ERC Moratorium, ‘Perfect’ R&D Tax Credit Claims, and Cybercrimes
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Tax Policy/News:
November 2: Latest information on the ERC Moratorium and Options for Withdrawing or Correcting Previously Filed Claims
The IRS released details about the recent ERC moratorium in a webinar to the public, detailing specifics about the moratorium process and its effect on taxpayers. This webinar also divulged additional information about the ERC withdrawal process for previously filed, incorrect claims.
The IRS iterated that the moratorium would ultimately function to protect businesses from predatory third party promoters due to the large influx of questionable claims.
The IRS detailed specifics on the timeline for processing ERCs during the moratorium, explaining that claims filed prior to the moratorium will take extended processing time, while claims filed on or after the September 14th moratorium will not be processed. Additionally, processing can take up to 180 days or longer for claims that are flagged for further compliance review or audit.
The IRS also advised those who have not filed yet, but are considering, to carefully review guidelines and consider waiting to file.
The webinar also detailed guidance on the ERC withdrawal process, explaining that a taxpayer can utilize the ERC claim withdrawal process in the following ways: the taxpayer made the claim on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X); the taxpayer filed an adjusted return only to claim the ERC and no other adjustments were made; the taxpayer desires to withdraw the entire amount of the ERC claim; and the IRS has not paid the taxpayer’s claim, or the taxpayer has been paid, but has not cashed or deposited the refund check.
The IRS emphasized that the effective date for a withdrawal request is the acceptance letter date, not the request signature date, fax confirmation date, OR proof of mailing date. The IRS also cautioned that ERC withdrawals may end with the moratorium.
PEOs are being asked to file an amended 941 with an updated schedule R if they cannot/do not want to withdraw all of the ERC claims on one return.
The IRS commented that taxpayers can withdraw the ERC claim even if they are currently in an audit or are awaiting audit and that ERC claims not processed and paid can be withdrawn if the employer is ineligible for the ERC. There is also additional guidance coming soon for misled taxpayers who have already deposited their checks who cannot withdraw their claim.
The IRS recently released an ERC eligibility checklist for taxpayers to assess eligibility for the credit, as well as details about resolving an improper claim: https://www.irs.gov/newsroom/employee-retention-credit-eligibility-checklist-help-understanding-this-complex-credit.
The IRS continues to urge businesses to be wary of third party ERC promoters advertising improper claims of the ERC. The IRS has released multiple newsletters about the warning signs of predatory ERC promoters; unsolicited calls, ads, emails, or texts from unknown individuals, statements indicating determination of eligibility in minutes, and large upfront fees to claim the credit are some of the most pertinent warning signs.
November 1: IRS extends time to 'perfect' R&D tax credit claims
The IRS has announced an extension of the transition period for taxpayers to perfect their research credit claim for a refund until January 10, 2025.
This extension gives taxpayers an additional year beyond the previously extended deadline to provide the necessary documentation for their claims.
The IRS has been intensifying its scrutiny of research and development (R&D) tax credit claims, requiring detailed evidence to support the legitimacy of the work claimed. To assist taxpayers, the IRS's Large Business and International Division has updated its FAQ page with a best practice example for claim submissions.
To make a valid refund claim for the research credit, taxpayers must now provide comprehensive details, including identifying all business components related to the claim, the research activities conducted, the individuals involved, and the specific information each individual sought to discover. They must also report total qualified expenses using Form 6765.
The IRS requires these five pieces of information for all research credit claims, whether formal or informal, and emphasizes that for Form 1120 taxpayers, an informal claim is not sufficient—they must file a formal amended return.
Additionally, taxpayers must sign a declaration under penalty of perjury to verify the accuracy of the information provided, and when submitting documents, they must highlight the exact pages supporting their claims.
The IRS accepts this information only in paper form or by fax, not through electronic storage devices, and the updated FAQs provide guidance on how to properly present this information in a claim.
