September 8, 2021
TIGTA Cites Multiple Failures in IRS Business Return Processing - William Hoffman, Tax Notes. "The IRS’s backlog of unprocessed business tax returns exploded 3,320 percent, to almost 7.98 million by the end of calendar year 2020, compared with 239,285 backlogged returns in 2019, according to a Treasury Inspector General for Tax Administration’s postmortem released September 7 on the agency’s COVID-19 business tax operations."
The report shows an IRS business return process in disarray:
Due to backlogs, management decided to destroy information returns and delay processing others
We continue to perform on-site walkthroughs at the Ogden Tax Processing Center and meet with staff to discuss challenges they are facing while addressing these ongoing backlogs of inventory. During our walkthrough of the Ogden Tax Processing Center, we learned that the IRS destroyed paper-filed information return documents. Management subsequently stated they estimated that approximately 30 million documents were destroyed on or around March 19, 2021.
But there's more:
In addition, the IRS has placed the processing of prior and current year Affordable Care Act information returns on hold since December 23, 2020. This includes, for example, Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns; Forms 1095-B, Health Coverage; and Forms 1095-C, Employer-Provided Health Insurance Offer and Coverage. The IRS uses these forms in its post-processing compliance activities. For example, the IRS uses information from Forms 1094-C and 1095-C to ensure compliance with the Employer Shared Responsibility Provision. IRS management indicated that the hold on the processing of these information returns is to allow testing of updates to its processing systems. The IRS estimated that 5 million prior year Affordable Care Act information returns were on hold.
Perhaps it's premature for Congress to require more information reporting until the IRS can process the information it already gets.
It's all fun and games until the IRS starts billing you for taxes you have already paid and penalizing you for not filing returns you have filed:
The IRS has assessed 2,545,120 Failure to Pay penalties from April 1, 2020, through December 31, 2020, totaling almost $1.4 billion. During this same time, the IRS has fully abated 24,926 of these Failure to Pay penalties totaling more than $738 million because the taxpayer in fact made a tax payment, but the payment was not processed timely. In addition, our review found that 3,378 of these penalties totaling more than $54 million were refunded to the taxpayer because the taxpayer paid the penalty assessed.
The IRS has assessed 577,835 Failure to File penalties from April 1, 2020, through December 31, 2020, totaling almost $1.2 billion. During this same time, the IRS has fully abated 217,924 of these Failure to File penalties totaling about $475 million because the taxpayer filed a timely extension. In addition, our review found that 1,103 of these penalties totaling more than $13 million were refunded to the taxpayer because the taxpayer paid the penalty assessed.
It's nice that the IRS has been able to get stimulus deposits and child care credit payments out. It would be nicer if it could actually process tax returns timely.
Ways and Means Takes Lead on Tax Bill; Senate Finance GOP Fumes - Doug Sword, Tax Notes ($).
Senate Finance Committee Republicans say that if the Senate’s taxwriting panel doesn’t hold its own markup of legislation for the massive reconciliation bill, it “would amount to a massive and unfortunate concession to the House.”
Perhaps the biggest surprise in the text released by the Ways and Means Committee was Neal’s inclusion of a provision requiring small businesses to offer workplace retirement plans or face an excise tax of $10 per day for each uncovered employee. The mandatory plan has long been a goal of Neal’s, and the American Council of Life Insurers has estimated that requiring all companies with more than 10 employees to offer coverage would provide access to 30 million workers who don’t have access to a workplace plan.
Everything that makes it harder to start a business means few businesses are started.
House tax-writers embark on crafting $3.5 trillion tax and spending bill - Jay Heflin, Eide Bailly:
The House Ways and Means Committee has announced two public meetings for the $3.5 trillion tax and spending bill. These meetings will occur on Thursday, September 9, 2021, and Friday, September 10, 2021. Both will begin at 10:00 a.m.
These meetings will involve Committee members debating and amending the bill. The provisions they will focus on will not be tax increases. Those meetings are expected to occur next week, on Tuesday, September 14, 2021, and Wednesday, September 15, 2021. The legislative text for tax increases is not expected to be released until shortly before those meeting begin.
Biden's tax increases: Drama in the shifting state of play - Lynnley Browning, Accounting Today:
Are Democrats’ “tax-the-rich dreams” really fading as Democrats race to shore up support, as The Wall Street Journal put it on Sept. 5? The separate infrastructure bill, already approved by the Senate, comes up for a House vote on Sept. 27. It isn’t being voted on in tandem with the $3.5 trillion bill, which leaves the latter more vulnerable to horse-trading.
