Tax News & Views Long IRS Memories and Self-Celebration Roundup

Programming Note: The pandemic-era employee retention credit still plagues taxpayers. Get the latest at our upcoming webinar "Helping Clients Navigate the Employee Retention Credit Mess" scheduled for Thursday August 7 at 1:00 p.m. Central. Register here. 1 hour CPE available.

IRS Walks Back Commissioner’s Filing Season Prediction - Benjamin Valdez, Tax Notes ($):

The IRS said it hasn’t settled on a start date for the 2026 filing season despite Commissioner Billy Long’s recent comment that the agency is aiming for President’s Day.

A written statement from the IRS provided to Tax Notes August 4 said Long’s recent prediction for the 2026 filing season isn’t set in stone as he continues to gather information on improving the agency.

...

Typically, the IRS begins the filing season in late January. President’s Day lands on February 16 next year and would mark the latest start to the season since 2021, when the agency began accepting returns on February 12.

Decade-Old Tea Party Case Looms Over IRS Probe of Career Leaders - Erin Slowey and Erin Schilling, Bloomberg ($):

In the decade since the IRS’s tax-exempt division was found to have flagged conservative-leaning nonprofit applications, Republicans haven’t forgotten.

Both of the senior career officials—Holly Paz and Elizabeth Kastenberg—put on administrative leave last week for unspecified, alleged conduct against Republicans worked for Lois Lerner, the central figure of the 2013 controversy. And while Lerner, the tax-exempt division head, and other top leaders were ousted amid investigations and congressional hearings, Paz and Kastenberg remained at the IRS.

...

Paz was a key official in helping Lerner decide how to handle the Tea Party cases and served as an intermediary with the Cincinnati office, which handled the review of tens of thousands of tax-exempt status applications. The IRS had seen a surge of applications following a Supreme Court ruling that loosened restrictions for political contributions.

End to Controversial Large Business Exam Step Earns Praise - Benjamin Valdez, Tax Notes ($):

IRS guidance seeking to eliminate the acknowledgement-of-facts (AOF) step of large business exams will speed up resolutions and ease taxpayers’ burdens, according to tax professionals.

Interim guidance (LB&I-04-0725-0008) issued by the IRS Large Business and International Division on July 25 will eliminate the AOF information document request — a process toward the end of an exam in which the IRS can ask a taxpayer to agree with a set of facts it believes to be true before taking the case to Appeals.

According to tax professionals, the change is overdue.

The government doesn’t care if a child’s Social Security number is used for fraud—even before they’re born - Shoshana Weissman and Maureen Flatley, RStreet:

More than half of all possible SSNs have been assigned to people. That means that even if a bad actor generates a random SSN, there is more than a 50-50 chance that it belongs to someone. And bad actors commonly use SSNs with a name that does not correspond to it. Moreover, because the SSA does not check SSNs before assigning them to newborns, it could easily assign a number that already has a history of arrests and financial problems. Two areas that highlight the extent of fraudulent use of children’s SSNs are IRS tax accounts and the foster care system.

A 2020 report by the Treasury Inspector General for Tax Administration revealed that the IRS failed to identify parents and guardians of 133,864 children and other dependents who were possible victims of identity theft related to tax accounts/employment...

The Inspector General recommended that the IRS fix this problem, but the IRS said it would not do so. The IRS explained that it notifies victims of employment-related identity theft only if the victim has an active tax account, and children do not have active tax accounts.

Tax Policy Update

Two GOP Senators Pressure Treasury on Energy Credit Guidance - Katie Lobosco, Tax Notes ($):

Two Republican senators are objecting to some of President Trump’s Treasury nominees until receiving assurances that the agency will implement the new phaseout timeline for clean energy tax credits as Congress intended in the One Big Beautiful Bill Act.

During last minute-negotiations on the legislation, Senate Finance Committee member Chuck Grassley, R-Iowa, Sen. John Ream Curtis, R-Utah, and other GOP senators worked to secure a 12-month reprieve for wind and solar projects seeking to use section 45Y production credits or section 48E investment credits.

GOP senators place holds over tax credit guidance - Rachel Frazin, The Hill. "Grassley, who recently engaged in a heated back-and-forth with Trump over the handling of judicial picks, announced his move to place the holds in the congressional record Friday."

Residential Solar Industry Looks to Cut Costs as End to Tax Credits Looms - Nicholas Miller, Wall Street Journal:

Analysts say other solar companies, such as Sunrun, First Solar and SolarEdge, which have more exposure to commercial or utility energy, energy-storage systems and lease-based solar systems, won’t be as disrupted by the tax law.

But companies reliant on the homeowner market, such as Enphase, will have to rapidly change their business model. Enphase shares are down 17% over the past month and are down 51% so far this year, while the company has projected lower third-quarter revenue compared with a year earlier. Beyond Enphase, many of the businesses dependent on residential buyers are small, local installers, who will likely have to exit from the market, analysts say.

Related: Eide Bailly is hosting a webinar "New Tax Legislation: Impacts on Energy Incentives" today at 11:00 a.m. Central. Register Here. No charge, 1.5 hours CPE.

Tariff Tuesday

Trump Vows to Ramp Up India Tariffs in Escalation of Russia Spat - Jennifer Dlouhy, Bloomberg via MSN. "President Donald Trump said he would be 'substantially raising' the tariff on Indian exports to the US over the Asian nation’s purchases of Russian oil, a move New Delhi slammed as unjustified in an escalating fight between the two major economies."

