ERC Disallowance Letters, November Inflation Report, and AI Impact on Climate Change
Probity Tax Recovery is a tax consulting firm specializing in tax credits and incentives for small to mid-sized businesses. We work with business owners and their CPAs to identify tax credits and incentives while saving you time and money. Schedule a free consultation with a member of our team here.
Tax Policy/News:
The Internal Revenue Service (IRS) is taking action against dubious Employee Retention Credit (ERC) claims by sending over 20,000 letters to taxpayers, notifying them of disallowed ERC claims.
The IRS is focusing on entities that did not exist or lacked paid employees during the eligible period to prevent improper payments. This comes in response to misleading marketing campaigns targeting small businesses.
The IRS is intensifying compliance efforts, including a special withdrawal program for those with pending inaccurate claims and a voluntary disclosure program for questionable payments.
The agency has identified two main ERC problem areas: entities not in existence during the eligibility period and those with no paid employees during that time. The disallowance letters aim to protect taxpayers, prevent incorrect refunds, and save IRS resources.
The agency plans additional letters and continues to review ERC claims, urging caution and withdrawal of pending claims. The IRS emphasizes the importance of complying with ERC requirements and consulting tax professionals amid ongoing misleading marketing efforts.
Economic News/Policy:
December 12: From restaurant meals to car insurance, high services prices slow progress on inflation
The latest inflation data for November presents a mixed picture, with overall consumer inflation slowing, but underlying price pressures, particularly in the service sector, remaining persistently high.
Despite a 0.1% rise in overall prices from October and a year-over-year inflation rate of 3.1%, core prices (excluding volatile food and energy costs) increased by 0.3% from October to November, maintaining a 4% rise from a year ago.
The service sector continues to drive inflation, with rental prices up 6.9% in the past year.
However, some goods prices are cooling or becoming cheaper, including furniture and appliances, while used cars' average prices increased 1.6% in November.
Despite economists' expectations of slowing inflation in the coming months, the persistently high service sector prices could impact the Federal Reserve's decisions on interest rates, with Fed Chair Jerome Powell cautious about signaling an end to rate hikes or future rate cuts.
December 11: Speculation about eventual rate cuts is rising, but Fed is set to leave interest rates unchanged
As inflation inches closer to the Federal Reserve's 2% target, there are growing expectations that the central bank may shift its policy and cut interest rates in the coming year, potentially as early as spring.
Such a move would lower borrowing costs across the economy, impacting mortgages, auto loans, and business borrowing; Fed Chair Jerome Powell, however, has downplayed the idea of imminent rate reductions.
While the Fed is likely to keep its key short-term rate unchanged in the upcoming meeting, the third consecutive time, there is a widespread assumption that rate hikes may be over.
The economy is showing signs of progress toward a "soft landing," with inflation expected to slow and job openings declining, reducing pressure on wages. The shift in thinking, where falling inflation occurs without a recession or job losses, is considered historically unprecedented.
While some economists believe a "soft landing" is possible, uncertainties remain, and the timing of any rate cuts will depend on the economy's health.
The Fed may cut rates this year even if the economy continues to grow, as long as inflation keeps falling. However, economists suggest that rate cuts in response to lower inflation may take longer than expected, as the Fed will want to ensure inflation is under control before making such a move.
The Fed's quarterly economic projections are anticipated to include a forecast for its key rate at the end of 2024, with expectations for potential rate cuts in the coming year. The timing and number of rate cuts will depend on the progress of inflation and economic growth.
December 6: Most Americans feel the economy is in recession despite strong job market, steady growth: survey
Despite the U.S. economy avoiding the predicted sharp downturn, nearly six in 10 Americans believe the country is currently in a recession, according to a recent Bankrate survey of 2,404 U.S. adults conducted in late October.
This perception is consistent across generations and income levels. Generation X and Millennials were the most likely to express this sentiment at 65% and 60%, respectively, while Baby Boomers and Generation Z followed closely at 58% and 55%.
Surprisingly, both lower-income households (earning less than $50,000) and higher-income households (earning more than $100,000) reported similar views on the economy's status. Economists, however, express greater optimism compared to a year ago when predictions of a recession were more prevalent due to high inflation and rising interest rates.
Despite economists' positive assessments of low unemployment, steady economic growth, and falling inflation, consumer sentiment remains more pessimistic, with 66% of Americans indicating a negative impact on their finances and 64% adjusting their financial habits in response.
Bankrate analyst Sarah Foster noted that individuals evaluate the economy based on their own experiences, focusing on their ability to meet needs and financial goals rather than broader economic indicators.
Technology:
December 6: Biden pressed to address AI impact on climate change
Climate and technology advocacy groups have penned a letter to President Biden, urging the administration to address concerns regarding the impact of artificial intelligence (AI) on climate change.
The letter, signed by 17 groups including Friends of the Earth, Accountable Tech, and the Center for Countering Digital Hate, emphasizes two main issues: the potential for generative AI tools to amplify the spread of climate change disinformation and the significant energy requirements of large language models contributing to increased carbon emissions.
The groups express disappointment that the executive order on AI, signed by Biden in October, did not address AI's potential role in exacerbating the climate change crisis.
