Tax News & Views Research Expense Regrets Roundup

By Joe Kristan
October 26, 2023

Key Takeaways

  • Wall Street Journal highlights taxpayers floored by requirement to capitalize research costs.
  • Court of Claims: Net Investment Income Tax can be offset with credit for foreign tax.
  • IRS "refining" approach to voluntary repayment of shaky Employee Retention Credits.
  • ACA penalties lead to $2 million lien on middle school.
  • Pro Bono week and Low Income Taxpayer Clinics.
  • 11th Circuit penalizes taxpayer for failure of preparer to transmit e-filed 1040s.
  • Homeland Security agent gets six years in secured facility.
  • National Greasy Foods Day.

The Tax Rule Change That Is Threatening Businesses’ Survival - Jennifer Williams-Alvarez, Wall Street Journal:

A tax code change that impacts how companies account for research and development costs is walloping businesses of all sizes. At best, it is a cash flow challenge, costing large public companies hundreds of millions or billions of dollars, which finance chiefs have said could dent their R&D spending. At worst, business owners wonder if their companies will make it, with some who run small and medium-size firms slowing growth, laying off workers or dipping into personal savings to cover tax bills due this month. 

Businesses for decades were allowed to deduct certain R&D expenses immediately to reduce their taxable income, similar to office supplies or rent payments. But under a provision of the 2017 Tax Cuts and Jobs Act that took effect last year, costs associated with R&D activities must now be amortized over many years, five for ones within domestic borders and 15 for those incurred overseas. In the long-run, it evens out, but in the near-term, the change means that companies can deduct less straight away, resulting in higher income and therefore higher tax costs. 

The article notes bipartisan support for repealing the Sec. 174 provision enacted in 2017 with a 2022 effective date that requires taxpayers to capitalize research costs, and mentions the congressional dysfunction that is preventing the repeal. Congressional Democrats have opposed a "tax break for businesses" unless an enhanced child tax credit is also enacted.

Related: The Impact of Changes to Section 174.


U.S. Claims Court Allows Foreign Tax Credit on NII Tax Liability - Michael Smith, Tax Notes ($):

The Court of Federal Claims has allowed a U.S. couple residing in France to use the France-U.S. tax treaty to claim a foreign tax credit against their net investment income tax liability.


The claims court reached a different result than the Tax Court did in Toulouse v. Commissioner, 157 T.C. No. 4, a case that involved similar facts. In its August 2021 decision, the Tax Court held that an FTC is not allowed under the IRC to offset a taxpayer's NII tax liability. It analyzed article 24(2)(a) of the France-U.S. treaty and determined that because the NII tax was placed in chapter 2, an FTC was not allowed because sections 27 and 901 limit the creditability of an FTC to taxes in chapter 1.

IRS Found to Wrongly Deny Foreign Tax Credit to Americans Abroad - Caleb Harshberger, Bloomberg ($):

“It is one thing for a taxpayer to pay his or her fair share of taxes; it is quite another to be improperly subjected to double taxation in direct contravention of the United States’ treaty obligations,” Stuart Horwich of Horwich Law, the attorney representing the Christensens, said in a release.


Horwich said in the statement that although the ruling specifically analyzes that French treaty’s language, because the language of most US tax treaties is the same, US citizens living in any country having a tax treaty with the US may be eligible to claim foreign tax credits to offset Obamacare taxes and should consult their tax advisers.

Related: Eide Bailly Global Mobility Services.


IRS Refining Approach to ERC Repayment Program, Werfel Says - Doug Sword, Tax Notes ($):

Speaking to reporters October 24 following his appearance as the lead witness in a joint hearing held by two subcommittees of the House Oversight and Accountability CommitteeWerfel spoke of the importance of developing a process for companies that received refunds that may have been improperly claimed to repay the IRS and avoid penalties and compliance actions.

“I’ve been around government a long time and seen a lot of different voluntary compliance programs where you’re trying to set the incentive where people will come in,” Werfel said. “You have to do it in a way that they see it’s to their benefit.”

