Tax News & Views Perfect Storm Roundup

February 25, 2022

Work Overload, Lackluster Funding created ‘Perfect Storm’ for IRS Backlog – Jay Heflin, Eide Bailly. “The processing backlog that plagues the IRS stems from a ‘perfect storm’ of work overload caused by the pandemic and lackluster funding, according to an executive who represents IRS employees."  

‘It’s kind of a perfect storm,’ Doreen Greenwald told The Tax Policy Center’s ‘The Prescription,’ which hosts online conversations about tax policy.

‘I think a percentage of it is Covid… But I would have to say that the underlying and the primary issue is the lack of resources and the lack of proper funding,’ Greenwald said, who is the National Executive Vice President at the National Treasury Employees Union, which represents 60,000 IRS employees.

Greenwald stressed that voluntary tax compliance is hard to expect when the IRS can’t respond to taxpayers’ questions or process a return within a reasonable timeframe.

‘If you want to have voluntary compliance, you need to make it as easy as possible and be able to answer people’s questions,’ she said, adding, ‘All of these pieces to the puzzle must function appropriately for the system to work. And without the proper funding and hiring, that system is on the verge of collapse.’

IRS Urges Use of Website, Mobile App to Check Refund Status – Tax Notes ($):

The IRS has reminded (IR-2022-43) individuals that the easiest way to check the status of their tax refund is by using the online ‘Where’s My Refund?’ tool or the IRS2Go mobile app, noting that this year, those who do not normally file a tax return may wish to do so to benefit from expanded child-related tax credits under the American Rescue Plan.

The IRS also reminded taxpayers that the safest and best way to file a complete and accurate tax return and get a refund is to file electronically and use direct deposit. Most refunds are issued within 21 days, but some may take longer when the return requires additional review. The IRS listed some of the reasons a tax refund may take longer.

IRS Surge Tactic Merely Shifts Backlog, Union Official Says - Joshua Rosenberg, Law360 ($). “The IRS' decision to deploy 'surge teams' to address the agency's millions of unprocessed returns and correspondence will prevent other areas of the agency from fulfilling their own responsibilities, an official with the union representing IRS workers said Thursday.”

Reassigning employees to process the paper return backlog will necessarily diminish the capacity of other parts of the agency to complete their own tasks, Doreen Greenwald, national executive vice president of the National Treasury Employees Union, said during a webinar hosted by the Urban-Brookings Tax Policy Center.


IRS Minimum Distribution Proposal Baffles Financial Advisers - Austin Ramsey, Bloomberg ($). “Retirement advisers are reeling this week after the IRS proposed new regulations governing how and when savers are required to begin drawing down their inherited account balances.”

The proposed rule (RIN: 1545-BP82) implements a 2019 law raising the age 401(k) and individual retirement account holders must begin taking required minimum distributions. It gives plan participants an additional year and a half to build up their savings tax-free.

But industry observers say the 275-page proposal increasing the minimum distribution age to 72 threatens to complicate an already complex and confusing area of the tax code by reversing course on guidance the Internal Revenue Service has already issued for plan beneficiaries who inherit an account.


IRS Revises FAQs Addressing the Premium Tax Credit – Bloomberg:

The IRS updated its frequently asked questions on the Premium Tax Credit, according to the agency Thursday.

The FAQ updates address a range of issues, including the impact of unemployment benefits received during the Covid-19 pandemic on eligibility for the tax credit.

The FAQ is here


Stalled Biden Agenda Leaves Planned Tax Hikes in Limbo (Podcast) – David Hood and Jeffery Leon, Bloomberg ($). “Corporations and wealthy taxpayers breathed a sigh of relief when Democrats’ economic agenda stalled in the Senate late last year.”

The roughly $2 trillion package—which the Biden administration branded “Build Back Better"—included a variety of tax hikes, including major changes for pass-through entities.

While corporations and high earners may have dodged anticipated tax increases last year, they aren’t necessarily off the hook. The legislation remains stalled, but labor and environmental advocates are pushing for President Joe Biden to re-engage with holdout Sen. Joe Manchin (D-W.Va.) in an effort to find a deal.


