31/10/23

US: Has the IRS Closed the Majority of Tax Reporting Loopholes?

As published on: financemagnates.com, Tuesday 31 October, 2023.

Recent efforts by the IRS have drawn both support and scrutiny from members of Congress.

Tax season is a stressful time for many Americans, but it is also an important time for the Internal Revenue Service (IRS) to ensure that taxpayers report their income honestly and pay their fair share of taxes. Over the years, taxpayers and the IRS have engaged in a perpetual cat-and-mouse game, with individuals and corporations looking for methods to reduce their tax liability while the IRS works to plug any tax loopholes.

The Game of Cat and Mouse:

The dispute between taxpayers and the IRS over tax loopholes is not new. Individuals and organizations have used various tax planning tactics for decades to legitimately decrease their tax liability. These techniques have included taking advantage of the tax code's deductions, credits, exemptions, and other benefits.

As a result, the IRS has constantly amended tax laws and regulations to fill gaps and close potential loopholes. As policymakers strive to handle various tax-avoidance methods, the tax system has risen in complexity. However, this complexity has generated opportunities for people and organizations to exploit tax law uncertainties.

Tax Loopholes vs. Tax Planning: Which Is Better?
It is critical to distinguish between legal tax preparation and taking advantage of tax loopholes. Tax planning entails employing provisions in the tax code to reduce one's tax bill while remaining within the legal parameters. This may involve retirement account, investment, and charitable contribution selections.

Tax loopholes, on the other hand, involve taking advantage of flaws or ambiguities in tax regulations in order to get an undue tax advantage. These loopholes frequently entail creative interpretations of the tax code or the use of legal structures to dramatically minimize tax liability.

The Implications of Tax Reform:
The Tax Cuts and Jobs Act (TCJA) of 2017 was a key development in recent years that attempted to remove some tax loopholes. This comprehensive tax reform law produced significant changes to the tax code, including the reduction of corporation tax rates, the modification of individual tax brackets, and the elimination or limitation of certain deductions.

The TCJA was intended to streamline the tax code and limit chances for tax evasion. It limited itemized deductions including state and local tax deductions (SALT) and mortgage interest deductions. It also reduced some tax benefits connected with certain corporate models.

While the TCJA closed some gaps, it also added additional difficulties and opportunities for tax planning. It created the Qualified Business Income (QBI) deduction, which allows eligible business owners to deduct up to 20% of their qualified business income. This clause has sparked debate about the possibility of abuse and innovative structuring to maximize tax benefits.

International Taxation Issues:
International taxes is another area where tax loopholes have been a source of worry. Because of the globalization of the economy, multinational firms now have more options to participate in profit-shifting methods and take advantage of disparities in tax rates between countries.

The Organization for Economic Cooperation and Development (OECD) has been working on a project known as Base Erosion and Profit Shifting (BEPS) to solve this issue. The purpose of BEPS is to create worldwide rules to prevent multinational firms from avoiding taxes. These guidelines are intended to guarantee that earnings are taxed where economic activities occur and value is created.

While BEPS is an important step toward reducing worldwide tax loopholes, its effectiveness is contingent on widespread adoption and enforcement by individual governments. Addressing the issues provided by foreign tax planning remains a complex and continuous endeavor.

Bitcoin and Emerging Technologies:
As technology advances, new forms of income and assets arise, providing tax authorities with new issues. For example, cryptocurrency has grown in popularity as an investment and a means of exchange. The decentralized and pseudonymous nature of cryptocurrencies, on the other hand, has generated concerns about tax avoidance.

To address these issues, the IRS has issued advice on the tax treatment of cryptocurrencies and requires taxpayers to declare their bitcoin transactions. The anonymity of some cryptocurrencies, as well as the worldwide character of the digital economy, provide significant issues for tax compliance.

Tax Administration and Compliance:
The IRS has been spending heavily in technology and data analysis to increase tax enforcement and compliance. The agency has access to a wealth of financial information, such as bank records, income reports, and other financial transactions. This data enables the IRS to more efficiently discover inconsistencies and potential tax evasion.

The IRS has also focused more on high-income individuals and sophisticated tax structures, such as offshore accounts and trusts. High-profile tax evasion cases have drawn public attention and served as a deterrence to potential tax evaders.

Legal Disputes with the Tax Court:
Taxpayers and the IRS routinely clash in court over how tax laws and regulations should be interpreted. In tax court, taxpayers can contest the IRS's stance, and court judgments can influence tax enforcement and interpretation.

Tax court cases can identify anomalies in the tax system, leading to regulatory modifications or legislative action to clarify tax legislation. The judicial system provides another route for resolving potential tax loopholes and ensuring that taxpayers follow the text and spirit of the law.

Impact and Controversy: IRS's Efforts to Close Tax Reporting Loopholes
The recent efforts by the Internal Revenue Service to close the majority of tax reporting loopholes have drawn both support and scrutiny from members of Congress. As the government averted a shutdown, legislators turned their attention to tax fairness and employee retention credit issues.

In a letter dated October 2, Sens. Elizabeth Warren, Sheldon Whitehouse, Chris Van Hollen, and Bernie Sanders urged the Treasury Department to use its rulemaking authority to close tax loopholes that they argue create inconsistency and unfairness in the tax code. These provisions build upon last year's Inflation Reduction Act and target tax avoidance behaviors by high earners and large multinational corporations. The senators called for guidance on issues such as "dynastic wealth" and transfers of foreign assets, tax liability for subsidiaries' passive earnings, and payroll taxes owed by fund managers. They emphasized the need to correct past rulemaking and ensure that the tax system is fair, particularly for the wealthy.

In a separate development, the IRS decided to halt processing new employee retention credit (ERC) claims, citing the proliferation of "ERC mills" – bad-faith tax preparers contributing to a backlog of questionable claims. This decision has raised concerns, as it could exacerbate wait times and hinder legitimate claims from receiving payments.

Ways and Means Committee Chair Jason Smith and Oversight Subcommittee Chair David Schweikert wrote to the IRS seeking clarity on this decision. They urged the IRS to expedite the processing of legitimate claims and install safeguards against future fraud while protecting taxpayers from scams.

These actions by the IRS underscore the ongoing efforts to address tax reporting issues, but they also raise questions about the potential impact on taxpayers and the fairness of the tax system. The IRS's response will play a crucial role in shaping the future of tax reporting and compliance in the United States.

The Ongoing Conflict:
In conclusion, the battle between taxpayers and the IRS over tax loopholes is ongoing. While the IRS has worked to close certain loopholes and improve tax enforcement, tax planning is still a legal practice. The tax code's complexity, the introduction of new financial technology, and worldwide tax problems all provide opportunity for people and organizations to engage in creative tax planning.

The IRS's ability to close the bulk of tax reporting loopholes for ordinary people is dependent on a number of circumstances, including legislative changes, enforcement actions, and taxpayer compliance. Taxpayers and the IRS must adapt to new challenges and possibilities as the tax environment advances, underlining the necessity of a fair and effective tax system that benefits society as a whole.

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IRS US Tax Reporting