As 2022 comes to a close, it is advisable for businesses and taxpayers to look ahead to 2023 and determine their involvement in areas of focus for Treasury and the IRS. Three tax topics are likely to see significant interest and activity in 2023, including:
- Renewable energy tax incentives guidance
- Employee Retention Credit (ERC) claims
- Regulation and taxation of cryptocurrency
All three areas have complicated rules. All three areas are the target of intensive government interest and activity, including from Treasury and the IRS. All three areas offer businesses and taxpayers significant potential value, but there are risks with each if the rules are not followed.
Businesses should engage now on these issues.
The White House has made the implementation of the energy and climate proposals in the Inflation Reduction Act (IRA) a priority for 2023, while Treasury has begun a year-long roll-out of detailed guidance on specific tax provisions. The IRS Criminal Investigations Division has been very public in its comments about the types of investigations that will be their priority in 2023, and that list includes pandemic-relief incentives, such as the ERC, and cryptocurrency misconduct.
Renewable Energy Tax Incentives: Guidance from Treasury and the IRS
Navigating the new energy landscape should be an urgent priority for any business that is engaged in the planning and development of renewable energy projects.
The IRA includes a wealth of tax incentive opportunities for businesses and taxpayers. Treasury and the IRS have begun to release guidance as part of a massive undertaking to provide the details businesses will need to utilize the new tax credits. The guidance will cover qualification, timing, application, standards for verification, and prevention of fraud.
If you engage now, you will have an opportunity to contribute to the development of regulatory guidance through the public comment process and stakeholder meetings being held by Treasury. You will also gain valuable insight into how the incentives are intended to work for tax planning purposes. You will be able to learn what other companies engaged in renewable energy are focused on including businesses you might partner with as well as your competitors.
A major change in the renewable energy tax area is the new Direct Pay Option, which is now available to a wide range of tax-exempt taxpayers, including tax-exempt organizations and tribal organizations, providing them with a refundable tax credit for several of the tax credits included in the IRA. For other taxpayers, there are new rules that allow the transferability of tax credits for cash payments, which represents a valuable method for monetizing several of the IRA tax credits.
The new rules are complicated, however, so you must be engaged now in order to take advantage of these benefits and to do so in a way that ensures that your project will qualify for the tax incentive.
Employee Retention Credit Claims: Government Review and Enforcement
The ERC is a high-value refundable employment tax credit enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. Employers still have time to take advantage of the ERC for qualifying quarters in 2020 and 2021, as amended returns may be filed up to three years from the date of the original tax return.
At the same time, qualification rules are complex, and we have seen instances of companies promoting the credit that have incorrectly advised clients on the ERC rules. The IRS warned taxpayers in October “to be wary of third parties who are advising them to claim the ERC when they may not qualify.” Officials from the IRS Criminal Investigations office have made it clear in recent public comments that the ERC is a priority enforcement topic for the IRS in 2023.
Businesses who have already claimed the ERC should consider whether to review their outstanding claims and should carefully assess whether to file new claims. The IRS is focusing on eligibility, including claims based on partial suspension of business operations, as well as the substantiation of the amounts claimed, which is a critical requirement for verifying qualification.
If your business is uncertain about the position taken on filed ERC claims or needs advice on proper documentation, you should consider engaging a professional who understands the ERC rules to perform a pre-audit review. If the review changes the determination of the proper amount to be claimed, the business can consider filing an amended return, which could mitigate IRS penalty assessments.
It is essential that your business perform the necessary due diligence on any previously filed ERC claims or any new claims to ensure that the determination of qualification is accurate and supported by documentation. Make sure you consult a tax professional who will be able to ensure that you follow the rules, file the proper documents, and prepare for a possible review or audit by the IRS in the future.
Cryptocurrency: Regulation and Enforcement
2023 promises to be a defining year for cryptocurrency and digital assets as regulatory frameworks become a reality in the US and internationally. Of key significance is the taxation of cryptocurrency assets due to the rising popularity of digital assets and the increasing volume of transactions.
The regulation of cryptocurrency and other digital assets is a clear priority of the US government, including Congress, as well as a number of US government agencies such as Treasury and the IRS. Developments in the digital asset world have moved more quickly than the tax laws, so there are many unanswered questions about taxation.
According to recent comments from a DOJ official, cryptocurrency and other digital assets are so pervasive in the current news headlines that taxpayers who are engaging in these transactions will have difficulty making a credible argument that they misreported on their tax returns due to innocent mistakes rather than willful misconduct. A new cryptocurrency reporting regime established by the 2021 infrastructure law takes effect on January 1, 2024, for tax year 2023.
The IRS has already prioritized certain cryptocurrency businesses as audit targets. The $80 billion supplemental funding for the IRS included in the IRA will support increased IRS enforcement in areas like digital assets. The 2022 IRS Criminal Investigations Annual Report identifies cryptocurrency as a priority area for 2023 following on the significant success the IRS had in 2022 in this area.
The IRS intends to continue to be aggressive on enforcement in this area, so it is imperative that companies and individuals take steps to comply with existing laws and regulations and ensure that they are consulting with professional counsel with knowledge of what is required.
Taxpayers Should Engage Now on these Issues
On each of these topics, knowledge of the rules and an understanding of review and enforcement activities underway at Treasury and the IRS are key. Legal advisors who understand what your business needs to know and how to comply can give you invaluable assistance in moving ahead with business planning and development.
If you have questions about the topics covered in this Alert, please contact Susan Rogers at srogers@potomaclaw.com.
