A different tax landscape at mid-year

The recent Supreme Court decision in Loper Bright will affect tax practitioners for years to come. The decision overruled the Chevron doctrine, which mandated that where a statute is ambiguous, courts should defer to a federal agency’s reasonable interpretation of the statute. 

“This gave the federal agencies, such as Treasury and the Environmental Protection Agency, the ability to create their own law, as long as it was a ‘reasonable interpretation’ of the statute,” said Dave Gair, leader of the tax controversy practice at law firm Locke Lord. “Courts have been pretty deferential toward federal agencies. They were able to put in things that were not in the law but were arguably a reasonable interpretation. Businesses and individuals did not necessarily know what to expect, particularly as interpretations changed from administration to administration.”

“For example, the Environmental Protection Agency had a certain view of fossil fuels under the Trump administration, but that view changed when Joe Biden became president,” he explained. “So they could go back and forth between administrations, which added the risk of uncertainty to tax compliance and planning.” 

Consequently, many regulations may be going by the wayside, according to Gair: “They may no longer be valid, and so for tax practitioners there will be a lot more to argue about. It’s creating a bit of a Wild West atmosphere. A couple of years ago they came out with new regs on partnership audits; practitioners have studied them exhaustively, but they may not be valid anymore.”

Shifting priorities

The Chevron decision is just one of a number of current changes in the tax landscape, Gair said.

Internal Revenue Service funding under the Inflation Reduction Act has made it possible for the Biden administration to hire additional staff. 

“If you go to any tax conference, you may have seen an IRS booth that is meant to attract attorneys and CPAs to come and work for the agency,” Gair said. “It’s one of the things the Biden administration is doing to try and restore fairness in tax compliance by shifting focus to high-income earners, partnerships and promoters of abusive tax shelters. By contrast, over the past few years there has been a focus on low-income taxpayers and preparers using questionable returns to qualify taxpayers for the Earned Income Tax Credit. The government is getting away from that part of the industry and focusing on those earning more than $400,000 a year.”

“Right now, they’re opening exams of 75 of the largest publicly traded partnerships,” Gair noted. “This includes hedge funds, real estate investment partnerships, large law firms and other industries. Another thing we’re seeing happening is an industry focus on cryptocurrency and other digital assets. Most of the IRS forms have been changed to add information about crypto and other digital assets. Some studies have shown that people who own cryptocurrency have a 75% noncompliance rate — the government thinks that if you’re dealing in bitcoin you’re very likely to be evading taxes.”

Another area the government is interested in is nonfilers with foreign accounts. A lot of high-income taxpayers have taken their money offshore to avoid disclosure and payment of taxes. ID theft is still an issue, and probably will be, for as long as we live, Gair said. 

Lastly, the Employee Retention Credit still raises questions: “The ERC was a pandemic-era method to help businesses stay afloat when they were suffering from government shutdowns or regulations,” he explained. “A very small percentage were valid, and the market was flooded with ‘consultants’ who took a cut upfront and may have disappeared by the time the claim could be denied.”