The most important recent development in the government's long battle against abusive syndicated conservation easements. what I call the industry based on nonsense, has to be the outcome of the trial of Jack Fisher, James Sinnott and Clay Weibel. The jury convicted Fisher and Sinnott on multiple counts, while acquitting Weibel. Fisher and Sinnott may be facing very long sentences. The most interesting part of the story is what went on with the jury, but we'll look at the big picture first."

 

An Expansive Decision in Moore Case Could Spell Trouble for Our Tax Code - Steven Rosenthal, TaxVox. "Former House Speaker Paul Ryan (R-WI) recently warned that a 'lot of the tax code would be unconstitutional' if the US Supreme Court rules for the petitioners in Moore v. United States, a case that challenges whether Congress may tax 'unrealized' income. Among the laws in danger are those that Congress over many decades has enacted to stem abuses in cross-border and capital-market transactions. As I describe in greater detail in a new Tax Notes article, If the Court invalidates these rules, it will reopen loopholes, strip away Congress’s ability to prevent future abuses, and undermine our country’s fiscal health."

 

Tax History: The Murky and Mutable Moral Status of IRS Leaks - Joseph Thorndike, Tax Notes:

David Cay Johnston, who won a Pulitzer prize for his coverage of taxes at The New York Times, called the ProPublica revelations the “biggest and most important” tax news of the last half-century. “We should be building statues to honor this leaker, if he or she is ever identified,” he wrote.

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David Kautter of RSM US LLP, a former acting IRS commissioner and current Tax Analysts board member, made a straightforward moral case against the disclosure after the Justice Department announced the Littlejohn charges. “The amount of damage done to those taxpayers whose information was disclosed cannot be overstated and cannot be undone,” he told Tax Notes. “Given the amount of harm caused, while I am glad that the federal government has finally charged someone, I am not sure that the charges brought are proportional to the amount of damage done.” 

Kautter has the better argument. If someone can come up with an excuse for leaking returns of thousands of high earners, they can come up with an excuse for leaking anyone's returns.

 

Omaha Women Sentenced for Paycheck Protection Program Fraud - IRS (Defendant name omitted):

Acting United States Attorney Susan Lehr announced that Defendant, of Omaha, Nebraska, was sentenced today in Omaha by Chief United States District Judge Robert F. Rossiter, Jr. to 42 months' imprisonment for Conspiracy to Commit Wire Fraud. There is no parole in the federal system. After her release from prison, Defendant will begin a three-year term of supervised release. Chief Judge Rossiter ordered Defendant to pay restitution of $552,287.26.

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During 2020 and 2021, Defendant submitted applications for PPP and EIDL loans on behalf of her purported businesses and herself, as a sole proprietor, and obtained several PPP loans and an EIDL grant. Those loans were created or expanded by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was designed to provide emergency financial assistance to the millions of Americans suffering the economic effects caused by the COVID-19 pandemic.

In the loan applications, Defendant misrepresented the average monthly payroll that her purported businesses paid, the net revenue from her purported businesses, and the gross income she received as a sole proprietor. In fact, the businesses did not have employees and thus had no payroll, and Defendant did not generate revenue as a sole proprietor.

As PPP scam prosecutions start to wind down, expect ERC fraud prosecutions to take their place.

 

Sorry, Pepperonians. It's National Sausage Pizza Day!