Tax News & Views Lays Off The Pizza And Beer Roundup

IRS furloughs nearly half its workforce, shuttering most operations - Danny Nguyen, Politico:

The IRS said it was furloughing nearly half of its workforce and shuttering most operations Wednesday, but will continue work to implement President Donald Trump’s signature tax cuts.

Work on preparing for next year’s tax-filing season will also continue, but numerous operations will be halted, including taxpayer services like call site operations.

The agency will also suspend non-automated tax collections and “most headquarters and administrative functions not related to the safety of life and protection of property” during non-filing season, according to the agency’s latest contingency plan.

Note that they are only suspending "non-automated" collections. That means that the notice-generating computers will remain on the job. Computer-generated notices have a high error rate. Good luck getting them resolved with no humans at the office.

Ben Peeler, leader of the Eide Bailly tax controversy team, comments:

The underreporter notices (mismatched documents sent to IRS like 1099s) or CP2000s will still be generated and the people we respond to for those are likely furloughed so the responses to those will be delayed. That has been a problem in the past five years, causing many cases to default to Tax Court.

New in-person exams will not be opened during the shutdown, so that will continue to spread the audit collapse that came from the DOGE firings and reallocation of resources. The layoffs will just put the IRS further behind and will benefit some taxpayers as the IRS runs out of time to examine the 2022 and 2023 tax returns. We expect very low audit numbers for those years.

Elyse Katz, another Eide Bailly tax controversy specialist, adds "The longer this lasts the more detrimental to the IRS. The IRS seemed to be settling in to the “new normal” after all the RIFs in the last 6 months and working to do more with less as they like to say. TAS is completely closed and it will be increasingly difficult to get the IRS to act on very old cases and issues, including processing amended returns, refunds, and other various issues."

So if you are waiting on an employee retention credit claim, the wait will continue.

IRS Stops Most Operations Due To Federal Budget Impasse - Kat Lucero, Law360 Tax Authority ($):

The Internal Revenue Service has temporarily halted most of its operations, furloughed workers and ended paid leave for the affected employees as Congress remains deadlocked over federal appropriations legislation to fund the government, the agency's acting human resources officer said Wednesday.

Furloughed employees will be in "non-pay, non-duty status" and "paid leave, such as annual, sick, court or military leave, which has been approved for this furlough period is canceled," said David Traynor, acting IRS human capital officer, in a memorandum to all employees.

...

While furloughed workers do not work, they typically get back pay after the shutdown ends under the Government Employee Fair Treatment Act of 2019, which Traynor referenced in the eight-page memo.

IRS Furloughs Half of Workforce, With Deep Enforcement Cuts - Benjamin Valdez, Tax Notes ($):

The agency’s enforcement arms are seeing some of the biggest staff reductions. The Large Business and International Division will lose about 74 percent of its staff, and the Small Business/Self-Employed Division will lose about 67 percent under the plan. The Tax-Exempt and Government Entities Division, meanwhile, will lose about 84 percent of employees.

The IRS prioritized retaining taxpayer services employees under the plan, keeping 24,470 employees out of the 32,381 that it had originally retained for five days.

Those employees come from return integrity and compliance services, operations support, customer relations, submission processing, and accounts management, the plan said. Many of those units have lost staff to the deferred resignation program, according to the Treasury Inspector General for Tax Administration.

IRS Furloughs Nearly Half of Agency, Updated Plan Shows - Erin Slowey, Bloomberg ($). "Preparing forms for tax season and protection of statute expiration, bankruptcy, liens, and seizure cases will continue."

IRS Furloughs Spark Concerns of a Bumpy Filing Season - Benjamin Valdez and Doug Sword, Tax Notes ($):

Tax watchers are worried that a prolonged government shutdown and deep furloughs at the IRS could spiral into a difficult filing season for taxpayers and the agency, which has already seen an exodus of employees this year.

The IRS entered the year with about 100,000 employees. But because of the deferred resignation program, separations, and now shutdown-induced furloughs, the agency has just 39,870 employees on the clock.

...

The AICPA, along with the National Association of Enrolled Agents and the National Association of Tax Professionals, had hoped the IRS would retain all employees during a shutdown, considering the approaching October 15 deadline for taxpayers who filed extensions and the filing season preparations.

