Tax Policy/News:

August 5: Claiming The Employee Retention Tax Credit Is An IRS Audit Red Flag

Businesses have swamped the IRS with amended payroll tax return filings for 2020 and 2021 on Form 941-X, claiming ERTCs and seeking refunds for payroll taxes paid in those quarters plus any excess ERTCs.

Promoters are taking full advantage of the complicated ERTC rules, with many hawking misleading claims for the credit.

The IRS is actively pursuing taxpayers that incorrectly take the ERTC and promoters who hype false ERTCs, and it's hitting businesses with civil tax penalties and bringing criminal charges in cases that warrant them.

They'll look at payroll records, state unemployment tax returns, and W-2s and W-4s. They'll ask for a list of employees whose wages were claimed for the ERTC and whether any worker on the list is a majority owner of the business or is related to the business owners.

Employers who got PPP loans can also claim the ERTC, but only for wages paid that were not funded by forgiven PPP loan proceeds during the covered period. Additionally, wages used for the following credits generally can't also be used for purposes of claiming the ERTC

If the ERTC is claimed on Form 941-X after the employer filed its 2020 or 2021 income tax return, the employer must then amend that year's income tax return to reduce its deduction for wages paid by the ERTC funds received.

Some businesses have claimed they are entitled to the ERTC solely because of supply chain snags.

There's a narrow exception if a supplier couldn't deliver critical goods or materials because of a COVID-19-related governmental order that caused the supplier to suspend operations, which in turn led to a cessation of the employer's business.

In this case, the employer must show it couldn't get the items from another supplier.

August 3: IRS loses track of tax info between processing centers

The Internal Revenue Service isn't doing enough to safeguard sensitive tax information when it's shipped between its tax processing centers, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, noted that IRS employees who work in various functions regularly need to get paper tax documents from other parts of the country.

The guidelines say that IRS employee requests for paper tax records should be sent to the tax processing center where the tax information is stored; those centers are in Kansas City, Missouri; Austin, Texas; and Ogden, Utah.

Some packages get lost, but the IRS's Privacy, Governmental Liaison and Disclosure Office doesn't notify businesses or put a data breach indicator on their business tax accounts when packages with sensitive business tax information go missing.

"TIGTA is concerned that the IRS is not taking actions to properly account for and control sensitive tax information," said the report.

"Therefore, the IRS is unable to identify, notify and offer protection to some taxpayers when their sensitive tax information is lost in the mail," the report continued.

 TIGTA offered five recommendations in the report, saying the IRS should make sure the Form 3210 is completed and included in all packages so actions can be taken to protect taxpayers when a shipment is lost; and ensure that Submission Processing Files function managers perform quarterly audits of the Forms 3210 acknowledgment process.

The agency intends to issue a notice to remind employees to include a Form 3210 with shipments of large volumes of tax information.

August 2: IRS Pledges Paperless Tax Processing By 2025

The IRS is aiming to allow taxpayers to digitally submit all agency correspondence by 2024 - the next tax filing season - and achieve paperless processing capabilities by the 2025 filing season, the Treasury Department announced Wednesday.

By 2025, the IRS will also digitize the estimated 1 billion historical documents in its catalog, which cost around $40 million per year to store.

The Paperless Processing Initiative "marks a significant step in our efforts to digitize IRS operations," Treasury Secretary Janet Yellen said during a visit to an IRS facility in McLean, Va., on Wednesday.

Yellen described the initiative as a "massive transformation" that will save 200 million pieces of paper each year, significantly reducing processing times and expediting refunds.

The initiative is voluntary: taxpayers who prefer to submit paper returns and correspondence may continue to do so.

The IRS says that by 2025, all paper documents will be digitized upon arrival. An $80 billion infusion over the next 10 years awarded to the IRS under the Inflation Reduction Act is funding the new initiative.

"Thanks to the IRA, we are in the process of transforming the IRS into a digital-first agency," Yellen said.

"This 'Paperless Processing Initiative' is the key that unlocks other customer service improvements."

Yellen called on Congress to provide "stable and sufficient" annual funding for the IRS to continue the modernization of the agency during her remarks Wednesday.

Economic News/Policy:

August 7: Federal Reserve official says more U.S. rate hikes likely will be needed to bring down inflation

The U.S. Federal Reserve will likely need to raise interest rates further to bring down inflation, Governor Michelle Bowman said on Saturday.

