Tax News & Views Data Debacle Roundup

By Jay Heflin
August 28, 2023

Smith, Grassley Press for Answers After IRS Loses Loads of Taxpayer Data – House Ways and Means Committee. “After a watchdog report revealed the Internal Revenue Service (IRS) lost millions of taxpayers’ data due to lax handling of backup records, U.S. Sen. Chuck Grassley (R-Iowa) joined forces with U.S. Rep. Jason Smith (R-Mo.) to press for answers and urge action.”  

‘The information contained in these backup records can be used by nefarious actors to commit tax fraud and identity theft,’ the lawmakers wrote. ‘The American people deserve better. They deserve an IRS that prioritizes protecting their confidential information and takes the necessary action to safeguard their confidential records. There must be accountability to prevent this type of misconduct from occurring in the future.’ 

The watchdog report is dated August 8, 2023 and is here.

What the report found:

  • The IRS cannot locate Fiscal Year 2010 backup records from a California processing center.
  • More than 100 backup cartridges – each holding up to 2,000 photos of tax information – were allegedly sent for reformatting by an outside contractor in 2013. The IRS does not know where the cartridges are now, and the contractor went out of business in 2018. 
  • Fifteen pallets of backup records that should have been sent to the Federal Record Center five years ago have, instead, been sitting at an IRS distribution center.   
  • While IRS policy requires backup records be stored in controlled areas, at some IRS processing centers, all employees can access them. 
  • IRS managers told TIGTA they cannot remember the last time a mandatory annual inventory of backup records was performed. 

How Many EITCs Were Lost When IRS Destroyed 30 Million 1099s? – Chandra Wallace, Tax Notes ($):

Taxpayers who claimed the earned income tax credit for 2019 were audited as a result of the IRS’s destruction of millions of information returns, despite the agency’s claim that no 'negative consequences' resulted from its action.

The decision by the IRS to expunge 30 million information return documents — mostly third-party income reporting on Forms 1099 — meant the agency didn’t have records to match income reported by thousands of low- and middle-income taxpayers claiming EITCs. But it continued auditing those taxpayers for “missing” Forms 1099 anyway.

The article notes that “approximately 30 million paper-filed information return documents” were destroyed.

True story: My family's personal tax information was not lost or destroyed, but stolen from the IRS during a recent data breach at the agency. We now receive countless calls from "authorities" who are coming to arrest us. My family's personal info is all over the dark web, according to credit monitoring services that I now have to pay. I have frozen our credit accounts, which means whenever a legit entity needs to look at our credit scores I must unfreeze them. Unfreezing the accounts can be unsettling because I don't know if the nefarious folks will tap into them while they're open.

Speaking about keeping taxpayer information secure:

The Potential for Direct E-Filing in the United States – Nana Ama Sarfo, Tax Notes ($):

Google, Meta, and several tax prep companies, including H&R Block and TaxAct, are fielding an escalating number of U.S. lawsuits alleging that they allowed tracking pixels to unlawfully collect taxpayers’ confidential information as they filed their federal income tax returns online.

Further down the article:

The IRC requires federal income tax returns and tax return information to remain confidential under section 6103(a), unless an exception applies. There is a third-party exception (section 6103(c)) that obligates third parties that receive return information to use it only as the taxpayer authorizes…

There are questions about whether the information allegedly captured by Google and Meta might violate the IRC’s criminal disclosure statute, section 7216, and whether taxpayers can seek civil damages under section 7431(a)(2). 



Democrats accuse tax prep firms of undermining new IRS effort on electronic free file tax returns – Fatima Hussein, Associated Press:

Congressional Democrats are accusing big tax preparation firms including Intuit and H&R Block of undermining the federal government’s upcoming electronic free file tax return system and are demanding lobbying, hiring and revenue data to determine what’s going on.

The lawmakers accuse the companies of lobbying against the new program, hiring former government workers to sway public interest against free file for all, and deliberately sabotaging a government program that had previously offered free tax prep services, according to letters obtained by The Associated Press.

Tax Prep Groups, Intuit Rebuff Warren’s Challenges Over Lobbying - Chris Cioffi, Bloomberg ($):

Tax prep advocates pushed back on a letter sent [last] week by a pair of Democrats accusing them of lobbying against an IRS-run pilot and seeking more details on their hiring practices, revenue, and lobbying expenditures.

Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) sent letters to H&R Block and Intuit, and industry advocates the Free File Alliance and American Coalition for Taxpayer Rights, citing Warren’s recent report that accused tax prep companies of violating taxpayer privacy and accused the groups of deliberately sabotaging an existing Free File program. Advocates and companies pushed back on that, pointing to individual company efforts to provide free tax prep services and the existing Free File program’s successes.

The lawmakers' letter is here.

The Sen. Warren's report is here.


IRS announces administrative transition period for new Roth catch‑up requirement; catch-up contributions still permitted after 2023 – IRS:

[T]he Internal Revenue Service announced an administrative transition period that extends until 2026 the new requirement that any catch-up contributions made by higher‑income participants in 401(k) and similar retirement plans must be designated as after-tax Roth contributions. 

At the same time, the IRS also clarified that plan participants who are age 50 and over can continue to make catch‑up contributions after 2023, regardless of income. 

