Treasury Plans Answers to Research Amortization Questions - Nathan Richman, Tax Notes ($):
The anticipated proposal will clarify the midyear convention that applies to section 174 amortization. Under the new version of section 174 amortization, the taxpayer starts amortizing research costs only at the midpoint of the year in which they are paid, meaning the taxpayer generally gets only half of a year’s amortization in that year.
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The IRS and Treasury plan to define both research expenditures and specified research activities, largely by reference to reg. section 1.174-2. Notice 2023-63 also includes a non-exhaustive list of the types of costs subject to section 174 amortization as well as a description of some costs that fall outside the new regime.
For example, administrative services like payroll processing aren’t subject to section 174, even if the underlying employees are performing amortizable research, according to the notice. Interest, some website costs, and amortization of older research costs also fall outside new section 174, the notice says.
The IRS guidance spells out some R&D expenditures that will have to be capitalized and amortized, rather than deducted. These can include labor costs, materials and supplies, depreciation or amortization, patent costs, and some indirect costs. Indirect costs that may continue to be deducted can include support services, such as payroll and HR, among others. The guidance also points out that "any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, [is to] be treated as a research or experimental expenditure..."
Why Bipartisan Support Isn’t Enough to Change This Tax Provision - Richard Rubin, Wall Street Journal:
The 2017 law required businesses to spread tax deductions for research costs over five or 15 years, rather than taking them immediately. Efforts to undo the change remain at a near-standstill, wrapped up in fights over the child tax credit and the state and local tax deduction.
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Republicans changed the rules for deducting research costs when they wrote the 2017 tax law as a way to help pay for tax-rate cuts. In the long run, little changes for the government by shifting when deductions are taken. But the change made the tax law’s math work: It meant the government would bring in more revenue in the first decade after enactment, the period that matters in Congress when determining how much a bill costs.
Related: The Impact of Changes to Section 174.
IRS Releases Interim Guidance for TCJA Requirement to Amortize §174 Research and Experimental Expenditures - Ed Zollars, Current Federal Tax Developments. "Most commentators have viewed the amortization of research expenses provision, added to the law as part of the Tax Cuts and Jobs Act, as a measure that was always expected to be repealed before taking effect. Why, you might ask, would Congress enact a provision that perhaps none of those voting for the bill actually wanted to see implemented? The answer is simple: budget scoring and Senate rules regarding budget reconciliation bills."
The effort, building off work following last August's IRA funding, will center on adding more attention on wealthy, partnerships and other high earners that have seen sharp drops in audit rates for these taxpayer segments during the past decade. The changes will be driven with the help of improved technology as well as Artificial Intelligence that will help IRS compliance teams better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid burdening taxpayers with needless "no-change" audits.
As part of the effort, the IRS will also ensure audit rates do not increase for those earning less than $400,000 a year as well as adding new fairness safeguards for those claiming the Earned Income Tax Credit.
The announcement says the agency will go after high-income taxpayers who haven't paid:
In the High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.
And the IRS is looking at partnership balance sheets:
The IRS has identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance. Taxpayers filing partnership returns are showing discrepancies in the millions of dollars between end-of-year balances compared to the beginning balances the following year. The number of such discrepancies has been increasing over the years. Many of these taxpayers are not attaching required statements explaining the difference. This effort will focus on high-risk large partnerships to quickly address the balance sheet discrepancy.
IRS to use AI to crack down on ultra-rich taxpayers and partnerships - Eli Tan, Washington Post:
Budget, Tax Corrections Top Of Mind As Congress Returns - Asha Glover, Law360 Tax Authority ($):
Democrats, in the past, have tried to garner Republican support for making the American Rescue Plan Act's expanded child tax credit permanent in exchange for restoring the ability to deduct research and development costs.
Republicans, including House Ways and Means Committee Chairman Jason Smith, R-Mo., support expanding the child tax credit, but it is likely that they'll want to attach work requirements to any expansion. They're also concerned about the cost of making the COVID-era child tax credit permanent, having argued that the cost of the provision dwarfs the cost of restoring the full deductibility of research and development costs.
Senators Begin Early Bipartisan Tax Talks, Seek House GOP Buy-In - Samantha Handler, Bloomberg ($):
The challenge now is the same one that’s plagued bipartisan tax deal talks over the past year—how to balance the Democrats’ child tax credit with the expired business tax breaks, Wyden and other senators said in interviews at the Capitol this week.
