Tech Needed to Simplify Energy Credits for Individuals

Special tax rules tend to be complex because they are "special" in that they are not part of the normal tax system and are not intended for all taxpayers and all activities. Drafting legislation and regulations to be sure the credits are used as intended, is challenging. We are seeing this with most of the energy credits added or modified by the Inflation Reducation Act of 2022. The IRS has to define many challenging terms that were not completely spelled out in the legislation, such as the value of critical minerals, battery components, and more.

I have written about some of this before and this blog post of 8/21/22 includes track changs for several of the revised credits such as the two home energy credits and the clean vehicle credit.

For the clean vehicle credit at IRC §30D, the "qualified manufacturer" has to verify most of the difficult provisions to know if the vehicle is "clean" and if it qualifies the buyer for the critical minerals credit of $3,750 and/or the battery components credit of $3,750. The provisions are complex, but some of that complexity is on the manufacturer rather than the buyer (and lots of complexity on the IRS).

For the two revised residential energy credits, the complexity falls on the homeowner (and for some elements of the credits, the tenant if they are incurring the costs). These rules are complex and are with us for the next 10 years to it is worth finding ways to simplify the process for individuals to know if they have purchased the proper property (meets the specified Energy Star or other standard). In addition, for the IRC §25C Energy Efficient Home Improvement Credit, there are different credit limits on doors versus windows versus biomass stoves, etc. 

Here is one suggestion for making it simpler for indviduals to know if they can qualify for the §25C credit which might also better encourage them to make home improvements that will reduce energy usage. 

Software, algorithms and databases can be created where the individual can use in at least two ways. First, the individual can enter a product code (often on many products) or description (name of product and manufacturer) into a website and learn if it qualifies for the §25C or 25D code. The website would need to have the Energy Star and similar information required per these provisions. And the individual would need to enter data about whether they own or rent their home and whether it is their principal residence (the §25C credit covers three broad categories of property and they all vary on how that information is relevant).

The second way to use the well-designed website is to input what they want to do. For example, they want to install energy efficient windows (and how many and the cost). The website should then provide a list of what windows qualify and how they can maximize the credit over multiple years since the maximum credit for windows, for example, is $600 total for the year (at a 30% rate that is a maximum door window cost of $2,000 per year).

The website could also provide a list of reminders such as the need to reduce basis of property by the credit amount, whether a carryforward is allowed, and what recordkeeping to keep and for how long.

Finally, these website should allow the individual to take the output and in a digital format, let it be connected to their tax prep software to produce the required form.

The technology exists to make this happen. It will take time to produce such websites for individuals du to the complexity of the provisions and the variety of items that may qualify for the credit.

There is some helpful information on the IRS website about the §25C credit (and others), but it is not everything and likely won't help individuals understand how to ensure they qualify for the credit and how to maximize it over multiple years.

What do you think?

How Do We Handle the Future of Taxes and Data - TCAST podcast

I recently had the opportunity to be a guest on TARTLE's podcast - TCAST. The topic tied to an op ed I had in The Hill in April - Let's say 'goodbye' to the April 15 due date.

The podcast and other interesting data related ones from TCAST can be found at:

Apple: https://apple.co/2TT8C1t
Spotify: https://spoti.fi/3ht4FcK 
YouTube:   https://bit.ly/3xspMBB

Thanks to Alexander and Jason for the invitation and hosting this topic about modernizing our tax system and improving transparency of the system. I hope you'll listen in - and check out TCAST's other podcasts.

What do you think?

Non-COVID Topic - Form 1040-SR and Data

I'll return to COVID-19 tax legislation policy topics soon, but wanted to note an item I noticed a few weeks ago in filing my own return.  In messing around with TurboTax, I discovered that it defaults to preparing a Form 1040-SR if the taxpayer or spouse is age 65 or older. I assume that likely confuses many affected people because they never heard of the form and might think it means they are paying more or paying less.

There is no difference between the 1040 and 1040-SR besides the "SR" and font size.  The SR form is not the idea of IRS who was already working to get rid of the 1040-EZ and 1040-A when Congress added 1040-SR starting for 2019 returns.  For more on that, please see my 7/29/19 blog post.

Perhaps other tax prep software is doing the same - defaulting to 1040-SR if the taxpayer is old enough, rather than giving a choice or defaulting to 1040.

I just note this because if we later see data on lots of seniors filing 1040-SR and thinking that means they like it, that data would be suspect of not really measuring liking the form.

For simplification and easing administrative burden for the IRS, it would be great to see the 1040-SR removed from the law AND to move towards filing systems using technology that makes filing so easy that it doesn't really matter what the tax form is called. It could be like online banking or ordering from Amazon in its ease and transparency (for more, see my 2019 post).

What do you think?

