Tax News & Views Waits on Tax Bills and Gumbo Roundup

Tax Package May Have to Wait for Delayed Spending Bills - Doug Sword, Tax Notes ($):

Prior to the drama of the past week over the speakership, there was speculation that there could be a giant year-end bill with a tax package attached, said James Alex of RSM US LLP.

But the backdrop for that speculation was what Alex called the “policy crucible” that holds business tax breaks like R&D expensing must be paired with improvements to the child tax credit.

If you are counting on passage of a tax bill to keep you from having to capitalize R&D costs this year, prepare a Plan B.

HILL TAX BRIEFING: What’s Next If Scalise Gets House Speaker Nod - Samantha Handler, Bloomberg:

How long it takes House Republicans to coalesce around Scalise and what concessions he’ll need to make for their support may affect how lawmakers come together on a bipartisan tax package. It could take days, if not weeks, for Scalise to claim the gavel, with many GOP lawmakers already declaring they won’t support him. Read more on the vote and Republican discord.

But as long as House GOP dysfunction rumbles on, it could give the Senate more leverage as lawmakers still hope to forge a deal on how to balance business tax breaks with an expanded child tax credit.

Microsoft Gets $28.9 Billion Tax-Payment Notice From IRS - Sabela Ojea, Wall Street Journal: 

The tech company said it disagrees with the proposed adjustments and “will vigorously contest the notices of proposed adjustments” through appeals office and even judicial proceedings if necessary.

Microsoft doesn’t expect a final resolution on the tax-proposal payment in the next 12 months.

Bloomberg reports ($) on the source of the adjustment:

The dispute centers on a 2012 IRS audit into transfer pricing, a method used by companies to shift profits to tax havens and avoid the US corporate tax rate. At the time, Microsoft had been moving billions of dollars in profits to such jurisdictions as Puerto Rico, a US territory that levies a much lower corporate rate.

A note on the Bloomberg piece. "Transfer pricing" is mandatory. Companies are required to use some sort of transfer pricing in related-party transactions; transfer pricing is a necessary part of intercompany accounting. The Bloomberg article makes it sound like it is inherently a tax shelter. Of course disputes arise with tax authorities, but they are disputes over the application of transfer pricing, not over whether it is some kind of fishy tax shelter.

Related: Transfer Pricing. 

While Risks Exist, AI Could Transform IRS Enforcement - Monica Uppal-Gupta, Sean Shecter, and David Kern, Law360 Tax Authority ($):

AI can identify patterns and trends that may indicate tax evasion, such as taxpayers who are reporting unusually high deductions or who are not reporting all of their income. Also, AI can detect anomalies in individual tax returns, such as returns that contain inconsistent information, or that show a significant change in income or deductions from year to year.

Having access to decades of important data that it can use to train and refine its AI models, the IRS is using AI to detect tax evasion in a number of ways.

These applications include identifying and assessing compliance risk in the areas of partnership tax, general income tax and accounting, and international tax. The IRS is expanding its Large Partnership Compliance program, using AI to identify and assess these compliance risks in a taxpayer segment that historically has been subject to limited examination coverage among the largest Form 1065 filers

Examining the Tax Rules at Risk in SCOTUS Moore v. US Case - Eric Todor, TaxVox:

The plaintiffs in Moore claim that the tax imposed by Section 965 is unconstitutional because the undistributed profits they accrued in a CFC do not meet the definition of income under the 16^th Amendment. Although the plaintiffs limit their complaint to the transition tax, many organizations have submitted amicus briefs in their support, arguing the 16^th Amendment does not apply to any unrealized income – or gains that have accrued to a taxpayer, but have not yet been received in the form of a cash distribution or receipt from selling an asset.

...

Many provisions in the tax code currently exempt or defer unrealized income from tax. For example, capital gains are usually taxable only when realized by sale or other disposition. This is largely for reasons of administrative convenience, illiquidity of assets, or where, in the absence of market transactions, it is difficult measure changes in the value of assets.

But there are many exceptions to the realizations rule. These exist to limit tax avoidance. In addition, there are also many rules that “look through” intermediary organizations to include their income in the income of their owners even when the owners do not receive a distribution. An example is the current inclusion in taxable income of some foreign-source income that US taxpayers accrue within CFCs.

Japanese Mistranslation Saves Man From FBAR Penalties for Now - Andrew Velarde, Tax Notes ($):

The U.S. District Court for the District of Hawaii issued an order denying the government’s motion for summary judgment in Kurotaki v. United States on October 10. The government has asserted that Osamu Kurotaki willfully ignored his FBAR requirements from 2011 to 2013 for dozens of foreign accounts that were held in the names of Japanese, Thai, and Hong Kong companies that he controlled. The court, however, found that there is a genuine issue of material fact regarding willfulness, indicating that a language barrier for Kurotaki, who speaks no English at all, must be considered.