Lower R&D Tax Perks Cause Companies to Consider Doom Scenarios – David Hood, Bloomberg ($). “Virtually no one expected Congress to let a lucrative tax break for research and development expenses lapse. Yet well into the first quarter of 2022, the legislative branch remains stalled in its efforts to pass Democrats’ tax-and-spend package with the tax perk in it.”

Now that the tax provision has lapsed, companies are modeling scenarios—some modest, others more serious—for what their tax strategies and expenses for R&D will be this year. Even though companies are beginning to model what 2022 will look like, there is broad expectation among tax professionals that Congress will bring back the credit’s full benefit.

The long-term risk for congressional inaction is job loss in R&D as companies eye more lucrative tax breaks overseas for R&D expenses. In the short term, uncertainty—something companies and their investors loathe—spurs more work for advisers tasked with modeling different scenarios and a mountain of paperwork for tax teams adjusting to a new R&D tax environment.

‘In the long run, our chances are good, but it’s difficult to enact law right now in this Congress—law you want or law you don’t want,’ said Janice Mays, managing director of tax policy at PricewaterhouseCoopers, said during a Wednesday webinar hosted by the firm. ‘Both have difficult paths ahead of them.’

The most likely scenario, Mays said during the webinar, is Congress includes a fix in a year-end extenders package if all other efforts to include it in must-pass legislation fail.

Taxpayer Questions on Research Amortization Are Changing – Nathan Richman, Tax Notes ($). “In the weeks since the research amortization regimen from the Tax Cuts and Jobs Act kicked in, taxpayers have started asking their advisers new questions about how to apply the changed law."

‘Historically, people really haven’t had to break out [section] 174 from the rest of their deductions. Maybe occasionally you do it for [section] 861 purposes or for computing foreign tax credits, but for the most part people really haven’t had to decide exactly what were the 174 costs,’ Mark Hindes of Deloitte Tax LLP said February 23 on a webcast sponsored by his firm.

According to Hindes, taxpayers in the last month or so have begun asking the same questions that tax professionals have been asking since at least 2020. ‘The biggest question we’ve gotten is ‘What do we do now? What do we do with our qualified research expenditures from section 41 to turn them into 174? What do we do with our book R&D numbers to estimate what the 174 is and what are the differences?’’ he said.

New R&D Credit Refund Requirements Create Hurdles - Eric Hylton, Bloomberg ($). “It’s undeniable that the research and development, or R&D, tax credit, provided under IRC Section 41, is already one of the more difficult tax provisions to deal with. In fact, the U.S. Tax Court has grappled with the difficulty of taxpayers claiming the research credit itself, including in the 2014 case of Suder v. Commissioner."

Now, it seems the IRS has added an additional layer of complexity for those who intend to claim a research credit refund. As many have seen by now, the agency released a chief counsel memorandum in October 2021 detailing several new requirements that must be met when a taxpayer files for refund.


Taxpayers and preparers face uncertainty from CTC and expiring tax breaks – Michael Cohn, Accounting Today. “Tax professionals and their clients are dealing with extra challenges this tax season from tax breaks that ended last year and haven’t yet been extended, including the enhanced Child Tax Credit.”

Around 40 tax provisions affecting individuals or businesses expired in 2021, six of which ended after the third quarter and 34 at the end of the year. Some provisions were related to pandemic relief and arguably intended to expire at some point, while others are on the traditional list of ‘tax extenders’ that traditionally get renewed by Congress, sometimes retroactively. 


SALT Alternative Takes Shape as Democrats Move Past Biden Plan - Laura Davison, Bloomberg ($). “Two House Democrats have a new plan to provide a more generous state and local tax deduction, the latest in a string of such proposals that have largely been stymied along with the rest of President Joe Biden’s economic agenda.”

The latest state and local tax, or SALT, deduction bill, introduced by Representatives Tom Malinowski of New Jersey and Katie Porter of California, would remove the current $10,000 cap entirely for those making less than $400,000 a year and raise the deduction limit to $60,000 for taxpayers making more than $400,000. The cap would decrease by $10,000 for each additional $100,000 in earnings, which would phase it out for those earning more than $1 million.

The legislation also requires that anyone claiming the SALT deduction must attest that they do not have total assets worth more than $1 billion.

