Key Takeaways
- Big IRS layoffs expected this fourth week of tax season.
- You still need to file.
- DOGE and taxpayer data.
- Are VATs trade barriers?
- Trade bill math problem.
- SALT and other tax bill battles.
- "The Dumbest Fiscal Policy in Recent Memory."
- National Battery Day.
IRS will lay off thousands of probationary workers in the middle of tax season - Fatima Hussein, Associated Press:
This comes as the Trump administration intensified sweeping efforts to shrink the size of the federal workforce, by ordering agencies to lay off nearly all probationary employees who had not yet gained civil service protection.
The article is dated Saturday, so "next week" means this week. I have heard from one such probationary worker who expects to be let go.
AICPA urges IRS to meet needs of taxpayers, preparers during filing season - The Tax Adviser.
Multiple news outlets reported Friday and Saturday that the IRS could lay off thousands of probationary employees beginning as early as this week.
Tax Breaks: The IRS Criminal Investigation And Cancer Scam Edition - Kelly Phillips Erb, Forbes:
That’s just one of several questions I’ve been asked about this tax season. Taxpayers aren’t happy–some are angry with perceived waste in government, while others believe that their financial data isn’t secure now that Elon Musk and his Department of Government Efficiency (DOGE) has so much access to federal computer systems. Still others believe that if the IRS will be shut down, there’s no point in filing (more on that in a moment).
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While the IRS still wants us to believe this is business as usual, tax professionals know differently. Discussions about federal hiring freezes and reducing staff at the IRS are causing some anxiety in the profession. This week, Tax Notes sat down with Robert Kerr, who currently runs his own tax consulting firm and has a decades-long career in tax administration, to talk about changes to the federal workforce that are bound to have immediate and long-term implications for the IRS. You can listen to the conversation on the Tax Notes podcast or read the transcript here.
If you assume that all of a sudden you don't have to file, you're making a terrible mistake.
DOGE and Tax Data
‘Five alarm warning': Possible DOGE access to private taxpayer data sparks outcry - Toby Eckert and Megan Messerly, Politico.
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The issue of who is privy to the data came under a microscope recently when an IRS contractor named Charles Littlejohn was caught leaking tax information about Trump and thousands of other wealthy people to the news media.
Top Democrats question IRS on DOGE access to taxpayer data - Tobias Burns, The Hill:
The Integrated Data Retrieval System (IDRS) is a software program the IRS uses to get access to taxpayer accounts. It allows IRS employees to request tax returns, generate notices and enter transaction and collections data on a taxpayer’s file.
Tariff Country
What Is VAT? The Tax Fueling Trump’s Latest Trade Fight - Konrad Putzier, Wall Street Journal:
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The VAT applies to goods and services sold in a European country, regardless of where they are from. An imported, American-made car faces the same VAT as a European-made car. A tariff, on the other hand, only applies to imports, favoring local producers.
Tariffs On Drugs And Chips May Not Bring Makers Stateside - Kevin Pinner, Law360 Tax Authority ($). "Tariffs on pharmaceuticals won't be enough to persuade drugmakers to invest more in production capacity within the U.S., according to John Murphy, CEO of the Association for Accessible Medicines, a trade group for domestic and international manufacturers of generic drugs. The industry, which currently does not face significant tariffs on its exports, would require more reimbursement from government healthcare programs for generic drugs to justify investing in U.S. production capacity, Murphy said."
Congress Still Struggles With a Tax Bill
Republicans Want Lower Taxes. The Hard Part Is Choosing What to Cut. - Andrew Duehren, New York Times:
For a sense of the Republican predicament, take a look at the 2017 tax cuts. Many of the measures in that law, including a larger standard deduction and more generous child tax credit, expire at the end of the year. The overriding goal of this year’s bill is to extend the expiring provisions, which provide their largest benefits to the rich, before they end.
But accomplishing just that would cost roughly $4 trillion over the next 10 years. Then there’s a coveted business tax break for research and development — which, in an example of the zigzag of tax policy in Washington, Republicans wound down in 2017 and now want to revive. That would be another $150 billion. Allowing companies to once again deduct more of the interest on their debt is another $50 billion.
Corporate SALT Break Tweaks Force GOP to Pick Winners and Losers - Chris Cioffi, Bloomberg ($).
That could lead to restrictions on pass-through entity SALT-deduction cap workarounds:
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Some states have created workarounds for pass-through business owners. Laws vary among states, but generally they allow pass-throughs to pay a state tax and give individual owners a credit for their share of the payment. These workarounds allow business owners to circumvent the SALT cap, but other individuals are out of luck.
