Around the Tax World- June 8, 2022 - Think Outside the Tax Box

Check out what’s happening all around the world of tax!

Twice per month, we post our “Around the Tax World” feature. This highly curated, concisely written feature acts as your own personal aggregator of all the news happening in and around the world of tax. Your days of endless scrolling and combing the internet for the tax stories of the day ends now because we’re doing that work for you!

Around the Tax World is just one small feature included in a Think Outside the Tax Box subscription. Subscribe today and start enjoying our hundreds of exclusive articles, live webinars, Client Alerts, private Facebook page, and more!

World NEWS

And now, please enjoy our free, twice monthly feature on what is happening in and around the world of tax! (Raises arm and shakes head at the sky while exiting stage left a la Kermit the Frog on the Muppet Show)

The tax fraud investigation surrounding the Trump Organization continues as the former president’s lawsuit against the New York attorney general is dismissed. Judge Brenda K. Sannes recently ruled against Donald Trump’s claim that the attorney general’s investigation of his company was politically motivated. The investigation is centered on the allegation that the company falsified the value of some of its properties for tax purposes.

Two Southern California tax preparers will stand trial for an identity theft scheme amounting to $1 million in tax fraud. Anton Nguyen and Rosemary Pham pled “not guilty” to federal charges of filing 433 falsified tax returns and receiving fraudulent welfare benefits. The stolen identities were supposedly provided by the social worker, John Tran, who pled guilty to a conspiracy charge in 2019.

U.S. NEWS

States’ attempt to provide relief to taxpayers may be contributing to rising inflation. Across the US, state legislatures have been negotiating new tax cuts and rebates as a way of funneling excess revenue back to taxpayers and offsetting the sharp rise in inflation. However, some economists are cautioning that cutting taxes may only worsen inflation, which is already increasing faster than it has in the past 40 years. Providing more spending dollars to taxpayers could heighten consumer demand and therefore raise prices on commonly used goods.

After the economic struggles of 2020, states rebounded surprisingly quickly in 2021, resulting in surplus funds. One report calculated that total state revenues rose by 17.6 percent in 2021. In response, both Republicans and Democrats state legislators have put forward new tax plans, including both permanent changes and temporary measures or tax “holidays.” For example Iowa, Indiana, and Idaho all reduced their state income tax rates. New Mexico approved $1,000 tax rebates in response to rising prices, and Delaware passed a similar measure for $300 relief payments. Many states are specifically considering suspending their fuel taxes as the Russia-Ukraine conflict contributes to increased costs at the gas pump.

Further stimulating the rush to address inflation, many state governors and legislators are up for reelection this November. Recent polls among voters show that the costs of basics like food, housing, and gasoline are major concerns this year. However, if state revenue does decrease in the coming years, as some are predicting, states may not be able to sustain long-term tax cuts and budget changes. Additionally, some state governments have found workarounds to indirectly use federal COVID-19 stimulus funds to subsidize tax cuts, which will not likely be replenished. Recent dips in the stock market and increased Federal Reserve interest rates are also contributing to concerns about the possibility of an impending recession.

On a federal level, the Biden administration has focused primarily on strengthening supply chains and taking measures against price gouging as inflation rises. The White House has yet to issue a statement on the advisability of state-level tax cuts.

STATE NEWS

Virginia votes to adjust its budget plan to include $4 billion in tax relief… but nixes the proposal for a gas tax holiday. The two-year spending plan was drafted in light of the state’s recent surplus revenue and unspent federal pandemic relief funds. The new budget offers $1 billion in one-time rebates of $250 for single taxpayers and $500 for families. Another $1.6 billion would go toward increasing the standard tax deduction, while $372 million would eliminate the state’s sales tax for groceries and personal hygiene necessities.

The proposed budget would also increase pay for teachers and certain state and local government employees and provide income tax relief for military retirees aged 55 or older. Hundreds of millions would go toward educational initiatives like the creation of lab schools and school construction and modernization projects. An additional $315 million would make the Virginia Earned Income Tax Credit partially refundable.

Virginia’s General Assembly has yet to convene on a more controversial proposal, which would provide substantial tax incentives to persuade the NFL’s Washington Commanders to move to Virginia. The bill approving a stadium site for the team initially received bipartisan support, but the cost of the tax breaks and allegations of financial misconduct surrounding the football team have caused concern among legislators.

New York’s gas tax holiday kicked into action on June 1st … in response to soaring fuel prices across the U.S. In recent weeks, the cost-per-gallon has risen to over $4 in every state due to a combination of factors including national inflation and the war in Ukraine. Meanwhile, the cost in New York state specifically has been creeping closer to $5 per gallon (reaching $4.93 at the end of May), compared to a mere $3.08 this time last year.