India Defies Trump on Russian Oil Despite Tariff Threats - Shan Li, Wall Street Journal. "India has nonetheless refused to back down and has suggested that it intends to continue to buy Russian oil. Political experts said that Indian Prime Minister Narendra Modi is calculating that Trump will decide that ties between the two countries are ultimately too critical to jeopardize in a trade spat."

EU Postpones Tariffs To Finalize US Trade Agreement - Dylan Moroses, Law360 Tax Authority ($). "The European Union will delay planned trade countermeasures for the next six months, including tariffs on over €93 billion ($107.6 billion) of U.S. goods entering the bloc, as the EU and U.S. work toward implementing the framework trade deal agreed to last week, a spokesperson for the European Commission said Monday."

Regulatory Complexity and Rents - Alex Tabarrok, Marginal Revolution, quoting Luis Garicano:

…The growing regulatory complexity and arbitrariness of the tariff regime provides rents to those connected with power, not to innovators. It is a recipe for the biggest enemy of growth: regulatory overkill and crony capitalism.

Law Firm Partner Doesn't Want to be a Partner

Court Dismisses Tax Claim in Non-Equity Partner Class Action - Tax Notes Research. "A U.S. district court granted in part and denied in part a motion to dismiss filed by a law firm in a suit filed by a non-equity partner at the firm who alleges that the firm misclassified her as a partner rather than an employee, dismissing her claim that the firm failed to properly withhold taxes, noting there is no private right of action to enforce that requirement."

Blogs & Bits

6 tax moves to make in August as the world turns faster - Kay Bell, Don't Mess With Taxes. "If you have a 401(k) plan at work, consider upping your contributions. Most employers allow workers to change their contributions at any time. But check with your benefits office to make sure. If you can add more, start now."

The Budget Law’s Tax Cuts For Overtime And Tips Are Popular, But Few Will Benefit - Howard Gleckman, TaxVox. "First, most workers don’t get tips or overtime pay. Second, low-income workers and retirees already pay no federal income tax simply because they make so little money. If you pay no income tax now, all these extra deductions do you no good, no matter how generous they sound."

Learning The Mechanics Of A Foreign Tax Credit! - Manasa Nadig, The Buzz About Taxes. "The U.S. is among the few countries that taxes its citizens and residents on worldwide income, regardless of where they live or work. Whether you’re a digital nomad in Bali, a corporate exec in London, or simply dabbling in foreign investments, the same rules apply: global income goes on your U.S. tax return."

Trump Accounts Won’t Replace Social Security - Adam Michel, Liberty Taxed. "Trump Accounts add a twelfth tax-advantaged savings account to the US tax code. Like each of the existing accounts, a Trump Account comes with its own new unique rules around eligibility, contributions, investments, and distributions."

A Grocer, Not an Insurer

‘Unusual’ Claims Management Trips Up Another Microcaptive - Chandra Wallace, Tax Notes ($):

The owners of a Chicago grocery store chain came closer than most but ultimately failed to achieve insurance treatment for their microcaptive arrangement, the Tax Court ruled.

In an August 4 memorandum opinion in the consolidated cases CFM Insurance Inc. v. Commissioner and Presta v. Commissioner, Judge Mark V. Holmes found that while the petitioners’ microcaptive arrangement bore some hallmarks of true insurance, it didn’t qualify as insurance for federal income tax purposes.

...

Microcaptives are small insurers owned by the companies they insure. Section 831 allows the insured companies to write off premiums paid as business expenses while the microcaptive insurer doesn’t have to pay taxes on the corresponding premium income. But that tax treatment is only available if the arrangement is bona fide insurance.

Tax Court Judge Mark Holmes said the taxpayer did a lot of things right in setting up the captive insurance companies:

Overall, we think that CFM [the captive insurance company] was organized and regulated as an insurance company and was adequately capitalized. On the basis of the extremely unusual battle of the experts in which the Commissioner's did not take up arms on the issue, we also find that CFM charged reasonable premiums.

Unfortunately for our grocer, Peter Reilly's Fourth Law of Tax Planning comes into play: "execution isn't everything, but it's a lot." Judge Holmes again:

While CFM was managed by Artex, Presta was the 50% owner and president of the company. He testified at trial that he knew little of the operations — he even forgot that he had appointed himself as CFM's president. We don't think that outsourcing the operation of a captive undercuts in all cases the characterization of a company as an insurance company, but when the president of the company doesn't even know that he is the president, something is off.

...CFM failed to operate as an insurance company normally would. It did not regularly issue valid and binding policies or collect premiums in a timely way for most of the years and policies at issue. The haphazard handling of the few claims that CFM received is a particularly strong sign that it did not operate the way an insurer would.

It's a much closer call than is usual in microcaptive cases, but in the end we find by a preponderance of the evidence that CFM was not offering something that would be commonly accepted as insurance.

That's a problem. If you aren't buying insurance, you are more or less funding a loss reserve. That's not a deduction if you aren't an insurance company. Decision for IRS, with an important exception. Judge Holmes found that the grocer reasonably relied on his tax advisor, allowing him to avoid penalties.

The Moral? As Mr. Reilly says, execution is a lot. If you set up an entity for tax purposes, you need to make sure you dot your i's.

What day is it?

It's Blogger Day! Celebrate me responsibly.

Tax News & Views Long IRS Memories and Self-Celebration Roundup

Joe B. Kristan, CPA