At Around the Tax World, you can find out all about what’s going on in the wonderful, worldwide world of tax. Every month, we’ll feature a few mini-articles on what’s been going on in the world when it comes to tax, and fully available for viewing even if you don’t have a subscription.
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WORLD NEWS
The Supreme Court rules that the IRS does not need to give notice to third parties when requesting bank records… for tax collection purposes. The case in question concerned a taxpayer, Remo Polselli, with a balance of over $2 million in unpaid taxes. The IRS issued a summons to each bank that had Polselli’s financial information but did not notify him about these requests. The Supreme Court unanimously ruled that the IRS was exempt from providing notice when the summons was related to a tax collection, acknowledging that in certain cases giving notice to a taxpayer might result in their moving assets so the IRS cannot locate them.
Mississippi Representative Earle Banks confesses to making a false statement on a tax return… and now faces three years in prison. The lawmaker admitted to failing to report over $500,000 of income from a real estate sale in 2018. Instead, Banks only claimed $38,237 in adjusted gross income. The conviction does not prevent Banks from seeking reelection this year, since violating federal tax laws does not bar people from holding a legislative seat in Mississippi. Banks is currently running unopposed.
U.S. NEWS
The IRS is developing a free electronic tax filing system that could replace commercial options
The agency is planning to pilot their own government-run system in 2024. Filing tax returns directly with the government will be optional, but the plan progresses in response to IRS surveys that found that 72% of taxpayers would be significantly interested in this option. The free system received the most support from younger taxpayers, those for whom English is not a first language, and those who prepare their own tax returns. Legislation passed in 2022 set aside $15 million in funding to study the idea.
Advocates of the IRS free filing system say that taxpayers should not have to spend time and money on filing tax returns when it is required by law. However, the plan is already receiving pushback from companies like TurboTax, which is part of the $14 billion tax-preparation industry. Opponents claim that building a government-run system will cost taxpayers billions of dollars looking to solve a non-existent problem. Many of these companies already offer a free-filing option through the IRS website, but only 2% of taxpayers currently use these.
A key concern that has been expressed is whether the IRS system will provide the largest possible refund or the lowest tax bill. Another question is whether the system will be able to integrate state-level returns. The first phase of the pilot will allow a select number of actual taxpayers to try out the system next year. The agency will use this limited group to test functionality and inform future iterations of the tool.
Research shows that pre-populated returns may be possible for up to 50% of taxpayers. A 2022 working paper published by the National Bureau of Economic Research estimated that the IRS could correctly auto-fill as many as 62 million to 73 million returns using information it already has. Based on an analysis of 350,000 individual tax returns, the highest level of accuracy was among low- to moderate-income filers and lowest for returns with a large number of itemized deductions. Possible problems with pre-populated returns include third-party tax forms, correctly identifying a taxpayer’s filing status, and taxpayer compliance.
STATE NEWS
Texas legislators advance a bill that would change property tax limits… and could save homeowners over $1,000 per year. The state House approved raising the homestead exemption and lowering the maximum yearly increase in tax value. This proposal comes in response to rising property values—and therefore rising taxes. If the bill passes in the Senate, property owners could collectively save up to $12 billion in taxes.
The House bill increases the mandatory homestead exemption to $100,000 for most homeowners and $110,000 for senior citizens. The bill also lowers the cap on property appraisal increases from 10% to 5%. Opponents, including Lieutenant Governor Dan Patrick, have expressed concern that the changes will not have the intended effects. One concern is that the proposal would undo current tax benefits that compress tax rates and put a higher tax burden on new home buyers.
A previous cap in 2019 put a 2.5% limit on revenue growth for school districts and 3.5% on cities and counties. The current bill would attempt to offset this by providing $12 billion in state funding to school districts.
The Minnesota House and Senate will be evaluating a new tax bill… that includes tax rebates, child tax care credits, Social Security tax breaks, and higher corporate taxes. First, the proposal introduces a $260 tax rebate for individuals (or $520 for couples) who made up to $75,000 in income in 2021 (or $150,000 for couples). The rebate may be even higher for families with children who could receive another $260 per child for up to three children. Additionally, families could qualify for child tax credits, which would start at $1,750 per dependent for joint filers who make up to $35,000. The credit would phase out for earners making between $35,000 to $90,000.
Changes would also come to Minnesotans receiving Social Security income. Originally, lawmakers considered exempting Social Security from state taxes, but the current proposal puts forth an exemption only for taxpayers making $100,000 a year or less. For joint filers, the exemption phases out for those who make up to $140,000. This change would aid an estimated 80% of Minnesotans who receive Social Security benefits.
TAX PLANNING
In 2023, the IRS flagged over 1 million tax returns as potentially fraudulent. Combined, these returns yielded about $6.3 billion in tax refunds. The IRS continues to investigate identity theft as a top problem facing taxpayers. This most commonly occurs when scammers use a taxpayer’s personal information to file a false return in their name and claim their tax refund. Identity crime hit an all-time high in 2021 and only slightly decreased in 2022. As of March of this year, the IRS confirmed that 12,617 of the tax returns evaluated were in fact fraudulent.
To deal with this pervasive problem, the IRS has increased the number of fraud filters it uses from 168 to 236 this year. When a tax return is flagged as potentially fraudulent, it is placed on hold until the IRS can verify the taxpayer’s identity. Taxpayers may find out they are the victim of identity theft when they attempt to file a return and see that their Social Security number has already been used.
Taxpayers can take steps to protect themselves by requesting an Identity Protection Personal Identification Number (IP PIN) from the IRS. Once issued, this six-digit number will be required as an authentication measure each time a tax return is filed. Taxpayers can also file their returns early in the tax season and adopt online security measures to reduce the risk of identity theft.
A new study highlights the discrepancy in tax breaks between top executives and their employees. The report published by the Institute for Policy Studies pulls data from the Department of Labor and the Securities and Exchange Commission on the executives and board chairs at S&P 500 companies. These corporate officers often receive special tax-advantaged retirement benefits, in part because the government does not require them to disclose the difference in retirement benefits between executives and other workers.
Each year, there is a cap on how much taxpayers can contribute to a 401(k) plan. In 2023, the limit is $22,500 or $30,000 if you are aged 50 or older. However, employers can also offer a nonqualified deferred compensation plan, or “top hat” plan, which does not have any such limit unless a cap is set by the employer. This type of plan allows high-earning executives to set aside large portions of their earnings tax-deferred.
Among the companies evaluated, the average retirement account balance for CEOs was $14.6 million, whereas the average 401(k) balance at Vanguard (a major retirement plan provider) was $33,472. Advocates for policy change have suggested introducing a contribution cap on nonqualified deferred compensation plans or a higher tax on high-income earners to help fund Social Security.
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CURRENT EDITION
The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys
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
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?
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.”