Meanwhile In The Control Room

Senate Tax Panel Advances IRS Chief Counsel Nomination - Asha Glover, Law360 Tax Authority ($):

The Senate Finance Committee approved President Donald Trump's nomination of a Sullivan & Cromwell attorney to be general counsel of the Internal Revenue Service, the nearly party-line vote Wednesday setting up the nomination for a vote by the full Senate.

The committee voted 15-12 to advance Donald Korb's nomination for the role of the IRS' top lawyer and assistant general counsel in the U.S. Department of the Treasury. One Democrat, Sen. Sheldon Whitehouse of Rhode Island, voted with Republicans to advance Korb's nomination to the Senate floor.

...

During his confirmation hearing in September, Korb said he has almost 52 years of experience in federal taxation in both the public and private sectors. He was an attorney-adviser in the chief counsel's office from 1974 to 1978 and a special assistant to then-Commissioner Roscoe Egger in the mid-1980s, when he coordinated agency work on the 1986 tax overhaul law, according to the IRS. He was chief counsel from 2004 to 2009.

Senate Panel Advances IRS Chief Counsel, Treasury Nominees - Cady Stanton, Tax Notes ($):

The Senate Finance Committee voted to approve nominations for IRS chief counsel and a key Treasury tax post as Democratic taxwriters raised concerns about the White House’s recent move to establish dual roles for some leaders.

The panel advanced Derek Theurer to be Treasury deputy undersecretary for legislative affairs on a 14-13 vote and Donald Korb to be IRS chief counsel on a 15-12 vote October 8.

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The votes came the day after Treasury announced that Theurer, who has been serving as counselor to Treasury Secretary Scott Bessent since January, will fill the role of acting deputy secretary at the department after the departure of Michael Faulkender, who left the position in September.

Tariffs and Trade

Trump Excludes Generics From Big Pharma Tariff Plan - Gavin Bade, Wall Street Journal:

The Trump administration said it isn’t planning to impose tariffs on generic drugs from foreign countries, after months of wrangling over whether to impose levies on the vast majority of drugs that are dispensed in the U.S.

The administration has been weighing duties on a range of pharmaceutical products and ingredients, using a tariff investigation under Section 232 of the Trade Expansion Act of 1962, which covers threats to national security. President Trump last month posted online that he would impose 100% tariffs on name-brand drugs on Oct. 1, but didn’t mention generics. Trump ultimately delayed imposing tariffs, as officials said they would allow for more negotiations with drug companies.

...

In a 2023 campaign video, Trump said he would “phase in tariffs and import restrictions to bring back production of all essential medicines to the United States of America where they belong,” referencing a number of common generic drugs.

EU Sees New US Trade Demands Hollowing Out Trump Deal - Alberto Nardelli and Jorge Valero, Bloomberg via Yahoo Finance. "European Union officials see new US demands for concessions as well as other measures as potentially undercutting a recent agreement that brought the allies back from the brink of a trade war."

Tax News & Views International Weekly: The Stewardship Situation - Alex Parker, Eide Bailly:

When Congress passed the One Big Beautiful Bill Act in July, they attempted to address one of the most persistent complaints from multinational corporations about the 2017 Tax Cuts and Jobs Act’s international tax regime. This was the seemingly unintentional quirk in the tax framework which caused the tax on global intangible low-taxed income to fall on income that was anything but low-taxed.

The new fix offers relief, but it also raises some new questions.

Trump’s New Furniture Tariffs Are (Almost) Everything Wrong with U.S. Trade Policy Today - Scott Lincicome, The Dispatch:

Maybe the tariffs’ most absurd aspect is that they’re being imposed on wood products for supposed “national security” reasons, pursuant to Section 232 of the Trade Expansion Act of 1962...

The baselessness of the government’s assertions—ones used to impose blanket taxes on wood and stuff made with it—reveals the next set of problems, which rest with the law itself. First, Section 232 doesn’t explicitly define “national security,” so it can basically mean whatever the president wants it to mean. Second, the law mandates a report summarizing the government’s findings and conclusions about the alleged security threat at issue (and input from the defense secretary on the same) but doesn’t require publication of these important documents. So, the public—including all the businesses now on the hook for millions in new taxes—has no actual evidence of any real security threat. We just have to take Trump’s word for it (even though he promised these tariffs before the investigation was even begun).

And that's just a start. "The wood tariffs’ economics are arguably just as bad."

