Tax News & Views Advances Tax Bills and ERC Refunds at Snails Pace Roundup

SALT Cap Showdown Complicated by Being Knotted With Hated AMT - Samantha Handler, Bloomberg ($):

Millions of people in high-tax states face their own fiscal cliff next year—when both a limit on their state and local tax deductions and higher exemption levels for an unpopular levy meant to ensure the wealthiest pay their fair share will be up for debate.

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The 2017 tax law greatly reduced the number of taxpayers who must pay the AMT, from nearly 5 million in 2017 to around 200,000 in 2018, according to the Urban-Brookings Tax Policy Center. It did that by raising the exemption and the income threshold for when the exemption starts to phase out— changes that expire at the end of 2025.

If both the SALT cap and the higher AMT exemption levels expire at the end of 2025, about 7.3 million taxpayers would be subject to the AMT in 2026, according to new Tax Policy Center data.

Most states with income taxes have enacted pass-through entity taxes (PTETs) as a way to work around the $10,000 cap on itemized deductions for state and local taxes. The pre-2018 AMT functioned as a SALT deduction cap for taxpayers who were well-off, but not millions of dollar income well-off. Absent Congressional action to limit the use of PTETs, they are likely to remain in place as AMT workarounds after 2025.

Republicans prepare to fast-track tax cuts in reconciliation - Tobias Burns, The Hill:

Nearly seven years after the GOP used budget reconciliation to pass the Tax Cuts and Jobs Act (TCJA), the party is gearing up to use the same maneuver to renew key provisions set to expire in 2026.

While most legislation needs the support of 60 senators to avert a filibuster, budget reconciliation allows lawmakers to pass major tax and spending bills with a simple majority — and without bipartisan backing.

This only works if the GOP gets a "trifecta," winning the presidency and both houses of Congress. Getting a bill through the Senate does nothing if the House and President won't go along.

Expat deadlines, IRS alternative dispute resolution, ERC liability.

U.S. taxpayers living and working abroad face June 17 deadline to file their 2023 tax returns - IRS:

The Internal Revenue Service reminds taxpayers living and working outside the United States to file their 2023 federal income tax return by Monday, June 17.

This deadline applies to both U.S. citizens and resident aliens abroad, including those with dual citizenship.

Taxpayers affected by the June 17 deadline can file for an automatic six months extension on Form 4868.

IRS update: Boosting alternative dispute resolution, and more - Roger Russell, Accounting Today:

The ADR process was lauded for its ability to resolve disputes much more quickly than the standard appeals process. It is a fundamentally different path that shows promise to both taxpayers and the IRS. Moreover, studies have shown that the process ends with both parties being more compliant. The fact that it reaches a shared resolution changes the perspective on both sides, according to officials. Both parties need to be willing to compromise in order to reach an agreed outcome.

However, ADR usage has been lower than expected and continues to decrease, according to officials.

Improper ERC Claims: Liability for Third-Party Payers, Employers, or Both? - Hale Sheppard, Bloomberg. "The number of ERC claims filed by third-party payers for employers must be staggering. If one were to believe the messaging from the IRS, many of those claims will be disallowed from the start (creating employment tax underpayments) or will be paid and later deemed unworthy (generating erroneous refunds). Either way, the IRS likely will seek to recoup considerable funds. Can it pursue employers, third-party payers, or both?"

St. Louis loses bid to tax remote workers

Mo. Panel Affirms Nixes Of St. Louis Teleworker Tax, Class Bid - Paul Williams, Law360 Tax Authority ($):

St. Louis must issue earnings tax refunds to six nonresidents for days they worked outside the city after the COVID-19 pandemic began, but those employees can't seek a class action on behalf of other remote workers, the Missouri Court of Appeals ruled Tuesday.

A three-judge panel affirmed a circuit court's holding that St. Louis' earnings tax ordinance doesn't permit the city to assess the 1% tax against nonresidents for work performed in other jurisdictions. The law allows the city to apply to tax "for work done or services performed or rendered in the city," and the appeals court said St. Louis was attempting to rewrite the ordinance to tax work or services "performed or rendered into the city" via telecommuting.

Banking, weed, and Crypto

Marijuana Reclassification Impacts Bank Servicing of Businesses - Heidi Urness and Aaron Kouhoupt, McGlinchey Stafford via Bloomberg:

Following rescheduling, financial institutions may be more likely to take the risk of banking marijuana-related businesses, but exposure to federal anti-money laundering and racketeering laws will persist.