The guidance is here.

IRS Will Delay 401(k) Roth Catch-Up Provision Under SECURE 2.0 - Austin Ramsey, Bloomberg ($):

The IRS will give retirement plans a two-year transition period to comply with a new policy requiring sponsors to treat high-income catch-up contributions as post-tax Roth deferrals.

Regulators issued temporary guidance (Notice 2023-62) Friday establishing an administrative transition period for the provision that will extend until 2026. It does away with an error Congress made when it passed the SECURE 2.0 Act (Pub. L. No. 117-328) late last year that could have resulted in the elimination of catch-up contributions after 2023.

Friday's Roundup coverage of this topic is here.


IRS Revises Instructions on Partnership-Sale Broker Withholding - Michael Rapoport, Bloomberg ($):

The IRS revised its instructions for brokers’ withholding on sales of partnership interests, saying brokers must issue a separate Form 1042-S for each publicly traded partnership, or PTP, that makes a reportable distribution.

The move applies to Section 1446(a) or (f) withholding, except when withholding agents report PTP distributions paid to qualified intermediaries using reporting pools, or the withholding agent is itself a qualified intermediary in that position, the IRS said in its revisions to instructions for Form 1042-S.


The SALT Cap Has a $20 Billion Hole – Richard Rubin, Wall Street Journal:

Many business owners can easily—and legally—dodge the $10,000 cap on state and local tax deductions, and that costs the federal government as much as $20 billion a year, according to a new estimate by the Tax Policy Center. 

The so-called SALT cap limits the break that individual taxpayers can get by deducting their state and local taxes from their federal taxable income. But owners of closely held businesses such as law firms and car dealerships are using workarounds allowed by three dozen states to avoid paying more to the federal government.

The SALT cap was included in the 2017 tax reform bill and expires in 2025. Many of the individual tax cuts included in the bill also expire in 2025. If any of the tax cuts are extended beyond 2025, then it is likely that the SALT cap will also be extended to help offset their cost, according to congressional tax staffers and a handful of lawmakers who sit on the congressional tax-writing committees.


Youngkin’s call for recurring tax cuts – Laura Vozzella, Washington Post:

Top negotiators for Virginia’s House and Senate announced Friday that they had struck a long-delayed budget deal that dismisses Gov. Glenn Youngkin’s quest for $1 billion in recurring tax cuts and provides one-time tax rebates instead.

Here are a few of the details that were made public:

Among the scant disclosures: The deal would provide a one-time rebate of $200 for individuals and $400 for joint filers, and would increase the standard deduction to $8,500 from $8,000 for single filers and to $17,000 from $16,000 for married couples filing jointly. Negotiators also noted that they agreed to a sales tax holiday and higher spending on education and mental health.

The deal still needs to pass a divided Capitol and get Youngkin’s approval before it can take effect.


The IRA Has Europe Upping Its Clean Energy Game – Keith Goldberg, Law360 Tax Authority ($):

The ripple effects of the Inflation Reduction Act are reaching the other side of the Atlantic Ocean, and attorneys say European policymakers have advanced new clean energy incentives in order to retain interest from developers and investors whose heads are being turned by the U.S.

The IRA, which recently celebrated its first birthday, has greatly expanded the global playing field for clean energy development with its billions of dollars worth of tax perks and government subsidies. Energy attorneys say that as a result, companies that may have prioritized European development because of the continent's historically more advanced climate change policies are seeking additional opportunities in the U.S., and that has sparked moves by both the European Union and its member states to expand their own incentive programs.


From the “Wisdom of Jerry Seinfeld” file:

National Vehicle-Mileage Fee Hangs in Balance as EVs Take Roads - Lillianna Byington, Bloomberg ($):

The Biden administration, under congressional pressure to shore up funding for the nation’s highways and bridges, is more than a year and a half late in taking a key step toward testing a fee that reflects Americans’ increasing move toward electric vehicles.

Bottom line: How to tax EVs that don’t use gas and therefore aren’t paying their fair share when it comes to maintaining the roads.

Congress included more than $100 billion to bail out the Highway Trust Fund, and about $125 million to pilot a national miles-traveled fee and more state distance-based tax programs as part of the bipartisan infrastructure law (Public Law 117-58). The November 2021 law directed the Transportation Department to establish an advisory board within 90 days, and a year later to recommend ways to pilot a national miles-traveled fee.

Based upon this timeline, the advisory board would have been formed by February of 2022 and its recommendations for a miles-traveled fee would have been created last February. None of this happened.

Lawmakers are still waiting for the board to be formed. Electric vehicle adoption is estimated to accelerate with more than 100 million passenger EVs on roads by 2026, up from 27 million early this year, according to BloombergNEF.

This is typically how congressional timelines go. Perhaps comedian Jerry Seinfeld summed up this situation best when suffering a car rental snafu on his show:

You know how to take the reservation. You just don't know how to hold the reservation. And that's really the most important part of the reservation: The holding.

Congress knows how to set a timeline. It just doesn’t know how to execute a timeline. And that is really the most important part of the timeline: The execution.  


It’s Rainbow Bridge Remembrance Day. Today we remember the pets we lost. Not an uplifting day, but hopefully one that brings a smile to your face.

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