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Tax News & Views Penalties & Penalties Roundup

September 8, 2022 | Blog
By Joe Kristan, CPA

Senate leans toward Dec. 16 stopgap funding bill - Aidan Quigley and Lindsey McPherson, Roll Call:

But navigating the evenly divided Senate to get the 60 votes needed to advance the as-yet-unwritten stopgap funding bill will likely require tough negotiations regarding pandemic-related funding, among other issues.

...

[Senate Minority Leader] McConnell said Wednesday that a CR should be “as clean as possible” to keep the government fully operational without controversy.

"As clean as possible" means "forget tax provisions."

Hurdles Remain for Bipartisan Compromise on Child Tax Credit - Benjamin Guggenheim, Tax Notes ($):

The June announcement of the Family Security Act by Sen. Mitt Romney, R-Utah, and Senate Finance Committee members Richard Burr, R-N.C., and Steve Daines, R-Mont., seemed like an opening for a coalition of Democrats who wished to see an extension of the enhanced child tax credit in a reconciliation bill.

But pay-fors in the Republican legislation — which would provide $4,200 annually for children under age 6 and $3,000 for children ages 6 through 17 — have left some Democrats skeptical that any compromise could be tenable.

The "pay-fors" include "a new $10,000 earnings threshold for the bill’s full benefit; and the elimination of the SALT deduction, the head of household filing status, and the tax credit for child care." 

Some progressive legislators in the closely-divided House are insisting on renewal of the child tax credit before passing business-friendly legislation, including renewing current deductions for research costs and relief from the Sec. 163(j) limits on business interest expense.

 

IRS move toward free e-filing could end years of corporate domination - Jacob Bogage, Washington Post:

The Internal Revenue Service will spend $15 million studying a free, government-backed tax filing system under a provision in the sweeping climate and health-care law Congress passed this summer. It’s a landmark step toward overhauling the way most Americans file their taxes and ending years of domination of tax prep by private corporations.

...

“The IRS is completely beholden to the software companies at this point because it just doesn’t have anything to replace them,” said Nina Olson, who served as the national taxpayer advocate, the IRS’s internal consumer rights watchdog, from 2001 to 2019.

Tax compliance software is hard to do well, and the IRS doesn't have a terrific track record in IT. Also, most taxpayers also need to file with a state, which will require a trip to a second website.

 

Backlog Thwarted IRS’s ‘Well-Planned’ IT Modernization Strategy - Jonathan Curry, Tax Notes ($):

The IRS had $1 billion worth of carefully considered modernization projects ready to go when it was forced to scuttle those plans to deal with its backlog instead, according to the Treasury Inspector General for Tax Administration.

...

TIGTA found that IT leadership within the IRS developed comprehensive plans for what projects it wanted to do and how to do them, collaborated with other leaders in the agency when selecting projects, briefed various stakeholders in the tax administration process, and obtained all the necessary approvals.

 

IRA Will Cut Deficits by $58 Billion, CBO Estimates - Doug Sword, Tax Notes ($):

The White House had boasted that the bill will cut deficits by “hundreds of billions” of dollars, economists at the University of Pennsylvania estimated that it would cut deficits by $264 billion over 10 years, and a budget watchdog forecast that the bill would cut deficits by $1 trillion over 20 years.

A big part of the difference in estimates stems from the CBO’s handling of the IRS portion of the reconciliation bill. The CBO doesn’t include in its estimate its own forecast that the bill’s allocation of $79.6 billion for additional IRS funding over the next decade will result in the agency increasing its collections by $180 billion over the period, for a net revenue increase of $100 billion. Estimates of increased IRS tax collections from program integrity investments aren’t included in budget scores on appropriations bill. 

The article says the projection will increase deficits through 2026, and the projected savings come later.

 

UK leader Truss vows energy relief, rules out windfall tax - Jill Lawless, AP via Washington Post. "Truss’s spokesman said she wouldn’t cancel a windfall tax imposed in May by former Treasury chief Rishi Sunak, her defeated Conservative leadership rival, but wouldn’t bring in a new one. She is also scrapping a previously announced increase in corporation tax from 19% to 25%."

Ex-Software CEO's Death Ends $2B Criminal Tax Fraud Case - Theresa Schliep, Law360 Tax Authority ($). "According to prosecutors, Brockman attempted to conceal capital gains earned through his investments in private equity funds managed by San Francisco-based Vista Equity Partners and had the capital gains wired from Vista's bank accounts to accounts in Bermuda and Switzerland."

Inflation Reduction Act A Boon To Hydrogen, Carbon Capture - Omar Samji, Gabriel Salinas, and Dan Feldman, Law360 Tax Authority ($). "The IRA extends the tax credits under Section 45Q for carbon capture and direct air capture to projects beginning construction before 2033, and provides additional modifications, including an enhanced credit for direct air capture and lowering the carbon capture threshold requirements at facilities."

Related: Opportunities with the Section 45Q Carbon Oxide Sequestration Credit.

 

Lawsuit Offers Important Reminders on Tax Professional Ethics - Kelly Phillips Erb, Bloomberg. "Tax professionals can be many things—attorneys, accountants, advisers, and preparers—but we’re not mind readers or fortune tellers."

Don't deposit a wrong IRS refund check - Kay Bell, Don't Mess With Taxes. "The bottom line, to your peace of mind and tax account correctness if not your bank account, is don't be the taxpayer wanting to revel, at least temporarily, in a huge tax windfall."

