ERTC Challenges, Large Partnership Audits, and US Economic Growth
Tax Policy/News:
July 28: Congress Hears From Tax Pros About ERTC Challenges
Tax professionals and other experts testified during a congressional hearing about the Employee Retention Tax Credit and the issues they and their clients are facing amid constant sales pitches overpromising hefty tax refunds to employers, despite processing delays and vetting by the Internal Revenue Service for rampant fraud.
"One disadvantage for small businesses that use a third-party mill with questionable practices is that if they are eventually audited, they will be asked to furnish documentation on how they qualified for the ERTC and how the claimed credit was calculated," said Roger Harris, president of Padgett Business Services, in his prepared remarks.
Rep. Brian Fitzpatrick, R-Pennsylvania, said his office has been inundated with complaints from constituents about delays in receiving their tax refunds from the IRS. "The volume of casework that my office has received on the ERTC issue since January alone has been mind-boggling," he said.
"The inquiries my office submitted were on behalf of a whole range of organizations, including veterans organizations, small businesses, senior homes, just to name a few. One of my constituents was owed almost $300,000 and needed it immediately in order to keep their business doors open,” Fitzpatrick commented. “Another constituent had difficulty getting the IRS to even confirm that they have received their application. Lastly, my office received in one instance a complaint from a constituent who had applied for the ERTC for the years 2020 and 2021, but never received the credit until the end of 2022. Most small businesses do not have the luxury of time when it comes to these issues,” Fitzapatrick added.
"One of the things that's missed by the small preparer in the small communities is that the Taxpayer Advocate actually will assist the tax professional, but they're being overrun with requests," Larry Gray, government liaison at the National Association of Tax Professionals and a partner at AGC CPA in Rolla, Missouri, pointed out.
Complaints about persistent delays have continued this week, not only in Congress but also from readers of Accounting Today who have seen delays in processing of the amended returns that many businesses needed to file to comply with the changing requirements.
Pat Cleary, president and CEO of the National Association of Professional Employer Organizations, would like to see technology improvements at the IRS to handle the flood of ERC claims and amended returns.
July 27: IRS plans better audits of large partnerships
The Government Accountability Office released a report Thursday recommending ways for the IRS to strengthen its audit process to address the increasing number of such partnerships.
Between 2002 and 2019, the number of large partnerships with over $100 million in assets and 100 or more partners grew nearly 600%. The IRS hasn't been able to keep up with this pace.
Since 2007, the audit rate for large partnerships has plummeted to below 0.5%.
The IRS only audited 54 large partnerships in tax year 2019.
Last year's Inflation Reduction Act provided the agency with $45.6 billion for enforcement activities through the end of fiscal year 2031, and in response the IRS identified large partnerships as an enforcement priority.
"Additionally, the IRS has not developed a plan to incorporate feedback from audit results into the models. Addressing these modeling issues could improve the IRS's ability to better identify and audit noncompliant partnerships," said the report.
Senate Finance Committee chairman Ron Wyden, D-Oregon, reacted to the GAO report, stating that "the business structures are extraordinarily complicated, the tax rules that apply to them are riddled with loopholes, and the wealthy investors and corporations who use them to get out of paying a fair share know that the IRS has essentially zero ability to crack down.”
“Congress never intended for large partnerships to become the granddaddy of all tax loopholes. As a matter of basic fairness, the Congress ought to close these large partnership loopholes that allow investors and corporations to make their taxes simply disappear," Wyden continued.
July 26: IRS Commissioner signals new phase of Employee Retention Credit work
With the Internal Revenue Service making substantial progress in the ongoing effort related to the Employee Retention Credit claims, Commissioner Danny Werfel said the agency has entered a new phase of increasing scrutiny on dubious submissions while renewing consumer warnings against aggressive marketing.
Speaking Tuesday at a special roundtable session of tax professionals in Atlanta, Werfel noted the IRS has shifted efforts after successfully clearing the backlog of valid Employee Retention Credits claims.
The Employee Retention Credit, also sometimes called the Employee Retention Tax Credit or ERTC, is a tax credit enacted to help businesses during the pandemic that was subsequently amended three times by Congress.
"We will work with the Treasury to explore legislative solutions we can share with Congress to help address fraud and error, including potentially putting an earlier ending date for businesses to claim the credit and increase IRS oversight of return preparers," Werfel commented.
The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims.
"The resulting number of claims prevents the IRS from doing other priority work. But the biggest risk is being taken by the promoters pushing these schemes and businesses filing these claims. This is an area where we urge caution; those improperly claiming the credit could face follow-up action from the IRS,” Werfel continued.
Unscrupulous promoters may lie about eligibility requirements, including refusing to provide detailed documents supporting their computations of the ERC. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer's identity or take a cut of the taxpayer's improperly claimed credit.
