Business Frame Weekly – Inflation showed further signs of cooling / IRS steps up ERC claim enforcement to combat fraud

Inflation showed further signs of cooling, according to a gauge released Friday that the Federal Reserve follows closely.

The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta.

Stocks inched slightly higher Monday as investors prepared for earnings from two more megacap techs and for the July jobs report to land later this week.

In this newsletter:

• Key Fed inflation rate falls to lowest annual level in nearly 2 years
• To combat fraud, IRS steps up ERC claim enforcement
• Stocks close higher to end another strong month: Stock market news today
• SEC sues entrepreneur, alleging $1 billion in unregistered crypto sales and multimillion-dollar fraud
• The 2023 stock market rally got a lot healthier in June and July
• Final regs. allow assessment of COVID-19 related tax credit refunds

August 01, 2023

Key Fed inflation rate falls to lowest annual level in nearly 2 years

Inflation showed further signs of cooling in June, according to a gauge released Friday that the Federal Reserve follows closely. The personal consumption expenditures price index excluding food and energy increased just 0.2% from the previous month, in line with the Dow Jones estimate, the Commerce Department said. So-called core PCE rose 4.1% from a year ago, compared with the estimate for 4.2%. The annual rate was the lowest since September 2021 and marked a decrease from the 4.6% pace in May. Headline PCE inflation including food and energy costs also increased 0.2% on the month and rose 3% on an annual basis. The yearly rate was the lowest since March 2021 and moved down from 3.8% in May.

To combat fraud, IRS steps up ERC claim enforcement

The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta. Werfel stated that, having cleared the backlog of valid ERC claims, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program. According to Werfel, the IRS has increased audit and criminal investigation work on these claims, looking into both promoters and businesses filing dubious claims. The IRS has trained auditors examining the claims that pose the greatest risk of fraud, and the IRS Criminal Investigation division is identifying promoters of fraudulent claims, he said. "The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," Werfel said. Instead, the IRS is receiving more and more questionable claims, which the IRS is addressing by intensifying its compliance work, he said. Businesses typically can file claims for the ERC until April 15, 2025. But those extra months are raising concerns for a credit that has generated a staggering amount of misleading marketing, Werfel stated. "A terrible scenario is unfolding that hurts everyone involved — except the promoters," he said at the IRS Nationwide Tax Forum. "We will work with Treasury to explore legislative solutions we can share with Congress to help address fraud and error, including potentially putting an earlier ending date for business to claim the credit" and increasing IRS oversight of tax preparers.

Stocks close higher to end another strong month: Stock market news today

Stocks inched slightly higher Monday as investors prepared for earnings from two more megacap techs and for the July jobs report to land later this week. The S&P 500 (^GSPC) ticked up 0.15%, while the Dow Jones Industrial Average (^DJI) was up 0.28%. The tech-heavy Nasdaq Composite (^IXIC) added about 0.21%. Monday's finish capped a strong month for all of the major indexes. The S&P 500 and Nasdaq both wrapped up their fifth straight month of gains. Year-to-date, the Nasdaq is up more than 37%, while the S&P 500 is up 19.5%, and the Dow is higher by 7.3%. Second quarter results from Apple (AAPL) and Amazon (AMZN) take center stage after Meta's (META) and Alphabet's (GOOG, GOOGL) releases wowed Wall Street last week. Eyes are on what the iPhone maker says about its Vision Pro headset and what Amazon reveals about its cloud business. The countdown is also on to the monthly nonfarm-payrolls report due Friday, which is expected to show that job growth is still moderating but resilient. That's raising optimism the Fed can bring inflation down to its target without triggering a recession.

SEC sues entrepreneur, alleging $1 billion in unregistered crypto sales and multimillion-dollar fraud

The Securities and Exchange Commission on Monday filed charges against a U.S. citizen it alleged raised more than $1 billion through the unregistered offer and sale of crypto securities before pilfering millions to fuel a high-status lifestyle and the acquisition of luxury goods, including the largest black diamond in the world. Richard Schueler, also known as Richard Heart, operated three crypto-asset offerings: Hex, PulseChain and PulseX. The SEC alleged he touted the investments as a “pathway to grandiose wealth.” The offerings were made through Hex tokens, which were marketed as an ethereum-based “Certificate of Deposit.” But the SEC alleged that the 38% annual return that Schueler touted was nothing more than cover for an elaborate scheme. Schueler faces three charges of securities fraud in civil court.

The 2023 stock market rally got a lot healthier in June and July

July has come and gone for investors, bringing with it a continuation and a new twist on the blistering stock market gains seen in the first half of this year. The Tech sector (XLK), along with some of last year's biggest losers like Communication Services (XLC) and Consumer Discretionary (XLY), powered the market's rally through May. But over the last two months, one of the biggest concerns among market bears — that the rally had become too concentrated — has been addressed with all 11 sectors in the S&P 500 (^GSPC) logging gains between June and July. And while the aforementioned stars of this year's rally are still playing a leading role, a surge in oil prices has brought Energy (XLE) into the fold with cyclical sectors like Materials (XLB) and Industrials (XLI) also sitting on gains north of 14% since June as optimism about the economy abounds. This has left all sectors with the exception of Health Care (XLV) and Utilities (XLU) sitting on year-to-date gains through July.

Final regs. allow assessment of COVID-19 related tax credit refunds

Final regulations issued Monday (T.D. 9978) authorize the assessment of erroneous refunds of paid sick leave credits, family leave credits, and employee retention credits paid to employers under the Families First Coronavirus Response Act, P.L. 116-127; the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136; and the American Rescue Plan Act of 2021, P.L. 117-2. These regulations finalize earlier proposed regulations (REG-111879-20 and REG-109077-21) with minor modifications. They provide that erroneous refunds of COVID-19 credits will be treated as underpayments of taxes imposed under Sec. 3111(a) or 3111(b), as applicable, and are subject to taxes imposed under Sec. 3221(a), which means assessment and administrative collection procedures apply. The preamble to the regulations states, "This allows the IRS to prevent the avoidance of the purposes of the limitations under the credit provisions and to recover the erroneous refund amounts efficiently while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation." These assessment and administrative collection procedures may apply both in the processing of employment tax returns and in examining returns for excess claimed credits; they are not exclusive and do not replace the existing recapture methods. Instead, they are an alternative method that the IRS has at its disposal to recover erroneous refunds of tax credits for employee retention, family leave, and sick leave.

Random Ramblings

• Pros and cons of the “kiddie tax”.
• Maryland digital ad tax case leaves states in limbo, but digital taxes aren’t going away.
• Will I be taxed on student loan forgiveness?
• Banks say conditions for loans to businesses and consumers will keep getting tougher.
• Why big banks like JPMorgan and Citi want to put Wall Street on a blockchain?