The letter coincides with Vice President Harris participating in COP28, the United Nations' Climate Change Conference in Dubai, where the groups urge a task force to ensure that the AI boom does not worsen the climate crisis.
December 5: IRS Criminal Investigation unit is taking on more crypto tax cases
The Internal Revenue Service (IRS) crime unit, prominent in the Binance Holdings Ltd. investigation, is witnessing a notable increase in cases related to cryptocurrency tax evasion, according to Jim Lee, chief of the IRS's criminal investigation division.
While three years ago, over 90% of active crypto investigations focused on money laundering, in the past year, about half of the digital-asset probes involve tax-related issues.
These investigations encompass various aspects, such as taxpayers not reporting income from capital gains or mining activities, and individuals intentionally concealing their crypto holdings.
Since the 2019 tax year, the IRS has required individuals to disclose cryptocurrency transactions to combat tax evasion in the digital asset space.
The IRS unit played a crucial role in the recent criminal case against Binance, which pleaded guilty to anti-money laundering and US sanctions violations, resulting in a $4.3 billion settlement. The IRS has also been instrumental in significant digital-asset seizures, including the recovery of $3.6 billion worth of Bitcoin stolen during the 2016 Bitfinex exchange hack.
Energy and Environmental Policy/News:
December 11: Climate summit draft decision drops fossil fuel phaseout language, instead calling for reduction
The latest version of negotiating text at the global climate summit has eliminated the previous suggestion of a fossil fuel phaseout.
The updated draft, introduced on Monday, now advocates for "reducing" the consumption and production of fossil fuels "in a just, orderly, and equitable manner."
While a group of 80 countries, including the U.S., small island nations, and the European Union, has called for a "phase out" of fossil fuels, unanimous adoption by the nearly 200 countries at the COP28 summit is required for official decisions.
The current text also emphasizes the rapid phasedown of unabated coal and calls for restrictions on new and unabated coal power permits.
Additionally, it sets ambitious goals for tripling global renewable energy capacity and doubling the annual rate of energy efficiency improvements by 2030.
The shift in language follows reports of OPEC's head urging member countries to oppose language specifically targeting fossil fuels.
December 6: House votes to block Biden EV rule
The House voted 221-197 in favor of blocking a Biden administration rule that aims to significantly increase electric vehicle (EV) sales in the U.S., with the potential for two-thirds of car sales to be electric by 2032.
The House Republicans' bill would prevent the Environmental Protection Agency (EPA) from enforcing rules leading to restricted availability of gas-powered cars.
Representative Tim Walberg (R-Mich.), the bill's sponsor, argued that the standard is unattainable, unaffordable, and unrealistic, emphasizing that it undermines the principle of Americanism, namely, consumer choice.
Despite passing in the House, the legislation is unlikely to progress in the Democratic-controlled Senate, and the White House has threatened to veto it.
The administration defended the rule, projecting savings of $12,000 per new light-duty vehicle over its lifetime by promoting technologies that reduce fuel and maintenance costs and pollution. Republicans argue the rule imposes an unattainable and unrealistic standard, limiting consumer choice.
Despite the bill's passage in the House, there are efforts among GOP members to incorporate language blocking the rule into an upcoming appropriations bill. Some members have indicated a willingness to vote against a funding bill if it lacks provisions to counter the EPA's rule.
ICYMI:
December 5: Supreme Court case could upend Tax Code
The Supreme Court case of Moore v. U.S., currently under review with oral arguments scheduled for December 5, has significant potential to disrupt the Tax Code.
At the heart of the case is the constitutionality of the deemed repatriation introduced by Section 965 of the Tax Cuts and Jobs Act of 2017.
This provision imposes a one-time inclusion of accumulated foreign earnings over the past 30 years, serving as a pay-for for various reforms.
The plaintiffs, individual shareholders with a controlling interest in a foreign company subject to the deemed repatriation, argue that the tax is unconstitutional as it applies to unrealized income and retroactively to past earnings considered "property" under the 16th Amendment.
Academics are divided on the issue, with some asserting Congress's power to tax unrealized income.
The case's potential implications extend beyond the Moores, affecting TCJA reforms, pass-through treatment of S corporations and partnerships, and the mark-to-market regime. The outcome could bring certainty or significant changes to U.S. tax law, depending on the court's ruling.
For Fun:
December 11: Gigantic skull of prehistoric sea monster found on England’s ‘Jurassic Coast’
The well-preserved skull of a gigantic pliosaur, a prehistoric sea monster, was discovered on a Dorset beach in southern England.
Estimated to be about 150 million years old, the fossil is almost 3 million years younger than any other pliosaur find, potentially representing a new species.
The carnivorous marine reptile's skull, nearly 2 meters long, was excavated from a cliff along Dorset's "Jurassic Coast."
The excavation, led by local paleontologist Steve Etches, was challenging, requiring a crew to work against time and weather conditions
The fossil, featured in the upcoming BBC documentary "Attenborough and the Jurassic Sea Monster," weighs over half a metric ton. Pliosaurs, apex predators of their time, could grow up to 15 meters in length.
The fossil provides valuable insights into the characteristics and predatory behaviors of these prehistoric sea monsters.