Tax News & Views Eye on Shutdown Roundup

Your Taxes and the Federal Shutdown: IRS Closing Explained - Erin Slowey, Bloomberg ($):

The IRS will maintain limited operations in the event the government shuts down Oct. 1, potentially creating further setbacks for taxpayers trying to resolve what they owe and limiting companies waiting for regulations.

About 60,000 of 90,000 IRS employees will be furloughed without pay, according to the agency’s plan released Thursday. The remaining one-third of the workforce will continue necessary work for the “safety of human life or protection of government property” and will be paid using funds from the Inflation Reduction Act, special compliance funding, and user fees.

Answering phones doesn’t seem to be included in “safety of human life or protection of government property.”

[T]axpayers won’t get their questions answered over the phone about their returns or collections, and refunds won’t be processed unless they were filed electronically without mistakes… All audits, examination of returns, and non-automated collections will be halted. The IRS in May paused its automated collection notices and has yet to start the process again.

The IRS shutdown plan is here.

A partial shutdown of the Federal Government will not only affect the IRS, it also places a huge question mark on whether Congress can pass tax legislation this year.

Capitol Hill Recap: Partial Shutdown of Federal Government will Hamper IRS – Jay Heflin, Eide Bailly:

During a shutdown (be it partial or full), lawmakers focus on re-opening the government and efforts to pass legislation are tabled until government employees return to work.

While it has always been considered a longshot that Congress would pass a tax bill by year-end, a partial shutdown only increases the odds of no activity.

At stake are three provisions: R&D expensing, expanding the 163(j)-interest deduction and upping Bonus Depreciation to 100%. These measures are called the “Big Three” by tax staffers because the effort to enact them has lasted nearly two years.

If a shutdown occurs no one knows how long it will last. And the longer it lasts the less likely it is that a tax bill passes Congress this year.  

And if the funding fight turns into a leadership brawl, who knows when lawmakers will focus on tax legislation.

Hard-liners plot to replace McCarthy with a deputy as shutdown looms – Leigh Ann Caldwell and Marianna Sotomayor, Washington Post:

A contingent of far-right House Republicans are plotting an attempt to remove Kevin McCarthy as House speaker as early as next week, a move that would throw the chamber into further disarray in the middle of a potential government shutdown, according to four people familiar with the effort who spoke on the condition of anonymity to discuss private talks.

Some members of the far-right faction of the party are coalescing around nominating a member of McCarthy’s leadership team, Rep. Tom Emmer (Minn.), to be the next speaker if they can successfully oust McCarthy, according to those people. The members think Emmer is more attuned to their concerns and will better deliver conservative results.

Ways and Means Passes HSA Expansion Package – Doug Sword, Tax Notes ($):

The House Ways and Means Committee advanced a pair of bills to expand eligibility and thresholds for health spending accounts that would cut the taxes of savers by $71 billion over the next 10 years.

A final vote was pushed into the evening September 28 by a prolonged debate over whether a range of HSA provisions in the bills would bring tax savings to millions of households, increase already vast deficits, or both. Also delaying committee votes were interruptions for dozens of House floor votes as the federal government careens toward an October 1 shutdown.

IRS Erroneously Issued More Than 10K Levies, TIGTA Says – Jared Serre, Law360 Tax Authority ($):

More than 10,000 taxpayers are estimated to have been issued erroneous levies from the Internal Revenue Service, the Treasury Inspector General for Tax Administration said in a report published Thursday.

The levies, which were issued to taxpayers with a pending collection due process, or CDP, hearing between July 1, 2021, and June 30, 2022, are among more than 11,000 total instances of noncompliance with levy issuance during the time period, according to the report, dated Tuesday. Also included are more than 1,000 instances of taxpayers not being timely notified of CDP rights, not receiving new CDP notices after additional assessments were made or not timely receiving a post-levy CDP notice, the report said.

The report is here.

IRS Should Fix Presidential Audit Guidelines, Watchdog Says - Caleb Harshberger, Bloomberg ($):

The IRS guidelines for mandatory presidential return examinations are “incomplete and inaccurate,” the Treasury Inspector General for Tax Administration said in a report released Thursday.

The report comes after lawmakers raised concerns about the presidential audit program, following the release of a report in December 2022 by the then Democratic-led House Ways and Means Committee that found shortcomings with the program as it pertained to the returns of former President Donald Trump. TIGTA’s report redacted information concerning specific presidents and audits.

The report is here.