Economic News/Policy:
November 7: Treasury's Yellen calls Republican effort to cut IRS funding for Israel 'damaging and irresponsible'
Treasury Secretary Janet Yellen has criticized the recent proposals by House Republicans to cut IRS funding as "damaging and irresponsible," especially during a time when the agency is working to improve customer service.
She emphasized the negative impact of such funding cuts during an event highlighting new customer service enhancements at the IRS.
The proposed $14 billion cut, part of a bill that also includes aid to Israel, is seen by Yellen as playing politics with crucial funding. Despite the claim from Republicans that the cuts would save money, independent analysts argue they would lead to billions in lost tax revenue. President Biden has indicated he would veto the bill should it pass both houses of Congress.
Yellen also announced advancements in IRS services, including the ability for taxpayers to submit documents digitally much sooner than initially planned, which is expected to expedite processing times and reduce the IRS's annual $40 million storage cost for historical documents.
The IRS, which handles over 200 million paper documents annually, will allow most submissions digitally by 2024, with a full digital processing system, including tax returns, by 2025. These improvements are part of the benefits from the $80 billion funding provided by the Inflation Reduction Act, which Yellen is keen to protect from cuts.
However, the IRS remains vulnerable to budget reductions, as evidenced by the recent rescission of $1.4 billion from the agency's budget in a deal to lift the nation's debt ceiling.
November 1: The Fed holds interest rates steady for second time
The Federal Reserve has maintained interest rates, keeping the benchmark rate unchanged for the second meeting in a row, which is the highest it has been in 22 years.
This decision was anticipated by economists and financial markets, following indications from Fed officials who expect a slowdown in the US economy due to the impact of previous rate hikes.
Despite this, the economy grew at a surprising 4.9% annualized rate in the third quarter, driven largely by strong consumer spending. This growth, alongside other factors, has led to a rise in bond yields, with the 10-year US Treasury yield nearing 5%.
Fed Chair Jerome Powell has acknowledged the importance of these yields, suggesting they could influence future rate decisions, especially as they reflect tightening financial conditions that the Fed is closely monitoring.
The robust growth of the third quarter is seen as an anomaly, and the economy is expected to cool down due to higher borrowing costs and other economic challenges.
The Fed is looking for 'below-trend growth' to ensure inflation heads towards the 2% goal. A softer job market could help achieve this by reducing wage pressures and consumption. The good news is that the bond market's current state is expected to help cool the economy.
Meanwhile, the Fed is keeping a close eye on the job market, where a slowdown could be beneficial for curbing inflation without causing a significant increase in unemployment, a scenario known as a "soft landing." Upcoming labor market data will be crucial for the Fed's assessment of the economic outlook and its policy decisions.
November 1: Senate passes first government funding package, setting up clash with House GOP
The Senate has successfully passed a series of government funding bills for fiscal year 2024, marking a significant step forward in the budget process and setting the stage for a confrontation with House Republicans.
The package, which passed with a strong bipartisan majority of 82-15, includes full-year appropriations for the Departments of Veterans Affairs, Transportation, Housing and Urban Development, and the Food and Drug Administration, among others.
Senate Appropriations Committee Chair Patty Murray highlighted the seriousness and bipartisan nature of these bills, contrasting them with the more partisan funding measures seen in the House, and emphasized that these bills are the result of extensive negotiation and collaboration across party lines.
Despite the Senate's progress, the path ahead is complicated by the stark differences between the Senate's funding measures and those passed by the House, where Republicans are pushing for deeper cuts to nondefense spending and attaching controversial riders.
The Senate's funding package, which includes significant increases for VA medical care, military construction, family housing, and various transportation and housing programs, faces opposition from House Republicans who are seeking to impose restrictions on abortion access and the enforcement of the Biden administration's policies on equity and diversity.
With the current funding extension set to expire on November 17, there is a widespread expectation that another stopgap measure will be necessary to prevent a government shutdown.
Technology:
November 2: IRS investigators go global to tackle cybercrime
Officials from the Internal Revenue Service's Criminal Investigation division met with tax officials from four other countries this week in an annual "Cyber challenge" as they explored ways to cooperate across borders on uncovering tax evasion and money laundering schemes using cryptocurrency and other digital technology.