Be Careful

Did you get a text about a refund from the Illinois Department of Revenue? It's a scam - Hannah Hudnall, Peoria Journal Star. "The scam involves unsolicited, urgent text messages claiming a tax refund has been processed. Recipients are then told they must provide or verify their personal banking information in order to avoid losing a state refund."

If it came by text or email and it says it's from the IRS, Social Security, or a state revenue department, it's a scam. If you're worried anyway, check with a tax pro. Whatever you do, don't text or email your bank information, or your credit card or social security numbers.

Blogs and Bits

Financial and tax tips prompted by the IRS’ shutdown - Kay Bell, Don't Mess With Taxes. "Adjusting your withholding amount will get you that cash in each paycheck. If you’re afraid you’ll just spend it, set up an automatic deposit of that money that used to go to the IRS into a savings account, aka your new emergency fund. Most payroll administrators and banks or credit unions will work with you here."

Oct. 15 deadline for extension filers is around the corner - IRS. "Most taxpayers who requested an extension to file their 2024 tax return must file by Wednesday, Oct. 15, to avoid a penalty for filing late. The IRS encourages taxpayers to opt for the fastest and safest option which is to e-file and choose direct deposit for their tax refund."

Tax Court Disallows Clean Vehicle Credit for 2019 for Vehicle Placed in Service in 2013 - Parker Tax Pro Library. "The Tax Court held that a married couple was not entitled to take a $7,500 Code Sec. 30D tax credit on their 2019 tax return for a plug-in electric drive motor vehicle that they purchased and began driving in 2013 and for which they had claimed yearly tax credits."

Six Reasons to Not Extend the Enhanced Obamacare Subsidies - Adam Michel, Liberty Taxed. "Covering the full premium costs of many marketplace plans led to significant enrollment fraud. A recent Paragon report estimates that the program has more than 6.4 million improper enrollees, costing taxpayers $27 billion in 2025."

Tax Obscura: The Accumulated Earnings Tax.

You might think of the Accumulated Earnings Tax as the Sasquatch of the tax law. It's rarely seen. You could even argue that it doesn't exist, as a practical matter. But it lives, lurking in the dark forest of Subchapter G, Chapter 1, of the Internal Revenue Code.

The AET is an extra 20% tax on "accumulated taxable income" for a tax year of a C corporation "formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed."

It has two features that make it almost as unusual as the Sasquatch:

1. It is subjective, requiring examination of the purpose behind a retention of earnings.

2. There is no form to report the tax. It only is assessed on audit.

Why is it there? The canonical Federal Income Taxation of Corporations & Shareholders traces its origins back to the earliest days of the tax law and much higher individual tax rates:

For many years, the top tax rate applicable to individuals was from 22 to as much as 65 percentage points higher than the top corporate rate. This disparity tempted individual taxpayers to form or use corporations as a shield against the individual income tax. To be sure, accumulated corporate income is not immediately available to shareholders for personal consumption, but this may not be critical: Shareholders may be satisfied to sell the stock (in effect, reporting the accumulated income as long-term capital gain), exchange it for the marketable stock of a publicly held corporation in a tax-free merger, or hold it for ultimate transfer to their heirs at death, with a stepped-up basis equal to its value at that time. After 1982, however, the highest individual and corporate tax rates have been much more closely aligned. Thus, the incentive to organize corporations for such tax-avoidance purposes is significantly reduced.

In 40 years of tax practice, I have been involved in exactly one accumulated earnings tax exam. The taxpayer lost. Unlike Sasquatch, this tax actually does exist. It's more like a wolverine that way - rarely seen, but dangerous when aroused.

As a policy matter, the tax is questionable at best in the post-1986 world of double-taxed corporate earnings. As a mere matter of logic, punishing corporations for accumulating income conflicts with the logic of the excise tax on stock buybacks used to distribute accumulated earnings.

Because it is not self-reported, it's existence depends entirely on how much effort the IRS wants to put into assessing and enforcing it. When enforced, it almost always hits closely-held entities. If you have a profitable C corporation sitting on a pile of unused cash, it is wise to document why it is needed for future growth plans or other purposes, just in case.

What day is it?

It's International Beer and Pizza Day! Because there is such limited awareness of these things.

Tax News & Views Lays Off The Pizza And Beer Roundup

Make a habit of sustained success.

Joe B. Kristan, CPA