Improving Services to Taxpayers With Visual Disabilities - Erin Collins, NTA Blog. "Millions of U.S. taxpayers are visually impaired and unable to read print material in a standard font size. As a result of a settlement agreement between the IRS and the National Federation of the Blind (NFB) on July 10, 2020, the IRS agreed to develop a process for taxpayers to request post-filing tax notices in a variety of acceptable formats, including Braille and large print."

City-based soda pop taxes don’t effectively reduce sugar consumption - Leigh Beeson, UGA Today. "But consumers simply turned to other sweetened foods to fill their sugar gap or traveled to surrounding towns without the tax to get their sugar fix, from both sodas and additional sweets like candy and cookies. These actions almost entirely offset the decrease in sugar intake from colas and other sweet drinks."

IRS Audits With No Time Limit And No Statute Of Limitations - Robert Wood, Forbes. "Even worse, don't omit Form 3520 for gifts or inheritance from foreign nationals, or Form 8938 for overseas assets. If you skip one of these forms, the IRS clock never even starts to run. Of course, the IRS also has no time limit if you never file a return. For unfiled tax returns, criminal violations or fraud, the IRS can take its time. In most criminal or civil tax cases, though, the practical limit is six years. What other tax forms allow the IRS to audit forever? If you own part of a foreign corporation, it can trigger reporting, including filing an IRS Form 5471."

Failing to Respond to the IRS and the Tax Court - Keith Fogg, Procedurally Taxing. "The Court detailed his failures to respond to its show cause orders before moving on to prior disciplinary actions taken against him by the Louisiana State Board of CPAs, which revoked his CPA license for failure to respond to clients, and the Board of Tax Appeals of the State of Louisiana which discussed his history of unresponsiveness... My concern after reading this case relates to future potential clients [of the sanctioned attorney]"

 

Special Hurdles: Expatriation of Minors / Mentally Challenged Individuals - Virginia La Torre Jeker, Virginia - US Tax Talk. "The renunciation of one’s citizenship is regarded as a personal elective right that cannot be exercised by another person. Parents or guardians cannot renounce or relinquish the US citizenship of a child who acquired his US citizenship at birth.  This means that only the individual child himself can renounce his US citizenship, but this is not so easy to do in the case of children."

The Unexpected Tax Consequences of Overturning Roe v. Wade - David Stewart. Caitlin Mullaney, and Caroline Rule, Tax Notes Opinions. "As I said before, tax-exempt covered abortion services must be legal where provided. If the employer's group health plan, and this would be a fully funded one, is offered by a health insurance company licensed only in a state where abortion is illegal, the employer can't offer abortion-related expenses under its plan."

States Inaugurate a Flat Tax Revolution - Jared Walczak, Tax Policy Blog. "Iowa is phasing in a 3.9 percent flat individual income tax by 2026, going from a graduated-rate tax that not long ago topped out at 8.98 percent. Mississippi will have a flat tax as of next year, with a 4 percent rate by 2026. Georgia’s income tax is now scheduled to convert to a flat rate of 5.49 percent, eventually phasing down to 4.99 percent. A court cleared the way for the implementation of Arizona’s transition to a 2.5 percent flat tax, which should happen, pending revenue availability, in 2024. In special session, Idaho adopted a 5.8 percent flat tax, replacing a four-bracket system. Missouri has been called into special session to adopt income tax rate cuts, but a flat tax could still be a consideration, soon if not this session, and a serious effort at adopting a flat tax is likely in Oklahoma next year."

 

This never works, but maybe it will this time. That could be a motto of those who believe that there really isn't an income tax, at least for them. That belief collided with the Tax Court yesterday when a taxpayer who filed returns showing nothing but zeros in the income lines tried to get out of the resulting penalties for filing "frivolous tax returns."

From Judge Lauber's opinion:

To his Form 1040 for 2003 petitioner also attached a Form 1099-MISC, Miscellaneous Income. Forms 1099-MISC are issued by payers of income to payees. But petitioner created this Form 1099-MISC himself, putting zero in the box for “Nonemployee compensation” and showing no tax withheld. He asserted that this was a “corrected” Form 1099-MISC that was intended to “rebut” the Form 1099-MISC issued to him by Ahera Consultants, Inc. (Ahera), the payer of the income. Petitioner wrote:

The form is NOT INTENDED to represent a corrected 1099-MISC filed by the party identified therein as “PAYER.” The corrected form 1099-MISC herein presented, is submitted to “rebut” a document known to have been submitted by the party identified therein as the “PAYER” which or who erroneously alleges a payment or payments to the party identified therein as “RECIPIENT” of “gains, profit or incomes” within the meaning of relevant law, which they ARE NOT.

The payments made to me by this “PAYER” did not result from any federally taxable activity whatsoever and do not constitute any taxable income under relevant income tax law. . . . [T]his payer is not connected with any activity or of any status which would render payments to me subject to federal income excise tax, nor am I.

Making points in ALL CAPS is not the killer legal trick it might appear to be. The Tax Court concludes: 

In sum, respondent has carried his burden of establishing that all 14 of petitioner's submissions satisfy the three conditions specified in section 6702(a) for a “frivolous tax return.” Petitioner is therefore liable for a $5,000 penalty for each Form 1040 that he filed.

That's $70,000 in penalties - $50,000 of which appear to be entirely self-inflicted. Judge Lauber (my emphasis):

Because petitioner's 2003-2012 tax liabilities had been finally determined by this Court by the time he submitted the Forms 1040, it is unclear what effect he intended his submissions to have for tax years 2003-2012. But these circumstances do not prevent the IRS from imposing a frivolous return penalty where a taxpayer “files what purports to be a return of tax.” § 6702(a)(1). A taxpayer may be penalized for filing a frivolous return even if he was not required to file a return or owed no tax for the year in question.

Oops.

 

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This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.