Tax News & Views Has a Penny For Your ERC Thoughts Roundup

Employee Retention Credit Guidance Raises New Questions - Caitlin Mullaney, Tax Notes ($):

Justin Elanjian of Frost Law told Tax Notes that the recent guidance — a March 20 update to the ERC FAQ — “was much anticipated and long overdue.” However, it “may be too little, too late and leaves much to be desired.”...

Contradictions between the FAQ and previous notice guidance were also noted by Elanjian, who advised practitioners and businesses to be careful about relying on nonauthoritative guidance.

“It seems like the IRS has published these FAQs as a metaphorical punting of the decision on when to account for the income tax effects to taxpayers and tax preparers,” Elanjian said.

Tonya Rule, leader of the Eide Bailly ERC practice, comments:

I agree the IRS’s new ERC FAQ’s released on March 20th leaves practitioners and taxpayers in a tough position. Obviously, the IRS would like Taxpayers whose statute of limitations have already expired to pay tax on ERC claims. Now we have taxpayers who had correctly amended their 2020 returns and paid the tax and a whole lot of interest on their ERC claims. Had these taxpayers not followed the letter of the law they might have saved a substantial amount of interest of the late payment of tax by waiting for this new FAQ. Now we have taxpayers asking if they can re-amend their 2020 returns to recoup the interest that was paid and pick up the ERC income on the year when they received the ERC funds. Some who did not amend are questioning whether the IRS can force income inclusion in the year of receipt. By trying to fix the problem the IRS unfortunately has made more problems for themselves.

What they actually need to do is process the claims as soon as possible. While taxpayers can follow the non-authoritative guidance, I would advise taxpayers and practitioners to print the new FAQ’s in case the IRS decides they were ill-advised and takes them off of their website.

The Modernization Program That Would Not Die - Marie Sapirie, Tax Notes ($):

The initial public assessment offered by Sam Corcos, the temporary DOGE senior adviser for technology and modernization at Treasury, is that the technology and contracts badly need an update. That assessment will come as no surprise to Tax Notes readers, who are keenly aware that the agency’s technology modernization efforts are well intentioned but often redolent with déjà vu.

No kidding.

Inertia is another problem, according to Corcos. He said that DOGE had found contracts that it couldn’t identify the purpose of and canceled them.

Nothing could go wrong if we drive right through Chesterton's Fence.

Corcos compared the IRS’s IT department to that of a typical midsize bank, which he said would have an IT staff of 100 to 200 and an operation and maintenance budget of roughly $20 million, while the IRS’s IT department has 8,000 employees and a budget of $3.5 billion. The IRS’s most recent Data Book shows roughly $3.5 billion in costs incurred for information services in fiscal 2023. (IRS Data Book 2023, Pub. 55-B, at 73, Table 32 (2024).) “I don’t really know why yet, but I will tell you that 80 percent of that budget goes to contractors and licenses,” he added. Corcos said that the IRS has “a lot of budget” for IT.

While I won't minimize the IT challenges of a "midsize bank" (A bank with an IT staff of 100 is pretty big in my book), at least a bank has a relatively limited set of transactions compared to the IRS, and a much smaller customer base. The IRS has to deal with a dozen different Form 1120-series returns alone, a tax law that changes every year, random policy provisions larded into the tax code by Congress, and, well - see the next item.

IRS Places Dozens of Information Technology Employees on Leave - Benjamin Valdez, Tax Notes ($). "The employees, placed on immediate paid leave on March 28, managed several IT operations at the IRS that 'are critical for the filing season,' including data centers, user and network services, and cybersecurity, according to the source, who is a former IRS IT executive."

'Liberation Day' Eve

Trump Says He Settled on ‘Liberation Day’ Tariff Plan but Doesn’t Reveal It - Gavin Bade, Brian Schwartz, and Vipal Monga, Wall Street Journal:

“I’ve settled, yeah,” Trump said in the Oval Office on Monday evening when asked whether he has decided on his “Liberation Day” plans, a term the president has used for tariffs to be announced by the self-imposed deadline of Wednesday.

Trump’s team has pitched him on several ideas of how to tariff other countries, including a 20% global tariff on virtually all imports. Throughout Monday, some of his aides were under the impression that he hadn’t committed to a particular path, according to people familiar with the matter. The people stressed that conversations remain fluid, and Trump’s comments that he had decided on an approach caught some White House advisers off guard.