The tax package from Ways and Means Republicans included some expired or expiring bipartisan business tax breaks—such as research and development expensing, full bonus depreciation, and interest expense deductions.
It's a good time to recall Jay Heflin's thoughts from last week on the possibility of tax legislation before year-end: "Legislation that would include R&D expensing, expand the 163(j)-interest deduction, and up Bonus Deprecation to 100% is currently not expected to pass this year. That could change, and passing such legislation would likely require bicameral, bipartisan support for providing tax relief to families."
Collection Part Two: End of the IRS Revenue Officer “Pop-In” Visit - Erin Collins, NTA Blog.
The IRS announced it is ending the practice of unannounced visits from its revenue officers. The policy change is due to the rise in tax scams and taxpayer confusion over verifying an IRS employee’s identity, leading to safety concerns for both taxpayers and IRS employees. This is good news for taxpayers since they will no longer be caught off guard and unprepared to discuss their unpaid taxes. Additionally, there is the benefit of an improved taxpayer experience when taxpayers receive advance notice and other information in the mail.
The end of unannounced visits does not mean revenue officers have stopped working outstanding tax due cases. It just changes the way they contact taxpayers in person. In the past, a revenue officer would conduct a preliminary investigation and then visit the taxpayer’s home or place of business unannounced. Now, prior to any face-to-face visit, you will generally (there are some rare exceptions) receive an appointment letter, Letter 725-B.
Related: IRS Collection Issues.
EITC audits: IRS' planned changes and recent problems - Kay Bell, Don't Mess With Taxes. "IRS Commissioner Danny Werfel said his agency will be adding new fairness safeguards for those claiming the Earned Income Tax Credit (EITC), a refundable tax credit that was created to help taxpayers with much more modest incomes."
The Secret to Saving for Retirement: Start Before You’re 20 - Ashlea Ebeling, Wall Street Journal. "Among the options for those who are younger, a Roth IRA makes sense because of the tax advantages. Once a child earns income, they are eligible to open up an individual retirement account. By making it a Roth IRA, children can get decades of tax-free compounding, giving them the potential to build a meaningful nest egg with little money down."
Paying Taxes And Checking Your Earnings History Can Help Boost Social Security Retirement Benefits - Kelly Phillips Erb, Forbes. "To qualify for benefits, most people need 40 credits, which is about ten years of work. You earn credits as you go. In 2023, you earn one credit for each $1,640 in earnings, up to a maximum of four credits per year. The amount needed to earn one credit usually increases each year."
Ninth Circuit Upholds $8 Million Penalty Against Promoter of Timeshare Donation Scheme - Parker Tax Pro Library. "A panel of the Ninth Circuit affirmed a district court's judgment imposing over $8 million in penalties against a taxpayer for promoting a tax-avoidance scheme that involved charitable deductions claimed in connection with the donation of unwanted timeshares."
Timeshare Tax Shenanigans End With Large Penalties - Peter Reilly, Forbes. "Apparently many of the people who will claim to help you get out of timeshare obligations are also running scams, which was arguably the case with Tarpey."
State Tax News & Views: Cookie Nexus and Clay Tablets - Eide Bailly. For the latest in state and local tax news.
Soft-landings, risk-free pensions and other economic fantasies - Allison Schrager, Known Unknowns. "But what I find most curious is the demand to bring back defined benefit pensions. Auto makers thought they got that monkey off their backs. But this is actually a demand from Shawn Fein of UAW. Now, I am not against DB pensions in principle. But we should not romanticize them, because they were never that great for workers. And they make even less sense in the modern labor market."
Boise man pleads guilty to preparing and filing false income tax returns - IRS (Defendant name omitted):
According to court documents and statements made in court, Defendant operated a tax preparation business in Boise, Idaho and prepared tax returns for clients for the 2016 and 2017 tax years. On returns he prepared, Defendant routinely falsely inflated clients' itemized deductions and Schedule C business expenses, falsely claimed fuel tax credits, and falsely inflated income to maximize the Earned Income Tax Credit. In total, Defendant's conduct resulted in a tax loss to the IRS of approximately $143,000.
Defendant is scheduled to be sentenced on November 28, 2023, and faces a maximum sentence of three years in prison.
The IRS will want to get those inflated refunds from his clients, whether or not they still have the cash. The biggest refund doesn't always come from the best preparer.
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