Compliance Assurance Process Program, IRS modernization, and Clean Energy Tax Credits

Tax Policy/News:

Feb 13: IRS pilots new phase in corporate tax compliance program

The Internal Revenue Service is making some changes in its Compliance Assurance Process program, testing out a new option to address complaints from participants. CAP is a cooperative pre-filing program for large corporate taxpayers that started in 2005 as a way to resolve tax issues through open, cooperative, and transparent interactions between the IRS and taxpayers before they file a return.

The IRS made a number of changes to the program in 2019 to improve operations and make the best use of limited IRS resources.

Part of the change involved the development of the Bridge phase in CAP, reserved for companies whose risk of noncompliance doesn't merit continued use of IRS compliance resources.

The IRS admitted that during the past three years since the inception of this option, the IRS has heard consistently from companies that participating in the Bridge phase deprives them of the most important benefit they see in CAP - review by the IRS. That's essentially what gives them the assurance that the IRS won't later call them out on the tax strategies they're using.

An IRS team will then risk-assess the documents to determine if the taxpayer is suitable for the Bridge Plus phase.

In keeping with its original purpose, CAP is a voluntary process where eligible taxpayers agree to engage in open, transparent, and cooperative relations with the IRS. The shortened timeline of Bridge Plus depends on timely responses, cooperation, and full transparency.

Feb 7: IRS dropped plans to modernize some of its outdated systems

Some of the main shortfalls are because the IRS isn't conducting regular evaluations of customer experiences and user needs, according to the report, and until the IRS fully addresses all its cloud computing requirements, it will have less assurance that it's adopting cloud solutions that efficiently and effectively help it meet its mission needs and protect sensitive taxpayer information.

As of last August, the IRS had documented plans for the 21 modernization initiatives that were underway, including nine associated with legacy systems.

All 21 of the plans addressed two key elements, but the plans for six of the nine initiatives didn't address how the IRS would dispose of its legacy systems.

The GAO made nine recommendations to the IRS in the report, including that it establish time frames to complete selected modernization plans, and fully address the OMB's cloud computing requirements.

The IRS is set to receive an additional $80 billion over the next 10 years under the Inflation Reduction Act that Congress passed last, some of which is supposed is to go toward updating the IRS's antiquated technology systems, and that comes after mandates under the Taxpayer First Act of 2019 prompted the IRS to set more aggressive tech upgrade plans.

"The IRS Integrated Modernization Business Plan released in FY 2019 has guided our technology modernization work since that time, and we have largely delivered those modernization capabilities our funding supported on schedule and within budget," Jeffrey Tribiano, deputy commissioner for operations support at the IRS, said in response to the GAO report.

"The plan provides a six-year strategy to modernize IRS technology systems and build the critical infrastructure needed for a fully digital tax system that provides on-demand customer services options. Although limited funding has forced us to rescope, replan and delay certain modernization projects, from FY 2019 through FY 2022, we delivered 147 modernization capabilities across all four components of the plan: improving the taxpayer experience, core services and enforcement, IRS operations and cybersecurity."

Feb 7: IRS tells taxpayers in some states to wait to file taxes

The Internal Revenue Service is cautioning taxpayers in states that offered special tax refunds or payments to wait to file their income tax returns until it's clear whether the money is taxable or not. The warning seems to apply mainly to California taxpayers, which offered a Middle-Class Tax Refund last year to millions of residents.

"The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers," said the IRS. "There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week." IRS headquarters in Washington, D.C. IRS headquarters in Washington, D.C.Andrew Harrer/Bloomberg Meet Sightline: A simpler way to see your tax ecosystem PwC's new tax platform streamlines your tax lifecycle into one easy experience.

In California, at least, the refunds are not supposed to be taxed by the state, but it isn't clear whether they will be on a federal level. California issued more than 7.1 million direct deposits and 9.4 million debit cards, totaling over $9 billion, according to the California Franchise Tax Board, later sending millions of Form 1099-MISC information returns to taxpayers in the state as well as the IRS. The IRS plans to issue further guidance this week, and state tax authorities probably will as well.

For now, it's also advising taxpayers and tax preparers not to file amended returns either.

"For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional," said the IRS. "For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS. We also do not recommend amending a previously filed 2022 return." Tax professionals should be able to advise taxpayers on the best course of action.

Economic News/Policy: 

Feb 14: US inflation slows to 6.4%, but price pressures re-emerge

The pace of consumer price increases eased again in January compared with a year earlier, the latest sign that the high inflation that has gripped Americans for nearly two years is slowly easing. At the same time, Tuesday's consumer price report from the government showed that inflationary pressures in the U.S. economy remain stubborn and are likely to keep prices elevated well into this year.

Combined with January's price figures, the slowdown in inflation since the fall is now more gradual than it seemed just a few weeks ago.

Core prices rose 5.6% from a year ago, down just a tick from December's 5.7%. In the past three months, core prices have risen at a 4.6% annual rate, which is below the year-over-year number and suggests that more declines are coming.

The Fed has aggressively raised its benchmark interest rate in the past year to its highest level in 15 years in its drive to get rampaging inflation under control.

Businesses typically pass their higher labor costs on to their customers in the form of higher prices, thereby helping fuel inflation. Most of the slowdown in inflation reflects freer-flowing supply chains and earlier declines in gas prices.

Feb 12: Economy Week Ahead: U.S. Inflation and Retail Sales in Focus

Tuesday: The Labor Department releases its January consumer-price index, a closely watched measure of what consumers pay for goods and services. Consumer prices rose 6.5% in December from a year earlier, the sixth straight month of cooling inflation.