"We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled," Bowman said. Bowman has frequently expressed views that are more hawkish than some of her colleagues.

In forecasts published in June, most Fed policymakers expected to end the year with the Fed policy rate at 5.6%, one quarter-point hike above the setting established at the Fed's late-July meeting.

Bowman's use of the plural "rate increases" in her remarks on Saturday indicates she thinks the Fed will need to go higher than that.

After the most recent rate hike, Fed Chair Jerome Powell left the door open to another increase in September, but also signaled that cooler data could allow a pause.

Bowman noted some progress on inflation, which by the widely followed consumer price index slowed to a 3% annual rate in June, down from 9% in the middle of last year.

"The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2 percent goal as I consider further rate increases and how long the federal funds rate will need to remain at a restrictive level," she said.

August 7: A Government Shutdown Could Be Months Away-Here's How It Would Further Roil Markets After Fitch Downgrade

The looming threat of a government shutdown this fall may shake up the U.S. economy and stock market, according to economists and strategists, further muddying the macro outlook after last week's historic downgrade to the U.S.' credit rating shook the confidence of some investors.

A possible federal government shutdown beginning October 1 would occur "at a particularly inopportune moment" after Fitch ratings agency lowered its grade for some U.S.-issued debt from AAA to AA+, according to Bloomberg economist Anna Wong.

Many on Wall Street viewed the Fitch news as a nothingburger, considering it was not based on new fiscal data and a similar downgrade a decade ago had little long-term material impact on stocks.

Added uncertainty from the shutdown could prevent the Federal Reserve from pivoting away from its tightening campaign this fall, TD strategist Gennadiy Goldberg told Bloomberg.

A shutdown in itself could bring pain to the slowly-growing U.S. economy: Goldman Sachs economists, led by Jan Hatzius, forecasted in June that a shutdown would knock off 0.2 percentage points from fourth-quarter gross domestic product for each week the government remains closed.

Citing the fiscal turbulence spurring Fitch's downgrade, Morgan Stanley strategist Michael Wilson cautioned clients Monday that "the unfinished earnings decline that began last year has further to fall" if government spending declines amid elevated political turmoil, sending yet another warning about U.S. stocks' broad rally amid an uninviting macro backdrop.

Among the most prominent to dismiss Fitch's announcement last week as little more than noise were hedge fund billionaire Daniel Loeb and former Treasury Secretary Larry Summers; Loeb called the downgrade a "cry by Fitch for attention," while Summers characterized the agency's decision as "bizarre and inept." 

In emailed comments last week, Commonwealth Financial fixed-income strategist Sam Millette explained the "Fitch downgrade didn't tell investors anything they didn't already know on the topics of rising political dysfunction and the state of the U.S. economy."

Energy and Environmental Policy/News: 

August 7: Year after Biden’s climate bill sees spike in renewable energy investment, industry says

The year after President Biden signed a major climate, tax and health care bill saw a significant spike in renewable energy investments, according to an industry trade group.

A new report from the American Clean Power Association says that the past year saw more than $270 billion in capital investments, an amount greater than such investments in the past eight years combined.

John Hensley, the association's vice president for research and analytics, told reporters that the new power capacity would be enough to fuel about 46 million U.S. homes.

Of the total $270 billion, $22 billion represents investments in manufacturing, the report said.

It identified 83 announcements for either new or expanded facilities related to the manufacturing of climate-friendly energy, including 52 solar manufacturing facilities, 14 facilities for making energy-storing batteries and 11 for wind energy manufacturing.

"Where locations are known, 80 percent of clean power projects are being built in Republican-held districts and over 60 percent of the manufacturing facilities that we've seen announced are being built in red states," Hensley said.

The investments follow the passage of the Inflation Reduction Act, which contains tax credits for power sources including wind and solar.

August 4: IRS Offers Guidance On How Home Energy Audits Can Qualify For Tax Credits

The Internal Revenue Service released information on how taxpayers can claim the energy efficient home improvement credit under the Inflation Reduction Act.

The IRS released Notice 2023-59, which outlines the rules for doing home energy audits so taxpayers can claim the tax credits.

