Tax News & Views Fraud, Vetoes, Rebates, Snakes and Trees Roundup

May 16, 2023

Training Docs Suggest IRS Focused Only on Most Serious ERC Fraud - Lauren Loricchio, Tax Notes ($):

The 1,000 pages of documents, obtained by Tax Notes through a Freedom of Information Act request, indicate that, for now, the IRS is focusing on fake businesses set up just to claim the credits.


Michele F. L. Weiss of Holtz, Slavett & Drabkin APLC said the materials indicate that the IRS is scrutinizing entities that were set up to claim the credits, not people who submitted claims through “ERC mills.”

“They might get hit with penalties, but they won’t be fraud penalties,” said Weiss, a former senior IRS trial attorney.

Related: What to Know About the Employee Retention Credit.


Kansas Governor Vetoes Omnibus Tax Bill - Emily Hollingsworth, Tax Notes ($):

Kansas Gov. Laura Kelly (D) has rejected an omnibus tax bill that would have allowed net operating loss deduction carryforwards, amended the homestead property tax refund program, and created sales tax exemptions for some businesses.


S.B. 8 would have clarified provisions in the state’s passthrough entity tax election enacted in 2022 (H.B. 2239); provided a property tax exemption for child care centers, health clubs, and restaurants located within 5 miles of state government entities that provide the same services; raised the homestead exemption income threshold to $80,000 and excluded Social Security from the income threshold calculation; exempted from sales tax machinery and equipment used for telecommunications, video, and internet services until July 1, 2028; and created a tax credit for contributions made to nonprofit pregnancy centers.

According to the story, the legislature has adjourned and there will be no attempt to override the veto.


Ariz. To Issue One-Time Income Tax Rebates - Sanjay Talwani, Law360 Tax Authority ($). "Under S.B. 1734, signed Thursday by Democratic Gov. Katie Hobbs, the state Department of Revenue will issue one-time "general welfare" rebates. The rebates will be worth $100 for each dependent age 17 or older at the end of 2021, and $250 per dependent who was under 17 as of the end of 2021, up to a total of three dependents."


IRS tests free e-filing system that could compete with tax-prep giants - Jacob Bogage, Washington Post:

The system will be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins, said the people briefed on the matter, who spoke on the condition of anonymity to discuss internal agency conversations. It was developed by the IRS and the U.S. Digital Service, the White House’s technology consulting agency.


The IRS currently refers people seeking no-cost filing options to a consortium of companies that provide free e-filing for taxpayers below a certain income level. Though 70 percent of taxpayers qualify for those products, known collectively as IRS Free File, fewer than 3 percent of taxpayers use them, according to a Government Accountability Office report.

IRS Weighs Creating a Government-Run Tax-Prep Option - Richard Rubin, Wall Street Journal:

The IRS could efficiently build and maintain a simple portal for people with wage income, the standard deduction, and the earned-income and child tax credits, said David Kautter, who was acting IRS commissioner in 2017 and 2018. Going beyond that would be a tougher call, he said.

The IRS would have several other challenges in implementing direct filing. It might need more taxpayer service representatives to answer queries and troubleshoot problems. Any IRS offering might have trouble competing with private companies in states with income taxes where taxpayers need to file a second form anyway. 

Report of Free File Prototype Irks Top Senate Finance Republican - Doug Sword and Cady Stanton, Tax Notes ($). "A report that the IRS is developing a prototype direct-file system for the next tax return filing season “flies in the face” of Commissioner Daniel Werfel’s previous assertions that the agency had made no decision on the matter, said the top Republican on the Senate Finance Committee."

My own take: advances in "artificial intelligence" large language models might revolutionize the tax software industry, and there's a good chance that the current push for IRS-provided software will seem quaint in a year or two.


Black Americans likely audited at higher rates, IRS says - Tobias Burns, The Hill:

The Stanford study found the main reason for the unfair treatment to be the way audits are administered relating to a specific tax credit called the Earned Income Tax Credit (EITC).


“The larger source of the disparity stems from the selection of taxpayers for audit within the population of EITC claimants: Black taxpayers claiming the EITC are between 2.9 and 4.4 times as likely to be audited as non-Black EITC claimants. In contrast, we observe a much smaller, though still statistically significant, difference in audit rates between Black and non-Black taxpayers who do not claim the EITC,” they wrote.


Anti-Money-Laundering Law Could Hurt Small Business, Tax Pros Warn - Lauren Vella, Bloomberg ($):

Under the 2021 law, businesses are required to report their beneficial owners—taxpayers who own 25% of more of a company or who have considerable control over the entity—to the Financial Crimes Enforcement Network starting in 2024.

Roger Harris, president at Padgett Business Services, says he’s “never seen something this important that impacts this many businesses that so few people know about.”

