Tax Breaks: The Hang On To Those Receipts Edition

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This is a published version of our weekly Forbes Tax Breaks newsletter. You can sign-up to get Tax Breaks in your inbox here.

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It was a short week for many Americans last week—Monday was Labor Day, considered the unofficial end to summer and the beginning of fall. If you took the day off, good for you! If you didn’t get your tax fix, here’s a quick look back (☆) at a little Labor Day history mixed with some tax trivia.

I wasn’t the only tax geek writing about history this week. Examples of wartime tax resistance can be found throughout U.S. history, and perhaps the most famous occurred during World War II, when President Roosevelt vetoed the Revenue Act of 1943, insisting that it was riddled with indefensible giveaways. “In this respect,” FDR declared in his veto message, “it is not a tax bill but a tax relief bill providing relief not for the needy but for the greedy.” Tax Notes’ Joseph Thorndike has more.

Flashing ahead to more modern times, the IRS has announced that it has made significant strides in improving taxpayer services through the Digital First Initiative—which leverages resources from the Inflation Reduction Act to modernize and streamline taxpayer services. The new system, which requires a porting of COBOL and Assembly code into Java, is intended to be more modern and sustainable moving forward. In the long run, it should reduce operational costs, but in the short term, it is an expensive and labor-intensive undertaking.

Speaking of days gone by, the IRS has historically offered a program called the Voluntary Disclosure Practice (VDP), where taxpayers can disclose their willful conduct, submit accurate original or amended returns, and pay any outstanding taxes and interest. In exchange, the IRS usually agrees not to refer the matter for criminal prosecution. To enter the VDP, taxpayers must meet certain requirements, such as timeliness, cooperation, and full and adequate disclosure. In June 2024, the IRS quietly revised its VDP program, and some of the changes represent significant departures from the prior version.

Voluntary disclosures only work when you come forward first. You won’t qualify if you’re under criminal investigation. One of the most talked-about criminal tax cases in recent years reached a surprising conclusion this week when Hunter Biden, the son of President Joe Biden, pleaded guilty (☆) to all nine charges in his federal tax case. Potential jurors had been waiting for jury selection to begin Thursday morning when Biden’s attorney proposed an Alford plea. With an Alford plea—sometimes called a “best interests plea”—a defendant pleads guilty while maintaining innocence. Prosecutors were taken aback by the offer, issuing objections and U.S. District Court Judge Mark C. Scarsi indicated that he would consider the matter. However, before Scarsi announced his decision, Biden’s legal team made the surprising announcement that he would plead guilty to all charges.

When taxpayers ask for an easy way to avoid tax trouble, outside of the obvious—file and pay on time—I almost always say, “Keep great records.” That advice would have made a difference in a recent U.S. Tax Court case, Kalk v. Commissioner, which focused on a lack of substantiation (☆). In Kalk, the taxpayer claimed to operate two businesses: a consulting business and a business developing a casino app. The IRS disallowed all of her business expenses because she failed to produce records substantiating the costs. The Tax Court largely agreed with the IRS except in the case of the casino app. The court determined the app wasn’t really a viable business, and the related expenses weren’t business expenses—they were gambling losses. Fortunately, for the taxpayer, those are deductible. Luck wasn’t exactly on her side, but she didn’t lose the house either.

A bit of luck helped stop a massive Covid fraud scheme earlier this year when a homicide investigation of a suspected gang member in San Diego resulted in seventeen indictments. How did it happen? A detective scrolling through a gang member’s phone discovered a notice from the IRS alerting him to a pending six-figure tax refund. This ultimately led to the discovery that four street gangs had conspired to defraud the IRS out of $1.75 million in pandemic relief funds. The fraudsters had some luck of their own, initially—they found and exploited a sloppy drafting error on Form 7202. As a result, payments from the IRS, ranging from $97,645 to $229,153, landed in their bank accounts.

The IRS is seeking opinions from taxpayers and tax professionals about a plan to legitimately direct money to bank accounts (☆). As a result of SECURE 2.0, beginning in 2027, qualifying individuals making annual contributions of up to $2,000 to certain retirement plans will be eligible to receive up to $1,000 in a saver’s match contribution from the Treasury each year. As you can imagine, there are still a lot of details to hash out, including how to make the election and whether participants will have to file a tax return to qualify. The IRS wants to hear from you.

Speaking of the IRS, I’ve been getting a lot of emails with the subject line “PTIN” together with attachments. Any tax professional who prepares any federal tax return or claim for a refund and receives compensation must have a valid Preparer Tax Identification Number—or PTIN—from the IRS.

(Taxpayers should not sign a tax return from a paid preparer without a PTIN on the form. Taxpayers looking for a prepared with a valid PTIN can search the IRS directory here.)

PTINs expire at the end of each year and must be renewed for use the following year. That means it’s about the right time of year to start seeing notes about renewals, but don’t be fooled into clicking on an attachment in an email—it’s a scam. If you have an existing PTIN, you can use the online renewal process on the IRS website (or if you prefer to renew by paper, you can file Form W-12), while first-time PTIN applicants can apply online by clicking over to the Tax Pros section of the IRS website at IRS.gov/taxpros.

