Tax News & Views Fiscal Constraint and Fig Newton Roundup

IRS reminder: Wage statements and certain information returns due by Jan. 31 - IRS:

As tax filing season nears, the Internal Revenue Service reminds businesses to submit wage statements and certain information returns to the federal government by Jan. 31.

Filing the required forms by deadline and without errors not only helps payers and recipients avoid penalties, it also helps the IRS fight fraud by making it easier to verify income information.

The Jan. 31 deadline applies to:

- Employers filing Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration.

- Payers filing Form 1099-NEC, Nonemployee Compensation, with the IRS.

Jan. 31 is also the deadline to:

Furnish copies of W-2, Form 1099-NEC and other information returns to the recipients. See each form’s filing instructions for the due dates to furnish copies to recipients.

Fiscal Constraints and Tax Legislation

Bond Market Sends Warning to Trump and Republicans on Tax Plans - Richard Rubin and Sam Goldfarb, Wall Street Journal:

House Republicans discussed the interplay between the bond market and their fiscal plans during a closed-door session Wednesday on their still-developing tax plans, according to lawmakers. The bond-market pressure could restrain their tax cuts or lead them toward spending cuts.

Politics have also been a factor. Many bond investors worry that Trump and congressional Republicans will pursue policies—tax cuts, tariffs and deportations—that could boost inflation and make rate cuts more unlikely. They also fear that Republicans will expand budget deficits, putting upward pressure on yields by forcing the Treasury Department to issue even more bonds into the market.

US Bond ‘Death Spiral’ Risk Brushed Aside by Foreign Funds - Ruth Carson and Alice Gledhill, Bloomberg via yahoo!finance. "There are plenty of reasons for global funds to buy even as Treasuries are mired in an historic bear market. The securities offer a huge yield premium over bonds in places such as Japan and Taiwan, while Australia’s rapidly growing pension industry is adding Treasuries every month because of the market’s depth and liquidity. The US also looks a safer bet than some European sovereign markets that are grappling with fiscal problems of their own."

Politics of Tax Legislation

State SALT Workarounds Get Lawmakers' Attention, JCT Chief Says - Chris Cioffi, Bloomberg ($):

Lawmakers from both parties have sought insight on legislative ways to push back on state workarounds to the $10,000 federal cap on individuals’ deductions for state and local taxes, Congress’ top tax scorekeeper said.

“There’s been a number of people, I’d say, from both sides of the aisle that have been interested in the issue of, ‘Well, what about these state workarounds? Are there things that we can do to rationalize the system if we want to retain this sort of limitation?’” said Thomas Barthold, the Joint Committee on Taxation’s chief of staff.

Freedom Caucus floats corporate tax boost in exchange for easing state, local deduction cap - Benjamin Guggenheim, Politico:

Under the proposal, blue-state Republicans would have to agree to restrict the state and local tax deduction — commonly known as SALT — for corporations in exchange for easing a cap on the deduction for individuals and families.

...

The idea is not going over well with so-called SALT Republicans who are negotiating with the tax-writing House Ways and Means Committee to increase the deduction for individual taxpayers. They aren’t up for “trading one blue-state penalty for another,” said a lawmaker participating in the discussions, granted anonymity to discuss the private deliberations.

IRS and Treasury

More IRS Partnership 'Soft Letters' Coming, Official Says - Kat Lucero, Law360 Tax Authority ($):

The Internal Revenue Service will keep using an educational compliance tool called soft letters to prod taxpayers to comply with a centralized partnership audit regime that has recently turned its focus to larger and more complicated entities, an agency official said Wednesday.

Soft letters, which the agency commonly sends out as a compliance measure in other areas, will be an ongoing effort in a relatively new practice area for pass-through entities within the IRS' Large Business and International Division, according to Clifford R. Scherwinski, director of that practice area. He spoke during the D.C. Bar Tax Conference, held in Washington, D.C., and online.

