Tax News & Views Worthlessness and Candy Roundup

Treasury Updates Worthlessness Presumption for Bad Debt - Chandra Wallace, Tax Notes ($):

 Existing regulations under section 166 direct the IRS to examine the surrounding circumstances of each loan to determine whether a debt is worthless, but they allow a conclusive presumption of worthlessness when debts are charged off in compliance with regulatory orders or rules. Changes to accounting rules since the regs were adopted have prompted questions about the continued application of the presumption.

Proposed reg. section 1.166-2(d) would permit regulated financial companies and members of regulated financial groups to use an accounting method that applies a conclusive presumption of worthlessness to “amounts charged off from the allowance for credit losses” under generally accepted accounting principles (GAAP) or statements of statutory accounting principles (SSAP) standards, according to the notice of proposed rulemaking. Those charge-offs may be conclusively presumed to “satisfy the requirements for a bad debt deduction under section 166.”

Taxpayers may rely on the proposed regulations for years ending after December 28, 2023.

IRS Floats Rules on Regulated Financial Companies’ Bad Debt - Lauren Vella, Bloomberg ($). " The new rules would allow regulated financial companies and members of regulated financial groups to use a method of accounting 'under which amounts charged off from the allowance for credit losses, or pursuant to SSAP standards, would be conclusively presumed to be worthless for Federal income tax purposes (Allowance Charge-off Method),' the IRS wrote, referring to statements of standard accounting practice."

Link: proposed regulations.

Pandemic Tax Break: Refunds, Upcoming IRS Guidance Explained - Erin Slowey, Bloomberg ($):

I already filed a legitimate claim. What’s next?

The IRS said it will continue to process claims made before the pause but at a much slower rate. The goal for processing existing claims will be 180 days—double the time from the previous goal of 90 days.

But if the agency doesn’t take action within six months after a business claimed the credit, employers can file a lawsuit in a US District Court or the US Court of Federal Claims to make sure they get their refund.

Though the costs to sue can be considerable, it’s an attractive option for big claims.

While one wouldn't want the deadline for filing suit to pass without considering a lawsuit, getting attorneys involved has costs, without necessarily doing anything to accelerate a refund.

Clock Starts Ticking On Employee Retention Credit Disclosure Program - Kelly Phillips Erb, Forbes:

Just before Christmas, the IRS announced a voluntary disclosure program for businesses who want to pay back the money they received after filing ERC claims in error. The program offers substantial relief to eligible small businesses—with a catch. To participate, taxpayers must provide information about the marketers and advisors who worked with them on the ERC—some have described it as a "bounty." It's a clear indication that investigations into alleged ERC fraud won't be going away any time soon.

...

As of July 31, 2023, IRS-CI, the criminal arm of the IRS, reported that it had initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. Of those, 15 investigations resulted in federal charges. Now, the IRS says more than 300 criminal cases are being worked with claims worth almost $3 billion, and thousands of ERC claims have been referred for audit.

Related: IRS Puts Temporary Hold On New ERC Claims.

The Employee Retention Tax Credit Is the Biggest Covid Scam - Wall Street Journal Editorial Board. "The ERC didn’t help businesses survive or reduce layoffs. Only after the lockdowns ended did millions of employers line up to exploit the credit. Now the IRS is scrambling to shut down the open bar."

Employers Cautious on 401(k) Law Optional Provisions in New Year- Austin Ramsey, Bloomberg:

Starting next year, employer plan sponsors can adopt new plan features that would allow them to treat workers’ monthly student loan debt repayments as retirement savings contributions when calculating matching benefits.

There are still lots of outstanding questions employers are grappling with about their fiduciary duty to determine whether loan repayments have actually been made and how loan-based matches would stack up against other workers’ account balances when conducting retirement plan non-discrimination testing.

A Look Ahead: Partnerships Have Important Research Amortization Questions- Nathan Richman, Tax Notes:

Jane Rohrs of Deloitte Tax LLP told Tax Notes that she has recently heard that the predicted timing of the proposed regs’ release may be slipping from spring 2024 to June or July. 

...

The question in the disposition rules is generally when can taxpayers accelerate those costs set for amortization under section 174, Rohrs said. Notice 2023-63 allows acceleration in corporate transactions not covered by section 381(a) if the researching taxpayer ceases to exist, “but there are certainly transactions where partnerships cease to exist and the partners don’t carry on the trade or business of the partnership — that could also be an acceleration,” she said.

Rohrs said she hopes the IRS and Treasury will set the trigger for accelerating the amortization more generally, using the end of a trade or business as the cue.

The Section 174 rules require taxpayers to capitalize research costs and spread their deduction over five years by amortization. Prior to 2022, these costs could be expensed as incurred. This has had harsh results for tech companies and others with high research costs. 

Related: The Impact of Changes to Section 174.

‘Workations’ Create Risky Tax Traps When Traveling Overseas - Christina Lee, Bloomberg. "While workations may seem ideal for those who can’t afford to leave work altogether while vacationing, there are potential tax implications. Failing to understand and comply with applicable tax regulations can lead to unpleasant surprises for both employer and employees, including financial penalties or even legal consequences."

Related: Eide Bailly Global Mobility Services. 

A Yearlong Way to Boost Stock-Market Returns - Spencer Jakab, Wall Street Journal. "Tax-loss harvesting is the real deal—something for nothing, as long as investors don’t run afoul of the Internal Revenue Service’s wash-sale rule by buying the same security, or a substantially similar one, within 30 days."