Economic News/Policy:
July 27: GDP: US economy grows at a faster pace than expected in Q2
The US economy grew at a faster-than-expected pace in the second quarter of 2023, adding to signs that the threat of a recession has faded in the immediate term.
The Bureau of Economic Analysis's advance estimate of second quarter US gross domestic product showed the economy grew at an annualized pace of 2.4% during the period, faster than consensus forecasts.
The reading came in higher than first quarter GDP, which was revised up to 2%. Increases in consumer spending and nonresidential fixed investment, which includes spending on commercial real estate and equipment, led the growth of the economy in the second quarter, according to the BEA. Housing and utilities as well as healthcare led services spending.
"Quirky seasonal adjustment factors may lead to outsized revisions down the road, but these data suggest the economy was solid in Q2," Oren Klachkin, Oxford Economics lead US economist, wrote on Thursday.
"The economy withstood pervasive pressures from persistent recession fears, elevated interest rates, the Fed's hawkish policy tilt, and tighter bank lending standards," Klachkin added.
Klachkin still believes growth will slow in the coming quarters as "tighter lending standards and elevated interest rates take their toll." But for now, the data is telling a different story.
In a press conference Wednesday after pushing interest rates to their highest levels since 2001, Federal Reserve Chair Jerome Powell noted the economy has withstood the rising rate environment.
"The overall resilience of the economy, the fact that we've been able to achieve disinflation so far without any meaningful negative impact on the labor market, the strength of the economy, overall that's a good thing," Powell said.
July 26: Fed raises rates again as it weighs how much further to go
The economy has shown remarkable resilience in the face of aggressive Fed action and inflation rates that, while improving, have remained above normal for nearly two years.
"We think we need to stay on task," central bank’s Chair Jerome H. Powell said at a news conference after the Fed's rate hike announcement.
The latest inflation data showed more progress than the Fed expected, but Powell noted Wednesday that "it's only one report." There are also various reasons inflation has eased - some of which have little to do with the Fed's actions.
The Fed is essentially trying to tweak rates gently so that they don't go too far and send the economy into a recession.
It's too soon to tell exactly what the right pace and rate levels are to avoid that, and the Fed is hesitant to put too much weight in a single data point that breaks their way.
The unemployment rate is at a hot 3.6 percent - the same level as when the Fed began raising rates in March 2022 - and the job market has grown for 30 consecutive months.
"Rising delinquency rates on credit cards and consumer loans suggest that some earners have exhausted their savings and will have less wherewithal to maintain spending in the face of elevated interest rates and unemployment," the report states.
Energy and Environmental Policy/News:
July 28: Biden Administration Poses Strict Targets for Vehicle Fuel Economy
Federal regulators are proposing stricter fuel-economy standards for light-duty cars and trucks, saying the revamped rules would save consumers money at the pump and reduce pollution.
Automakers would have to sell a portfolio of light-duty cars and trucks averaging 58 miles a gallon by 2032, up from the 49 miles a gallon now required in model year 2026.
The addition of millions of electric cars on U.S. roadways in coming years, for example, would require a massive build-out of charging stations.
There are also questions around how quickly U.S. car buyers will warm to battery-powered cars, which today account for about 7% of U.S. sales.
In April, the Environmental Protection Agency proposed separate rules that govern tailpipe emissions.
Meeting those rules likely would require two-thirds of new vehicles sold to be electric by 2032, according to the Alliance for Automotive Innovation, which represents major car companies.
Carlson told reporters that if manufacturers meet EPA's proposed standards, they should be able to comply with NHTSA's rules "Relatively easily." Earlier this year, the Biden administration withdrew its nomination of Carlson as NHTSA's administrator after Republicans raised concerns about her past statements on using the agency's car regulations to advance the president's climate change agenda.
Technology:
July 27: Warren, Graham partner in proposing new agency to regulate tech giants
Sens. Elizabeth Warren (D-Mass.) and Lindsey Graham (R-S.C.) partnered in proposing a new agency to regulate tech giants.
The bipartisan Digital Consumer Protection Commission Act, unveiled Thursday, would create an agency charged with oversight of Meta, Google, Amazon and other large tech companies and seek to promote industry competition and consumer privacy online.
The bill is the latest effort from Congress to rein in the power of tech giants.
"Enough is enough. It's time to rein in Big Tech. And we can't do it with a law that only nibbles around the edges of the problem," the senators wrote in a joint op-ed published in The New York Times on Thursday.
"Piecemeal efforts to stop abusive and dangerous practices have failed. Congress is too slow, it lacks the tech expertise, and the army of Big Tech lobbyists can pick off individual efforts easier than shooting fish in a barrel. Meaningful change - the change worth engaging every member of Congress to fight for - is structural," they added.