Employee Retention Credits: What the IRS Didn’t, Did, and Might Do - Hale Sheppard, Tax Notes ($). "Uncertainty regarding some aspects of the ERC persists. One thing is clear, though: The IRS is now in enforcement mode, and taxpayers should be hiring qualified tax counsel without conflicts of interest, analyzing all their options, and otherwise preparing to defend themselves."


House GOP Pushes IRS To Identify Tax Evaders Faster - Asha Glover, Law360 Tax Authority ($). "Some House Republicans said Tuesday they want the Internal Revenue Service to sooner identify wealthy taxpayers who aren't paying their taxes, while others criticized the number of auditors the agency employs and the Inflation Reduction Act's enforcement funding."


IRS Has Lien on D.C. Area Middle School - Erin McManus, Tax Notes ($):

The IRS, or at least one revenue officer, may have taken extraordinary efforts to penalize a school district for allegedly failing to file Affordable Care Act information returns when it filed a lien against one of the district’s schools.

The district is challenging a final notice of intent to levy in a proposed collection action now seeking $2.24 million in penalties and interest, according to the district’s October 18 petition filed with the Tax Court regarding tax year 2019 in Arlington County School Board v. Commissioner.

Another unintended but predictable consequence of the Affordable Care Act. There is no issue presented here about whether the school provided the mandated health insurance. It's just a multi-million dollar paperwork foot-fault. Tony Rule, head of Eide Bailly's ACA practice, comments:

It’s interesting that many businesses do not put IRS notices as a priority.  Additionally, Taxpayers do not realize how fast the ACA penalties can add up.  Unfortunately, businesses tend to put the ACA forms and filing requirement and the importance of getting those forms correct on the backburner until they get hit with a large ACA penalty.  The penalties that this school is getting hit with are not even the larger ‘pay or play’ penalties, they are simply just the non-filing penalties.  

If they can do it to a middle school, they can do it to you, so make sure your business takes care of the ACA paperwork. 

Related: Eide Bailly Affordable Care Act Compliance & Consulting.


Two men who gambled on tax evasion schemes lost - Kay Bell, Don't Mess With Taxes. "Eventually, a gambling adage typically applies to taxes, too. The house always wins."

Taxability and Nontaxability of Social Security Benefits - Rachel Szeklinski, Tax School Blog. "State taxation of Social Security benefits does not conform to the federal tax treatment. Most states, 39 to be exact, exclude Social Security benefits from taxable income. However, as of 2023, there are 11 states that don’t allow a full exclusion or deduction for benefits paid..."

Foreign Retirement Plans Not Protected in U.S. Bankruptcy Cases - Keith Fogg, Procedurally Taxing/Tax Notes. "As the world gets smaller and more and more U.S. citizens end up working portions of their careers overseas, and perhaps contributing to retirement accounts in other countries, state legislatures might consider extending their exemptions to cover retirement accounts established in foreign countries if they sufficiently track their U.S. counterparts. At present, the language of the Illinois statute, which is similar to the provisions in other states, does not appear to allow for that option."

The Show Must Go On - Rasmus Corlin Christensen:

Certainly, there’s an inescapable appetite for more “market-based taxation”, the allocation of taxing rights to the places where companies sell their goods and services, at the expense of countries where companies are headquartered. Debate on international tax reform is thoroughly occupied with market-based taxation these days.

But its specific manifestation in a great multilateral convention, which requires the United States’ legislative branch to formally ratify a clear and overt transfer of taxing rights from the US to foreign nations – that seems unlikely to happen.

Taxes and Tail-ends - Alex Parker, Things of Caesar. "Imagine if the global tax rules tossed aside all notions of value creation, arm’s-length prices and objective determinations of economic origin and simply allocated income to whoever we think needs it, or deserves it, most?"

But who decides need or desserts? 


Recognizing the 2023 National Celebration of Pro Bono - Erin Collins, NTA Blog. "In honor of this week’s celebration, I would like to recognize the immense significance of pro bono assistance that Low Income Taxpayer Clinics (LITCs) and their volunteers provide to low-income and English as a second language (ESL) taxpayers in our communities. Pro bono, derived from the Latin phrase pro bono publico, meaning 'for the public good,' embodies the essence of selflessness and community service. Particularly where there is a lack of equal access to legal and tax-related assistance, pro bono volunteer work stands as a beacon of hope, ensuring that the rights embodied in the Taxpayer Bill of Rights are upheld and essential services are accessible to all, regardless of their financial status, age, or other factors."

