IRS Audit Rates, US v. Grigsby, and Green Comet

Tax Policy/News:

Jan 9: CBO: GOP’s IRS bill will add $114B to deficit

The Republican proposal to eliminate billions of dollars in IRS funding will pile more than $100 billion onto federal deficits, according to a new estimate from Congress's official budget scorekeeper. The bill, which is slated to hit the House floor Monday night as the first legislative act of the new GOP majority, would claw back most of the almost $80 billion in new IRS funding provided under the Democrats' massive climate, health and tax package, which was signed by President Biden last year.

The Congressional Budget Office (CBO) estimated Monday that the legislation would cut federal spending by $71 billion, but would reduce tax revenue to the tune of almost $186 billion. The net effect would be a $114 billion increase in deficits over the next decade.

The numbers were not overlooked by Democrats, who wasted no time hammering Republicans for vowing to rein in deficit spending, then defying that promise in their first act of business.

Republicans had made the IRS funding cut a top promise on the midterm campaign trail, warning that the money would lead to the hiring of 87,000 new tax collectors to target middle-income Americans.

Zach Moller, who previously worked as a Senate Democratic budget aide, says the GOP's bill would violate previous House rules targeting legislation that would add to the deficit, known as PAYGO, that were in effect when Democrats held control.

Under the prior rules, Moller explained, it wouldn't be in order for lawmakers to "Have a bill on the floor that increases the deficit over the first five or seven or first 10 years." The PAYGO rules were often waived, but aimed at fiscal responsibility, Moller said.

The Republican majority is expected on Monday to pass a new set of rules governing the new Congress, to include a so-called "CUTGO" rule that exempts tax cuts from the deficit spending prohibitions.

Jan 4: IRS audit rates declined further in 2022

The Internal Revenue Service audited fewer taxpayers last year, according to a new report, although audits of millionaires ticked up slightly. The IRS is increasingly relying on correspondence audits. Only 93,595 of the audits were regular audits, compared to 532,609 correspondence audits, with about 85% of audits conducted through the mail.

In response to persistent complaints about the IRS failing to properly audit high-income taxpayers, the number of audits of millionaires ticked up slightly after years of declines, but those audits too were mostly via letters. Last year, 48% of millionaire audits consisted of correspondence audits, but still, most millionaires avoid tax audits.

"Adding those who received a letter asking for more documentation on a specific item, the odds of millionaires receiving some attention by the IRS rose to 2.8%," said the report. "Yet this left somewhat under 700,000 millionaires - taxpayers reporting a million or more in total positive income - with absolutely no scrutiny whatsoever." 

Millionaires did have the highest odds of being audited, the report acknowledged, but the odds that millionaires received a regular audit by a revenue agent were less than the audit rate of the targeted lowest-income wage-earners, whose audit rate was 1.27%. The taxpayer category who saw audit rates five and a half times more than nearly everyone else were low-income wage-earners claiming the Earned Income Tax Credit. The EITC claimants have historically been targeted for examinations not because they account for the most tax under-reporting, the report noted, but because they are relatively easy targets at a time when the IRS increasingly relies upon correspondence audits but doesn't have the resources to help taxpayers or answer their questions.

Jan 4: Cajun Industries Case Yields Four Lessons for the R&D Tax Credit

The US government in 2019 sued a construction company over a research and development tax credit refund claim and won this past October, resulting in a costly loss for the taxpayer. The case, US v. Grisgby, centered on the company's research activities and taught four critical lessons to anyone claiming the tax credit. Cajun Industries LLC, a civil construction company in Louisiana that was primarily owned by Leonard Grigsby, had amended its return to claim the tax credit, which flowed through to Grigsby's return.

While six years were claimed, the 2013 tax credit was approximately $1.3 million, which the IRS initially refunded roughly $575,000 to Grigsby.

Despite the taxpayer failing to state the relevant business component, the court proceeded to review the contracts of the four sample projects, striking down three because Cajun didn't retain rights to the research.

The court noted this level of protection financially favored Cajun but meant the research credit was unavailable. Grigsby's company lost the case, but the court provided several important lessons for those claiming the credit.

Lesson 1: If You Claim a Process, Describe the Process

We don’t get to see how the court would have handled the case on its merits, but we do get a glimpse into the likely challenges that a construction company will face in defending its credit. The court almost immediately took issue with the taxpayer’s business components. For the research credit, qualified activities must develop a new or improved product or process, among other things.

Lesson 2: Works Made for Hire Are Funded

Despite the taxpayer failing to state the relevant business component, the court proceeded to review the contracts of the four sample projects, striking down three because Cajun didn’t retain rights to the research.

Lesson 3: Read All, Not Just Favorable, Contract Terms

Cajun’s contract problems didn’t end with its lack of rights. The court found that the last project, while not a work made for hire, still failed because it was funded by the customer.

Lesson 4: Don’t Ignore Your Mistakes

This litigation-focused lesson also is an excellent general lesson. Early in the proceedings, Cajun stated it was developing products.

Economic News/Policy: 

Jan 8: Economy Week Ahead: Consumer Inflation in Focus

Monday: The Federal Reserve Bank of New York releases its December survey of consumers’ expectations on inflation, labor-market conditions, and household finances. 

Tuesday: The Commerce Department releases November figures on wholesale inventories. Inventories at U.S. wholesalers increased 0.5% in October from the previous month and were up 21.9% from the same month a year ago.

Wednesday: China’s National Bureau of Statistics releases December figures on consumer inflation. Consumer prices in China rose 1.6% in November from a year earlier, a slower pace than the 2.1% annual pace in the prior month.