"[The inception of the J5] brings together investigators, crypto experts and data scientists from all five countries to work together in a collaborative fashion with our private sector partners. This year's challenge focused on data mining and financial reporting relating to crypto assets and technology-enabled financial threats," said Eric Ferron, director general of the Criminal Investigations Directorate in the Canada Revenue Agency.
"This year's challenge focused on digital assets within the financial institution reporting documents and public data sets revolving around digital assets," said Jim Lee, chief of IRS Criminal Investigation.
"At this challenge, we had a team of about a dozen investigators working around the clock on operational lead generation," said Ryan Ryder, manager of investigations at Chainalysis.
The information gathered during the challenge will be used for investigations in the tax authorities' various countries.
"One of the most important things for us in the field is also that we can share the knowledge and that we can retrieve the knowledge, not only working on the leads in the investigations, but also that we make friends and that we can build up a network, so after this challenge, we can also call them and reach out to them and work with them," said Ron Willemse, strategic advisor to the Dutch Fiscal Intelligence and Investigation Service.
November 1: AI Forum On Elections To Be Held In Senate Next Week, Schumer Says
The Senate will hold a forum with experts about the impacts of artificial intelligence on elections next week, Senate Majority Leader Chuck Schumer said Wednesday.
The forum will be the fifth in a series of AI Insight Forums Schumer convened that bring in stakeholders from tech companies, civil society groups and other experts to discuss the risks and benefits of AI with senators in closed-door meetings.
The election-focused forum will be one of a "bunch more" the Senate will hold, Schumer said.
Schumer's comments came after a Wednesday morning forum about the impacts of AI on the workforce.
In the afternoon Wednesday, the Senate is holding another forum session about AI in "High Impact" areas, such as health care and finance.
Next week's election forum falls just one year before the 2024 presidential election.
Amy Klobuchar, Josh Hawley, Chris Coons and Susan Collins - introduced a bill that aims to ban the use of deceptive AI in elections.
Energy and Environmental Policy/News:
The Internal Revenue Service (IRS) has launched a new online tool called IRS Energy Credits Online (IRS ECO) to facilitate the registration and management of clean vehicle credits for sellers and dealers.
This tool is designed to be secure, accurate, and user-friendly, with no need for special software, making it particularly beneficial for small businesses.
It enables sellers of clean vehicles to register, complete the entire process online, and receive advance payments within 72 hours.
The IRS ECO will also produce a Time of Sale report for taxpayers to use when filing their federal tax returns to claim or report the credit.
Starting from January 1, 2024, all clean vehicle sellers and licensed dealers will be required to use this tool for their customers to claim or transfer credits for new or previously owned clean vehicles.
The IRS has provided detailed proposed regulations and guidance for dealers to register through the IRS ECO to be eligible for credit transfers. Benefits of using the tool include quick advance payments, real-time confirmation of eligible vehicles, the ability to make corrections, and the retention of issuer information year to year.
The IRS is encouraging dealers to enroll in the tool now, with initial registration limited to one legal representative per dealer until December 2023, after which multiple employees can be authorized. The IRS has also made available a suite of resources to assist with the registration and use of the IRS ECO.
November 3: House GOP approves cutting EPA budget by nearly 40 percent
House Republicans approved legislation Friday that would slash nearly 40 percent of the budget for the Environmental Protection Agency.
The funding bill, passed by a 213-203 vote, cuts 39 percent of the EPA's budget and would be the smallest budget the agency has had in three decades.
The massive funding cut proposed by the GOP has virtually no chance of becoming law in this year's budget but marks a starting point in negotiations for Republicans as they look to negotiate with Democrats in the Senate on funding the government.
In addition to the top-line EPA cuts, the GOP bill would also rescind provisions from the climate, tax and health care bill that Democrats passed last year.
The bill would also deliver cuts, albeit less dramatic ones, to the Interior Department, reducing its funding by about 4.5 percent.