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The same day the DEA announced the proposed rescheduling of marijuana, the American Bankers Association said “Cannabis would still be largely illegal under federal law, and that is a line many banks in this country will not cross. The solution is the bipartisan SAFER Banking Act, which would allow banks to provide services to the cannabis industry in those states where it’s now legal.”

Tax Chiefs Share Crypto Red Flags for Financial Institutions - Nathan Richman, Tax Notes ($):

The list of red flags from the Joint Chiefs of Global Tax Enforcement (J5) includes cryptoasset layering, geographical risk indicators, high-risk counterparties, new client onboarding risks, and ransomware/cybercriminal risk indication.

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Cryptoasset layering involves deliberately making transactions more intricate in order to hide the origin of the funds. “For example, unusually high volumes with rapid movement of funds between digital wallets, especially across multiple jurisdictions, can signal potential layering,” according to a notice issued by the J5 on May 23. Other possible layering indications include use of mixers or tumblers and interactions with darknet marketplaces, the group said.

Down in Puerto Rico

I.R.S. Failed to Police Puerto Rico Tax Break, Whistle-Blower Says - Jesse Drucker, New York Times:

For the past decade, thousands of wealthy Americans have been flocking to Puerto Rico to take advantage of a tax break that can cut their tax bills to zero. For nearly as long, there have been allegations that the benefit enables multimillionaires to avoid paying what they owe when they reap big investment profits.

Now, an Internal Revenue Service insider has accused the agency of failing to police the tax break. Despite a high-profile campaign announced more than three years ago to unearth possible abuse, the agency has audited barely two dozen people and has collected back taxes from none, according to a letter that an agency insider wrote this year to lawmakers and that has been reviewed by The New York Times, as well as interviews with I.R.S. officials.

Blogs and bits

Hurricane season 2024 forecast to be the most active ever. Get ready now. - Kay Bell, Don't Mess With Taxes. "My special Storm Warnings page on preparing for natural disasters has suggestions on how to get ready for hurricanes and other types of Mother Nature madness. Specifically, my post last August as that year’s hurricane season was heating up has details on financial and tax preparations, as well as the physical storm steps, including for your pets, that you need to take now."

"Funded" Research Precludes Engineering Firm from Taking Research Tax Credits - Parker Tax Pro Library. "The Eighth Circuit affirmed the Tax Court and held that a structural engineering firm was not entitled to tax credits for research expenses incurred in creating documents for certain building projects because the research was considered 'funded' within the meaning of Code Sec. 41(d)(4)(H)."

What’s Next For ERC Refund Claims Pending With The IRS? - Tom Cullinan, Forbes. "Unfortunately, I think the most likely IRS path for the near future is to issue some refunds, audit some claims and deny several more, with all of those numbers totaling in the tens of thousands. That will leave quite a lot of claims pending at the IRS. Nothing in the Internal Revenue Code requires the IRS to act on a refund claim within a prescribed time, although one company recently filed a lawsuit against the IRS asking the court to require the agency to 'resume processing new refund claims under the ERC,' which bears watching."

Crooked Preparer Corner

Justice Department Seeks to Shut Down Miami Tax Return Preparers and Their Tax Preparation Businesses - US Department of Justice (Defendant names omitted, emphasis added):

The Justice Department’s Tax Division filed a civil injunction suit today to permanently bar Defendants and their tax return preparation businesses... from preparing federal tax returns for others. The United States also seeks an order requiring the defendants to disgorge to the United States their ill-gotten preparation fees.

The complaint, filed in the U.S. District Court for the Southern District of Florida, alleges that Defendants, through their businesses, prepared and filed over 8,000 federal income tax returns for customers since at least 2018. According to the complaint, Defendants used a variety of schemes to claim false deductions and credits, including knowingly reporting fake or inflated business expenses and fraudulent losses from the supposed sale of personal investments and business property and fraudulently claiming various credits like the Residential Energy Credit and the American Opportunity Credit, all without customers’ knowledge. The complaint alleges Defendants hid their fraudulent activity by not identifying themselves as the return preparer, and instead listed another person as the return preparer or listed no one at all.

This case shows how taxpayers need to be careful in selecting preparers. Not signing returns is a red flag.

But the case also should act as a warning for policymakers. The tax law is a black box to most taxpayers. Adding new credits or breaks to an already overcomplicated personal income tax means little to most taxpayers, but it provides new tools for fraudsters, whose clients now have to pony up taxes that they may not have available cash to pay.

What day is it?

It's National Snail Day! So slow it down a bit.

Tax News & Views Advances Tax Bills and ERC Refunds at Snails Pace Roundup

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Joe B. Kristan, CPA