This is a published version of our weekly Forbes Tax Breaks newsletter. You can sign-up to get Tax Breaks in your inbox here.
A few weeks ago, a friend asked me a question about her father. She hadn’t seen him in years, but he had reappeared—and he wasn’t well. “If he gets worse,” she asked, “Will I have to pay his bills?”
It was a real worry. She seemed to recall reading that if her father couldn’t pay his bills, she might be on the hook. She’s right. More than 25 states—and the territory of Puerto Rico—have something called filial support laws on the books. While they can vary widely, the idea is the same: a spouse, child, or parent may be responsible for footing the bill for an adult relative like a parent (or, as noted in my story, an adult child).
Pennsylvania Rep. Kristine Howard (D-District 167) understands that it can be counterintuitive to expect to pay for someone you don’t otherwise support. It’s confusing, she says, because you think, “My parent is an adult.” Howard recently sponsored H.B. 2094, also called the “Stop Bankrupting Pennsylvanians Over Family Medical Bills” Act, which wouldn’t repeal Pennsylvania’s filial law, but would tweak it. While working on this story about filial laws, I reached out to folks who had been impacted. No one would agree to go on the record. The experts that I talked to weren’t surprised—these situations can be a complicated set of emotions all rolled up into messy legal, medical, and financial bundles.
Speaking of messy (this issue of the newsletter will eventually be less morbid, I promise), more and more Americans are living and working overseas. This inevitably means that some U.S. citizens will pass away while living in another country. Not only are there practical consequences when this happens, but the estate of the U.S. citizen who died and the beneficiaries may be impacted. Understanding these tax implications can help navigate the complexities of handling estates with international ties.
Offshore tax evasion is weighing heavily on the minds of the Senate Budget Committee these days which has hosted two hearings on offshoring this year. The first, held in January, addressed corporate loopholes. The second, held earlier this month, addressed tax evasion by corporations and high-net-worth individuals. In that latter discussion, Chair Sheldon Whitehouse (D-R.I.) and ranking member Chuck Grassley (R-Iowa) laid out differing views on how Congress can combat offshore tax evasion. Whitehouse is largely turning his attention toward the Foreign Account Tax Compliance Act, or FATCA. Grassley thinks the government should rely more heavily on whistleblowers. Both have recently been addressed in pending legislation and hearings, but it’s unclear whether there might be any movement in the near future.
The government has moved forward on efforts to tax crypto and digital assets. The IRS has released a draft of Form 1099-DA, the next step in the agency’s efforts to bolster crypto tax reporting and follows proposed regulations published last year. (☆) The proposed regulations would, among other things, require brokers to report sales and exchanges of digital assets to the IRS on the new Form 1099-DA. In some circumstances, gains, losses, and basis information would also have to be reported—much like the 2008 requirement that brokers report the cost basis of certain securities to the IRS when a sale occurred.
Also being talked up? New tax proposals.
The White House released its Fiscal Year 2025 budget, which contains a pretty revolutionary proposal: the imposition of an excise tax on private space companies, such as SpaceX. At its core, the excise tax is an acknowledgment of the logistical effort borne by air traffic control whenever a rocket is launched—an occurrence that is becoming more common. At the end of 2022, countries had 6,718 active satellites orbiting the planet, an increase of nearly 2,000 satellites in just one year. (Other cool things I learned while reading this article include that there are such things as the Outer Space Treaty (around since 1967) and the United Nations Office for Outer Space Affairs (created in 1958). I feel smarter already.)
A more down-to-earth proposal involves capital gains. The number causing alarm is 44.6%, which would be the highest formal federal capital gains rate since its inception. But it’s not an across-the-board proposal. That number comes from a footnote from the General Explanations of the Administration’s FY 2025 Revenue Proposals, and is a combination of two proposals—a bump in ordinary income rates at the top from 37% to 39.6% (back to pre-2018 rates) and a boost to the net investment income tax surcharge from 3.8% to 5% for taxpayers whose taxable income exceeds $1 million ($500,000 for married filing separately). As an example, a taxpayer with $1,100,000 in taxable income, of which $200,000 is preferential capital income, would have $100,000 of capital income taxed at the preferential rate and $100,000 taxed at ordinary rates. Currently, short-term capital gains are taxed according to ordinary income tax brackets ranging from 10% to 37% (long-term capital gains are taxed at 0%, 15%, or 20%).