Lawmakers have long faced an uphill climb when pursuing tech reforms, with the industry launching massive lobbying campaigns targeting congressional legislation.
At the same time, Republicans leading the House have focused their tech agenda on content moderation battles rather than advancing bills aimed at reining in the market power of Big Tech.
July 25: IRS good at addressing cyberthreats, but not documenting them
While the IRS has done a good job of addressing cyberthreats, the Treasury Inspector General for Tax Administration said it needs to do better at documenting the incidents afterward.
In a recent report, TIGTA said, after reviewing 25 threat-hunting intelligence tickets, it determined that IRS analysts properly conducted the threat hunts.
"For the first three phases of the threat hunting process, we found that the Advanced Threat Analysis team properly conducted the threat hunts for each sampled ticket. For the fourth phase, post-threat hunting, we determined that improvements were needed," said TIGTA. Inspectors found that 10 of the 25 threat intelligence tickets they examined did not contain sufficient information regarding the threat hunt process, results or severity of the risk; and seven of the 25 tickets did not contain all necessary documentation.
The IRS guide does not specify what should be included, such as actions taken to address the potential threat.
Further, said TIGTA, the IRS has not added appropriate language to document a baseline of security controls for threat hunting.
While the IRS said such a setup allows threat teams to maintain speed and agility, TIGTA said that by not having a formal or documented review process in place for removing device or program blocks from the server, the IRS risks an analyst accidentally removing a device or program block from a domain that still poses a threat to the IRS network, or intentionally removing a block to cause harm to the IRS network.
The IRS chief information officer ensures the Internal Revenue Manual is updated with NIST requirements for conducting threat hunting at the IRS; and that the CIO should ensure that the Cybersecurity function develops a formalized process for the review and approval of proposed device or program block removals.
ICYMI:
August 1: Climate collapse debate reinvigorated by study of Atlantic ocean currents
A new study last week predicted the Atlantic Meridional Overturning Circulation, or AMOC, could pass a tipping point and collapse as soon as 2025.
The risk of collapse remains a topic of hot debate and scientists are in disagreement over whether it is already slowing down or if it could be nearing a tipping point.
The arguments illustrate scientists' uncertainty about the next phases of climate change and just how to characterize the risk of extreme - hopefully unlikely - events as real-world climate disasters are taking place.
AMOC describes a series of ocean currents that cycle water in the Atlantic Ocean.
When it comes to weather, AMOC transports heat to Europe and also determines the location of a belt of precipitation in Central America, said Spencer Jones, a visiting assistant professor in physical oceanography at Texas A&M University.
A rapid halt to AMOC would cause rapid cooling in the North Atlantic, warming in the Southern Hemisphere and extreme changes in precipitation.
A collapse would trigger extreme change - perhaps three to four times bigger, Jones said.
"We estimate a collapse of the AMOC to occur around mid-century under the current scenario of future emissions," wrote co-authors Peter and Susanne Ditlevsen, countering a United Nations Intergovernmental Panel on Climate Change report that said collapse was unlikely this century.
Stefan Rahmstorf, a professor of physics of the oceans at Potsdam University in Germany, wrote that standard climate models are "Underestimating risk" and that multiple methods of analyzing past climates suggest that a risk of collapse needs to be "Taken very seriously."
"We don't have good evidence for anything being irreversible in the climate system except for ecosystems and ice sheets," he said of large-scale physical climate systems.
For Fun:
July 28: A worm has been revived after 46,000 years in the Siberian permafrost
Scientists have revived a worm that was frozen 46,000 years ago - at a time when wooly mammoths, saber-toothed tigers and giant elks still roamed the Earth.
The roundworm, of a previously unknown species, survived 40 meters below the surface in the Siberian permafrost in a dormant state known as cryptobiosis, according to Teymuras Kurzchalia, professor emeritus at the Max Planck Institute of Molecular Cell Biology and Genetics in Dresden and one of the scientists involved in the research.
Five years ago, scientists from the Institute of Physicochemical and Biological Problems in Soil Science in Russia found two roundworm species in the Siberian permafrost.
One of the researchers, Anastasia Shatilovich, revived two of the worms at the institute by simply rehydrating them with water, before taking around 100 worms to labs in Germany for further analysis, transporting them in her pocket.
After thawing the worms, the scientists used radiocarbon analysis of the plant material in the sample to establish that the deposits had not been thawed since between 45,839 and 47,769 years ago.
They didn't know whether the worm was a known species.
Eventually, genetic analysis conducted by scientists in Dresden and Cologne showed that these worms belonged to a novel species, which researchers named Panagrolaimus kolymaenis.