Tax News & Views Brackets and Boston Cream Pie Roundup

IRS raises standard deduction, adjusts tax brackets for 2025 - Julie Zauzmer Weil, Washington Post:

The IRS on Tuesday announced new inflation-adjusted tax brackets for the coming year, setting the standard deduction for a single filer at $15,000 and for a married couple at $30,000 for the first time.

The new tax brackets, standard deduction and other policies will apply to income earned in the year 2025, which Americans will report on their tax returns in 2026.

The 2025 Tax Brackets Are Here. See Where You Land. - Ashlea Ebeling, Wall Street Journal:

The threshold for the top federal income-tax bracket in 2025 will climb by about $20,000 next year for a married couple. The 37% income-tax rate will apply to income above $751,600. For individuals, that top tax bracket will start at $626,350.

Your effective tax rate will be lower than your top rate. That is because the first slice of income is taxed at 10%, the next slice at 12%, and so on. A single person who makes $120,000 and takes the standard deduction in 2025 would have a sliver of income taxed at 24% but a 15% effective tax rate, according to Stan Veliotis, a CPA and tax lawyer at Fordham University’s business school.

Not all tax parameters get inflation adjustments. The $10,000 cap for deducting state and local taxes, known as the SALT break, the $2,000 child tax-credit maximum and the $3,000 limit on capital losses that can be deducted from ordinary income aren’t indexed for inflation.

IRS Releases Annual Tax Inflation Adjustments - Bailey Finney, Eide Bailly. "The IRS has released (Rev. Proc. 2040-40) the annual tax inflation adjustments for 2025."

New IRS exam approach for pass-throughs begins

IRS’s New Partnership Field Unit Opens for Business - Nathan Richman, Tax Notes ($):

Announced September 2023, the passthrough field unit is part of the IRS’s effort to increase audit rates in a complex and previously underexamined area, according to the release. The IRS said it spent the last year hiring for the unit, gathering both internal and external hires.

The IRS has been turning its attention toward partnerships and other passthroughs using its increased resources under the Inflation Reduction Act. Other efforts in the area include a guidance package addressing related-party basis shifting.

From the IRS press release:

The creation of a new unit specifically devoted to ensuring compliance of pass-throughs of every size and form—including partnerships, S-corporations and trusts—reflects the IRS’s broader efforts to focus more attention and resources on an area that has historically been under-scrutinized.

Previously, pass-through exams were divided between LB&I and the Small Business/Self-Employed (SB/SE) division based on the size of the entity. Going forward, revenue agents in pass-through field operations will be assembled into geographically based teams that are responsible for primary exams of pass-through entity returns. LB&I will be responsible for starting pass-through exams, regardless of entity size. SB/SE will continue to examine pass-through entities as part of a related exam of a tax return.

Consolidating the case-working expertise and removing the entity-size barrier helps the IRS achieve its goal of increased audit rates in this complex area, streamlines workflows and provides a more consistent experience for taxpayers.

Elyse Katz of the Eide Bailly IRS Dispute Resolution and Collections Team comments on the unit: "I'm hoping it helps with the skill level and exams. Most agents with the new focus on taxpayers with incomes over $400,000 are undertrained and it causes issues with exams."

ERC Update

Want to Sue the IRS for Unpaid ERC Claims? Consider These Factors - Matthew Lee, Brian Bernhardt, and Jonathan Wasser, Bloomberg:

Is filing a lawsuit the best way to get the IRS to pay an unpaid employee retention credit claim? Some businesses think so, but before filing a suit, they should consider how they qualified for the ERC, the size of their claim, and their access to capital, among other things.

...

Litigation is expensive, and it isn’t economical to sue for a small refund. Businesses with smaller claims are better served waiting for the IRS to process their claim (while earning refund interest during the delay).

Even if a business has a large ERC claim, it may be difficult to afford litigation expenses if its litigation attorneys charge hourly rates for their time and bill clients monthly. A business impacted by Covid-19 and seeking an ERC refund might not be able to afford litigation costs. To assist these types of businesses, attorneys may agree to handle ERC refund litigation on a contingent fee or alternative fee arrangement.

A Look at the Second ERC Voluntary Disclosure Program - Hale Sheppard, Tax Notes ($). "The participation level in the first VDP was low. It will be interesting to see if the IRS fares better with the second VDP, particularly when the terms are less favorable than those of the first VDP, a long list of considerations remains, and the courts have yet to issue decisions regarding key ERC issues."

Taxes and the Election

Trump Excludes Asian, European Cars From Vehicle Tax-Break Plan - Stephanie Lai, Bloomberg ($):

Donald Trump touted his pledge to provide tax breaks for purchasing cars, highlighting that the benefit would only apply to vehicles made in the US as he rallied voters in a crucial swing state with just two weeks until Election Day.

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Trump didn’t specify if the tax breaks would be available to many foreign-owned carmakers who produce millions of vehicles in the US, including Volkswagen AG, Toyota Motor Corp. and Hyundai Motor Co.

