Tax News & Views Sweeping Rulings Roundup

Pa. Justices OK J&J Unit's $2.1M Tax Refund In Sourcing Fight - Paul Williams, Law360 Tax Authority ($):

Many states have moved to such "market based" sourcing of revenues in recent years. As most states now apportion income based on revenues alone, rather than on a combination of revenue, property, and payroll, this makes a big difference in where state income taxes are paid.

Look for our Friday State Tax News & Views feature for more state coverage. 

Related: Eide Bailly State & Local Tax Services.

2023 tax season is going more smoothly than anticipated; IRS increases number of returns processed - Mark Friedlich, Wolters Kluwer Tax & Accounting.

As of February 10, the IRS had processed just over 26.6 million tax returns, compared to 23.4 million over the same period in 2022, an increase of 13.6% (filing season statistics for the week ending February 10, 2023).

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However, the average amount of refunds received by taxpayers was $1,997 for tax returns processed through February 10, compared to $2,323 during the same period in 2022. That is a reduction of 14% for the same period last year.  

TIGTA Finds Weaknesses in Employment Tax Audit Selection - Lauren Loricchio, Tax Notes ($):

In a report released February 22, the Treasury Inspector General for Tax Administration noted that this is significant because employment taxes accounted for $93 billion of the $496 billion gross tax gap — the difference between the amount of tax owed and the amount paid on time — for tax years 2014 through 2016, as reported by the IRS in October 2022.

TIGTA flagged concerns with a process in which classifiers determine which employment tax returns will be selected for examination, including incomplete documentation and ineffective managerial reviews.

From the report: 

Employment tax returns generally do not contain sufficient information to provide a basis for identifying issues with examination potential. As a result, the Specialty ET Examination Program workstreams are identified through leads and referrals. We reviewed the classification process for 37,329 cases that were classified in FYs 2018 through 2020. As shown in Figure 4, 22,044 cases (59 percent) were derived from leads, while 15,285 cases (41 percent) were derived from referrals.

This isn't surprising. Every time an employer pays wages in cash, a new potential informant is created. 

House and Senate Taxwriters Propose Inventory Relief Bills - Nathan Richman, Tax Notes ($):

Taxpayers with section 471 inventory using LIFO offset their sales with the basis of their most recent stock purchases instead of the oldest items (first-in, first-out) or by tracking the items sold (specific identification). The problem is that during 2020 and 2021, the height of the COVID-19 pandemic, international trade disruptions made it hard to restock some inventory, forcing LIFO taxpayers like car dealers to potentially recognize income from decades-old LIFO layers.

Taxpayers and organizations like the National Automobile Dealers Association (NADA) first tried lobbying Treasury for regulatory relief under section 473, but they have since turned their attention to Congress for a legislative fix.

There is no obvious way such a bill will advance right now. Absent a surprise, no tax bills are expected to move before autumn at the earliest.

FAA Bill Eyed by Some Lawmakers for Tax Add-Ons - Chris Cioffi, Bloomberg ($):

Hearings to reauthorize the Federal Aviation Administration kicked off this month, and some lawmakers hope there’s an appetite for using the bill’s tax section to get more than just airline taxes enacted.

The legislation, which expires Sept. 30, reauthorizes federal aviation programs and related excise taxes on passengers, cargo, and fuel that is responsible for much of the agency’s funding. For some on the Hill, it’s a rare legislative opportunity in divided government to revive expired tax provisions. Republicans are warm to the idea of extending business breaks like the research and development deduction, while Democrats see a chance to bring back an expanded version of the child tax credit.

Bipartisanship Isn’t Dead. Here’s What Congress Might Actually Agree on - Steven T. Dennis, Laura Litvan, and Erik Wasson, Bloomberg ($):

A banking bill for cannabis businesses. “Junk fee” curbs. Insulin price cuts. The US Congress is bitterly divided, but in these niche areas, there’s hope for compromise. 

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An effort to provide legal protections for banking services for state-authorized marijuana businesses didn’t quite get across the finish line last year, but has already been the focus of bipartisan discussions with Senate Majority Leader Chuck Schumer taking a leading role. Notably, a version passed the House in 2021 with support of a narrow majority of Republicans, including now-Speaker Kevin McCarthy. Schumer’s challenge will come from progressive Democrats like Cory Booker, who have sought broader legislation, while maintaining an appeal to Republicans.

Tax legislation is not on this "agreeable" menu.

House GOP’s top tax man throws K Street in a tizzy - Brian Faler, Politico. "The Missouri lawmaker is making it clear he isn’t the sort of Chamber of Commerce Republican his side usually picks for this job. He is going out of his way to let corporate America know he’s not terribly concerned with its problems, even if its taxes are going up substantially, while promising a lot more scrutiny of its relations with China."

Margarita recipe: tequila, lime juice, and alcohol taxes - Kay Bell, Don't Mess With Taxes. "Of course, if you do go to your favorite bar or restaurant, you know that your professionally made margarita will cost you more than concocting the drink at home. But I'm with you in paying a bit more to not have to do the work, especially when alcohol is involved. Those second or third drinks might not measure up to the initial one mixed when you were totally sober."

Qualifying vehicles for the clean energy tax credit - National Association of Tax Professionals. "Here is a list of some of the qualified vehicles and more information about the credit."