The bill looks drastically different from its counterpart in the Senate, which calls for $7 billion more in total funding than the legislation passed in the House and was approved with overwhelming bipartisan support in committee earlier this year.
The gap comes as no surprise, as House Republicans announced earlier this year they would be marking up their fiscal 2024 government funding plans below the budget caps deal struck between President Biden and former Speaker Kevin McCarthy over the summer.
ICYMI:
November 3: IRS business tax and tax pro accounts may get slashed
The Internal Revenue Service's development of its newly introduced business tax accounts and recent improvements in its tax pro accounts could be jeopardized if funding is cut.
That could mean reductions in taxpayer service, like the new Taxpayer Assistance Centers that the IRS has been opening around the country, and improvements to the IRS's aging technology, such as the new business tax accounts that the IRS unveiled last month.
"The business tax account will allow businesses to check their tax payment history, make payments, view notices, authorize powers of attorney and conduct other business with the IRS," said IRS Commissioner Danny Werfel during a press conference.
Over time the accounts will allow business taxpayers to check their tax payment history, make payments, view notices, authorize powers of attorney and conduct other business with the IRS. Future improvements will enable taxpayers to use their business tax accounts to view letters or notices, request tax transcripts, add third parties for power of attorney or tax information authorizations, schedule or cancel tax payments, and store bank account information.
Tax professionals are already finding the initial version of the business tax accounts to be useful, but limited.
The business tax accounts build off the capabilities already available in the individual online tax accounts that the IRS has been offering in recent years.
October 31: What the tax gap tells us
The IRS has released updated tax gap estimates, revealing an increase in the amount of money lost annually due to taxpayer non-compliance. For the tax year 2021, the estimated loss is $688 billion, with underreporting accounting for the largest portion at $542 billion.
These figures have prompted discussions in Congress and were instrumental in justifying additional IRS funding through the Inflation Reduction Act.
The IRS is using this data to bolster its compliance programs and service initiatives, which have seen progress such as improved phone service levels and advancements in online assistance. However, compliance enforcement has been slow to rebound post-pandemic, with much of the enforcement still on hold, particularly in the IRS campuses responsible for issuing notices for non-filing and underreporting.
The tax gap data suggests that non-filing is an increasing problem, with losses nearly doubling from 2016 to 2021. The IRS has been less focused on non-filer compliance, which has been exacerbated by the pandemic's impact on the IRS's ability to process returns and send out inquiries.
Small business non-compliance is also a significant contributor to the tax gap, with estimates indicating that it accounts for half of the underreporting tax gap. The IRS acknowledges that it needs to target small business non-compliance more effectively, despite political sensitivities.
New reporting rules for third-party payment processors are expected to aid in closing the tax gap by providing the IRS with more data to enforce compliance.
The voluntary compliance rate remains high, but there is concern that the recent lack of enforcement presence could negatively impact future compliance.
The IRS is aware that it needs to reverse the trend of declining enforcement revenue and is looking to enhance its compliance enforcement processes to address this issue.
For Fun:
November 1: NASA’s Lucy spacecraft swoops past first of 10 asteroids on long journey to Jupiter
NASA's Lucy spacecraft on Wednesday encountered the first of 10 asteroids on its long journey to Jupiter.
The spacecraft on Wednesday swooped past the pint-sized Dinkinesh, about 300 million miles away in the main asteroid belt beyond Mars.
Lucy came within 270 miles of Dinkinesh, testing its instruments in a dry run for the bigger and more alluring asteroids ahead. Dinkinesh is just a half-mile across, quite possibly the smallest of the space rocks on Lucy's tour.
Lucy's main targets are the so-called Trojans, swarms of unexplored asteroids out near Jupiter that are considered to be time capsules from the dawn of the solar system.
The spacecraft will swing past eight Trojans believed to be up to 10 to 100 times bigger than Dinkinesh.
It's due to zip past the final two asteroids in 2033.
NASA returned its first samples of rubble from an asteroid in September.