September is a busy month for taxpayers and tax professionals. Estimated taxes and business tax returns on extension are due September 16, 2024. For more on that—and other good stuff, keep reading.

And, of course, enjoy your week!

Kelly Phillips Erb (Senior Writer, Tax)

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Taxes From A To Z: O Is For Ordinary Dividends

When a corporation distributes profits to shareholders, it typically issues a dividend. Dividends are generally paid in cash, but can also be paid out in other ways, like additional shares of stock. You have to report the dividend no matter how it’s paid to you.

Dividends are normally reported on Form 1099-DIV. The rule is that a company must issue the form if you receive more than $10 in dividends during the tax year, but as a practical matter, many companies send them out to all shareholders who receive payment.

How dividends are taxed depends on what kind they might be:

An ordinary dividend is, well, the most ordinary and it’s taxed as ordinary income—those rates max out at 37%, depending on your tax bracket. A dividend is generally considered ordinary unless otherwise stated.

A qualified dividend has to meet certain criteria—typically, that means it is paid out from a domestic corporation or qualified foreign corporation held for more than 60 days in the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which you are not entitled to receive the next dividend payment (when counting the number of days, include the day you disposed of the stock, but not the day you acquired it). If a qualified dividend meets the criteria, it can be taxed at more favorable capital gains rates—those rates max out at 20%, depending on your tax bracket.

Statistics

Earlier this summer, the IRS published its migration data for the United States. The data is based on year-to-year address changes reported on individual income tax returns filed with the IRS. The data shows inflows—the number of new residents who moved to a state or county and where they migrated from, and outflows—the number of residents leaving a state or county and where they went. I’ll be diving more into that data this fall, but for now, here’s a peek at where taxpayers file their federal individual income tax returns. Tax returns tend to follow population trends—but not always.

(Keep in mind that some individuals may use the address of a tax attorney or accountant, and those addresses could have been located in a state other than the state where the individual resided.)

The five states that filed the most individual tax returns for the 2023 fiscal year were California, Texas, Florida, New York, and Pennsylvania.

The five states (or more properly, four states and one district) that filed the least individual tax returns for the 2023 fiscal year were Wyoming, Vermont, Alaska, District Of Columbia, and North Dakota.

Taxpayers who file outside of the country weren’t included in those numbers—and they have their own set of challenges.

Questions

This week, a reader asked:

Help me out. What is the difference between the federal deficit and the debt?

Here’s the quick difference between deficit and debt:

The federal deficit is the overage of expenditures versus revenue/receipts in a fiscal year. In simple terms, if we spend more than we take in, we have a deficit. If we were to spend exactly what we took in, we’d have a balanced budget. And if we were to take in more than we spent, we’d have a surplus. We haven’t had a surplus since 2001.

The deficit at the end of 2023 was $1.69 trillion. Estimates have us at $1.5 trillion today.

The deficit is recalculated every year based upon the shortfall or surplus each month. If we have a deficit, the Treasury borrows money to make up the slack. The Treasury does this by selling securities like T-bills, notes, and savings bonds.

The federal debt is, more or less, the aggregate of the deficits. So if we owe $800 million one year and it’s not repaid, and we owe $500 million in another year and it’s not repaid, we have a debt of $1.3 billion. Make sense? And since this money represents borrowed money, we also pay interest on it, so it continues to increase even if we’re not affirmatively adding to it.

According to the US National Debt Clock, our debt as of September 6, around 1:30 p.m. ET, was $35.4 trillion—your share as a taxpayer is $269,269.

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Do you have a tax question or matter that you think we should cover in the next newsletter? We’d love to help if we can. Check out our guidelines and submit a question here.

A Deeper Dive

With the 2024 election looming on November 5, Congress is about to return from its five-week summer break. There isn’t much time to get down to business, with only 13 working days before the six-week break heading into the election. Tax Notes Capitol Hill reporters Cady Stanton and Doug Sword dove into what might be up for discussion when Congress returns to Washington.

Just before the recess, the Senate voted on the Tax Relief for American Families and Workers Act. That bill was the Senate version of the deal passed by the House of Representatives that would restore bonus depreciation, end the Employee Retention Credit (ERC) early, and expand the Child Tax Credit (CTC). It failed in the Senate (☆), and Stanton suggests that it’s not only merely dead, but really most sincerely dead.

Also potentially on the horizon? A tax extenders bill. A tax extender is what’s known as an expiring provision—basically, a short-term tax provision slated to expire. Congress often extends those tax provisions, usually for just a year or two. According to Stanton, there are a couple of extenders—especially business extenders—that have a deadline for the end of the year that could vie for spots and must-pass legislation for the end of the year.

And something else to talk about? A potential government shutdown. Government funding is set to run out after September 30, and Sword notes we are nowhere near a deal on government budgets. This will be the 28th year in a row that Congress will have failed to do the one thing the Constitution requires it to do, which is to pass a spending package on time. Sword predicts yet another continuing resolution that will extend funding at current levels for a period of time.

