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Ext. PublicationThe Tax Navigator – IRS Filing and Refund Trends, AI Risks in Tax Court, Tax Shelters and Section 163(j) Updates
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In this episode of The Tax Navigator, Sean Muller breaks down several tax developments, including current IRS filing and refund trends, increasing risks tied to the use of AI in Tax Court proceedings and heightened scrutiny of a charitable tax shelter. He also explains recent changes affecting Section 163(j), outlining how interest expense limitations apply and what relief options may be available to qualifying taxpayers.
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Detailed Description of The Tax Navigator – IRS Filing and Refund Trends, AI Risks in Tax Court, Tax Shelters and Section 163(j) Updates
00:00:00
Sean: The IRS released a report on Friday that they have processed 68 million returns through last Friday, pretty much in line with last year’s, so all the fears we had about their inability to process returns may be for naught.
00:00:15
Sean: Refunds are up about $350 over what last year was. President Trump had proposed it would be $1,000 for everybody, but that hasn’t come true, so we’ll see how that plays out in the midterm elections if they don’t get all the refunds they’re expecting.
00:00:30
Sean: Now we keep talking about AI and all its great benefits, but in the tax world, we see a lot of hallucinogenic cases that are brought up and these fake rules that are brought up by AI, so we really can’t rely on it. We’ve got to go test it.
00:00:43
Sean: Well, now the court system has seen a number of attorneys that have used AI to cite wrong things, and now we’re seeing the same thing in the Tax Court.
00:00:53
Sean: In the Tax Court, you can represent yourself, and so taxpayers are going in there and filing briefs using AI that are completely wrong. Now the Tax Court is arguing or considering what kind of fines they’re going to put on taxpayers. There is a code section out there, Section 6673, that will actually allow the Tax Court to assess up to a $25,000 fine on taxpayers if they’re having frivolous arguments or wasting time, and that would fall under the case of providing AI citations that are incorrect. So more to come on that with tax courts.
00:01:26
Sean: A whistleblower just recently went to the Senate and talked about a tax shelter that’s out there.
00:01:32
Sean: There is a company that says they’ve done everything up and up, but what the gist of the process is, is they go to wealthy taxpayers and tell them to go invest in a technology shell company. And then, after investing a minimal amount of dollars in the shell company, they actually get a charitable contribution. They contribute that to some charity out there, and then they take up to five-times benefit for what they put in there. So, they may invest $50,000 into a shell company that has some technology.
00:02:02
Sean: They will then contribute that technology to a not-for-profit that could potentially use the technology, and they value the technology at five times what it is. So a whistleblower brought that to Congress, and Congress is going to take a look at that.
So, if you’re being pitched that idea, it is on the radar screen now, and it may be a problem.
00:02:22
Sean: The last thing from last week, there is an eligible real property election you can make dealing with Section 163(j). Section 163(j) deals with interest expense disallowance, and prior to 2022, you could add back depreciation and amortization.
00:02:38
Sean: For OBBBA, you could add back depreciation and amortization again to determine your interest expense limitation. Well, for 2022 to 2023, 2024, you had to deduct depreciation and amortizations. So, if you’re a qualifying real property entity, you can make an election where Section 163(j) would not apply.
00:02:56
Sean: The problem is that election is permanent. And so now that bonus depreciation is allowed at 100%, and you can add back depreciation and amortization, taxpayers want to undo that election that was permanent. So, they came out with a revenue procedure last week that allows you to actually go back and make a retroactive election to elect out of that election, and then elect into bonus depreciation by amending some returns.
00:03:20
Sean: We’re going to do another video on that. I thought it was a low-key week. All we ever hear about is the TSA problems that hopefully go away soon, but actually more happened last week.
This episode of The Tax Navigator was recorded prior to publication. Some references or updates discussed may reflect information current as of the recording date.
