By: Drew Thompson

Looking Back

2024 was a year of small tax changes on the tax statute side but modest changes in the regulatory world. Part of the stasis in tax policy was due to the election year and divided government, encouraging major tax policy to be put on hold. Another factor was the 2017 Tax Cuts and Job Act (“TCJA”) sunset in 2025.

IRS Action

One of the largest changes in the tax world was the influx of funding to the IRS. The IRS received about $80 billion in additional funding that came with substantial criticism. About 60% of that funding went to enforcement, with the next largest chunk, about a third, going to operational support. There will likely be additional debate over the IRS’s funding as we move into 2025, and tax changes are top of mind for legislatures.

2024 also saw the start of the direct file program where taxpayers can file their income tax return directly with the IRS. Direct file is particularly easy for W-2 only filers who can have information pre-populated. This program was in addition to the “free file” program provided by paid tax preparers in concert with the IRS. Direct file is less popular due to, and has been criticized because of, privacy concerns and the IRS’s reach. Nevertheless, the IRS proclaimed direct file a success and will continue in 2025. It would be difficult to stop the direct file program for the 2025 season since the filing season is already upon us. Yet, after 2025 the program’s low popularity may mean its demise. 

The IRS also received criticism for pausing Employee Retention Credit (“ERC”) payments most of the year due to the high presence of fraud. The IRS stopped processing new ERC applications in September of 2023 and resumed processing applications last August. Last October the IRS confirmed there were about 1.2 million pending ERC claims, and the IRS is aiming to process roughly 500,000 applications. There has only been one case brought by the IRS against an entity, COS Accounting & Tax LLC, and its two owners for ERC credit abuse, referred to as an ERC credit mill. Yet, in that case, the defendants were acquitted of the charges alleging they had prepared $11 million in improper applications. Despite its poor success rate, the IRS has reportedly initiated over 500 criminal investigations. Besides its criminal enforcement, the IRS has denied over 28,000 and $5 billion in ERC claims.

The Supreme Court

Besides the IRS, the Supreme Court addressed two tax cases, a rarity in itself, along with a third case that could have a substantial impact on the IRS. Foremost was Moore v. United States which addressed realization issues for taxation. The specific challenge was whether the US in the Tax Cuts and Jobs Act could tax potentially unrealized earnings from foreign corporations that the defendants may have received. The arguably more important general issue was whether the government could tax unrealized gain.

Generally, income is only subject to tax when it is received, and thus has been “realized”, by the taxpayer. Essentially, money is only taxed once you have it in your hands. However, there are several instances where statutes, frequently for anti-fraud purposes, allow unrealized gains to be taxed. One example is subpart-F which prevents U.S. persons from using foreign corporations to defer taxes. In Moore, the government narrowly won on a smaller issue and the Court held the plaintiff had realized income thus bypassing the realization issue altogether. Still, many justices expressed interest in a realization rule in the future and strongly signaled opposition to a wealth tax that would necessarily involve taxing unrealized gains. In the future, the Court will likely address realization again as Moore showed that at least four justices were willing to take a case with bad facts for a realization requirement challenge. Thus, those same justices may be willing to take up a better case if a more favorable set of facts comes along.

The second tax-related Supreme Court case was Connelly v. United States. Connelly held that life insurance proceeds a company receives are included in the company’s valuation for estate tax purposes, even if a mandatory redemption obligation offsets the life insurance money. This case involved a common structure in closely held businesses where an entity will have a mandatory buyout/stock redemption provision triggered by the death of an owner paired with a life insurance policy on that owner to offset the buyout. Thus, when the owner dies the entity must buy out their shares and it receives the life insurance money at the same time to fund the buyout. Connelly recognized that because a redemption obligation is not a liability in the traditional sense, it does not offset the life insurance proceeds when valuing the business for estate tax purposes. Connelly’s holding has encouraged cross-purchase agreements, where the owners have life insurance policies on each other, instead of redemption agreements, like the one in Connelly.

The last Supreme Court case that impacted the IRS was Loper Bright Enterprises v. Raimondo. Loper Bright represents the death knell for the Chevron doctrine and the principle of agency deference that it represented. It is unclear what this may mean for the IRS and the tax world, but it may make it more difficult for Congress to delegate decision-making power to the IRS. In the recent past, Congress would pass tax bills with vague language and the IRS and the Treasury Department would clarify them with regulations. This combination of vague statutes and agency interpretations will be less common after Loperbright. In the short term, taxpayers can be bolder in challenging regulations and increased litigation. It is also likely that many courts will be open to hearing these challenges under the Administrative Procedure Act even if the IRS has been more immune to these types of challenges than other agencies.

Summary

In conclusion, the tax landscape of 2024 was characterized by subtle statutory changes and moderate regulatory adjustments, largely influenced by the political climate and the impending sunset of the TCJA. The year saw significant developments in IRS operations, including increased funding and the introduction of the direct file program, both of which sparked debate and criticism. The IRS’s handling of the Employee Retention Credit program highlighted ongoing challenges in balancing fraud prevention with efficient processing of legitimate claims. Meanwhile, the Supreme Court’s decisions in Moore v. United States and Connelly v. United States provided important clarifications on realization issues and estate tax valuations, respectively. Loper Bright may inhibit the IRS’s ability to promulgate new rules and receive deference in enforcement. These rulings are likely to have far-reaching implications for tax planning and policy in the coming years. As we approach 2025, with potential major tax policy changes on the horizon, taxpayers and practitioners should remain vigilant and prepared to adapt to evolving tax laws and regulations.

Andrew L. Thompson joined Lane & Waterman in 2024. Andrew primarily specializes in civil defense litigation, encompassing a diverse array of matters such as tax, employment, labor, estate litigation, and other commercial litigation.