Um...the House already passed legislation that modifies the SALT cap. Neither sponsoring lawmaker of the legislation sits on the tax-writing House Ways and Means Committee. BBB could be dead. And many Democrats oppose modifying the SALT cap. Why was this legislation introduced?


Chemical Company Addresses Superfund Excise Tax – Tax Notes ($):

The Lyondell Chemical Co. has responded to a request for comments (Notice 2021-66) on the reinstatement of the excise taxes on specified chemical substances, recommending that ethyl alcohol for non-beverage use should be removed from the list of taxable substances.


Cannabis advocates push senators to ease draft bill’s tax burden – Laura Weiss, Roll Call. “As top Senate Democrats finalize their plan for making marijuana legal across the country, industry and advocacy groups are urging a lower tax rate.”

They’re arguing that setting levies too high could allow an illegal market to keep flourishing and hit hard in some states that already legalized marijuana.

The details of senators’ vision for a federal cannabis tax regime will be a key factor in the coming weeks as Majority Leader Charles E. Schumer of New York, Finance Chair Ron Wyden of Oregon and Sen. Cory Booker of New Jersey work toward unveiling their bill in April.


Taxing Business Incomes: Evidence from The Survey of Consumer Finances - William Gale, Swati Joshi, Christopher Pulliam, and John Sabelhaus, Tax Policy Center:

More than half of economic income generated by closely held businesses does not appear on tax returns and that ratio has declined significantly over the past 25 years. Tax data alone provide incomplete insights about business income taxation because the incomes reported to the IRS are already affected by tax rules, avoidance strategies, and non-compliance. We explore distributional analyses of business income taxation using the Survey of Consumer Finances (SCF), which has the comprehensive household-level income, wealth, and demographics needed to simulate tax filings and benchmark against published IRS data. Under conservative assumptions, we show that the part of economic income from closely held businesses that does not show up on tax forms is distributed disproportionately to the most affluent households.


DOJ Seeks Dismissal of Microcaptive Adviser’s Privacy Claim – Kristen Parillo, Tax Notes ($). “A microcaptive adviser’s accusation that the IRS improperly disclosed her return information is time-barred and should be tossed from her lawsuit challenging $11.6 million in promoter penalties, the Justice Department says.”

With evidence showing that Celia R. Clark was aware of the alleged taxpayer privacy violations no later than 2014, the two-year statute of limitations for seeking redress had long expired before the claim was included in Clark’s November 2021 lawsuit, the Justice Department asserts in a February 23 motion in Clark v. United States.

The government’s motion asks the U.S. District Court for the Southern District of Florida to dismiss Count II of the complaint, which seeks damages for the IRS’s alleged unauthorized disclosures of Clark’s tax return information. In its February 24 answer and counterclaim, the Justice Department asked the court to reduce to judgment the unpaid balance of penalties assessed against Clark.


Government Fires Shot Against Perceived Charitable Trust Abuses – Nathan Richman, Tax Notes ($). “The Justice Department has accused a group of people and entities of promoting an abusive tax scheme involving charitable remainder annuity trusts (CRATs) and asked a court to prevent them from continuing to do so.”

The government filed its February 23 complaint in United States v. Eickhoff accusing five individuals and two limited liability companies of telling customers that they could use CRATs to eliminate capital gains taxes.

In the complaint, the government says the IRS conducted 19 audits related to the scheme that found $17 million in underreported income.


Guidance on Tax-Exempt LLCs Largely Depends on Public Feedback – Fred Stokeld, Tax Notes ($). “Public comments on guidance addressing limited liability companies seeking tax-exempt status will help determine whether the IRS and Treasury will publish additional guidance on the topic, according to officials.”

The purpose of Notice 2021-56, 2021-45 IRB 716, was 'in part to sort of get the lay of the land on state LLC law and how state laws may differ from state to state and just get a sense of how LLCs can be used in the exempt organizations context,' the notice’s coauthor, Christopher A. Hyde of the IRS Office of Associate Chief Counsel, noted February 24 during a webinar sponsored by the District of Columbia Bar Taxation Community.