...

The court also was not swayed by the government’s position that Kurotaki “simply put his head in the sand,” pointing to his retention of an accountant who was fluent in Japanese to prepare his returns. Kurotaki was not at fault for the mistranslation, the court held.

The FBAR rules require the reporting of foreign financial accounts outside the U.S. if their total exceeds $10,000 at any time during the year. Severe financial penalties apply if you fail to file the FBAR reports, even if you aren't underpaid on your taxes. 

Related: Offshore Voluntary Disclosure.

How to Invest in Mutual Funds - Mallika Mitra, Buy Side from WSJ:

If you buy mutual fund shares, watch them appreciate in value and then sell them, you may owe taxes on your capital gain. Unlike with other assets, however, you may owe capital-gains taxes even before you sell your mutual fund shares. 

That’s because mutual funds themselves trade stocks and bonds, realizing their own profits, ultimately on your behalf. Uncle Sam requires that the fund pass out, or distribute, these capital gains to you, and requires you to report them as taxable, even though you haven’t sold your fund shares. Active funds are far more likely to pass out capital gains than index funds, since they tend to buy and sell securities more often.

GOP tax bill would increase standard deduction by up to $4,000 - Kay Bell, Don't Mess With Taxes. "Whether any of the provisions of the Republican tax measure makes it into law is unclear. The Tax Cuts for Working Families Act cleared the tax panel back in mid-June, but hasn't been considered by the full House, and that's not going to happen in the near future."

Ten Defendants Charged In Covid-19 Relief Schemes Totaling Nearly $1 Million - Kelly Phillips Erb, Forbes. "It’s worth noting that the dollar amounts in these cases, unlike some of the previous high-profile cases, are relatively small. That may mean that the Department of Justice is sending a warning shot to others who falsely believe that low levels of fraud will keep them under the radar."

IRS Issues Annual Per-Diem Guidance for 2023-2024 - Parker Tax Pro Library. "For purposes of the high-low substantiation method, the per diem rates are $309 for travel to any high-cost locality and $214 for travel to any other locality within the continental U.S. (up from $297 and $204, respectively)."

How Taxing Consumption Would Improve Long-Term Opportunity and Well-Being for Families and Children - Erica York, Garrett Watson, Alex Durante, and Huaqun Li, Tax Foundation. "Income taxes impose steeper economic costs, and often steeper administrative and compliance costs, than consumption taxes. They place a higher tax burden on saving and investment. They also impose significant administrative and compliance costs that undermine the large anti-poverty programs for families and children administered through the tax code. Moving to a consumption tax would end the tax bias against saving and investment and provide an opportunity to greatly simplify anti-poverty programs embedded in the tax code."

Americans Abroad: IRS’s E-Filing Plan Won’t Solve the Problem! - Virginia La Torre Jeker, tax Notes ($).  "To fully address the burdens faced by U.S. taxpayers living abroad, a comprehensive reform of the tax system is needed. This reform should aim to simplify the tax code, provide clearer guidance to taxpayers, and reduce the risk of inaccurate filings. Also, education and outreach efforts should be expanded to ensure that U.S. citizens living overseas have the resources and support they need to fulfill their tax obligations accurately and efficiently." 

Related: Eide Bailly Global Mobility Services. 

Bakersfield men indicted for 25 million dollar tax refund fraud scheme using stolen identities - IRS (Defendant names removed):

According to court documents, between November 2019 and June 2023, the defendants and others participated in a scheme to file hundreds of fraudulent individual federal income tax returns that claimed over $25 million in refunds. The defendants used stolen identities to create fake businesses and reported phony wage and withholding information to the IRS that the businesses never actually paid. The purported owners of the businesses listed on these documents were unaware that the businesses even existed. The defendants then submitted hundreds of individual income tax returns to the IRS in the names of the individuals whose identities they had stolen, claiming tax refunds based on the income and withholding information. Defendant A was a tax preparer in Bakersfield who filed a significant number of the fraudulent returns. In many cases, the fraudulent tax returns resulted in tax refunds being paid out through checks issued by the IRS. The checks were primarily cashed at businesses in Kern County.

According to court documents, at arrest, Defendant B was in possession of more than $750,000 in fraudulent tax refund checks and identification cards for more than 200 people.

It's frightening that they can go at least 3 years (allegedly) doing that, and that they received so much cash before being caught. Protect your sensitive personal data and please please please don't send tax documents to your preparer as e-mail attachments.

Yes, please. It's National Gumbo Day!