Tax News & Views Basis Shift Strudel Roundup

New IRS teams being established; new guidance designed to stop partnerships from using sophisticated tax-free transactions that lack economic substance - IRS:

As part of ongoing efforts to focus more attention on high-income compliance issues, the Internal Revenue Service announced today a new series of steps to combat abusive partnership transactions that allow wealthy taxpayers to avoid paying what they owe.

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The new guidance is designed to stop the use of “basis shifting” transactions that use related-party partnerships to avoid taxes. In these complex moves, high-income taxpayers and corporations strip basis from assets they own where the basis is not generating tax benefits and then move the basis to assets they own where it will generate tax benefits without causing any meaningful change to the economics of their businesses. These basis shifting transactions allow closely related parties to avoid taxes.

Treasury estimates these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period.

The IRS says the basis-shifting guidance is part of a larger effort to police pass-through entities:

IRS compliance work continues to accelerate in this complex area of law following Inflation Reduction Act funding. As part of this, the agency is announcing a new dedicated group in the Office of Chief Counsel specifically focused on developing guidance on partnerships, including closing loopholes. The office will work closely with a new pass-through work group being established in the IRS Large and Business International division that will be formally established this fall.

Links: Notice 2024-54; Rev. Rul. 2024-14; Proposed regulations [REG-124593-23].

Employee Retention Credit news coming?

A Covid Lifeline for Businesses Has Become a Curse for the IRS - Erin Slowey, Bloomberg ($):

Four years after the ERC was created, the IRS still has no clear path to see the program through. It isn’t clear how big its backlog of unprocessed claims is now. When the agency last gave an update in December, the number was about 1 million.

The credit is projected to end up costing over four times its initial $55 billion estimate, with interest on unpaid claims continuing to climb and businesses starting to take the agency to court.

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[Former IRS Commissioner] Rettig said he thinks the overwhelming majority of the ERC claims are valid, contrary to what the IRS now says. The blanket labeling comes at a cost to the IRS’s relationship with taxpayers, he said.

New Employee Retention Credit Details Expected Soon, IRS says - Chris Cioffi, Bloomberg ($):

The IRS is planning to release additional analysis on claims made as part of its pandemic-era employee retention credit program that’s been paused since last year, a top agency official said Friday.

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“There is a very high percentage of them where we have questions about their eligibility,” IRS Deputy Commissioner Douglas O’Donnell said Friday at the Pacific Rim Tax Conference in California. “I expect a news release will be coming out early next week to describe that a bit more.”

Tax Policy and Politics - Corporate rate campaign battle

Corporate Tax Rate Spurs Political Fight With More Than $1 Trillion at Stake - Richard Rubin, Wall Street Journal ($):

The 21% U.S. corporate tax rate is the biggest single variable in the sprawling 2025 tax debate, and the two parties are trying to turn that dial in opposite directions with major consequences for companies’ profits and federal revenue.

The rate could climb as high as 28% if Democrats sweep November’s elections and move as low as 15% if Republicans gain full power.

President Biden’s plan for a 28% rate would reverse half of Republicans’ 2017 rate cut, pushing the U.S. corporate rate back near the highest among major economies.

Trump Pledges to Cut Corporate Income Tax Rate Again - Alexander Rifaat, Tax Notes ($). "In a meeting hosted by the Business Roundtable in Washington June 13, Trump told a gathering of America’s top executives his plan for a 1 percent reduction from the current 21 percent, which was enacted during his time in office as part of the Tax Cuts and Jobs Act."

Warren to lay out 2025 tax vision - Laura Weiss, Punchbowl News:

Sen. Elizabeth Warren (D-Mass.) is ready to push Democrats to take a tough stance in the 2025 tax fight.

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Warren will lay out red lines for a tax deal: “At the end of the 2025 tax reform process, large corporations must pay higher taxes. A typical billionaire must pay a higher tax rate than a typical middle-class family. Wealthy tax cheats must be sweating because the IRS has enough money to enforce the law.”

Trump Has Tossed Out Some Unorthodox Tax Proposals—With Scant Details - Richard Rubin and Alex Leary, Wall Street Journal. "After imposing certain targeted tariffs as president, Trump has talked throughout this campaign about a 10% across-the-board tariff on imported goods as a way to punish other countries and protect domestic industries. On Thursday, he went further, floating to House Republicans the idea of replacing the entire income tax system with tariffs. That is an arithmetically challenged plan that would reverse more than 100 years of progressive taxation and is virtually assured to raise consumer prices."

IRS warns of scams targeting seniors.

IRS warns against scams targeting seniors; joins other federal agencies to recognize special awareness day - IRS:

The IRS has identified a concerning trend where fraudulent actors are increasingly targeting unsuspecting individuals, particularly senior citizens, by masquerading as IRS agents. Victims are pressured into making immediate payments through unorthodox methods such as gift cards or wire transfers under the pretense of resolving fictitious tax liabilities or securing false refunds.

