Tag: losses

IRS Should Target Individual Taxpayers Reporting Large Business Losses

The estimated annual “Tax Gap” exceeds $440 billion.  That is to say, the amount that U.S. taxpayers pay in taxes every year falls short of the amount actually owed by some $440-plus billion.  The Treasury Inspector General for Tax Administration—or, for those who prefer a more wieldy acronym, TIGTA—a government tax watchdog, has been engaged in an effort to determine how the IRS can make a meaningful dent in that ever-troubling Tax Gap.  The answer, in part, is more audits.  But more specifically, the right kinds of audits.  According to TIGTA, that means placing a particular focus on taxpayers who report “Schedule C” activity reflecting significant losses.

Schedule C Reporting

A sole proprietor engaged in a business is generally required to report the associated income and expenses on Schedule C of their Form 1040.  Much the same, an individual operating through a single-member limited liability company (LLC) is often required to report such business activity on a Schedule C.  Schedule C is used to calculate a sole proprietor’s business profits and losses.  While Schedule C often involves complex business expense deductions, there is often limited tax withholding or information reporting associated with Schedule C activities.  In other words, there are often limited third-party checks in the system, and thus it is not easy to validate or cross reference those deductions without conducting an audit.  

The IRS estimates that net misreporting with respect to Schedule C activities is as high as 55 percent when there is little information reporting or associated tax withholding.  The IRS estimates that underreporting contributes to approximately $352 billion of the annual Tax Gap, and that as much as 45% of this underreporting is attributable to individual business income associated with Schedule C.  So it comes as no surprise that TIGTA has drawn its attention to Schedule C reporting.  

The courts, for their part, have characterized the consistent, sizeable underreporting of income as a so-called “badge of fraud” that indicates tax fraud.  Recognizing this, TIGTA has recommended that the IRS should focus its efforts on systematically identifying Schedule C underreporting—a recommendation that it maintains will combat a significant source of repeat noncompliance. 

The Primary Target: Taxpayers Reporting Schedule C with No Gross Receipts and No Profit

TIGTA’s most recent study indicates that the IRS should zero in on tax returns with at least one Schedule C reflecting no profit.  TIGTA found that when the IRS audits tax returns with at least one Schedule C with no gross receipts and no profit, and where the return reflects a loss of $100,000 or more, the audit results in an average assessment in excess of $50,000.  In layman’s terms, the IRS gets a pretty big bang for its buck. 

TIGTA’s report was also critical of the IRS’s past failure to focus on, or even audit, Schedule C losses.  TIGTA noted that individual tax returns with a Schedule C reflecting losses present a high compliance risk and an opportunity for the IRS to realize a high return on investment when

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‘Danger sign’: State, local government job losses grow as Congress stalls on relief

The new data undercut a Republican argument that state and local governments have gotten enough help from Washington, with some citing an uptick in revenue for many states this summer that outpaced initial projections. But the job losses suggest that economic relief that Congress approved in the CARES Act in late March gave a temporary boost to local economies that’s now drying up.

Not all Republicans have rejected more state aid outright. In an interview, Sen. Bob Menendez (D-N.J.) cited three Republican cosponsors — Sen. Bill Cassidy of Louisiana, Cindy Hyde-Smith of Mississippi and Susan Collins of Maine — for his bill to provide $500 billion in flexible grants to help state and local governments.

“One of the lessons we should take from the Great Recession was that massive layoffs and tax increases at the state and local level acted as an anchor and weighed down our economic recovery for years to come,” Menendez said. “We shouldn’t repeat that.”

He pointed to a Moody’s Analytics report this month that predicted the fiscal shock for state and local governments could run as high as $450 billion, or 2.2 percent of the economy. However, that figure assumes an additional stimulus, projected at approximately $1.5 trillion, from the federal government arriving sometime in the fall.

Rep. Tom Cole (R-Okla.), a member of the House Republican leadership and a senior appropriator, told POLITICO that if lawmakers fail to reach agreement soon, the economy could “lose the momentum that we created over the summer.”

“There’s a lot of things that were actually generating revenue for states that are ending,” Cole said, referring to unemployment benefits, stimulus checks and coronavirus support funds.

Even though many of his fellow Republicans think no more aid is needed, the “political reality is if you want a package, there’s going to have to be state and local and tribal aid in it, period,” Cole said.

Meanwhile, local budget officials have kept up a steady call for more aid. They also warn that federal funds already provided can’t be used the same way by all states.

Colorado Treasurer Dave Young said that even though the state managed to fill shortfalls earlier this year using reserves, the drawdown led to automatic spending cuts because a certain level of reserve funds is required by statute.

Young said the state also has difficulty using the Municipal Liquidity Facility, which the Federal Reserve set up in April as a backstop emergency lending source for states in financial distress. With so few states using the facility, Sen. Pat Toomey (R-Pa.) has suggested that officials wind it down.

But Young said the facility, which lends short-term debt at above-market rates to be paid off over a maximum of three years, isn’t a viable option for Colorado, because state law requires that any borrowing must be paid off in the same fiscal year it is made.

“When they say, ‘Well, you’re not utilizing it!’ Well, there’s a number of reasons we’re not utilizing it. None of them have

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