“The increase in the top individual tax rate has the broadest support among Democrats — and therefore the best chance of being approved,” Schwab wrote in an Aug. 20 note.
By contrast, changes to the capital gains rate and basis step-up rule “are not yet universally embraced by all Democrats on Capitol Hill” and will be the subject of intense negotiations. The upshot, Schwab said: “There’s a good chance that what emerges, if anything, will look very different from what the White House has initially outlined.”
Dems Look To Biden To Close Tax Deal Amid Centrist Dissent - Alan Ota, Law360 Tax Authority. "Several senior Democrats in both chambers predicted Biden could serve as a key deal maker as the House Ways and Means Committee prepares to mark up a reconciliation tax package Thursday. They said party leaders likely would need Biden's help to settle tax-related disputes and to pull together liberal supporters of his fiscal agenda along with undecided moderates including Sen. Joe Manchin, D-W.Va., a crucial swing vote in the 50-50 Senate."
Reviewing Wyden’s Reconciliation Tax Policy Proposals - Erica York and Alex Muresianu, Tax Policy Blog:
While President Biden has not included changes to the pass-through deduction in his proposals, Wyden has proposed significant alterations to the deduction before it is scheduled to expire after the end of 2025. His plan would phase out the deduction for taxpayers with taxable income above $400,000, with a full phaseout at $500,000; remove the limitations of the deduction for a “specified service trade and business,” which include services in health care, law, finance, accounting, athletics, consulting, and the performing arts; and forbid the deduction for married taxpayers filing separately, and for estates and trusts. He would also introduce new limits for agricultural cooperatives and qualified real estate investment trusts (REITs).
Advocacy Battle Lines Being Drawn on Wyden’s GILTI and FDII Proposal - Andrew Velarde, Tax Notes ($):
The bill proposes overhauling the global intangible low-taxed income provision, including through the elimination of the 10 percent qualified business asset investment exemption, and a move to a country-by-country application of the provision. Significant changes to the foreign-derived intangible income provision are also proposed, including equalizing the deduction’s rate to GILTI's and changing its calculation to be based off research and development and worker training expenses. Missing from the bill is exactly what the increase to the GILTI or FDII rate would be.
IRS: Deadline for third quarter estimated tax payments is Sept. 15 - IRS: In most cases, taxpayers should make quarterly estimated tax payments for 2021 if both of the following apply: Individuals expect to owe at least $1,000 in tax for 2021 after subtracting their withholding and tax credits. They expect their withholding and tax credits to be less than the smaller of: 90% of the tax to be shown on their 2021 tax return or 100% of the tax shown on their 2020 tax return. Their 2020 tax return must cover all 12 months. For taxpayers with 2020 AGI over $150,000, read "110%" instead of "100%." States have similar rules.
Benefits of Establishing a Private REIT - Sonja Sparks, Eide Bailly:
There are a couple of reasons that partnerships are becoming more interested in REITs:
199A tax deduction is spurring interest for real estate investors to move their properties into REITs in order to qualify for the 20% deduction.
Foreign investments have become increasingly popular.
Lucrative Capital Gains Exclusion Rule Is a Hot Topic Again - Emily Foster, Tax Notes ($):
Taxpayers are increasingly inquiring about a provision that offers tax-free capital gains on some small business stock, which remains unchanged under the Biden administration’s revenue proposals to fund infrastructure plans.
Discussions on how to qualify for section 1202 qualified small business stock (QSBS) heated up after enactment of the Tax Cuts and Jobs Act because the benefits from that provision — tax-free gain on the sale of stock — along with lower corporate tax rates made the conversion from a passthrough structure to a C corporation potentially more compelling.
Related: Choice-of-Entity Under the New Tax Law.
Critics Sound The Alarm Ahead Of Possible Retroactive Capital Gains Tax Hike - Robert Wood, Forbes. "A natural reaction to a looming tax hike is to sell quickly before the new law takes effect. But as proposed the rate hike is already in effect for sales after April 28, 2021. It might not pass, or it might pass with a different effective date. But it is hard to decide what to do, especially now that additional proposals seem inevitable as part of the pending infrastructure bill."
Seventh Circuit Reverses $9 Million Excise Tax Judgment Against Trucking Company - Parker Tax Publishing. "The Seventh Circuit, in a case involving two issues of first impression, reversed a district court's ruling and held that a trucking company was not subject to the excise tax under Code Sec. 4051(a)(1) when it leased refurbished highway tractors because the company qualified for the safe harbor in Code Sec. 4052(f)(1) for repairs and modifications the cost of which do not exceed 75 percent of the retail price of a comparable new vehicle."
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