According to a report from the Federal Trade Commission, Americans lost more than $10 billion from theft and fraud in 2023. With many modern-day fraud schemes perpetuated online, victims of theft and fraud are often left with little to no prospect of recovering their stolen funds. Are there deductions available? It’s complicated. Before the 2017 tax reform, theft losses were fairly straightforward—you could typically claim a theft loss deduction under section 165(c)(3) if you could prove an unreimbursed theft loss. That changed in 2018 when losses were generally limited to those attributable to a federally declared disaster. Some IRS guidance, however, suggests that there might be support for a position that theft losses may be claimed outside section 165(c)(3). Given the uncertainty, it’s a good idea to consult with a trusted tax professional.
There’s even more post-2018 workaround fun involved in the Pass-Through Entity Tax (PTET). Congress capped the total amount taxpayers can deduct for state and local taxes—or SALT taxes—at $10,000 for all taxpayers. That means that even if your combined state and local tax bills top, say, $40,000, you’re limited to $10,000, assuming you itemize. (An earlier proposal to retroactively reinstate the deduction for 2023 was blocked earlier this year.) Some states, like California, have introduced a workaround via the PTET. It’s a valuable tax credit that can mean substantial tax savings for some, including high-income California business owners. With a Pass-Through Entity Tax payment, you essentially have your business pay your state income taxes—there are lots of caveats here, including that you must have a business taxed as an S corporation or partnership (that’s the pass-through part). If it sounds complicated, it can be, which is why you should work with a trusted tax professional to see if it works for you.
And finally, if you’re starved for some good conversation this weekend over cocktails, you can always ask your friends and relatives whether Perrier is water or a soft drink. A Pennsylvania court tackled that very question earlier this month. After some statutory interpretation—and a science lesson—they came down on the side of soft drink (making it subject to sales tax). (☆)
Cheers, and thanks for reading!
—Kelly Phillips Erb (Senior Writer, Tax)
Articles marked with (☆) are premium content and require you to log-in with your Forbes membership credentials. Not a subscriber yet? Click here to sign up.
IRS Deems Direct File Pilot Program A Success
The IRS has announced the closure of the Direct File pilot. The program, which was announced last year, and opened in mid-March, attracted several hundred thousand taxpayers across 12 states who signed up for accounts, with 140,803 taxpayers filing their federal tax returns using the new service.
The 12 pilot states included Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington State, and Wyoming. After filing their federal returns, taxpayers in states with state income tax—Arizona, California, Massachusetts, and New York—were guided to a state-sponsored tool to complete their state filing. The IRS reports that taxpayers using Direct File claimed more than $90 million in tax refunds and reported $35 million in tax balances due.
The IRS says that, “overall, usage exceeded IRS expectations for the limited pilot and far exceeded what was necessary to provide sufficient data for the agency to evaluate.”
The total amount spent by the IRS on the program was $24.6 million, including the Report to Congress. Operational costs, including customer service, cloud computing, and user authentication, were $2.4 million. To build and run the pilot, the IRS also engaged the U.S. Digital Service (USDS), which does not involve costs to the IRS.
Questions
As I noted last week, one of the things that I tell my clients is that almost everything is fixable. This week’s question is another example. A reader wrote:
So I tried filing my taxes with Turbo Tax, and I received a notification that I couldn’t file electronically, so I would have to print off the papers and mail them. I was afraid it was too close to the deadline to do it through the mail and I went to H&R Block and filed them. I didn’t realize Turbo Tax had already charged my card and apparently filed my taxes. So now I’ve received two refunds for the same amount and I don’t know where to go from here. How do I fix my mistake?
Mistakes happen, and fortunately, there’s a process to fix this.
The twice-filed tax return is the easy part—you don’t need to do anything right away. If a second tax return is submitted under the same Social Security number, the IRS will typically flag the second return, reject the return, and send you a letter.
If you receive two refunds, however, you’ll want to take action so that you don’t get a bill (plus interest) later.