Tax, Tech and Form 1099 - H.R. 5377

H.R. 5377, Creating An Online Platform For Instant 1099 Submissions Act, introduced in March 2018 by Congressman Renacci (R-OH), a CPA, calls for something that should already be part of our tax system. H.R. 5377 "directs the Internal Revenue Service (IRS) to provide taxpayers with online access to IRS resources and guidance that will allow them to: (1) prepare and file Forms 1099, (2) prepare Forms 1099 for distribution to recipients other than the IRS, and (3) create and maintain necessary taxpayer records. The IRS must ensure that the online services required by this bill: (1) are a supplement to, and not a replacement for, other services provided to taxpayers by the IRS; and (2) comply with security standards developed by the National Institute of Standards and Technology.

Just like we can pay bills online, order goods and services online, why can't a business complete a Form 1099, such as for payment to a contractor, online with it being automatically sent to the contractor and the IRS?

H.R. 5377 would give the IRS until 2021 to get the system working.  Seems reasonable.

What do you think?

Tax refunds on debit cards - good idea?

A few states are using bank debit cards to issue tax refunds if a taxpayer does not request that the refund be issued as a check or direct deposited to an account. A story in The Charlotte Observer, "S.C. tax refunds could take form as debit card," 2/24/12, notes that this could involve transaction fees for the users. The SC cards are issued by Bank of America and apparently if you only use the cards at merchants or BofA, there would be no transaction fee.

The state says this will save them money. A few interesting concerns raised in the article include how secure the cards are sitting in someone's mailbox and the form will encourage use for spending rather than paying debts.

The Connecticut Department of Revenue Services announced in January 2012 that it would be issued debit cards for tax refunds. Their website notes that security features are built into the cards.

Oklahoma also uses debit cards for tax refunds. The Oklahoma Department of Revenue has information on how to activate it and a set of FAQs to help people use them. The instructions note that there is an inactivity fee of $1.50 per month so holders should be sure to use the card at least once every 60 days. The card lasts for 3 years.

Sounds like a good idea to save the printing of checks, but it still involves the mailing of the cards and security issues. I think states can do more to assist its citizens who do not have bank accounts by setting them up and paying for them. Why not have the states use the mailing cost savings to help low-income taxpayers set up bank accounts? Would a state bank help? California is exploring this and North Dakota has had a state bank for some time.  Can the state and employers help reduce tax refunds by adjusting paycheck withholding?

What do you think?

From CT Dept of Revenue Services website - http://www.ct.gov/drs/cwp/view.asp?A=1436&Q=498324

Read more here: http://www.charlotteobserver.com/2012/02/24/3039646/sc-tax-refunds-could-take-form.html#storylink=cpy

Use of New Technologies for Tax Administration

One of the trends I think really got underway in 2010 regarding the tax law was new and expanded uses of various technologies by the IRS and state tax agencies. These include:

• Going green or paperless - The IRS and California Franchise Tax Board both stopped mailing paper returns to people. Other states likely did as well. This also reduces costs for the tax agencies, but really reflects the fact that many tax returns can be prepared and filed without the need for paper.
• Interactive websites - The IRS had a webpage that allowed individuals to enter their name, birth date and social security number to get information on whether they received a Recovery Act Payment. The California FTB has a variety of online verification and payment features it is encouraging taxpayers and practitioners to use. It includes the ability to schedule an electronic payment of taxes (such as estimated taxes) up to one year in advance.
• Web-based guidance - The IRS made greater use of FAQs to get information to taxpayers and practitioners, especially when quick guidance was needed, such as for the payroll exemption enacted for employers in March 2010. While FAQs are a good way to get timely information released, it is not traditional guidance and some questions and safeguards are missing. For example, how long will the FAQs be posted? When an answer is changed, what happens to the original answer? I have a short article on this topic - “How Heavy is an IRS FAQ?” AICPA Tax Insider (11/11/10)
• Twittering - The IRS is releasing updates and making announcements on Twitter. Some state tax agencies are as well including California (more than one - see John, Steve, Marlene, and Steve/FTB Advocate), Minnesota, and Oregon. Again, while this seems to be a good use of available technology and perhaps is just duplicating other existing outlets for information, it raises a question of whether tax practitioners should be following these tweets. Is this the new level of professional conduct and expectations? And ...what about this? - I received an email on December 13 saying that the Franchise Tax Board was now following me on Twitter! That doesn't bother me, but perhaps some people don't want to be followed by a tax agency. What rules should exist for this or are none warranted - that is, you Tweet, you can be followed?
• Others - continued use of YouTube, offering of webinars, auditors getting information related to examinations from the Internet, and more.

Hopefully we'll see more uses of technology where it can improve compliance and administration. Yet, it seems we also need some additional guidance or actions such as:

1. The IRS elevating FAQs to the level of revenue rulings and notices so they can be relied upon as "authority."
2. Statements from tax agencies on whether practitioners are obligated to follow tax agency tweets. This would include some reference in rules of conduct.
3. When a practitioner is allowed to input client data into a tax agency's secure, interactive website without violating any rule of conduct or whether they must always ask a taxpayer first.

What do you think?

I hope you have a very happy, healthy, and tax error free 2011!