Tax News & Views Scrutinize Partnerships Roundup

July 28, 2023

IRS Should Target Large, Complex Partnerships, Watchdog Says - Erin Slowey, Bloomberg ($):

The IRS should focus on large and complex partnerships during audits as the number of partnerships continues to rise, the Government Accountability Office found in a report released Thursday.

  • The audit rate for large partnerships fell to less than 0.5% since 2007.
  • GAO also recommended the IRS study its current partnership model to improve performance and find areas of noncompliance. The IRS agreed with all recommendations.

The report is here and its recommendations are here.

This subject has been a bee in the bonnet of Senate Finance Chairman Ron Wyden (D-Ore.) for a long time:

‘Large partnerships are the Wild West of tax compliance,’ Wyden said. ‘The business structures are extraordinarily complicated, the tax rules that apply to them are riddled with loopholes, and the wealthy investors and corporations who use them to get out of paying a fair share know that the IRS has essentially zero ability to crack down. Congress never intended for large partnerships to become the grand-daddy of all tax loopholes. As a matter of basic fairness, the Congress ought to close these large partnership loopholes that allow investors and corporations to make their taxes simply disappear…’

In 2021, Wyden released a draft bill (meaning the legislation wasn’t complete) that would “close loopholes that allow wealthy investors and mega-corporations to use pass-through entities, primarily partnerships, to avoid paying their fair share of taxes,” according to the press release on the bill.

The legislative outlook for this issue is unclear. Normally, in a Congress that is politically divided, whatever one party passes the other party ignores. That might not be the case in this instance. Wyden and House Ways and Means Chairman Jason Smith (R-Mo.) meet regularly, and Smith has often said he supports tax policy for ‘the working man’ and not large businesses (except farmers). It might be interesting to see what the next steps will be for this issue.

Reality Check:

Paltry Partnership Audit Capabilities Hindering IRS Crackdowns – Jonathan Curry, Tax Notes ($):

The IRS has a long way to go to make complex partnership audits start paying off, a new Government Accountability Office report reveals.

Increased scrutiny of complex partnerships is a cornerstone of the IRS′s strategic plan, but the July 27 GAO report examining IRS audits of large partnerships found that the agency is starting from a weak position. Between 2010 and 2018, four out of every five of those audits resulted in no change, and of those that changed, the average adjustment was in the partnership’s favor: a $264,000 reduction in the entity’s income.


W&M Panel Considers Amnesty for Fraudulent ERC Payments – Doug Sword, Tax Notes ($):

The lucrative payroll tax credit was an incentive in the Coronavirus Aid, Relief, and Economic Security Act for companies to keep employees on their payrolls during the pandemic, and was later extended and sweetened. But in their testimony before the subcommittee, tax professionals blamed the sizeable dollars involved, an IRS backlog, and complexity in filing for what is apparently rampant and growing fraud involving the benefit.

Oversight Subcommittee Chair David Schweikert, R-Ariz., said he wanted to collect more information on what was occurring. He added that he was willing to consider a suggestion made publicly July 26 by IRS Commissioner Daniel Werfel that Congress could help combat the fraud by moving up the April 15, 2025, deadline for businesses to apply for the credit… Schweikert also suggested that the taxwriting committee might look at granting amnesty to businesses that erroneously applied for more of the credit than they had coming or fell for a scammer’s high-pressure pitch.

As with most hearings, there were a lot of suggestions proposed during yesterday’s event. Killing the ERTC program prematurely was talked about a lot, but it has consequences:

Capitol Hill Recap: ERTC Gets Controversial – Jay Heflin, Eide Bailly:

Congress could end the ERTC program early, which the IRS would reportedly support. However, congressional chambers are politically divided, which makes it virtually impossible to pass controversial legislation.  Ending the ERTC early would be contentious because it would block legitimate ERTC filers from receiving relief.

The idea about creating a safe harbor for ERTC filers who might not have qualified for the relief didn’t get much play during the hearing.

This got a chuckle during the hearing:

Employee Tax Credits Need Safeguards, House Panel Told – Asha Glover, Law360 Tax Authority ($):

Pat Cleary, president and CEO of the National Association of Professional Employer Organizations, told the subcommittee that improving the IRS' technology would also help to improve the experience of applying and receiving the employee retention credit.

‘They need technology … our members mail stuff and they fax stuff,’ Cleary said. ‘When we come talk to your young staffs about the problems we have, we have to tell them what a fax machine is first.’


Senate Call for Crypto Tax Input Shows Progress for Industry – Cady Stanton, Tax Notes ($).

A lag in congressional action on taxing the industry is rooted in a lack of knowledge on digital assets and a misperception that the concept is too difficult, cryptocurrency industry members say. But that knowledge appears to be improving.