Iowa Lawmakers Back Shift to Flat 3.9% Personal Income Tax Rate – Michael Bologna, Bloomberg ($). “Iowa would transition to a flat 3.9% personal income tax regime over four years and waive taxes on retirement income under legislation speeding toward Gov. Kim Reynolds. The Republican governor has already signaled her support.”

Flush with pandemic relief dollars and better-than-expected revenue collections, Iowa is one of a growing number of states signaling major tax cuts for 2022. Already legislatures in Arizona, California, Georgia, Idaho, Indiana, Kansas, Michigan, Mississippi, New York, South Carolina, Wisconsin, and West Virginia have taken steps to reduce taxes or provide rebates to ratepayers.

Iowa’s legislation also creates a framework for cutting corporate income taxes over several years, eventually leaving Iowa with a flat rate of 5.5%. The provisions of the omnibus tax package, H.F. 2317, will provide significant relief to individuals and businesses after full implementation, Senate Majority Leader Jack Whitver (R) said.

H.F. 2317 won support in the Senate Thursday by a vote of 32-16. The House already voted its support on Feb. 16, but will have to enter a concurring vote due to amendments added in the Senate, said Tom Sands, president of the Iowa Taxpayers Association.


States Pioneering Legal Marijuana Sales Lead in Tax Revenue – Bloomberg:

Another round of states, including New York, are looking to capitalize on recreational pot. But the latest available figures on cannabis sales and tax revenue show they have a big gap to catch up to the states with a well-established presence.


Washington State’s Plan to Tax Fuel Exports Angers Neighbors - Dina Bass, Bloomberg ($). “Washington’s plan to tax fuel exported from the state is angering neighbors in Oregon, Alaska and Idaho, who say their residents would bear the cost of the proposal.”

The state’s legislature has proposed a 6-cent-per-gallon tax, part of a $16.8 billion transportation bill that would fund roads and transit and modernize an aging ferry system. The export tax would be the first of its kind in the nation, according to the Washington Policy Center. The revenue plan narrowly advanced out of a state House committee Tuesday.


Marlins Player Absolved of $400,000 Tax Bill by Utah High Court - Perry Cooper, Bloomberg ($). “Retired professional baseball player John Buck and his wife, Brooke, don’t owe Utah $400,000 in back taxes because the state erred in determining their domicile, the Utah Supreme Court ruled.”

The Bucks own a house in Utah but moved to Florida when John Buck joined the Florida Marlins. The state tax commission found the Bucks were still domiciled in Utah for tax year 2012 and put them on the hook for almost $400,000 in taxes and interest.

The Utah Supreme Court reversed the commission’s determination Thursday, finding the ‘uncontested facts overwhelmingly support the Bucks‘ contention that they were domiciled in Florida in 2012.’


California Biomass Plants Lose Appeal For $21 Million in Grants - Maya Earls, Bloomberg ($). “Two California biomass facilities were placed in service too late to qualify for $21.8 million in grants under the American Recovery and Reinvestment Act, the Federal Circuit affirmed Thursday.”

The act says entities can receive federal grants if they placed a renewable energy facility in service in 2009 or 2010. An entity can also receive grants if they began constructing a property in 2009 or 2010 that they later placed in service, according to the ruling.


Mich. Panel Advances Income Tax Cut, Retirement Changes - Asha Glover, Law360 ($). “Michigan would cut the state's flat income tax to 3.9% from 4.25% and eliminate the state's three-tiered treatment of retirement income under a bill approved Thursday by the state House Tax Policy Committee.”

The committee passed H.B. 5838, introduced by Rep. Matt Hall, R-Marshall Township, which would lower the income tax rate to 3.9% beginning this tax year and allow an increased exemption level for taxpayers 62 and older on retirement income. If passed, both provisions would take effect retroactively on Jan. 1, 2022.

The bill also was approved by the House Appropriations Committee. It will be considered next by the full House.


Mo. Senate OKs Referendum On Digital Products Tax - Asha Glover, Law360 ($). “Missouri voters could choose to remove a ban on sales taxes on subscriptions and licenses for digital products in the state constitution and to cap the income tax at 5.9% under a resolution passed Thursday by the state Senate.”

