Tax News & Views Denied ERC Root Beer Roundup

IRS Crackdown on Bogus Covid Refunds Hits Snags - Richard Rubin, Wall Street Journal:

In its initial test of the new sorting system the IRS built to evaluate returns, the agency disallowed 28,000 tax-credit claims in July, targeting what officials said were the easiest pending refunds to analyze and reject. The IRS is also sending refunds to some taxpayers who have been waiting.

But problems are popping up. Some IRS denials told employers they weren’t operating a business during the pandemic, when they actually were but didn’t file separate business tax returns, said several tax professionals whose clients received letters. Other IRS letters said businesses didn’t experience the required decline in gross receipts; tax advisers said those IRS statements apparently relied on annual data, though eligibility is determined quarterly.

The article quotes the IRS as saying it is confident that most disallowances are correct.

Errors in Many Early ERC Denial Letters Add to Taxpayer Woes - Benjamin Valdez, Tax Notes ($):

Gil Mitchell, who heads the ERC team at Eide Bailly LLP, said August 1 that the firm disagrees with every ERC denial that it has received in the last two weeks.

“Our stance would be, you’re issuing these disallowance letters and you don’t have all the facts,” Mitchell said, noting that the denial letters are compounding taxpayers’ headaches over the ongoing delays in processing the credits.

Mitchell, who spent over 30 years in the IRS in examinations and has dealt with ERC claims, said he understands the agency’s concerns about fraud but doesn’t think the denial letters Eide Bailly has received fit claims in that category.

Failed Tax Bill Vote Removes Lifeline for IRS on Covid Credit - Erin Slowey, Bloomberg ($):

The failure of the $78 billion tax bill to advance in the Senate last week paints an even bleaker and more uncertain future for the IRS as it sorts through a backlog of pandemic-era tax credit claims while businesses wait to get cash they are owed.

...

The tax bill, brokered by Senate Finance Committee Chair Ron Wyden (D-Ore.) and House Ways and Means Committee Chair Jason Smith (R-Mo.), would have ended the ERC program early, given the IRS more time to go after fraudulent claims, increased the penalties for taxpayers who abused the program, and further define who is considered a promoter. It passed the House earlier this year but Senate Republicans blocked a test vote Aug. 1 due to concerns about separate child tax credit provisions. It’s not out of the question that Congress could revisit the ERC provisions later but it’s far from a guarantee.

IRS shares more warning signs of incorrect claims for the Employee Retention Credit; urges businesses to proactively resolve erroneous claims to avoid penalties, interest, audit - IRS:

Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts. Promoters convinced many essential businesses to claim the ERC when, in many instances, essential businesses weren’t eligible because their operations weren’t fully or partially suspended by a qualifying government order. Modifications that didn’t affect an employer’s ability to operate, like requiring employees to wash hands or wear masks, doesn’t mean the business operations were suspended. The IRS urges essential businesses to review eligibility rules and examples related to government orders.

Taxpayer Advocate doesn't pick up; notes IRS denials of low-income credits.

Tax practitioner complaint leads to review of advocate phone service - Martha Waggoner, The Tax Adviser:

A tax practitioner, frustrated by a six-week wait for a Taxpayer Advocate Service (TAS) response about a tax refund, complained to a federal watchdog. That complaint, related to a client facing financial hardship, led to a review that found the phone service provided by TAS offices across the nation was slow and inconsistent.

The review by the Treasury Inspector General for Tax Administration (TIGTA) of the phone lines to the 76 local TAS offices found some lines were not in service; others had full voicemail boxes; and some had inconsistent recorded scripted messages and callback time frames.

Only two offices answered the call, TIGTA's report said. Fifty-six calls went to voicemail; voicemail boxes at 16 offices were full; and two lines were not in service.

Link: TIGTA report.

Taxpayers Can Lose Thousands When the IRS Doesn’t Follow Its Own Procedures - Erin Collins, NTA Blog:

Congress establishes certain refundable credits to assist taxpayers with particular expenses. In an attempt to prevent improper claims of these credits, Congress authorizes the IRS to ban taxpayers from claiming certain refundable credits for two years if it determines that the taxpayers claimed the credit(s) due to reckless or intentional disregard of the rules and regulations.

In a Taxpayer Advocate Service (TAS) research study on these bans, we found on average, taxpayers in the study lost approximately $4,100 each year of the ban. This is a significant dollar amount for many taxpayers, particularly low-income taxpayers claiming the Earned Income Tax Credit (EITC). Considering the financial impact this ban has on taxpayers, it is especially concerning that the study showed that the IRS often fails to follow its own policies and procedures when imposing this ban.

State tax happenings

Va. Owes Refund To Remote Worker, Tax Commissioner Says - Michael Nunes, Law360 Tax Authority. "The Virginia tax commissioner said in a letter ruling published Friday that the state Department of Taxation wrongly denied the man a refund and that his employer shouldn't have withheld state income tax from his earnings for tax year 2022. The man, who was working remotely for a federal agency located in Virginia, completed his work out of state and didn't have Virginia source income, the commissioner said."