What to expect on taxes next year, depending on who wins - Burgess Everett, Semafor:

The expiring Trump tax cuts will require action no matter who’s in charge, but from there it gets tricky. An all-Republican government would seek to simply extend those pricey tax cuts, though some Republicans want to take another look at the corporate rate and Donald Trump has floated a bevy of tax promises that are very tough to fulfill. An all-Democratic government almost certainly would let tax cuts for higher earners expire and keep some of them for others that “could be counterbalanced by tax increases on the billionaires or corporations,” said Sen. Richard Blumenthal, D-Conn. OK, what about a split government? It’s hard to see Congress allowing a tax increase for everyone right at the holidays next year. A temporary extension is always an option.

Trump’s Proposed Tariffs Would Fall Hardest on States in the Midwest and South - Robert McClelland and Richard C. Auxier, TaxVox. "Trump’s proposed tariff payments would total more than 3 percent (but not 4 percent) of state GDP in Illinois, Michigan, and Wisconsin and total more than 4 percent of state GDP in Kentucky, Indiana, Mississippi, and Tennessee. Kentucky would see the largest total tariff payment under Trump’s proposal, with tariff payments totaling nearly 5 percent of its state GDP."

Harris Tax Hikes On Top Incomes Will Hit Harder In High Tax States - Robert Wood, Forbes. "Both Vice President Harris and former President Trump tout tax changes they will make if elected. Harris proposed a 28% tax on long-term capital gains for Americans who earn $1 million or more."

CHIPS Credit Regulations go final

Wafer Factories Qualify For CHIPS Tax Credit In Final Regs- Kat Lucero, Law360 Tax Authority ($). "Treasury's inclusion of wafer production in the final regulations clarifies the tax credit's definition of "semiconductor manufacturing," which was introduced in the March 2023 proposed rules. The clarification also benefits some in the renewable energy supply chain because these semiconductors and wafers are also critical components in solar energy technologies."

IRS Warms Up to Solar Industry with Investment Credit Rules - Mary Katherine Browne, Tax Notes ($): "Designed to boost semiconductor manufacturing, the CHIPS and Science Act of 2022 established the advanced manufacturing investment credit for 25 percent of a qualified investment in an advanced manufacturing facility. Like the clean energy credits under the Inflation Reduction Act, the section 48D credit is eligible for a direct-pay election. The credit is available for facilities beginning construction before 2027."

Blogs and Bits

Georgia accountants get prison time for roles in $1.3 billion conservation easement scheme - Kay Bell, Don't Mess With Taxes. "Smith and Tomasello also knowingly instructed and caused their clients to falsely backdate documents, such as subscription agreements and checks, related to the illegal tax shelters, according to federal prosecutors."

Failure to Attach Power of Attorney to Refund Claim Doesn't Necessarily Doom Filing - Parker Tax Pro Library. "The Federal Circuit vacated a Federal Claims Court decision that dismissed a taxpayer's refund claims based on a procedural flaw - namely that the taxpayer failed to attach a power of attorney (POA) to those claims."

Giving Back: Recognizing the 2024 National Celebration of Pro Bono - Erin Collins, NTA Blog:

When a low-income taxpayer faces a tax controversy, the amount at issue may significantly impact the taxpayer, but the cost of hiring a representative may be cost-prohibitive by comparison.

This is where the pro bono legal services of Low Income Taxpayer Clinics (LITCs) can help. They are critical in helping taxpayers with limited resources who are often representing themselves when dealing with the IRS navigate the complexities of the tax system. LITCs also advocate for the right to a fair and just tax system by elevating systemic issues to the IRS or TAS when they have the potential to harm taxpayers or interfere with their rights and proposing solutions.

Tax Crime Unit: Oklahoma City

Attempting to impede federal tax laws lands Oklahoma City man in federal prison for three years - IRS (emphasis added, defendant name omitted):

Defendant has been sentenced to serve 36 months in federal prison, the statutory maximum, for corruptly endeavoring to obstruct or impede the due administration of the federal tax laws, announced U.S. Attorney Robert J. Troester.

On April 4, 2024, a federal grand jury returned a four-count Indictment against Defendant, charging him with one count of corruptly endeavoring to obstruct or impede the due administration of the federal tax laws and three counts of failing to file a tax return. According to the Indictment, Defendant, a career drilling consultant in the energy industry, has not filed a tax return since at least 2005, despite being required to do so based on his level of income. The Internal Revenue Service (IRS) initiated enforcement action in 2013, which included the collection of levied funds from Defendant’s paychecks.

Court documents allege that beginning in 2017, while knowing of the IRS enforcement actions, Defendant forged the signature of an IRS revenue officer onto IRS forms, including an IRS Installment Agreement and an IRS Release of Levy, in an attempt to have levied funds paid to himself rather than be sent to the IRS.

A couple of simple lessons:

1. File your tax returns. The IRS notices, sooner or later, if you stop. That's especially true when they get a copy of your W-2 every year.

2. Don't forge IRS signatures. They really, really don't like that.

What day is it?

It is National Boston Cream Pie Day. I'll pass on National Slap Your Coworker Day.

Tax News & Views Brackets and Boston Cream Pie Roundup

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Joe B. Kristan, CPA