Barring last-minute legislation, next year's filing season is shaping up to be one with more certainty than the recent past.
For starters, following a dramatically improved 2023 filing season, the Internal Revenue Service is planning additional improvements for filing season 2024.
It met the first goal of the Paperless Processing Initiative three months ahead of schedule. Taxpayers are not able to digitally submit all correspondence and responses to notices, but the IRS estimates that more than 94% of individual taxpayers will no longer have to send mail to the service. Prior to filing season 2023, taxpayers could only submit documents through the mail. What's more, the IRS has now achieved the ability to digitally respond to all notices. As of Oct. 27, 2023, the service had received more than 35,000 responses to notices via this online tool.
The agency plans to meet the second goal of the Paperless Processing Initiative by the start of filing season 2024 by providing the option for taxpayers to e-file 20 additional tax forms, enabling up to 4 million additional tax documents to be digitally filed every year. This includes amendments to Forms 940, 941, 941-SS and 941(PR), which are some of the most common forms businesses file when amending returns.
Finally, in filing season 2024, taxpayers will benefit from important new updates to the "Where's My Refund?" tool, the IRS's most popular customer service tool. The updates will allow them to see more detailed refund status messages in plain language. Taxpayers will see clearer and more detailed updates, including whether they need to respond to a letter requesting additional information, and it will reduce the need for taxpayers to call the IRS to answer basic questions.
Charting courses
Tax practitioners, meanwhile, are studying the waters for clues as to possible navigational hazards.
Ryan Losi, executive vice president of Virginia-based CPA firm Piascik, cited a number of legal developments that will affect his practice.
"The Bittner case was a huge win for taxpayers," he said. "It basically reduces the exposure for high-wealth taxpayers and expatriates who may have been concerned about noncompliance with FBAR requirements, especially if they had multiple accounts."
The Supreme Court decision in Bittner clarified the confusion regarding penalties associated with the Bank Secrecy Act, which requires U.S. persons with certain financial interests in foreign accounts to file an annual FBAR report — the Report of Foreign Bank and Financial Accounts. The maximum penalty of $10,000 for nonwillful violations was applied by various courts on a per-report basis or a per-account basis. For a taxpayer with multiple accounts, the difference could amount to hundreds of thousands of dollars. The taxpayer-friendly decision by the Supreme Court was that it applied on a per-report basis, so that there was just one penalty for multiple accounts in a year.
"Once they found that they were in violation of the Bank Secrecy Act, taxpayers were afraid to comply because the penalty was so harsh," remarked Losi. "Exposure should not be so draconian that it forces people to hide rather than comply."
The Moore case is another one that might affect past filing as well as the tax landscape for years to come, Losi believes. The case, scheduled to be argued before the Supreme Court in December, has gained the attention of a number of academics recently. It examines the age-old issue of whether unrealized gain can be made subject to tax.
Two law professors filed an amicus brief with the court regarding Congress' power to tax income under the 16th Amendment. The professors argue that the nation has used federal income taxes since the Civil War, and therefore prior to the ratification of the 16th Amendment. The history of income taxation shows, they maintain, that Congress has the authority to tax unrealized income and gain.
"If the court rules in favor of the plaintiffs, it will blow up 26 years of tax practice," remarked Losi. "But generally, audits are up and will continue to go up, especially for sole proprietors. Single proprietor LLCs and Schedule C businesses will continue to be targeted, especially the ones that make more than $400,000."
Gian Pazzia, chief executive of KBKG, a tax services provider for CPAs, identified issues that he believes businesses are most likely to need help with as tax season progresses.
The IRS recently suspended accepting new Employee Retention Credit claims through at least Dec. 31, 2023, because of the increasing number of fraudulent claims, noted Pazzia: "While many taxpayers and their advisors are tired of hearing about the ERC, it is still an issue that should be considered for those who qualify. If a CPA doesn't feel comfortable signing a return with an ERC, they should contact an independent firm to review it, because at this stage it is highly unlikely that they would qualify."
To pay for the Tax Cuts and Jobs Act, beginning in 2022, Section 174 expenses need to be amortized over five years, or 15 years for international projects, increasing many businesses' taxable income. "The R&D Credit utilizes Section 174 expenses as the basis for the credit," said Pazzia. "With uncertainty about the potential repeal of the TCJA measure, many who qualify for the R&D credit were hesitant to claim for the 2022 tax year or waited, in the hope of a repeal. Many still believe there will be a repeal of the amortization. However, it likely won't be retroactive, and will apply for 2023 at the earliest."
A transfer-pricing nightmare?
While most accountants won't be involved in huge multinational tax entities, there are some lessons to be learned from Microsoft's dispute with the IRS, according to Mimi Song, chief economist at Exactera.
"Last month, the IRS demanded $28.9 billion plus penalties and interest in back taxes from Microsoft," she said. "The issue? A transfer pricing cost-sharing arrangement."
"The setup isn't uncommon," she explained. "Many tech companies send intellectual property to entities in low-tax countries to be legally owned, developed, maintained and exploited. Then they share ongoing costs associated with the IP, which effectively allows them to book revenue and retain profits locally, thus reducing their hefty tax bills in higher-tax countries."
Microsoft's IP was originally developed in the U.S., which raised the question about Microsoft's business need for such a cost-sharing arrangement. After an initial investigation involving the Puerto Rico manufacturer, the IRS determined the arrangement was "illusory in nature, servicing no material economic purpose except to shift income to Puerto Rico."
"Microsoft will contest the case through the IRS administrative appeals office, and if necessary, court," said Song. "This will take several years, but in the meantime, taxpayers can learn from this case and be proactive about transfer pricing arrangements involving intangible assets."
She suggested a few takeaways:
- Tax can't lead the business. "You can't let the desire for lower tax bills lead business decisions," said Song.
- The IRS is a juggernaut. With the infusion of funds from the Inflation Reduction Act, the service will have the resources to go after other companies.
- Substance matters. "Transfer pricing isn't just a numbers game," she said. "Even with bona fide cost-sharing arrangements, tax authorities are likely to challenge the substance of the transaction and the buy-in payment. Profits stemming from intangible assets that land in tax havens or shell companies won't go unnoticed."