AI, SALT Measures in Focus as California Legislature Reconvenes - Andrew Oxford, Titus Wu, and Laura Mahoney, Bloomberg:

California is poised to extend its elective tax that gets around the $10,000 federal cap on state and local tax deductions through 2027 under a bill from Sen. Anthony Portantino (D) and make it easier to use the workaround under a bill from Sen. Steve Glazer (D).

...

To make an election under current law, entities must make a payment by June 15 of the current year of $1,000 or 50% of the amount of elective tax paid the prior year, whichever is greater. If entities miss the deadline or underpay, their election is invalid and they can’t use the mechanism.

The bill (SB 1501) would allow entities to miss the prepayment deadline but impose a penalty of 5% of the amount of elective tax paid for the year.

North Dakota voters will decide whether to abolish property taxes - Jack Dura, Associated Press vis The Hill. "If the measure passes, the state would have to replace over $1.3 billion a year beginning in 2025, according to a preliminary legislative research estimate. The state operates on a two-year budget, and the total two-year estimate of replacement revenue would be over $2.46 billion after deducting the state’s current property tax credit program amounts, according to the estimate. The state expects to collect $5 billion in general tax revenues over those two years."

Blogs & Bits

Senate blocks bipartisan tax bill, dooming popular tax breaks - Kay Bell, Don't Mess With Taxes. "That means businesses will face upcoming September and October filing deadlines with the tax breaks in limbo. And Democrats will use Republican opposition in their campaign speeches and ads."

Planning for the Estate Tax Exemption Cliff - Klaralee Charlton, Tax School Blog. "Then, in 2017, the Tax Cuts and Jobs Act made an unprecedented move by temporarily doubling the exemption to $10 million. With inflationary adjustments, the exemption currently stands at $13.61 million for gifts or inheritances transferred in 2024. Under IRC §2010(c)(3), the basic exclusion amount automatically returns to its $5 million threshold in 2026. Analysts estimate the inflation-adjusted exemption will be approximately $7 million per taxpayer in 2026 after the sunset."

Taxpayers' Carriage House Losses Are Nondeductible Under Passive Loss Rules - Parker Tax Pro Library. "The court did not find credible the husband's testimony that he spent 2,500 hours in the year at issue constructing the carriage house in addition to working full-time as an employee; therefore, the court concluded that the taxpayer did not spend more than one-half of his total personal services on the rental real estate activity in the year at issue."

Why Did the IRS Send Me a $1.87 Refund? - Russ Fox, Taxable Talk. "Now, I wasn’t expecting a refund (I owed tax, which I paid with the filing). It’s definitely labeled as a tax refund, but no explanation accompanied the check. That’s not unusual; the checks and the notice of explanations are generally sent from different offices. I ran a transcript, and there’s nothing noted on my account for 2023 that gives an explanation (no entry for $1.87)."

Tax Policy Corner

Budget Literacy for Form W-2 - Annette Nellen, 21st Century Taxation:

H.R. 8372, Debt Per Taxpayer Information Act, proposes to require the IRS to add this information to the bottom of Form W-2:

1) Total revenue, outlays and deficit of the Federal government;
2) Total gross Federal debt; and
3) Estimate of the pro rate amount of Federal debt for taxpayers who will file 1040s for that year.

I wonder how many taxpayers would claim the debt number as a deduction?

Exempting Social Security Benefits from Income Tax Is Unsound and Fiscally Irresponsible - Garrett Watson, Tax Policy Blog. "Exempting Social Security benefits from income tax would increase the budget deficit by about $1.6 trillion over 10 years, accelerate the insolvency of the Social Security and Medicare trust funds, and create a new hole in the income tax without a sound policy rationale."

Trump’s Social Security Benefit Tax Repeal Would Lower Taxes, Accelerate Program Insolvency - Howard Gleckman, TaxVox. "In dollar terms, the biggest winners would be those in the top 0.1 percent of income, who make nearly $5 million or more. They’d get an average tax cut of nearly $2,500 in 2025. But as a share of after-tax income, the biggest beneficiaries would be middle- and upper-middle income households, those making between about $63,000 and $200,000."

No Tax On Tips - Now Social Security - What Is Next? - Peter Reilly, Forbes. "A single person drawing the average social security check of $1,909 per month would have to have $40,000 in other income to be taxable on 85% of their social security. It would start phasing in when they have around $13,000 of other income which when you consider the standard deduction has them in the 10% bracket, possibly moving up to 12%."

Tax in the courtroom

St. Louis Attys Can't Get Acquittal In $4M Tax Avoidance Case - Christine DeRosa, Law360 Tax Authority ($, defendant names omitted):

According to trial testimony, [defendants] restructured their clients' businesses as limited partnerships with a charitable organization to reduce their taxable income, a practice known as a gain elimination plan. They did so in part by inflating business expenses through bogus royalties and management fees supposedly paid to the charity, the government alleged.

Instead of distributing any income from the business to the nonprofit, clients were instructed to collateralize the debt with a hefty life insurance policy, which [a defendant] often applied for on their behalf, prosecutors said.

Consider a "hefty life insurance policy" in an income tax planning strategy as a red flag.

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Tax News & Views Denied ERC Root Beer Roundup

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Joe B. Kristan, CPA