Lawrence Zlatkin, vice president of tax for Coinbase, said that much of the lack of understanding on digital assets is due to a generational divide but that members like Wyden have still shown they can learn quickly about the industry’s issues.


IRS invites public input on ways to improve dispute resolution programs; suggestions wanted – IRS:

The Internal Revenue Service today invited public input on improvements to certain post-filing alternative dispute resolution (ADR) programs currently offered to taxpayers.

‘The IRS is greatly interested in examining ways to help to reduce the time, costs and administrative burden for taxpayers and the government in resolving tax disputes,’ said Andy Keyso, Chief of the Independent Office of Appeals. ‘We're open to all suggestions about how to better use ADR techniques to help expedite their fair resolution.’


Mylan's Litigation Costs Are Tax Deductible, 3rd Circ. Rules – Adam Lidgett, Law360 Tax Authority ($):

The Third Circuit on Thursday backed a finding that generic-drug maker Mylan was not on the hook for $50 million in taxes the Internal Revenue Service said it should pay over deducted patent litigation fees.

A three-judge panel handed Mylan — since absorbed by Viatris — a win in the IRS' appeal challenging a U.S. Tax Court ruling that Mylan could deduct the costs of defending itself against patent infringement lawsuits as it tried to secure expedited approval from the U.S. Food and Drug Administration to make generic versions of name-brand drugs.


Does Your State Have a Sales Tax Holiday? – Manish Bhatt, Tax Foundation:

Sales tax holidays continue to be politically popular, especially as states seek to share strong budget surpluses with taxpayers. Although state coffers may be unusually full, sales tax holidays remain the same as they always have been—ineffective and inefficient. 

2023 sales tax holidays by state back to school sales tax free weekends


Oregon Extends Its SALT Deduction Cap Workaround Through 2025 - Laura Mahoney, Bloomberg ($):

Oregon’s elective tax for businesses to get around the $10,000 federal cap on individual deductions for state and local taxes is extended through 2025 under a bill signed by Gov. Tina Kotek Thursday.

The Democratic governor signed the bill (H.B. 2083) as debate continues in Congress on raising the federal cap. Under the new law, Oregon’s workaround would expire at the same time the federal cap is set to expire in 2026.


US Lawmakers to Travel to OECD in Europe to Talk Global Tax Deal - Chris Cioffi, Bloomberg ($):

A bipartisan House Ways and Means Committee delegation is heading to Paris to meet with OECD officials at the tail end of August.

Lawmakers will travel to France and Germany over the Labor Day weekend—which runs through the last day of August into the beginning of September—said Rep. Don Beyer (D-Va.), who said he plans to travel with other members of the tax-writing panel. The trip, led by Ways and Means Chairman Jason Smith (R-Mo.), was initially scheduled for earlier this year but got postponed after the debt limit standoff left members grounded in Washington.

FWIW: Lawmakers will be making this trip near the end of their summer recess, which started yesterday and ends on September 12th. You read that right. Lawmakers are recessing for 46 straight days.


Wyden, Crapo Announce Finance Committee Will Consider Taiwan Tax Legislation in September – Senate Finance Committee. “Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) today released the following statement announcing that the committee will meet in September to mark up tax legislation strengthening our economic relationship with Taiwan.”


From the “Not Sold” file:

Summer of Heat and Fire Doesn’t Sway Republicans on Climate - Ari Natter, Bloomberg ($):

Record-setting wildfires and deadly heat waves across the globe are providing the most tangible evidence of climate change yet. In fact, 2023 is likely to be the globe’s hottest year ever , according to the non-profit research group Berkeley Earth.

But that’s not motivating Republicans in Congress to want to do much about it.

Some of Capitol Hill’s top Republicans said they are unmoved by recent weather to take a more aggressive stance on global warming, which is caused primarily by humans burning fossil fuels.

‘I hope we would not be swayed by news of the moment,’ Representative John Curtis , a Utah Republican who chairs the Conservative Climate Solutions Caucus, said. ‘I think we sometimes have to be careful when we look at anomalies in weather as to whether or not they are a piece of a larger pattern or news of the moment. Because I’m not a scientist, I don’t spend a lot of time worrying about that.’

What does this have to do with taxes? Carbon tax.

In the past, carbon taxes have been proposed to reduce carbon dioxide emissions, which some say have helped warm the planet (aka climate change). Republican have historically opposed a carbon tax. If they were to be swayed that the climate is changing, they might be swayed to support a carbon tax to combat climate change.

Speaking of carbon and heat:

It’s National Waterpark Day! The temps are hitting historical highs across the country. Time to take a dip!

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