Thursday: The Labor Department releases its December consumer-price index, a closely watched measure of what consumers pay for goods and services. Consumer inflation has slowed in recent months but remains historically high. The CPI increased 7.1% in November from a year earlier, compared with a 7.7% rise in the prior month.

The Labor Department releases initial unemployment insurance claims for the week ended Jan. 7. Initial claims, a proxy for layoffs, averaged about 215,000 through the end of 2022, a slightly lower figure than the 2019 average.

Friday: The University of Michigan releases its preliminary reading of U.S. consumer sentiment for January. The final consumer sentiment reading for December showed an improvement from the month before.

The U.K.’s Office for National Statistics releases the gross domestic product for the three months through November. The British economy shrank by 0.3% in the three months that ended in October.

China’s National Statistics Bureau releases December figures on the country’s trade surplus, which declined in November because of a steep drop in exports.

Jan 6: Jobs report shows signs of a cooling economy — as well as its resiliency

The final jobs report of 2022 showed U.S. employment growth slowing under the weight of higher interest rates and stubborn inflation, but not enough to derail a historically strong labor market. The U.S. added 223,000 jobs in December and brought the unemployment rate down to 3.5 percent, its level in February 2020, from 3.7 percent in November, according to the Labor Department.

While job growth slowed from November's revised total of 256,000, December's employment gain still came in above economists' expectations and without other warning signs of an overheating economy.

"It's hard to imagine a jobs report in better balance. Job growth is still strong, so many Americans seeking a job can find one and the economic expansion should continue," said Robert Frick, corporate economist at Navy Federal Credit Union, in a Friday analysis.

"Wage growth is slowing, which will take some pressure off inflation, and could slow Fed rate increases. Labor force participation rose, pointing to more good jobs reports in the future. And industries that still lack many employees and which are vital for the economy and society, especially health care and social services, had another strong month of hiring," Frick said.

Job growth is almost certain to keep slowing in 2023 as the combination of higher interest rates and prices continues to strain the U.S. economy.

"Highly publicized layoffs in the tech sector have not affected the broader economy given how many job openings still exist, and higher interest rates have yet to meaningfully affect the demand for workers," said John Leer, chief economist at Morning Consult, in a Friday analysis.

ICYMI: 

Jan 8: What we know about the XBB.1.5 COVID variant sweeping the Northeast

5 omicron subvariant is raising concerns of a potential surge in COVID-19 cases as it sweeps across the Northeast. 5 was the most prevalent subvariant in the U.S. as a whole, accounting for 40.5 percent of cases in the country.

5 is "The most transmissible subvariant that has been detected yet" of the already highly contagious omicron strain, Maria Van Kerkhove, technical lead of the World Health Organization's COVID-19 response, said in a recent briefing.

5 causes more severe illness than previous subvariants and is behind this jump.

"The XBB variant and its related variants are sweeping through the Northeast and will likely move to other regions quickly," he tweeted.

The subvariant is descended from XBB, which in turn has genetic data from two viral strains that descended from the BA.2 "Stealth" subvariant.

Columbia University researchers found in an early preprint study that subvariants descended from the BQ and XBB lines are better than previous strains at evading neutralizing antibodies.

Jan 7: McCarthy elected House speaker in the rowdy post-midnight vote

Republican Kevin McCarthy was elected House speaker on a historic post-midnight 15th ballot early Saturday, overcoming holdouts from his own ranks and floor tensions that boiled over after a chaotic week that tested the new GOP majority's ability to govern. Finally elected, McCarthy took the oath of office, and the House was finally able to swear in newly elected lawmakers who had been waiting all week for the chamber to formally open and the 2023-24 session to begin.

McCarthy strode to the back of the chamber to confront Republican Matt Gaetz, sitting with Lauren Boebert and other holdouts.

Order restored, the Republicans fell in line to give McCarthy the post he had fought so hard to gain, House speaker, second in the line of succession to the presidency.

The night's stunning turn of events came after McCarthy agreed to many of the detractors' demands - including the reinstatement of a longstanding House rule that would allow any single member to call a vote to oust him from office.

One significant former holdout - Republican Scott Perry, chairman of the conservative Freedom Caucus, who had been a leader of Trump's efforts to challenge the 2020 election - tweeted after his switched vote for McCarthy, "We're at a turning point."

At the core of the emerging deal was the reinstatement of a House rule that would allow a single lawmaker to make a motion to "Vacate the chair," essentially calling a vote to oust the speaker.

For Fun: 

Jan 10: A green comet will appear in the night sky for the first time in 50,000 years

A recently discovered comet will soon make an appearance in the night sky for the first time in 50,000 years.

Discovered on March 2, 2022, by astronomers using the Zwicky Transient Facility’s wide-field survey camera at the Palomar Observatory in San Diego County, California, the comet will make its closest approach to the sun on January 12, according to NASA.

Named C/2022 E3 (ZTF), the comet has an orbit around the sun that passes through the outer reaches of the solar system, which is why it’s taken such a long journey — and a long time — to swing by Earth again, according to The Planetary Society.

Skygazers in the Northern Hemisphere using telescopes and binoculars should look low on the northeastern horizon just before midnight to spot it on January 12, according to EarthSky.

The icy celestial object, which has steadily brightened as it approaches the sun, will subsequently make its closest pass of Earth between February 1 and February 2, around 26 million miles (42 million kilometers) away, according to EarthSky — as the comet nears Earth, observers will be able to spot it near the bright star Polaris, also called the North Star, and it should be visible earlier in the evening.

The comet should be visible through binoculars in the morning sky for sky-watchers in the Northern Hemisphere during most of January and those in the Southern Hemisphere in early February, according to NASA.