Like several other state legislatures, New York approved a measure to eliminate the state gas tax through the end of 2022, reducing the cost per gallon by a total of 48 cents. The changes are expected to cut state revenue by $585 million, which primarily impacts funding for the repair of highways and bridges and for mass transit subsidies. The state will instead pull the money needed from its general fund. On the other hand, New York residents will save an estimated $600 million from the gas tax suspension.

The gas tax holiday received some pushback from climate advocates who expressed concern about funneling resources toward drivers instead of the transit systems, which have struggled financially during the pandemic. However, others contend that many communities in New York state rely on automobiles for transportation and do not have sufficient mass transit systems for commuting and other everyday needs.

TAX PLANNING

Using cryptocurrency as compensation raises tax issues for employees and employers alike. Earlier this year, the financial services company Fidelity announced that it would include bitcoin as an investment option for the 23,000 employers using Fidelity’s 401(k) plans. The Department of Labor has cautioned against the idea, yet employers seem to be increasingly considering cryptocurrency as a legitimate retirement plan investment and even a form of regular pay.

The tax issues around compensating employees with digital currency are similar to those raised when compensating employees with employer stock. One potential drawback is the price volatility of cryptocurrency—the value of a digital coin when the employee receives it could end up being substantially higher than the value when that coin is sold. If an employee has to sell a large amount of cryptocurrency at a loss, they could exceed the $3,000 cap on capital loss deductions and simply lose that money. A potential benefit is that an employee could sell their cryptocurrency—to the extent it is vested—to cover their tax liabilities (which is not often true for private stock).

Another possible hiccup is compliance with the Fair Labor Standards Act (FLSA). These laws set the minimum wage, salary, and overtime compensation requirements for employees. Because the value of cryptocurrency can fluctuate, employers may not be able to reliably meet these standards by using digital tokens. Also, if the cryptocurrency provided is not considered acceptable compensation under FLSA and state laws, an employer may be required to provide the employee with a second, acceptable form of payment.

New research indicates that the IRS may have the ability to automate almost half of individual tax returns. The National Bureau of Economic Research recently released a paper showing that the agency may be able to use taxpayer information it already holds to auto-fill between 62 million to 73 million returns, which would cover 41% to 48% of taxpayers. The study used a random sample of 344,400 returns from 2019—a year when almost 90% of taxpayers claimed the standard deduction.

The taxpayers most likely to benefit from automated filing are those who are single, young, and have no dependents. The research findings suggest that low-to-moderate income earners are most likely to have accurate returns, while an increase in itemized deductions would cause the likelihood of errors to also increase. With the enactment of the Tax Cuts and Jobs Act in 2018, the amount of the standard tax deduction nearly doubled, which led to a decrease in the number of taxpayers electing to itemize deductions.

Across the globe, 36 countries currently have a return-free filing system, including Germany, Japan, and the UK. The two common systems are “exact withholding” or “tax agency reconciliation.” With exact withholding, employers attempt to set aside the exact amount of taxes employees owe. With tax agency reconciliation, the taxpayer is provided with a tentative pre-filled return that they must review and approve. However, the US tax code may make these systems less viable—complications include the fact that households are taxed as a single unity and that certain investments that are not subject to withholding are taxed at regular income tax rates.

Recent Highlights

Wondering what you missed in our last newsletter? Check out our latest exclusive articles here:

CURRENT EDITION

The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys

Dominique Molina, CPA MST CTS

Gather ’round, pardners! The Employee Retention Credit (ERC) has been the latest gold rush in the tax frontier, drawing business owners, tax deputies, and even a few sly outlaws. But as the dust settles, the IRS—our law keeping sheriff—is on the hunt for any who might’ve bent the rules. In this frontier of finance, knowing who’s who can keep you out of trouble as the IRS rounds up dubious claims.

Selected Techniques to Monetize Tax Attributes

Ted Stotzer

In the prior article “Tax Trends in M&A and What It Means for Your Clients,” we had discussed certain techniques to, e.g., maximize net operating loss (“NOL”) and interest expense deduction utilization in the context of M&A transactions. This article examines certain additional strategies to monetize expiring, latent, or otherwise disallowed tax attributes.

Do Those Tricks Really Work?

Peter J Reilly CPA

On the website for Axium Wealth, Charles Dombek tells us that: “Most CPAs are historians that tell their clients how much they make, how much they owe, when and where to file their taxes, and oftentimes how to write large checks at the last minute when you least expect.” When it comes to Axium, though: “We help clients recover dollars they unnecessarily pay in State and Federal income taxes.” Axium also helps clients diversify capital into off-market passive real estate and alternative investments. Before Axium, there was The Optimal-Financial Group LLC. Of course many of the readers of Think Outside The Tax Box are CPAs, or EAs or others who both help their clients be compliant and advise on ways to minimize their liability. When I was practicing I would call the things I might suggest my “bag of tricks.”