Wednesday: The Commerce Department releases January retail sales figures covering spending at stores, online, and at restaurants. Retail sales declined a seasonally adjusted 1.1% in December from the prior month, the biggest monthly drop of last year.

The Fed releases January industrial-production figures, which measure the output of factories, mining, and utilities. U.S. industrial production declined 0.7% in December from the previous month, its second consecutive monthly drop.

The U.K.’s Office for National Statistics releases January inflation figures. The U.K. consumer-price index rose 10.5% in December from a year earlier, a slowdown from the previous month’s 10.7% increase.

Thursday: The Labor Department releases its January producer-price index, a measure of prices that suppliers charge businesses and other customers. The index rose 6.2% in December from a year earlier, down sharply from the previous month’s 7.3% rise.

The Commerce Department releases January figures on new residential construction and building permits. Housing starts fell 1.4% in December from the prior month while building permits declined 1% in the same period.

The Labor Department reports the number of worker filings for unemployment benefits in the week ended Feb. 11. Initial jobless claims climbed in the prior week, but remained at a historically low level.

Energy and Environmental Policy/News:

Feb 13: Biden restarts $10B credit for clean-energy makers

The Biden administration is restarting a popular tax credit for manufacturers of solar panels, wind turbines, fuel cells, and other clean energy equipment after getting a $10 billion infusion from the Inflation Reduction Act.

Clean energy projects that expand domestic manufacturing, reduce industrial greenhouse gas emissions, or help create a domestic supply chain for critical minerals can begin applying for the "Advanced energy" tax credit at the end of May, the Treasury Department announced Monday.

The program provides a 30% tax credit for technologies including carbon capture systems, grid modernization projects, clean hydrogen production, and electric or fuel cell vehicles, as well as equipment that reduces emissions from industrial facilities, the department said in a notice.

The first round of funding, some $4 billion, includes $1.6 billion devoted to projects in areas where coal mines and coal-fired power plants have shut down.

The Qualifying Advanced Energy Project Credit was first created as part of the American Recovery and Reinvestment Act in 2009, which provided $2.3 billion at the time.

The program quickly ran out of cash, and efforts to refund it stalled in Congress until it was included in Democrats' marquee climate bill last year, which provided some $370 billion in climate funding.

The Treasury Department announced it is establishing an Inflation Reduction Act program to provide up to 20% in an additional bonus tax credit for wind and solar projects located in low-income communities that could increase the total value of the incentive to as much as 50% of the project's cost.

ICYMI: 

Feb 12: Chinese spy balloon has GOP saying no cuts to defense

A growing number of Senate Republicans are saying that President Biden and Speaker Kevin McCarthy should take defense spending cuts off the table in their negotiation over the debt ceiling.

Sen. Lindsey Graham (R-S.C.), another outspoken opponent of cutting defense funding, said he’s open to cutting wasteful programs within the Pentagon but he wants to redirect those savings to other defense-related priorities.  

“I don’t mind reforming the Defense Department and doing away with certain programs. I want to apply it back into the Defense budget and put it in other areas. We need a bigger Navy,” he said. "I do not think that we should be talking about cutting the defense budget at all right now. If anything, substantial defense increases," he said.

Defense cuts weren't popular with most Republicans even before the controversy surrounding the Chinese spy balloon, which was shot down off the coast of South Carolina a week ago Saturday.

The balloon controversy, which some see as underlining an aggressive stance from Beijing, has become a No. 1 reason to draw a line against defense cuts.

Sen. Mike Rounds said, "There is no way that we should be looking at defense cuts right now."

The tough GOP line on defense spending could make it even harder to reach a deal on spending cuts - which House and Senate Republicans are demanding as a price for raising the debt ceiling.

Sen. Rand Paul (Ky.), a leading Senate Republican budget hawk, said his GOP colleagues need to broaden the parameters of the negotiations if they’re going to have any meaningful impact on the deficit.  He said lawmakers who want to take defense cuts off the table "Are just not serious about trying to do anything about the debt."

For Fun: 

Feb 15: NASA’s Webb Uncovers New Details in Pandora’s Cluster

Astronomers have revealed the latest deep field image from NASA's James Webb Space Telescope, featuring never-before-seen details in a region of space known as Pandora's Cluster.

"The ancient myth of Pandora is about human curiosity and discoveries that delineate the past from the future, which I think is a fitting connection to the new realms of the universe Webb is opening up, including this deep-field image of Pandora's Cluster," said astronomer Rachel Bezanson of the University of Pittsburgh in Pennsylvania, co-principal investigator on the "Ultradeep NIRSpec and NIRCam ObserVations before the Epoch of Reionization" program to study the region.

“When the images of Pandora’s Cluster first came in from Webb, we were honestly a little star-struck,” said Bezanson. "There was so much detail in the foreground cluster and so many distant lensed galaxies, I found myself getting lost in the image. Webb exceeded our expectations." The new view of Pandora's Cluster stitches four Webb snapshots together into one panoramic image, displaying roughly 50,000 sources of near-infrared light.

Astronomer Ivo Labbe of the Swinburne University of Technology in Melbourne, Australia, co-principal investigator on the UNCOVER program, said that in the lensing core to the lower right in the Webb image, which has never been imaged by Hubble, Webb revealed hundreds of distant lensed galaxies that appear like faint arced lines in the image.

The UNCOVER team used Webb's Near-Infrared Camera to capture the cluster with exposures lasting 4-6 hours, for a total of about 30 hours of observing time.

The imaging mosaics and catalog of sources on Pandora's Cluster provided by the UNCOVER team combine publicly available Hubble data with Webb photometry from three early observation programs: JWST-GO-2561, JWST-DD-ERS-1324, and JWST-DD-2756.

Webb is an international program led by NASA with its partners, ESA and the Canadian Space Agency.