Nice partnership you have there. It would be a shame if we had to examine it.

What to Know About the E.V. Tax Credit That Trump Might Repeal - Neal Boudette, New York Times. "In 2024, 50 percent of the value of critical materials in E.V. batteries had to be sourced or processed in either the United States or a trading partner country. That number increased to 60 percent this year. That change caused some models to lose their eligibility for tax credits."

Treasury Lists Qualifiers for Tech-Neutral Clean Energy Credits - Erin Schilling, Bloomberg ($):

The Treasury Department released the first annual table describing which technologies are eligible for the new clean electricity credits.

The table, issued in IRS revenue procedure 2025-14, describes which technologies have greenhouse gas emissions rates that are less than zero. Those technologies qualify for the clean electricity production and investment tax credits under sections 45Y and 48E—also known as tech-neutral credits.

International Terminal

House passes U.S.-Taiwan double taxation relief bill - Focus Taiwan.

The United States-Taiwan Expedited Double-Tax Relief Act, which was passed in the House by 423-1 vote, will now be sent to the U.S. Senate for a vote, and if approved, will be sent to the American president to be signed into law.

The main aim of the bill is to prevent double taxation between the U.S. and Taiwan. It seeks to amend the current U.S. tax laws to provide tax exemptions for eligible Taiwanese residents in the U.S. and to lower the withholding tax rates on income from specific sources in the U.S., such as dividends and interest.

Taiwan Double Taxation Relief Could Hit Hurdles in the Senate - Cady Stanton, Tax Notes ($):

Sen. Rand Paul, R-Ky., has repeatedly opposed tax treaties moving through the chamber over concerns about taxpayer privacy issues. A spokesperson for Paul didn’t respond to a request for comment by press time on whether he plans to oppose the bill in the chamber.

“This isn’t a treaty, but it provides similar benefits,” Jose Murillo of EY said. “You could see him maybe objecting to something like this, because what he is particularly opposed to is the exchange of information between the two tax authorities, and that is a very important part of a treaty.”

Final IRS Rules Detail Taxation of Gifts From Expatriates - Erin Schilling and Lauren Vella, Bloomberg ($):

The final regulations (TD 10027, RIN 1545-BJ43) explain how taxpayers can apply Section 2801 of the tax code—a tax added by the Heroes Earnings Assistance and Relief Tax, or HEART, Act in 2008. The levy applies to certain gifts or bequests from people who gave up US citizenship or permanent residency after June 2008.

In its final regulations, the IRS acknowledged public comments that said the tax on gifts from an expatriate are much higher than the levy imposed if the person who made the gift was a US citizen.

Corporate Income Tax Rates in Europe, 2025 - Cristina Enache, Tax Foundation | Europe. "European countries—like almost all countries around the world—require businesses to pay corporate income taxes on their profits. The amount of taxes a business ultimately pays on its profits depends on both the corporate tax base and the corporate tax rate. Today’s map shows how statutory corporate income tax rates compare across European OECD and EU countries."

Donald Trump’s return raises prospect of global tax war - Emma Agyemang and Aime Williams, Financial Times. "Plans to levy higher rates on US multinationals could spur president-elect to respond with tariffs."

Spain proposes 100% tax on property purchases for non-EU buyers - Barney Jopson and Carmen Muela, Financial Times. "Spain is planning to impose a 100 per cent tax on real estate purchases for buyers from non-EU countries such as the UK in a bid to improve housing affordability by deterring foreign purchases."

Hong Kong Weighs Hiking Taxes on Top Earners for Second Year - Kiuyan Wong, Bloomberg via MSN. "During consultation with members of the public in recent weeks, Hong Kong’s officials floated the idea of raising the 16% tax rate on the top income band of HK$5 million ($642,000) or more, said the people, who asked not to be identified discussing private information. Another option discussed was to include more people in the highest tax bracket by lowering the threshold, they added."