If your refund was issued as a paper check and you haven’t cashed it, write “Void” in the endorsement section on the back of the check and return it to the IRS (you can find the address here). Include a note stating “Return of erroneous refund check” and explain why you’re returning the check—a quick explanation is okay, there’s no need to write a novel.
If your refund was issued as a paper check and you cashed it, you’ll want to pay it back immediately. Write “Payment of Erroneous Refund” on the check or money order, the tax period (here, it’s the 2023 tax year), the account type (in this case, IMF for an individual) and your taxpayer identification number (Social Security number or individual taxpayer identification number). Mail it to the IRS (you can find the address here). Again, you’ll include a note stating “Return of erroneous refund check” and explain why you’re paying it back.
If your refund was a direct deposit, contact your bank or financial institution and have them return the refund to the IRS. Since there’s no paper trail, the IRS wants you to call 800-829-1040 to explain why the direct deposit is being returned. (If that’s too stressful or your bank won’t cooperate, try sending a check or money order as outlined above.)
No matter how you return the refund, keep excellent records in case the IRS follows up. If you mail a check or money order, keep a copy and send using a traceable method (ideally, certified mail). If you work directly with the bank, keep a note of the date you asked for the check to be returned, along with the name of the person you spoke to.
—
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
The IRS suffered another defeat in the U.S. Tax Court focused on civil penalties and automatic assessments—and taxpayers have last year’s ruling in Alon Farhy v. Commissioner of Internal Revenue to thank. In Farhy, the taxpayer was required to report his ownership interests in foreign corporations. Farhy didn’t dispute that he did not file nor that he had not paid. Instead, he challenged whether the IRS had the legal authority to assess section 6038 penalties. “Simply put,” the Court found, “while section 6038(b) provides for penalties, it does not provide for assessable penalties.” That was a huge success for the taxpayer and raised questions about other kinds of assessable penalties—precisely the issue raised in Mukhi. (☆) The Court ultimately found that analyzing the penalties under section 6038(b) wasn’t necessary, referring to Farhy. The Court also rejected the taxpayer’s Eighth Amendment arguments related to section 6677, finding that the additions were penalties, not fines. (Farhy is on appeal and you can bet that Mukhi will be appealed, too. Keep an eye out on this one.)
Another case worth watching is Townley v. United States. Tony D. Townley, cofounder of Zaxby’s, and his wife, Elizabeth A. Townley, are suing for a tax refund of $43 million based on charitable deductions for conservation easements valued at $166 million. How are easements on 794 acres with a basis of $1,277,420, and assessed at $1,678,435, worth $166 million? Gravel has been discovered on the land—Townley appraisers argue that gravel mining is the highest and best use, so they are valuing the property, in part, by taking the discounted cash flow from mining for the next twenty years. The appraisers for the government do not agree that the gravel mines are economically feasible. The case is slated to be heard in U.S. District Court (not the Tax Court) on May 13, 2024.
Listen Up
Nearly 40 years ago, the Supreme Court ruled in Chevron v. Natural Resources Defense Council that courts should give deference to regulatory interpretations of ambiguous statutes as long as those interpretations are reasonable. Earlier this year, the Court heard oral arguments in a case called Loper Bright Enterprises v. Raimondo. The takeaway? Chevron is not likely to survive intact—if at all.
This week, Tax Notes spoke with Frank Agostino, the founder and president of Agostino & Associates, a firm in Hackensack, New Jersey, about the potential fall of Chevron and what it means for the tax world. Among other things, there could be a renewed by courts at interpretations in the Regs. For now, there’s a lot of deference. But in a post-Chevron world, it will be interesting to see whether courts exercise their oversight function over the executive branch to bring us closer to what they believe was the plain language of the statute or congressional intent, applying the traditional rules of statutory construction. (Transcript available).
Important Dates
📅 May 2 – May 4, 2024. ABA Section of Tax May Tax Meeting. Washington, DC. Registration required.
📅 May 15, 2024. Information tax returns (series 990) are due for tax-exempt organizations with a tax year ending in December.
📅 May 17, 2024. Deadline for filing for refunds for tax year 2020. The IRS has announced that almost 940,000 people have unclaimed refunds for tax year 2020.
📅 June 17, 2024. Second quarter estimated payments are due for individuals for the 2024 tax year.
