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TaxBuzz Top 5 - Supreme Court Upholds Trump-Era Tax, IRS to Deny Billions of ERTC Claims & More

by
Rebekah Barton
on
6/21/2024
TaxBuzz Top 5 - Supreme Court Upholds Trump-Era Tax, IRS to Deny Billions of ERTC Claims & More

Each Friday, TaxBuzz brings you the top five tax and accounting headlines you need to know from the workweek. We know life can get busy and you don't always have time to scroll through your news feed to stay informed.

We weed through all of the week's stories to showcase the most important updates in the tax and accounting world.

1. Supreme Court Upholds Trump-Era Tax on Foreign Income

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Credit: Philip Yabut/Getty Images

The Supreme Court upheld a tax on foreign income tied to former President Donald Trump's 2017 tax cuts, with a 7-2 vote. Justice Brett M. Kavanaugh, writing for the majority, stated the tax was within Congress's constitutional authority. Justice Amy Coney Barrett, joined by Justice Samuel A. Alito Jr., wrote a concurring opinion, while Justices Clarence Thomas and Neil M. Gorsuch dissented.

The case, initiated by Charles and Kathleen Moore of Washington State, challenged a provision requiring U.S. shareholders owning significant shares in foreign corporations to pay a one-time tax on undistributed earnings. The Moores, facing a $15,000 tax bill, argued this violated the Constitution's apportionment requirement.

Paul Ryan, former House speaker, supported maintaining the tax, warning that overturning it could destabilize the tax code. The Biden administration also defended the tax, emphasizing its limited application and historical precedent.

The case has been controversial since the justices agreed to hear it, according to a New York Times report. Some tax experts urged the Supreme Court to distance itself from the dispute entirely, while certain ethics professionals urged Chief Justice Roberts, Justice Thomas, and Justice Ketanji Brown Jackson to recuse themselves. Each of this trio has a stake in a limited liability company or partnership, and could potentially benefit from the tax being declared unconstitutional. They all participated in the case.

Justice Kavanaugh noted, “The tax fell within the authority of Congress under the Constitution,” a decision crucial for maintaining the integrity of the tax system.

2. IRS Set to Deny Billions of ERTC Claims

Per the Wall Street Journal, the IRS plans to deny billions in improper claims for the pandemic-era Employee Retention Tax Credit (ERC) while beginning to pay some valid claims after a lengthy review. The IRS maintains a moratorium on processing new claims filed since mid-September 2023, initially intending to resume in late spring. Commissioner Danny Werfel stated, “The IRS remains deeply concerned about how many taxpayers have been misled... into thinking they’re eligible for a big payday.”

In December of last year, federal authorities launched a voluntary disclosure initiative for those who had mistakenly or incorrectly claimed ERTC benefits.

The ERC program, costing the government around $230 billion, aimed to help employers retain workers during the pandemic. However, fraudulent claims surged post-pandemic, with many deemed questionable. Currently, the IRS has over one million pending claims, mixing legitimate and fraudulent ones.

To curb abuse, the IRS has allowed claim withdrawals, increased audits, and launched criminal investigations. The House voted to end the ERC for new claims post-January 31, 2024, potentially saving $80 billion, but the bill stalled in the Senate. The IRS plans to deny tens of thousands of high-risk claims soon and continue scrutinizing others.

3. Treasury, IRS to Close Large Partnership Tax Loophole

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Credit: Silverman Media Services/Getty Images

The U.S. Department of the Treasury and the IRS unveiled a plan on Monday aimed at closing a major tax loophole used by large partnerships, potentially raising over $50 billion in tax revenue over the next decade. Per CNBC, the plan targets “related party basis shifting,” a strategy where businesses use different legal entities to trade asset purchase prices, allowing them to take more deductions or reduce future gains.

“These tax shelters allow wealthy taxpayers to avoid paying what they owe,” said IRS Commissioner Danny Werfel. The agencies plan to issue proposed regulations and released a revenue ruling on related-party partnership transactions lacking economic substance or substantial business purpose.

The initiative builds on IRS efforts to audit wealthy taxpayers, large corporations, and complex partnerships. Treasury Secretary Janet Yellen stated, “Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit.”

Pass-through business filings with over $10 million in assets increased 70% between 2010 and 2019, while audit rates for these partnerships fell from 3.8% to 0.1%, contributing to an estimated $160 billion annual tax gap attributed to the top 1% of filers.

The announcement follows President Joe Biden’s economic advisor's call for sustained IRS funding to ensure wealthy taxpayers pay their fair share. IRS funding has been contentious, with Republicans targeting the nearly $80 billion allocated via the Inflation Reduction Act.

4. Some U.S. States Look to Abolish Property Taxes

Some state lawmakers around the United States are proposing a total elimination of property taxes, with anti-tax initiatives appearing on this year's ballots. Home prices have surged over the past few decades, leading to significantly higher property taxes, especially impacting elderly residents on fixed incomes and low- to middle-income earners.

In Michigan, a grassroots effort led by real estate agent Karla Wagner aims to abolish state and local property taxes. “Think about elderly people who bought their homes 40 to 50 years ago,” Wagner said in a Governing.org article. “Now, because they’re no longer earning income, they’re forced to sell that house because property taxes have become unaffordable.”

Replacing property taxes is challenging. In Wyoming, a bill to eliminate property taxes for most residents failed due to its plan to increase sales tax by 2%. Nebraska Governor Jim Pillen has proposed reducing property taxes by 40%, offsetting with higher sales taxes.

Critics argue that relying on sales taxes could disproportionately impact lower-income workers. Some suggest limits on assessments or rate increases as alternatives. Despite challenges, efforts to eliminate property taxes continue, with lawmakers like Florida GOP state Rep. Ryan Chamberlin pushing for further studies.

5. Kenyans Protest Controversial Tax Bill

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Credit: narvikk/Getty Images

Crowds of Kenyans clashed with police in Nairobi on Thursday, June 20, protesting the Finance Bill 2024, which proposes significant tax increases. The bill, first presented in May, has sparked widespread discontent across the nation.

In Nairobi, police used tear gas and water cannons against demonstrators. "Police were firing teargas at us and we had to run into a nearby café to seek shelter," said Stella Njoki, a student protester in an ABC News report. Amnesty Kenya reported at least 283 arrests, including four journalists, condemning the excessive force and arbitrary detentions.

The U.S. Embassy in Nairobi issued a demonstration alert, advising citizens to remain vigilant as peaceful events can quickly turn violent.

Finance Minister Njuguna Ndung'u said the bill aims to revitalize the economy and raise 346.7 billion Kenya shillings. However, many fear it will worsen the economic burden amid high living costs.

President William Ruto’s office announced amendments to the bill, removing the proposed 16% VAT on bread, taxes on foreign exchange transactions, and a 2.5% motor vehicle tax, following public feedback.

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Feature Image Credit: narvikk/Getty Images

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Rebekah Barton

Rebekah Barton

Rebekah's search engine optimization career began completely by accident as a college student. Over the course of her career so far, she has "grown up" with the SEO industry, from writing content while juggling classes to managing her own teams of writers and overseeing SEO strategy in subsequent roles. She is excited to bring her passion for high-quality content to CountingWorks, Inc.

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