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Remember the following:

-The IRS will never demand immediate payment via prepaid debit cards, gift cards or wire transfers.
-Typically, if taxes are owed, the IRS will send a bill by mail first.
-The IRS will never threaten to involve local police or other law enforcement agencies.
-The IRS will never demand payment without allowing opportunities to dispute or appeal the amount owed.
-The IRS will never request credit, debit or gift card numbers over the phone.

Be careful, and keep an eye out for vulnerable friends and relatives.

St. Louis Refund Opportunity; Kansas Tax Deal.

St. Louis Agrees To Return Tax Paid By Remote Workers - Sanjay Talwani, Law360 Tax Authority ($).

Under a settlement filed Wednesday with the Missouri Court of Appeals, the city agreed to establish a claim process for refunds of the 1% income tax it imposed on remote workers in 2020, 2021 and 2022. The settlement follows a May 28 ruling by the Missouri Court of Appeals affirming that St. Louis law does not allow it to assess the tax on income of nonresidents earned for work outside the city.

Under the settlement, workers who paid the tax have from July 1 to Oct. 1 to apply for the refunds for tax years 2021 and 2022, and until April 15, 2025, for tax year 2023. St. Louis has budgeted $26 million to pay for the refunds, the city revenue collector's office said.

So the refunds are not automatic, and taxpayers only have three months to file claims for 2021 and 2022. This likely will result in St. Louis keeping a significant amount of the illegally-collected taxes for those years.

Kansas governor and GOP leaders say they have a deal on tax cuts to end 2 years of stalemate - John Hanna, Associated Press via Washington Post:

The deal announced late Thursday by Gov. Laura Kelly and GOP leaders would save taxpayers a total of about $1.2 billion over the next three years and move Kansas from three personal income tax rates to two, something Kelly had resisted. Republican leaders had hoped for income and property tax cuts worth at least $230 million more over the next three years, rejecting Kelly’s argument that larger cuts would lead to budget shortfalls within five years.

Lawmakers are set to convene a special session Tuesday, called by Kelly after she vetoed the last of three tax plans approved by the Legislature before it ended its regular annual session May 1.

Catch up on more recent state and local news in last Friday's State Tax News & Views.

Blogs and bits

IRS issues erroneous balance due notices to some taxpayers - Kay Bell, Don't Mess With Taxes. "The only thing worse than getting a notice from the Internal Revenue Service, is getting a wrong one."

IRS Issues Proposed Regulations on Clean Electricity Credits - Parker Tax Pro Library. "The proposed regulations provide guidance for owners of qualified clean electricity facilities and energy storage technology placed in service after December 31, 2024."

Oregon Ballot Measure Would Yield Sky-High Business Tax Rates - Jared Walczak, Tax Policy Blog. "The all-in Oregon state and local tax rate on large businesses could exceed 56 percent under a proposed ballot measure that purports to impose only a small tax increase on large businesses."

Tax Shelter Fraud Watch

Georgia CPA Pleads Guilty to Promoting Syndicated Conservation Easement Tax Scheme Involving Fraudulent Charitable Deductions - US Department of Justice (Defendant name omitted, emphasis added):

According to court documents and statements made in court, Defendant was a CPA and return preparer at an Atlanta-based accounting firm. Beginning at least in 2014 and through at least 2019, Defendant promoted and sold tax deductions to his wealthy clients in the form of units in illegal syndicated conservation easement tax shelters organized and created by co-defendants... and others. For their involvement in the scheme, Co-defendants were sentenced in January to 25 and 23 years in prison respectively.

According to the superseding indictment, the scheme entailed the creation of partnerships that would purchase land and land-owning companies and then donate conservation easements over that land or the land itself. Appraisers would allegedly generate fraudulent and inflated appraisals of the conservation easements that frequently valued the easements at amounts at least 10 times higher than the price actually paid by the partnership for the land or land-owning company – often just months prior to the appraisals. As the superseding indictment charged, the partnerships claimed a charitable contribution tax deduction based on the inflated value of the conservation easement, resulting in a fraudulent tax deduction flowing to the clients who purchased units in the partnership.

Note the word "fraudulent." When a deduction is due to fraud, there may be no statute of limitation to keep the IRS from collecting taxes attributable to the fraud from partners.

According to the Department of Justice press release, the Defendant made it easy to call it fraud, rather than just an "aggressive" shelter:

In some cases, to make it appear that his clients had joined the partnerships before the date of the conservation easement donation, which was necessary to claim the tax benefits, Defendant also instructed and caused his clients to falsely backdate documents – such as subscription agreements and checks – related to the partnerships. In 2019 alone, Defendant assisted 15 clients with claiming false deductions on their 2018 returns. In total, Defendant assisted in the preparation of tax returns that claimed nearly $14 million in false deductions based on backdated documents, causing a tax loss to the IRS of nearly $5 million.

Don't do that.

The moral? The usual: if a tax idea seems too good to be true, it likely is. Don't take the word of the person promoting the shelter. Have your own tax pro look at the deal before you sign on.

What day is it?

It is National Eat Your Vegetables Day and National Apple Strudel Day. For our purposes, consider strudel an honorary vegetable.

Tax News & Views Basis Shift Strudel Roundup

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Joe B. Kristan, CPA