Stay Ahead of Tax Changes: 2024 Controversy Roundup & Analysis

During 2024, the government scored significant victories in two court cases: Moore v. US and Farhy v. CIR. These cases highlight the limits and necessities of tax legislation, both in terms of protecting the public coffers and easing IRS administrative burdens. These issues are at the center of the IRS’s efforts to administer the employee retention tax credit (ERTC) program, which had several significant developments during 2024. So, what happened?

Moore v. US

In June 2024, the Supreme Court decided Moore, upholding the constitutionality of the Internal Revenue Code’s so‑called Section 965 transition tax, which imposes an income tax on the undistributed earnings of certain shareholders of certain foreign corporations. In that case, the taxpayers argued that the U.S. Constitution requires income be realized (received or subject to a triggering event) before it may be taxed. Many observers viewed the case as a preemptive strike against future attempts by Congress to impose a wealth tax like the proposals to tax appreciated but unrealized gains within property.

Under its longstanding precedents, the Court determined that Congress may attribute an entity's realized and undistributed income to its owners and then tax the owners on their portions of that income. Having determined a realization event in these circumstances, the Court declined to address the taxpayer's argument that the Constitution requires income to be realized before it may be taxed. In concurring and dissenting opinions, however, four of the Court’s nine justices indicated realization is required, perhaps signaling they would strike down a wealth tax as unconstitutional.

Farhy v. Commissioner

The government’s other notable victory was in Farhy. In that case, the D.C. Circuit Court of Appeals reversed the Tax Court, which had held the government could not administratively assess and collect specific international information return penalties, effectively requiring the government to sue and obtain judgments on these penalties, or counterclaim in a taxpayer’s refund suit, before the IRS could enforce their collection. The Tax Court's decision also seemed to prohibit the IRS from administratively assessing and collecting other similar penalties. The government, however, likely does not have the resources to litigate every one of these penalties or even a meaningful portion of them.

The D.C. Circuit Court’s decision, while relieving the IRS’s administrative burden somewhat and sparing Congress, for now, from having to enact a legislative fix, is not binding on other appellate courts nor is it binding on the Tax Court in cases not appealable to the D.C. Circuit. However, it gives the government an arrow in its quiver of arguments in future cases and allows it to move forward with administrative assessment of the penalties. In a separate case appealable to a different circuit, and prior to the D.C. Circuit’s reversal, the Tax Court followed its holding in Farhy, and the government will presumably seek reversal there as well.

Employee Retention Tax Credit (ERTC)

There was no shortage of legislative and administrative issues arising in connection with the ERTC program, which Congress created during the COVID era to offer financial protection to American businesses and workers. After finding itself awash in tens of thousands of invalid, possibly fraudulent ERTC claims valued at several billions of dollars, the IRS announced in mid-September 2023 a moratorium on processing new ERTC claims. What actually occurred fell just short of a grinding halt on processing all claims until the IRS could get its arms around the potential abuse surrounding the ERTC program.

In June 2024, following the review of more than one million ERTC claims aggregating more than $86 billion, the IRS announced plans to deny tens of thousands of the claims because they showed clear signs of being erroneous, containing "warning signals that clearly fall outside the guidelines established by Congress." The IRS estimated that 10% to 20% of the claims it analyzed fell into this high-risk group. Another 60% to 70% of claims showed “an unacceptable level of risk,” requiring additional IRS analysis to speed up the resolution of valid claims while protecting against improper payments. The remaining 10% to 20% of claims not falling into the first two groups showed a low risk, with the IRS anticipating that payments on these claims would be paid by the end of the summer.

In July, a federal district court in Arizona denied a request for an injunction against the IRS that would have lifted the IRS’s moratorium on processing new ERTC claims. The court observed that the IRS is notorious for processing delays and that the party seeking the injunction, a tax advisory firm assisting businesses with filing for credits and having “built its business model knowing that these types of delays were possible,” should bear “at least some responsibility for the harm [it is] now facing.”

Perhaps in response to this case and to stave off further ones like it, the IRS subsequently announced that it was lifting its moratorium on ERTC claims. However, this only applies to claims filed through Jan. 31, 2024, and it would begin judiciously processing those claims, focusing on those with the highest and lowest risk, thereby acting on those claims having a “sound basis to pay or deny a refund claim.” Indeed, we saw evidence in August 2024 of taxpayers receiving either payments or denials, presumably relating to the low- and high-risk groups, respectively.

Subsequently, a Senate vote in August failed to advance the Tax Relief for American Families and Workers Act of 2024, passed by the House in January 2024. That legislation would have, among other things, fixed certain statutes of limitations issues to give the IRS more time to recover invalid ERTC refunds and prevented ERTC claims filed after Jan. 31, 2024, from being considered. It is possible that some other form of this legislation could be revived in the future, even in 2025 or beyond; however, the early termination of the ERTC claims was the sole revenue generator in that statute and retroactively enacting it could be problematic.

On Sept. 24, 2024, the IRS explained how to respond to a denial of an ERTC claim. Taxpayers have two years to file a refund suit, but in the meantime, the IRS asks that taxpayers submit a protest to be reviewed by IRS Appeals. The IRS suggests submitting all the information necessary to substantiate the claim and asks taxpayers not to simply address the reasons for denial. The IRS also waives the preferred 30-day window to file a protest. Once the protest is filed, the IRS will take a fresh look at the claim before forwarding it to Appeals, effectively giving taxpayers two tries before needing to file a refund suit. It is important to stress, however, that unless you have received your refund prior to the two-year statute of limitations, you must file the refund suit to protect your claim.

Future legislation might be necessary to help ease the administrative burden the IRS faces in its efforts to properly and efficiently resolve the voluminous amounts of ERC claims and their corresponding dollar amounts at stake. Stay tuned.

CBIZ will continue to monitor these issues. Connect with our team to learn more.