SC Considers Fees On New Residents As Population Continues To Skyrocket - Kelly Phillips Erb, Forbes. "Goldfinch says that long-time residents have already funded roads, bridges, and green spaces that attract new residents. He suggests that new residents who want to enjoy that quality of life should pay for the privilege of being able to take advantage of those things 'on day one' that existing taxpayers have already funded."

Which makes one wonder if it would apply to South Carolina newborns, who also get to use roads, etc. "on day one," before they pay any taxes.

IRS Can Audit You For 3 Years & Often Longer, Here’s How To Tell - Robert Wood, Forbes. "So if it has the effect of understating your income by more than 25%, the IRS gets six years. The three years is also doubled if you omitted more than $5,000 of foreign income (say, interest on an overseas account), even if you disclosed the account! There are just some of 13 key IRS statute of limitation rules. Even worse, don't omit Form 3520 for gifts or inheritance from foreign nationals, or Form 8938 for overseas assets."

Digital Asset Reporting for Mr. FBAR @FinCEN - Virginia La Torre Jeker, Virginia - US Tax Talk. "With the various announcements by the Internal Revenue Service (IRS) that focus on the proper tax reporting for digital assets, as well as delaying implementation of third party broker reporting, it makes total sense that the Financial Crimes Enforcement Network (FinCEN) will soon require that foreign accounts holding virtual currency (and perhaps all kinds of digital assets) must be disclosed on the Report of Foreign Bank and Financial Accounts (FBAR, Form 114)."

Interview: Updates From IRS Criminal Investigation Deputy Chief - David Stewart, Nathan Richman, and Guy Ficco, Tax Notes Opinions. "Sitting here today we have about 2,100 special agents, and about 3,000 employees. So we're about 60 percent the size that we were. And even before the [Inflation Reduction Act] and the $80 billion was passed, CI had been able to hire special agents. We've been aggressively hiring for the last several years."

Breaching The Debt Limit Risks Hurting Children - Elaine Maag, TaxVox. "Over the next decade, the kids’ share of federal spending is expected to decline to 6.4 percent because of economywide growth in healthcare costs, aging demographics, and growing interest payments on the national debt. That’s an almost one-third reduction on the share of the budget spent on children."

Local Income Taxes: A Primer - Jared Walczak, Janelle Fritts, and Maxwell James, Tax Policy Blog. "Most states avoid municipal income taxes for good reason. They add substantial complexity for governments and taxpayers alike, particularly since taxpayers are far more likely to live and work across town lines than state lines. They are more volatile and less economically competitive than other forms of taxation available to local governments. And particularly in an era of enhanced mobility, they have the potential to drive outmigration or accelerate remote work."

Buyback Mountain (of Nonsense) - Scott Lincicome, The Dispatch. "At the risk of sounding like a broken record, I regret to inform you that the populists are mostly mistaken—often wildly—when it comes to the evils of stock buybacks. Yes, of course, some buybacks can prioritize short-term profits and corporate insiders over sound financial moves, but the idea that they are systemically corrupt or economically harmful (and thus deserve to be banned) suffers from major flaws."

Irvine man sentenced to 4½ years in federal prison for fraudulently obtaining 5 million dollars in COVID loans he spent on sports cars - IRS (Defendant name omitted):

An Orange County man was sentenced today to 54 months in federal prison for fraudulently obtaining $5 million in COVID-relief loans for his sham businesses, then used the money on himself, including purchasing Ferrari, Bentley and Lamborghini cars.

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According to court documents, Defendant claimed to have operated four Newport Beach-based companies, none of which were in operation: All American Lending Inc., All American Capital Holdings Inc., RadMediaLab Inc., and Ad Blot Inc.

In May and June of 2020, Defendant submitted false and fraudulent Paycheck Protection Program (PPP) loan applications to three banks on behalf of those companies. The false information Defendant submitted included the number of employees to whom the companies paid wages, altered bank account records with inflated balances, and fictitious quarterly federal tax return forms. Defendant also used someone else's name, Social Security number and signature to fraudulently apply for one of the loans.

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Relying on this false information, the banks funded the PPP loan applications and transferred approximately $5 million to accounts Defendant controlled. Defendant used the fraudulently obtained PPP loan proceeds for his own personal benefit, including for expenses prohibited under the requirements of the PPP program, such as the purchase of luxury vehicles, lavish vacations, and the payment of his personal expenses.

Federal agents seized the Ferrari, Bentley and Lamborghini cars that Defendant purchased with the fraudulently obtained PPP loans, along with $2 million in ill-gotten gains from his bank account.

If you are in the market for some used high-end sports cars, watch the IRS Auction web site, as they may show up there before long.

Pa. Justices Nix BJ's Customer's 38-Cent Tax Refund Claim - Jaqueline McCool, Law360 Tax Authority:

A BJ's Wholesale Club customer isn't entitled to a 38-cent sales tax refund on purchases made with store coupons, because the coupons weren't described on the receipts, the Pennsylvania Supreme Court ruled Wednesday.

This is the best part, to me: The taxpayer "is represented by George Alexander Bochetto and John O'Connell of Bochetto & Lentz PC and William Wolk of Eaton & Wolk PL."

Which makes me think that maybe, somehow, more than 38 cents was at stake. 

Of course it is. They play it on ice. Today is Curling is Cool Day!