Additional information: Beneficial Ownership Information Reporting Rule Fact Sheet:

Under the rule, a beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The rule defines the terms “substantial control” and “ownership interest.” In keeping with the CTA, the rule exempts five types of individuals from the definition of “beneficial owner.” 

This will be a much bigger issue when small businesses start getting hit with penalties of $500 per day for failing to report a new owner or a transfer of an ownership interest.


TIGTA Presents Interim Results of 2023 Filing Season - Tax Notes ($). "The IRS said that individual return processing and related activities are returning to normal timeliness goals for the first time since the beginning of the pandemic, although backlogs persist for rejects, unpostables, and amended returns."

Link: TIGTA report.


Snakes On A Tax Return—Why You Can’t Deduct Damage From A Snake-Infested House On Your Tax Return - Kelly Phillips Erb, Forbes. "A longstanding rule allowing homeowners to deduct casualty losses on a federal tax return no longer applies. Under the Tax Cuts and Jobs Act (TCJA), casualty losses for individuals are now only deductible to the extent they are attributable to a federally declared disaster."

Missing appraisals reduce donor's charitable tax deduction - Kay Bell, Don't Mess With Taxes. "The taxpayer argued that he didn't need the appraisal because he didn't donate any individual item worth more than $5,000. However, he misread the appraisal rules."

IRS Taxes Usually Apply If Your Debt Is Cancelled, Here Are The Exceptions - Robert Wood, Forbes. "Like it or not, when a debt you owe is canceled or discharged, in many cases the tax code treats the wiped-out debt as cash income to you that you must report. If you owe $500,000 to the bank, but the bank forgives it, it's as if the bank just handed you $500,000, so the IRS and the state want a cut."


Imminent IRS Changes to Schedule K-1 Seek to Refine Debt Reporting and Partner Obligations - Ed Zollars, Current Federal Tax Developments. "Additionally, the impending modifications and corresponding instructions should underscore the fact that it’s not appropriate for multiple partners to lay claim to the same dollar of debt when determining their basis in their respective interests, with the erroneous assumption that debts guaranteed by all partners create a basis equivalent to the total debt amount for each partner."

Taxpayer Prevails in Dispute Involving Receipt of Partnership Units for Services - Parker Tax Pro Library. "The Tax Court held that a taxpayer did not have unreported income under Reg. Sec. 1.721-1(b) on its receipt of class C units in a partnership in exchange for cash and the performance of services because the taxpayer received a profits interest, rather than a capital interest, in the partnership, which is not treated as income under Rev. Proc. 93-27."

Related: Profits Interests: Granting “Free” Equity in a Partnership.


Trustee liable for penalties for trust’s frivolous returns - National Association of Tax Professionals. "The court explained that it does not matter if the trustee believed the returns to be correct, only that the IRS labeled the position as frivolous."

Defaulting On The Debt Could Be “Catastrophic” – Or Worse - Leonard Burman, TaxVox. "The manufactured debt crisis could turn into a real one in short time. If interest rates spike, our federal government debt would become much larger."

Ranking Sales Taxes on the 2023 State Business Tax Climate Index - Janelle Fritts, Tax Policy Blog. "An ideal sales tax applies to a broad base of final consumer goods and services, with few exemptions, and is levied at a low rate. Broad-based, low-rate tax structures minimize tax-induced economic distortions that can occur when people change their purchasing behavior because of tax differences. In addition, sales tax exemptions narrow the tax base, driving up the sales tax rate on those goods and services that remain subject to the tax or forcing greater reliance on less economically efficient taxes."


Appraiser in billion-dollar conservation easement fraud scheme pleads guilty - IRS (Defendant name removed). " A North Carolina land appraiser pleaded guilty today to conspiring to defraud the United States as part of a syndicated conservation easement tax shelter scheme – involving inflated charitable contribution deductions based on a fraudulent appraisal value of a conservation easement on land – that claimed more than $1.3 billion in fraudulent tax deductions."

The investors in these easement deals aren't likely to get good results either.


Forged Documents Shatter Iranian Seizure Deduction Claim - Nathan Richman, Tax Notes ($). "Taxpayers weren’t able to prove millions of dollars in lost property deductions based on claims of Iranian government seizures because they relied on a fictitious lawyer and forged documents, the Tax Court concluded."

From the Tax Court opinion:

Confronted with respondent's expert's findings that there was no record of an Iranian attorney named Mohammad Ali Soltanpour with the bar number, phone numbers, or addresses listed on the Declaration, petitioners took the position for the first time at the supplemental trial that Mr. Soltanpour was in fact an alias for an attorney who did the work under an assumed identity for fear of reprisals from the Iranian government if he were discovered assisting petitioner. 

Secret undercover lawyer, that's the ticket.


Beats loving a 26-foot fungus. Today is National Love a Tree Day. "Before trees, our Earth had fungi that grew 26 feet tall and resembled trees."

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