Pro Bono Week Offers Opportunities To Make A Difference In Tax And Law - Kelly Phillips Erb, Forbes. "Of course, you don't have to be a tax professional to make a difference for taxpayers. For over 50 years, the IRS's Volunteer Income Tax Assistance (VITA) (and later, Tax Counseling for the Elderly (TCE)) programs have offered free basic tax return preparation to qualified individuals."


11th Circ. Upholds Penalty For Tax Returns CPA Never E-Filed - Anna Scott Farrell, Law360 Tax Authority ($):

A Florida surgeon cannot recover nearly $80,000 in tax penalties for failing to file federal returns for three years, even though he believed his accountant had made the filings electronically, the Eleventh Circuit said Tuesday in the first appellate court decision to address the issue.

Though Wayne Lee had argued he should be reimbursed for the penalties because it wasn't his fault his accountant never filed the returns, an Eleventh Circuit panel upheld a lower court, deciding Lee was responsible for supervising the e-filing process and should have ensured his returns were submitted.

Circuit Court Applies Boyle Bright-Line Rule to E-Filing - Caitlin Mullaney, Tax Notes ($):

“Though we have never addressed whether e-filing alters the reasonable cause analysis, we are not convinced that it does. The statutory obligation to timely file a tax return does not depend on the filing medium, and we agree with the few lower courts to have considered the issue,” Circuit Judge Andrew L. Brasher wrote, referencing Intress v. United States, 404 F. Supp. 3d 1174 (M.D. Tenn. 2019).


“Lee argues that he falls within the reasonable cause exception because he exercised ordinary business care and prudence by retaining a CPA, reviewing his tax returns, signing Form 8879 each year, and overpaying his taxes in 2014. We are not persuaded,” Brasher wrote, adding that “even if we ignore Boyle, we cannot say Lee has demonstrated reasonable cause for his late filings or late payments.”

A harsh and unfair result. One would think that providing your tax information to a preparer and providing timely electronic filing authorizations would constitute a reasonable effort to file, and that the preparer failing to pull the trigger wouldn't lead to taxpayer punishment. One would be wrong.

Link: D.C. Docket No. 8:21-cv-01579-TPB-AAS


Former HSI special agent sentenced to more than six years in prison on tax, structuring, and concealment charges - IRS (Defendant name omitted):

A former special agent with Homeland Security Investigations (HSI) has been sentenced to more than six years in federal prison for tax, structuring, and concealment offenses.

A jury in May convicted Defendant, of Naperville, Ill., of illegally structuring financial transactions, concealing material facts from the U.S. Department of Homeland Security, and filing false federal tax returns. In addition to the 74-month prison sentence, U.S. District Judge Andrea R. Wood on Thursday ordered Defendant to pay $93,422 in restitution to the IRS.


Defendant was assigned to the Oakbrook Terrace, Ill. field office of HSI, a criminal investigative unit within DHS. Evidence at trial revealed that Defendant maintained a corrupt relationship with an HSI confidential informant and tipped off the informant to sensitive investigations conducted by other law enforcement agencies, including the FBI and DEA. In exchange for Defendant's protection, the informant paid Defendant at least $50,000. Defendant also stole cash from drug dealers and pocketed money from HSI that had been earmarked for investigative activity.

Defendant deposited more than $250,000 into a bank account for which he was the sole signatory. He made the deposits in more than 160 transactions, with the amount of each deposit being less than $10,000. The deposits were structured in an effort to evade federal reporting rules, which require financial institutions to notify the U.S. Department of the Treasury about transactions of more than $10,000.

Securing the homeland apparently wasn't enough reward in itself. 

It's a bit surprising that a federal criminal investigator was apparently unaware that banks report "suspicious" transactions, where people keep their cash deposits under $10,000 to avoid having the deposits reported to the IRS. But as a man once said, police don't spend their days chasing geniuses.


Followed by National Evening of Regrets. Today is National Greasy Foods Day!

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