Related: IRS Blesses Entity-level Tax Deduction used as SALT Cap Workaround
Don’t let the loophole lobby decide the tax debate - Daniel Bunn, The Hill:
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Already, we’ve seen groups come forward to push for specific policies.
There’s the SALT Caucus, which wants to see the $10,000 cap on the state and local tax deduction nixed or dramatically increased. President Trump has advocated eliminating taxes on tips, which has gained traction in Congress. And a debate has begun regarding the nonprofit sector — particularly nonprofits that earn a lot of business-like income or investment income, such as universities.
Bipartisan Tax Efforts Persist Despite GOP Grip On Congress - Stephen Cooper, Law360 Tax Authority ($). "A prime example of bipartisan cooperation is H.R. 1103, a bill introduced by Rep. Claudia Tenney, R-N.Y. With backing from 14 Republicans and 10 Democrats, the bill would permanently extend the new markets tax credit, a 39% tax credit designed to spur private investment in low-income, nonmetropolitan and distressed communities."
This dynamic may also affect efforts to kill Biden-era energy credits, some of which are supported by Midwest GOP representatives.
Why this carried interest fight is different - Sam Sutton and Declan Harty, Politico. "Private equity has a storied history of beating back similar efforts. But Trump’s latest attempt comes as more Republicans are echoing what has typically been Democratic talking points about the industry’s profits."
Blogs and Bits
Make sure you got your 1099-K forms, and that they are correct - Kay Bell, Don't Mess With Taxes:
The 1099-K, officially titled Payment Card and Third Party Network Transactions, finally was issued this year on a widespread basis. It was supposed to go out years earlier to sellers who made $600 or more. That was a change made in the American Rescue Plan Act (ARPA) of 2021 from the $20,000 in sales and 200 transactions trigger to issue the form.
Tax Court Disallows Deduction for Conservation Easement, Approves IRS Proposed Penalties - Ed Zollars, Current Federal Tax Developments. "The court then found that the partnerships were liable for a 40% gross valuation misstatement penalty under section 6662(h), because the claimed value of the easements on the tax returns was well in excess of 200% of the correct value. The court also noted that, because the misstatement was “gross,” the taxpayer was not eligible for a reasonable cause defense."
A Newborn Credit Has Advantages Over A Pregnant Mother Credit To Support Growing Families - Margot Crandall-Hollick, TaxVox. "Representative Blake Moore (R-UT) has introduced the Family First Act to reform several tax benefits for families. Among other changes to current law, the bill would create a new 'tax credit for pregnant mothers.'"
Tax Credits Gone Wild
Italy’s Superbonus: The Dumbest Fiscal Policy in Recent Memory - Alex Tabarrok, Marginal Revolution:
Luis Garicano has an amazing post on “one of the dumbest fiscal policies in recent memory.” Launched in Italy during COVID by Prime Minister Conte, the “Superbonus” scheme subsidized 110% of housing renovation costs. Now if one were to use outdated, simplistic, Econ 101 type reasoning one would predict that such a scheme would be massively costly not only because people would rush to renovate their homes for free but because the more expensive the renovation on paper the bigger the bonus.
The proponents of the Superbonus, most notably Riccardo Fraccaro, were however, advocates of Monetary Monetary Theory so deficits were considered only an illusory barrier to government spending and resource constraints were far distant concerns. Italy still had to meet EU rules, however, so the deficit spending was concealed with creative accounting:
So what were the results? The “free renovation” scheme quickly spiraled out of control. Initially projected to cost €35 billion, the program ballooned to around €220 billion—about 12% of Italy’s GDP.
Sort of like the Employee Retention Credit. Speaking of which:
Nevada Woman Pleads Guilty to Fraudulently Seeking Nearly $100M in COVID-19 Employment Tax Credits - US Department of Justice (Defendant name omitted, emphasis added):
In total, these claims sought refunds of over $98 million, of which the IRS paid approximately $33 million. Defendant personally received over $1.3 million in fraudulent refunds and was paid about $800,000 from those on whose behalf she filed fraudulent returns. Defendant knew that these returns were fraudulent. Neither she nor the others for whom she filed them were eligible to receive the refundable credits in the amounts claimed. Defendant used the proceeds for her personal benefit, including the purchase of luxury cars, gambling at casinos, vacations and other luxury goods.
With both the Italian renovation credits and the ERC, "good intentions" led to unintended but easily foreseen bad consequences. As far as I can tell, the ERC isn't yet on the DOGE agenda. Meanwhile, an ERC promoter is in line to head the IRS.
What day is it?
It's National Battery Day! It's 10 below outside this morning, so I may be asking a lot of a battery today.
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