The Senate passed S.J.R. 33, sending the proposal to the state House. The bill would modify a provision prohibiting sales taxes levied on transactions not taxed as of Jan. 1, 2015, to allow an exception for sales and use taxes on subscriptions, licenses for digital products and online purchases of tangible personal property.


Liberty Global tax win may open up repatriation floodgates – Andrew Silverman, Bloomberg ($). "A taxpayer victory in a case challenging restrictions on the tax-free repatriation of foreign cash could result in U.S. companies, especially in technology, bringing back billions of dollars held overseas. The case may also limit the government’s future ability to attack tax abuse. A win could give plaintiff Liberty Global a $110 million refund.”

Alphabet, Meta, Oracle and Microsoft still hold hundreds of millions of dollars offshore that could be brought back to the U.S. tax-free if territorial regulations issued in 2019 are withdrawn. The U.S. District Court in Colorado hears a case this month that will determine whether rules restricting companies’ ability to bring cash into the U.S. were invalidly issued. If, as we believe, the challenge is successful, many multinationals could seize the opportunity to bring cash back.


OECD Scrutinizes Tax Incentives Offered by Developing Countries - Janna Brancolini, Bloomberg ($). “Tax incentives offered by countries can attract investment and increase productivity, but if they are poorly designed they can have limited impact and result in windfall gains for projects, according to an OECD report released Thursday.”

The Organization for Economic Cooperation and Development surveyed 36 developing countries and looked at 298 incentives, which took the form of reduced tax rates, exemptions, allowances, and credits.


U.S. Companies Demand Withdrawal of Foreign Tax Credit Regs – Hamza Ali, Bloomberg ($). “A group of multinational companies has called on the U.S. Treasury department to remove new regulations on foreign tax credits, arguing they make American companies less competitive.”

The Alliance for Competitive Taxation, which represents corporations including The Coca-Cola Company, Exxon Mobil Corporation, and Google, Inc., argues in its letter that the regulations go beyond their original purpose.

That purpose, said the ACT, was to deny a U.S. foreign tax credit for novel extraterritorial taxes, such as digital services taxes (DST). However, the final regulations published in December 2021 go much further, and ‘will deny foreign tax credits for taxes that have nothing to do with DSTs and that have been creditable for many years,’ said the letter.


Pass-Throughs Face Added Costs To Sort Out Int'l Reporting - Dylan Moroses, Law360 ($). “New tax schedules for partnerships and other pass-through entities with foreign interests have practitioners spending significant time this filing season to accurately fill out the new forms, which will likely lead to increased compliance costs for businesses.”

Tax practitioners told Law360 the new schedules require a granular level of detail from those clients with international ties, and the exercise to complete the new forms is more intensive than what the Internal Revenue Service previously required from partnerships with foreign interests.

Schedules K-2 and K-3, finalized by the IRS last year, require any pass-through entities and S corporations that may claim foreign tax credits, deductions or other tax treatment tied to international activity to report that information on the new forms.


Sunak Makes Low-Tax Pitch as U.K. Leadership Question Looms - Joe Mayes, Bloomberg ($). “Chancellor of the Exchequer Rishi Sunak laid out a vision to cut taxes in the U.K., establishing his credentials as a Thatcherite who can appeal to the members of his Conservative Party who are questioning Prime Minister Boris Johnson’s leadership following a succession of scandals.”

‘I firmly believe in lower taxes,’ Sunak said at the annual Mais lecture at the Bayes Business School in London, an event used by past chancellors to signal their economic plans and discuss their politics. Sunak said his priority is to cut taxes on business investment, and also that Britons should be ‘able to make decisions about how to save, invest or use the money we earn.’


It’s National Skip the Straw Day! Pro-environment folks should celebrate. Today is about not using a straw to slurp a drink.

“For thousands of years, humans have enjoyed slurping a refreshing beverage through a cylindrical tube. If Marvin Stone (the inventor of the first paper straw in 1888) were alive today, he might be shocked to know of the five large areas of the ocean, called gyres, where plastic garbage collects. The sea’s currents create vortexes trapping plastics, and in the collection are plastic drinking straws,” states National Day Calendar.

How to celebrate today? Shots! Be it milk, water or bourbon!

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