Trump aides draft tariff plans as some experts warn of economic damage - Jeff Stein and David Lynch, Washington Post:

White House aides have drafted a proposal to impose tariffs of around 20 percent on most imports to the United States, three people familiar with the matter said, as President Donald Trump pushes for the most aggressive overhaul of the global economic system in decades.

If implemented, the plan is likely to send shock waves through the stock market and global economy. Assuming that permanent tariffs took effect in the current quarter and triggered robust retaliation by U.S. trading partners, the economy would almost immediately tumble into a recession that would last for more than a year, sending the jobless rate above 7 percent, according to Mark Zandi, chief economist for Moody’s, who described the results as a worst-case scenario.

White House advisers cautioned that several options are on the table and no final decision has been made.

How a $1.4tn Trump trade war could unfold - Peter Foster and Alan Smith, Financial Times:

A trade war triggered by President Donald Trump applying a 25 per cent tariff on all imports could cause a $1.4tn hit to the world economy and dramatically drive up US prices, according to a new study modelling the fallout from a retaliatory spiral.

Econometric analysis of a worst-case scenario, where US trade partners hit back against Washington, shows a Trump-inspired tariff war would cause widespread trade disruption, rising prices and falling living standards.

Financial Times chart of estimated effect of tariffs on prices

GOP senators vs. Trump on tariffs - Lisa Kashinski and Mia McCarthy, Politico:

Four Republicans would need to join all 47 Senate Democrats in backing Kaine’s resolution for it to win approval, and it’s still unclear if supporters will hit that number. If they do, it would be the GOP Congress’s biggest break with Trump since he took office in January — and it would serve as a warning shot as his economic policies roil markets and threaten core industries across the country.

Still, the resolution has no teeth — it is ultimately a political statement. Any show of opposition in the Senate is likely to die in the House, where Speaker Mike Johnson has already moved to block the ability of tariff critics to force a floor vote on ending the types of national emergencies Trump is leaning on to levy his tariffs.

Congress and Taxes

House Advances Bills on Disaster Extensions and Lost Checks - Tyrah Burris, Tax Notes ($):

The House passed five tax-related bills that would, among other things, provide filing deadline extensions to taxpayers based on governors’ disaster declarations, allow the national taxpayer advocate to hire their own counsel, and provide additional security for tax refund checks.

...

The House advanced the Internal Revenue Service Math and Taxpayer Help Act (H.R. 998), introduced by Ways and Means Committee member Randy Feenstra, R-Iowa., by a voice vote. The bill would require the IRS to explain math errors to taxpayers and convey the deadline for any errors to be abated. The legislation would also require a description of the math or clerical error in plain language alongside any adjustments that need to be made to the return and require the agency to send a notice to the taxpayer’s last known address.

Ben Peeler, leader of the Eide Bailly tax controversy practice, welcomes these changes:

Some of these changes would greatly improve the IRS service, especially allowing the Taxpayer Advocate to hire their own Counsel. Currently, the Taxpayer Advocate is the band-aid that keeps the IRS moving considering the complete mess of the IRS in handling penalty and interest abatements when they are clear IRS errors. Often the Taxpayer Advocate Service has to wait for the IRS to decide what is correct or not often defeating the purpose of their intervention. If they could receive advice from Counsel as quickly as they work on cases it would help resolve many obvious issues. Then hopefully, they could create a system where that advice is passed directly to the IRS with some force.

Additionally, we hope that the extension of the mailbox rule will clear up so many of the disputes, especially when there are errors in the software on either the IRS or processing company side.

Big Beautiful Bill Update

Trying to move quick on tax cuts - Bernie Becker, Politico:

In fact, Senate Republicans are planning to move forward with a compromise budget as soon as Wednesday, as our Meredith Lee Hill and Jordain Carney reported.

The Senate passing a budget this week would be another big step toward Republicans passing a measure with tax cuts, more funding for border security and other priorities, even if the two chambers also would be holding off on working through some fundamental issues like how much spending would be cut in the broader fiscal package.

If the Senate plans to bring a budget resolution to the floor as soon as Wednesday, that also means Republicans expect the chamber’s parliamentarian, Elizabeth MacDonough, to answer one of the key outstanding questions in budget reconciliation — whether she’d allow the GOP to use what’s known as the current policy baseline.

The GOP reconciliation plan is getting House blowback - Laura Weiss, Andrew Desiderio, and Jake Sherman, Punchbowl News:

Indeed, it took no time at all for the House’s deficit hawks to start bashing the proposed compromise budget resolution.