Tax Loss Harvesting and Cryptocurrencies - Olivier Wagner, 1040Abroad. "In a stroke of luck for crypto investors, the Wash Sale Rule only pertains to securities and, therefore, doesn’t apply to cryptocurrencies. Cryptocurrency is considered a property by the IRS, not a security, so the Wash Sale Rule does not apply to crypto right now."

Good news: you got a year-end bonus. Bad news: it's taxable income - Kay Bell, Don't Mess with Taxes. "But, hey, any amount of additional money is, well, a bonus. I don't know of anyone who's turned down a bonus because of the tax implications. But do be aware of those tax matters and their effect on your bonus."

IRS Issues Guidance on Clean Vehicle Credit Excluded Entity Provisions - Parker Tax Pro Library. "Code Sec. 30D provides a credit with respect to each new clean vehicle that a taxpayer purchases and places in service. Effective beginning on April 18, 2023, Code Sec. 30D(b) provides a maximum credit of $7,500 per new clean vehicle, consisting of $3,750 if certain critical minerals requirements are met and $3,750 if certain battery components requirements are met."

Too Many Days in America? The “Closer Connection Exception” May Save the Day (& the Tax Hit) - Virginia La Torre Jeker, US Tax Talk. "Too many people naively believe that meeting the 'substantial presence test' simply means residing in the US for more than 182 days in a given calendar year.  This is misleading, since the actual calculation under the tax laws is more complicated. Physical presence is examined over a three-year period.  The day of arrival and departure counts as 2 full days even if the individual was physically present in the US for only 10 minutes on a particular day."

Racing to the Top - Alex Parker, Things of Caesar. "I question whether stopping tax competition is possible in a world with sovereign nations with the right to set their own tax rates. Maybe it would be a great thing for everyone to come together and agree on an acceptable range for corporate tax rates, but if they don’t want to, the amount of diplomatic pressure it would take to compel them would be enormous. (Though some, like Zucman, argue that the U.S. could impose this on multinationals unilaterally.) "

Measuring Income Inequality: A Primer On The Debate - William Gale, John Sabelhaus, and Samuel Thorpe, TaxVox. "Although the two author teams start with the same tax return data and aim to measure inequalities in the same concept—national income—their results differ substantially because a substantial share of national income is not reported on tax returns."

Las Vegas-area accountant sentenced to prison for bribery and tax fraud - IRS (Defendant name omitted):

According to court documents and statements made in court Defendant, of Henderson, was a certified public accountant employed by [a] Las Vegas-based accounting firm... Beginning in February 2015 through about February 2016, Defendant conspired with and paid a public official with the U.S. Department of Interior's Bureau of Reclamation (USBR) more than $150,000 in bribes and kickbacks. In exchange for those payments, Defendant' co-conspirator, who was a member of a selection committee responsible for awarding government contracts to perform auditing services for USBR programs, steered an audit contract to [the accounting firm].

Defendant and his co-conspirator also conspired to file a false 2013 corporate tax return and other tax forms on behalf of six business entities that collectively claimed over $11 million in fraudulent business deductions. Defendant' conduct caused a tax loss to the IRS of more than $1.5 million.

 Nothing shows auditor independence like paying a bribe to get the audit work.

Losing for winning. The tax law does not favor gamblers. Two Nevadans learned a little about that in Tax Court in an unpublished opinion released yesterday. 

Unlike many taxpayers, they maintained adequate records to show their gambling losses. But that didn't help them. What sank them was the commonsense, but erroneous, assumption that merely losing money gambling was enough to avoid tax problems.

Special Trial Judge Carluzzo explains (citations omitted):

According to petitioners, their gambling income should not be includable in their income because the gambling income was fully offset by gambling losses. Petitioners look at the situation from a "bottom-line" approach, if you will. Petitioners' approach provides a simple and efficient way to proceed and is perhaps supported by common sense and common practice, but that is not how it works.

This might be considered an application of Peter Reilly's First Law of Tax Planning, "It is what it is. Deal with it." (Buy the book!). The problem is that gambling income is "above the line" gross income, while gambling losses are "below the line" itemized deductions, and can only be claimed if you itemize. Some made up numbers might help here.

Assume a taxpayer has $100,000 of taxable income other than gambling income and losses. Assume the taxpayer also has $30,000 of gambling income, and $30,000 of gambling losses. Also assume the standard deduction for the year is $25,000, and the taxpayer has no other itemized deductions. 

The gambling losses can only be taken as itemized deductions. So the taxpayer has $130,000 of gross income, $30,000 of itemized deductions, and taxable income of $100,000. But because the taxpayers itemize, they don't get the $25,000 standard deduction. 

The taxpayers here instead just ignored gambling income and losses, because they "netted," and took the standard deduction. In our example numbers, that would reduce their taxable income by to $75,000. The judge says that doesn't play:

Although, not in the same manner as petitioners would have liked, respondent high school computationally speaking, "netted" petitioners gambling winnings and losses.  The increase to petitioners' taxable income as shown in the notice is in the exact amount of the standard deduction claimed on the return.  And petitioners, like all taxpayers, are not entitled to claim a standard deduction in addition to otherwise allowable itemized deductions.  

The moral? When it comes to gambling, in taxes as in the casino, the house always wins. 

If Santa filled your stocking with calories, today is your day. It's National Chocolate Candy Day!