You can hear more, including a look at changes in personnel on the House Ways and Means Committee and the Senate Finance Committee, on Tax Notes Talk. You’ll find a transcript here.

Work It

If you follow me on social media, you know I can’t get through my day without music. With about a month before individual tax returns filed on extension are due (October 15, 2024) and just days before business tax returns filed on extension are due (September 16, 2024), many taxpayers and tax professionals need a last-minute push. What better way to do it than a community Spotify list?

Send me the names of the song or songs that you use to get through the end of not-so-regular tax season, and I’ll put together a list of some of the most popular for Forbes tax readers to follow. I’ll post the link in the newsletter and on social. Be sure to include your name, city, and state for attribution.

Tax Filings And Deadlines

📅 September 16, 2024. Third quarter estimated payments due for individuals and corporations.

📅 September 16, 2024. Due date for 2023 calendar year partnership returns (Forms 1065) and S corporations (Forms 1120-S) filed on extension.

📅 February 3, 2025. Due date for individuals and businesses affected by Hurricanes Beryl and Debby—more info here (☆) and here. (☆)

📅 February 3, 2025. Due date for individuals and businesses in South Dakota affected by severe storms, straight-line winds and flooding that began on June 16, 2024.

📅 February 3, 2025. Due date for individuals and businesses in Puerto Rico affected by Tropical Storm Ernesto.

Tax Conferences And Events

📅 September 18-19, 2024. National Association of Tax Professionals (NATP) Tax Forum. Caesars Palace, Las Vegas, Nevada. Registration required.

📅 September 23-27, 2024. ABA Section of Taxation Virtual 2024 Fall Tax Meeting. Registration required.

📅 October 22-24, 2024. NATP Tax Season Updates. Virtual. Registration required.

📅 December 16-17, 2024. NYU 43rd Institute on State and Local Taxation, Westin New York at Times Square, New York, NY. CLE and CPE available. Registration required, virtual option available.

Trivia

Which Las Vegas casino reportedly got its name from Benjamin “Bugsy” Siegel’s girlfriend, Virginia Hill, who had long, thin legs?

A. Aria

B. Bellagio

C. Circus Circus

D. Flamingo

Find the answer at the bottom of this newsletter.

Positions And Guidance

The IRS has published its most recent Internal Revenue Bulletin 2024-37.

Noteworthy

An AICPA & CIMA Economic Outlook Survey reports that 26% of business executives said they were optimistic about the economy’s prospects over the next 12 months, down from 35% last quarter and 29% a year ago. Those expressing optimism about the global economy also fell slightly from 22% to 19%, quarter over quarter. The quarterly survey polls chief executive officers, chief financial officers, controllers, and other certified public accountants in U.S. companies who hold executive and senior management accounting roles.

Global law firm Baker McKenzie announced that Ligeia Donis has joined the Firm’s North America Tax Practice as a partner in Washington, DC. Donis joins the firm with nearly 20 years of experience in the private and public sectors, including with the IRS Office of Chief Counsel and a Big Four accounting firm. Her practice focuses on employment benefits and compensation tax-related matters, including issues related to US employment tax, information reporting, and employee benefit rules.

Steptoe LLP has expanded its Transactions & Tax practice with the addition of partner Tim Walsh, who joins the firm in New York, and will co-lead the Insolvency & Restructuring practice along with partner Jeffrey Reisner. Walsh has more than 30 years of bankruptcy experience and advises clients on restructuring transactions.

A&O Shearman is expected to cut 10% of its partnership, end its consulting business, and close its South Africa office. According to the firm’s website, the Johannesburg team advises on corporate and M&A, finance, tax, projects, and dispute resolution matters.

Baker Botts LLP announced that Jason Graham has joined the firm’s tax department as a partner in the Dallas office. Graham’s practice focuses on representing multinational companies on cross-border tax matters involving internal restructurings, M&A and corporate transactions, and financing transactions.

Fox Rothschild announced that William M. Bromley has joined the firm’s West Palm Beach, FL office as counsel in the Taxation & Wealth Planning Department. Bromley provides practical solutions for trust and estate administration, including minor guardianship matters and helping clients settle disputes.

PwC has advised its 26,000 UK employees that it will begin tracking their working locations to ensure that all workers spend “a minimum of three days a week” in the office or at client sites. The requirement that partners and staff to spend 60% of their time with clients or in the office will take effect in January.

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If you have career or industry news, submit it for consideration here or email me directly.

In Case You Missed It

Here’s what readers clicked through most often last week:

• What You Need To Know—And Do—About The Massive Social Security Numbers Breach (☆)
• Businesses Aren’t Confident About Corporate Transparency Act Compliance (☆)

You can find the entire newsletter here.

Trivia Answer

The answer is (D) Flamingo.

Hill was a long time fixture in Las Vegas. However, in the 1950s, she was indicted for failing to pay $161,000 in income taxes—$1,947,728.46 in today’s money—and fled to Europe.

Feedback

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