“For me, it’s dead on arrival,” Rep. Ralph Norman (R-S.C.) said. Norman added he has a problem with going above a $4 trillion debt-limit increase. GOP leaders are considering a $5 trillion debt-limit hike.

Scoop: Trump might let taxes rise for the rich to cover breaks on tips - Marc Caputo and Neil Irwin, Axios. "Some White House officials believe letting income taxes on the very highest earners rise would buy breathing room on other priorities, and help blunt Democrats' attacks as they seek to extend President Trump's 2017 tax cuts."

Blogs and Bits

Mississippi's income tax on the way out, in the 2030s - Kay Bell, Don't Mess With Taxes. "After some specific phasing down of the tax rates, which is 4.7 percent on 2024 tax year returns now being filed, the final cuts to and end of the state tax rate will be determined by growth triggers starting in 2031."

Interim Final Rule Exempts Domestic Companies from Beneficial Ownership Reporting - Parker Tax Pro Library. "Under this interim final rule, entities previously defined as 'domestic reporting companies' are exempted from the reporting requirements and do not have to report BOI to FinCEN, or update or correct BOI previously reported to FinCEN."

Bozo Tax Tip #9: Only Income Earned Outside the United States Is Taxable - Russ Fox, Taxable Talk. "Section 861 states that certain items are always considered as income from within the United States. It does not say that income earned in the US is exempt from tax. But tax protesters claim that’s the case; courts, though, basically state, ‘You must be kidding.’ This argument has never been used successfully."

Appeals Court Sets Back Truck Assembler Excise Tax Argument

IRS Gets Win as Court Overturns $400 Million Tax Break on Trucks - Tristan Navara, Bloomberg ($):

Judge Chad A. Readler said for the court that Fitzgerald Truck Parts and Sales LLC had in fact proven that its vehicles, constructed with used engines and transmissions, could qualify for the safe harbor within IRC Section 4051(a) exempting it from the 12% excise tax. The rebuilt trucks didn’t exceed 75% of the price of a comparable new vehicle, the court said.

But Fitzgerald didn’t overcome an exception to the safe harbor, which doesn’t permit the deduction for trucks that never triggered the excise tax when they were new, the court said. The company didn’t meet its burden to show its trucks did, as “at least some of those vehicles were first sold in tax-exempt transactions,” Readler said.

Link: No. 24-5078

Adventures in Appraisal

Tax Court Nixes $26M Easement Deduction Over Quarry Value - Kat Lucero, Law360 Tax Authority ($):

The court decision slashed the easement value to $355,5000 and ordered a 40% penalty on Ranch Springs for grossly misstating the value of the easement to the Internal Revenue Service.

Ranch Springs exceeded the actual easement value by $25.5 million, or 7,694%, when the partnership claimed the deduction on its 2017 tax return a year after it purchased the 110-acre open space for $715,000, which was a comparable price to nearby similar property during the 2014-2020 period, according to the opinion.

From Judge Lauber's opinion:

According to petitioner, “the fair market value of the perpetual conservation restriction” is the value of what the donor gives up by granting the easement, i.e., the value of “the property rights sacrificed.” In this case, petitioner says, the “the property rights sacrificed” consist of the right to construct and operate a limestone quarry on the land. The NPV of the hypothetical limestone quarry, petitioner concludes, is thus the FMV of the easement. On this theory, it does not matter what a knowledgeable willing buyer would pay for the land unencumbered by the easement. The “willing buyer/willing seller” test thus goes out the window.

This argument is wholly unconvincing.

He adds this in a footnote (my emphasis:

The central error committed by Messrs. Clark and Wick was equating the value of the land (one cost input to the DCF) with the total NPV of the hypothetical mining business (the bottom-line output of the DCF). Theoretically, an NPV-oriented method might be employed in an effort to estimate the value of the land, but only if all other value inputs were stripped out so as to isolate the value of the land. But it would seem illogical to conjure an imaginary business with myriad hypothetical inputs and outputs just to back into a purported value for the land. An objective appraiser would not turn to an NPV-oriented method given its inherent uncertainties, especially where comparable land sales are plentiful.

This was a case in which the conservation easement was granted to generate charitable deductions, and partnership interests were sold to investors as a pure tax play. If the only economics for an investment are based on implausible valuation tricks, that investment just might not go well.

What day is it?

It is, of course, April Fools Day. It's also National One Cent Day, so some respect for that bag of pennies in your closet, please.

Tax News & Views Has a Penny For Your ERC Thoughts Roundup

Joe B. Kristan, CPA