The notice announces the upcoming proposed regulations and offers interim guidance regarding home energy audits for purposes of the energy efficient home improvement credit under Section 25C of the Tax Code, as well as a transition rule for certain home energy audits conducted during tax years ending this year.

The amount of the credit comes out to 30% of the total paid by taxpayers throughout the year for qualified energy efficiency improvements installed, residential energy property expenditures and home energy audits.

The maximum amount for home energy audits is $150, so taxpayers can claim a 30% credit on audits that cost as much as $500. The home energy efficient home improvement is nonrefundable, so it can only decrease the amount of tax owed and won't create a refund.

The IRS guidance details the rules for claiming the home energy improvement credit and how to do a home energy audit, including estimating the energy and monetary savings for each improvement.

Home energy auditors need to give a written audit report to the taxpayer.

Technology:

August 7: SEC Chairman Warns Of Risk To Financial Systems From AI

Securities and Exchange Commission Chairman Gary Gensler warned in a new interview that artificial intelligence will eventually lead to financial crises.

"This technology will be the center of future crises, future financial crises," Gensler told The New York Times.

Gensler predicted the future business systems in the U.S. will be reliant on two or three foundational models, which he says would make a financial crash more likely due to "Herding," which means all companies will rely on the same information.

The SEC proposed a new rule last month that would require investment advisers to rid conflicts of interest in their technologies.

Gensler said in a press release at the time that AI could place brokers' or investment advisers' interests above the investors' interests, which is what the proposed rule would aim to curtail.

"You're not supposed to put the adviser ahead of the investor, you're not supposed to put the broker ahead of the investor," he told the Times.

He also said if AI gives out "Faulty" financial advice, investment advisers are still held responsible for it.

"Investment advisers under the law have a fiduciary duty, a duty of care, and a duty of loyalty to their clients," Gensler said.

August 3: Civil Society Groups Urge White House To Make AI Guidelines Into Binding Policy

The White House is facing a call from a coalition of civil society groups to make its proposed guidelines for artificial intelligence regulation into binding policy as part of a forthcoming executive order, according to a letter sent Thursday.

The coalition of civil, technology and human rights organizations sent a letter to the White House urging the Biden administration to make the AI Bill of Rights, which the administration released a blueprint for in October, into binding government policy on the use of AI by federal agencies, contractors and federal grant recipients.

The letter follows the White House last month saying it is developing an executive order related to responsible AI innovation.

The groups said the new executive order should direct the executive brand to immediately implement the AI Bill of Rights for federal agencies, contractors and grantees.

As the largest employer in the country, the groups wrote the federal government has "enormous ability to shape the emerging AI policy and business landscape."

"The forthcoming AI EO presents a clear opportunity to implement the White House's own AI Bill of Rights. We urge you not to miss this critical chance to operationalize the values your administration has uplifted," they wrote.

At the same time as the White House weighs action, Congress is also considering how to regulate AI. Senate Majority Leader Chuck Schumer revealed a framework for AI policy and organized briefings for senators on risks and opportunities from AI, but no clear regulatory package has yet emerged.

For Fun: 

August 2: NASA's Trio Of Mini Rovers Will Team Up To Explore The Moon

NASA is sending a trio of miniature rovers to the Moon to see how well they can cooperate with one another without direct input from mission controllers back on Earth.

The technology demonstration will show the potential for cooperative, autonomous exploration by a team of three small solar-powered rovers.

Currently slated to arrive aboard a lander in 2024 as part of NASA's CLPS initiative, CADRE's three small rovers will be lowered onto the Reiner Gamma region of the Moon via tethers.

Each about the size of a carry-on suitcase, the four-wheeled rovers will drive to find a sunbathing spot, where they'll open their solar panels and charge up.

In a second experiment, the rovers will each take a path of their own choosing to explore a designated area of about 4,300 square feet, creating a topographic 3D map with stereo cameras.

In the searing sunlight, the rovers could face midday temperatures of up to 237 degrees Fahrenheit.

To prevent the rovers from cooking, the CADRE team came up with a creative solution: 30-minute wake-sleep cycles.

“We’ll see how multiple robots working together – doing multiple measurements in different places at the same time – can record data that would be impossible for a single robot to achieve,” Subha Comandur, the CADRE project manager at NASA’s Jet Propulsion Laboratory in Southern California, said. “It could be a game-changing way of doing science.”