Noteworthy
American Bar Association (ABA) member dues will rise for the first time in a decade. At the 2024 ABA Midyear Meeting, the House of Delegates overwhelmingly approved a new member dues structure that will go into effect September 1. Under the new fee structure, government attorneys, non-profit and public interest attorneys, judges, solo practitioners, small firm lawyers, retirees, international lawyers, and affiliated professionals will pay $195 in dues. Paralegals will pay $120.
The IRS encourages tax professionals to register for the 2024 IRS Nationwide Tax Forum, coming this summer to Chicago, Orlando, Baltimore, Dallas, and San Diego. This year’s agenda will feature more than 40 sessions on tax law and ethics as well as hot topics like beneficial ownership information, cybersecurity, tax scams and schemes, digital assets, and clean energy credits. Enrolled agents, certified public accountants, Annual Filing Season Program (AFSP) participants, and other tax professionals can earn up to 19 continuing education (CE) credits.
A major year for tax policy is looming in 2025, when several tax cuts enacted in the 2017 tax law are set to expire. To help inform debate, the Tax Law Center has launched a new online tool. The interactive Tealbook offers over 50 options for policymakers to improve the integrity of the tax system that can be considered.
Sovos, a global provider of tax, compliance and trust solutions and services, announced that it has aligned with the Digital Business Networks Alliance (DBNAlliance), a non-profit backed by the Federal Reserve. The partnership aims to accelerate U.S. e-invoicing adoption and revolutionize digital sales and purchasing transactions within the business community, both domestically and internationally.
A new survey commissioned by the Economic Security Project, the first of Direct Filers since the tax deadline, shows that the new IRS Direct File tool improved tax season for the hundreds of thousands who used it this year. Some specific findings include: 74% of respondents said they prefer Direct File over their previous tax filing method, and 82% of respondents gave at least an 8 out of 10 likelihood they would recommend the service to others.
—
If you have career or industry news, submit it for consideration here.
Trivia
Which Apollo 13 astronaut infamously radioed Mission Control from space to ask, “How do I apply for an extension?” when he realized he had not yet filed his taxes?
A. Ken Mattingly
B. Fred Haise
C. Jim Lovell
D. Jack Swigert
Find the answer at the bottom of this newsletter.
Our Team
I hope you’ll get to know some of our staff and contributors. This week, the idea of an excise tax for space travel made me wonder: If you had the opportunity, would you travel to space?
Kelly Phillips Erb (Senior Writer, Tax): I saw Apollo 13, so no, thank you.
Emma Whitford (Writer, Education): I would totally go, assuming many, many people have already tested out recreational space travel before me.
Maria Gracia Santillana Linares (Writer, Careers): If the whole submarine fiasco taught me anything is that I am doing just fine on earth! So no space for me, I think.
Amber Gray-Fenner (Contributor, Tax): Space? #ConeOfNope
Mitchell Martin (Editor, Digital Assets): I can’t imagine space technology being good enough for me to want to go anywhere in my lifetime.
David Rae (Contributor, Personal Finance): Yes, if given the opportunity to go to space I would…but boy, would I be nervous.
Virginia La Torre Jeker (Contributor, Tax): I would definitely not travel to space. The size of the cosmos frightens me – A LOT!
Andrew Leahey (Contributor, Tax): My answer is an unreserved no—for the same reason I wouldn’t want to take one of those private submarine rides to the bottom of the ocean: I will invariably have to rely on too many people having done their job too meticulously to ever feel comfortable.
Key Figures
That’s the amount of tax that the Airport and Airway Trust Fund (for Federal Aviation Administration work) will get for the current fiscal year. Commercial space companies are currently exempt.
Trivia Answer
The answer is (D) Jack Swigert.
Jack Swigert was originally part of Apollo 13’s backup crew but was bumped to the space crew when Ken Mattingly was exposed to German measles. The last-minute switch meant that he hadn’t filed his taxes by the deadline of April 15, 1970.
Swigert did get his extension. NASA contacted the IRS, which agreed he would qualify as a U.S. citizen abroad—really, really abroad.
(Jim Lovell and Fred Haise accompanied him on the space flight but were part of the original crew.)
Feedback
How did we do? We’d love your feedback. If you have a suggestion for making the newsletter better, let us know.
Read the full article here