If the federal government remains open, there might be a hearing on this development that will likely go nowhere.

IRS Top Lawyer Pick Vows Four Years From Work With Ex-Clients - Chris Cioffi, Bloomberg ($):

President Joe Biden’s IRS chief counsel pick Marjorie Rollinson, who spent most of her career at accounting giant Ernst & Young LLP, has vowed to recuse herself for four years from work involving former clients.

More from the article:

Republicans pushed Rollinson on some of the party’s concerns, including frustration over the IRA’s green energy credits, and controversies like the publishing of wealthy taxpayer information and the destruction of millions of taxpayer documents.

Sen. Charles Grassley(R-Iowa) asked Rollinson about the chief counsel’s office in upholding the agency’s whistleblower program and about reported reprisal against IRS whistleblowers who testified to Congress in a probe of the finances of the president’s son Hunter Biden.

“It’s very important that the whistleblowers be treated with respect and that there not be retaliation,” she said.

Lawmakers Ask Werfel About Possible Conflicts of Interest – Tax Notes ($):

Senate Finance Committee member Elizabeth Warren, D-Mass., and Rep. Pramila Jayapal, D-Wash., in a September 27 letter to IRS Commissioner Daniel Werfel requested information on IRS policies for addressing potential employee conflicts of interest, including how the agency deals with employees who have worked or will work for large corporations.

There's a phrase for this: The revolving door. It happens often in DC. 

Fraud Risk Rises as IRS Fixes Low-Income Credits, Tax Pros Warn - Erin Slowey, Bloomberg ($):

A long-awaited change in how the IRS audits low-income taxpayers to help address bias signals an opportunity for unscrupulous tax preparers, many in the industry are warning.

Internal Revenue Service audit rates generally grow the more income an individual has, but taxpayers who claim a tax credit meant to help working families—the earned income tax credit—have been an exception in audit trends. Low-income taxpayers, who typically make less than $25,000 annually and claim the EITC had a higher-than-average audit rate from 2010 to 2019, according to a Government Accountability Office report.

The report is here.

Hawaii Wildfire Aid - Naomi Jagoda, Bloomberg ($) (Scroll down). “The IRS on Thursday issued tax guidance about programs in which employees give up vacation or sick days in exchange for their employers making cash donations to charities aiding victims of the Hawaii wildfires.”

The guidance is here.

Life Insurance Exchange Rules Confuse Firms, Could Cost Them - Caleb Harshberger, Bloomberg ($):

Proposed regulations around Section 1035 life insurance policy exchanges may lead some companies to stumble into taxable exchanges without realizing it, IRS officials were told at a Thursday hearing.

Federal Policy Group consultant Ken Kies, representing Finseca, an association of financial planning professionals, told the IRS at the hearing—and Finseca wrote in a comment letter—that the group heard from members that some employers are misunderstanding the proposed rules. Some companies think they can exchange former employees’ insurance policies with those of new hires under Section 1035, when they actually are surrendering one policy and creating a new one—which is taxable.

States Fret Over Supreme Court Challenge to Foreign Income Tax - Michael J. Bologna, Bloomberg ($):

State tax administrators, academics, and tax practitioners have taken a keen interest in Moore v. United States, which the high court will likely hear in December. The case focuses on whether the Sixteenth Amendment authorizes the federal government to tax undistributed earnings, but the resulting precedent in Moore could have broad implications for state tax bases.

A broad ruling could restrict the federal government’s authorities to tax undistributed, or “unrealized,” earnings. Such restrictions would likely impact state tax collections as well, because most states conform to features of the Internal Revenue Code, said Greg Matson, executive director of the Multistate Tax Commission, an intergovernmental agency committed to uniform tax policy across the states.

From the “Bad Timing” file:

Rich Tax Cheats’ $66 Billion Tab Pressures IRS to Crack Down - Samantha Handler, Bloomberg ($):

More than 1.4 million high-income tax cheats didn’t file tax returns for 2017 to 2020, potentially racking up some $65.7 billion in unpaid taxes, according to an examination of IRS data by Senate Finance Chair Ron Wyden (D-Ore.).

The lawmaker disclosed the findings in a letter to IRS Commissioner Danny Werfel, urging the agency to step up enforcement.

A better time to urge the IRS to step-up enforcement might be when its not about to furlough two-thirds of its staff because you guys (i.e., Congress) can't get your act together on spending. 

The letter is here.

Happy National Coffee Day! Like, seriously.