Blogs and Bits

What's new on your 2024 federal tax return? - Kay Bell, Don't Mess With Taxes:

A tax credit of up to $7,500 prompted many car shoppers last year to buy an electric vehicle (EV). Those EV buyers also got to get that tax break up front, instead of waiting to file. They were able to transfer to the expected credit amount to the dealership and have that reduce the vehicle’s total price.

But these owners of more environmentally friendly transportation still have some tax return work to complete. When they file their tax return, the must attach Form 8936, Clean Vehicle Credits, and Schedule A (Form 8936), Clean Vehicle Credit Amount, to report the transfer of the credit and reconcile their eligibility on their return.

How To Help Those Affected By The California Wildfires–And Maybe Get A Tax Break - Kelly Phillips Erb, Forbes. "Cash is king. While you may want to send food and other items, the infrastructure may not support those donations. Many organizations have been clear that cash, or cash equivalent, is preferred. Keep receipts if you intend to claim those donations on your tax return."

IRS Issues Applicable Federal Rates (AFR) for February 2025 - Bailey Finney, Eide Bailly. "The Section 382 long-term tax-exempt rate used to compute the loss carryforward limits for corporation ownership changes during February 2025 is 3.67%"

Good records can be more valuable than jewels, at least in Tax Court.

Jewelers Can’t Trace Hidden Income to Mystery Treasure Trove - Chandra Wallace, Tax Notes ($). "In a January 15 memorandum opinion in Sehati v. Commissioner, Judge L. Paige Marvel rejected as “entirely fanciful” a story offered by petitioners to explain their failure to report millions in income — a long-unopened box of gems and precious metals they claim to have received as a gift."

A hidden box? From the opinion (taxpayer last names omitted, first names included for clarity):

Petitioners, relying on some of their own and Jamshid's testimony and some of the documentary evidence, present us with a story about why they did not report a substantial portion of JFJ's and SJC's sales as income (gift jewelry story). We summarize the gift jewelry story in this part without making any finding that it has any truth.

...According to Jamshid, in late 1983 Mohtaram (with his assistance) boxed and shipped the gemstones, finished jewelry, and related receipts from Israel to Joseph in the United States because she intended to emigrate from Israel to the United States.

It was a ponderous box, with 1,400 or more separate items, according to the taxpayers. They said that selling that jewelry didn't generate any income. Tax Court Judge Marvel felt that the taxpayers records didn't bear that out (citations omitted, emphasis added):

Petitioners offer the gift jewelry story to explain why much of the unreported income respondent has identified allegedly derives from a nontaxable source of income. As an initial matter, petitioners' reliance on the gift jewelry story is misplaced because gain from the sale of gift property (including any gain attributable to the holding period of a donor or a succession of donors) is a taxable source of income, not a nontaxable source.

It is true, of course, that a sale of property for an amount realized that is less than or equal to the property's adjusted basis will not cause a taxpayer to realize gain. Nonetheless, petitioners have not done the work of tracing each item of income respondent identified to a specific piece of alleged gift jewelry and an alleged adjusted basis for each piece, let alone presenting this information in a usable format or calculating the resulting gain or loss on each piece. Likewise, they have not traced the entries on the Jewellery Studio invoices to specific customer transactions or sales invoices at JFJ or SJC.

Long story short, taxpayer records didn't support the taxpayers story, which the judge rejected as "entirely fanciful." So fanciful, in fact, that some, but not all, of the taxpayers involved were hit with the 75% civil fraud penalty.

The moral? When somebody gives you a big box of mystery jewels, and you plan to sell them, you need to know how much they cost the donor. If you sell them, you need to report any gain. Oh, and don't tell a fanciful story to a Tax Court judge.

What day is it?

It's National Fig Newton Day! So tasty, and good for you.

Tax News & Views Fiscal Constraint and Fig Newton Roundup

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Joe B. Kristan, CPA