Corporate Innovation, IRS Whistleblower, and IRS Direct File Program
Probity Tax Recovery is a tax consulting firm specializing in tax credits and incentives for small to mid-sized businesses. We work with business owners and their CPAs to identify tax credits and incentives while saving them time and money. As of November 1, 2024, Probity began operating as a division of MS Consultants. Read more about the exciting news here.
Tax Policy/News:
April 22: Simplifying Tax Compliance Criteria May Increase Corporate Innovation
While the United States has always been at the forefront of innovation, barriers continue to grow for it to maintain its dominance. One significant barrier is the affordability of innovation projects, especially given the complicated nature of the R&D tax credit.
According to a recent research study forthcoming in the Journal of Accounting & Economics, complex tax compliance requirements contribute to corporations passing on good R&D projects, suggesting that simplifying the requirements for the tax credit can enhance corporate innovation. The R&D tax credit, provided under § 41 of the Internal Revenue Code, offers a 20% tax credit for qualified research expenditures.
However, the credit is complex and requires meeting a four-part test, maintaining clear documentation, and following a complex formula for determining eligibility. A study by Dr. Mary Cowx of Arizona State University found that IRS enforcement spending is associated with lower R&D tax credits, and the documentation requirements discourage firms from claiming the credit.
Simplifying the credit documentation requirements could reduce compliance burdens and mitigate enforcement-related disincentives to investing in R&D. Understanding the costs that corporations face when engaging in innovation projects is crucial for the success of the R&D tax credit and ensuring the United States remains a destination for innovative activities.
April 18: IRS whistleblower on Hunter Biden is out as acting commissioner just days after getting the job
Just days after being promoted to acting IRS commissioner, Gary Shapley, the whistleblower who testified about investigations into Hunter Biden’s taxes, has been replaced by Deputy Treasury Secretary Michael Faulkender.
Shapley’s short tenure comes amid significant turmoil within the IRS, with numerous high-ranking officials exiting due to Trump’s policy decisions, layoffs, and demotions. Treasury Secretary Scott Bessent reportedly complained that Shapley was installed without his knowledge at the behest of Trump adviser Elon Musk.
The IRS has temporarily paused its reduction in force plan due to the leadership changes. Shapley had replaced Melanie Krause, who resigned over a deal to share immigrants’ tax data with ICE. Trump’s nominee to head the IRS, former U.S. Rep. Billy Long, has not yet been confirmed.
April 17: Trump administration plans to end the IRS Direct File program for free tax filing, AP sources say
The Trump administration plans to eliminate the IRS’ Direct File program, an electronic system for filing tax returns directly to the agency for free, according to sources familiar with the decision.
The program, developed during Joe Biden’s presidency, was praised for making tax filing easy and economical. However, Republican lawmakers and commercial tax preparation companies criticized it as a waste of taxpayer money. The program had been in limbo since the start of the Trump administration, with Elon Musk and the Department of Government Efficiency cutting through federal projects.
Despite hopes that Musk’s team could improve Direct File, IRS staff were instructed to stop working on its development for the 2026 tax season. Critics argue that ending the program betrays public trust and benefits commercial tax preparation companies.
The Treasury Department has not made a final decision on the program’s future. The IRS accepted 140,803 returns filed using Direct File in 2024, and it was expanded to include half the country this year. The decision to end Direct File has faced backlash from various stakeholders, including Senator Elizabeth Warren, who supports the program.
April 16: Republicans reconsider their commitment to tax cuts for the rich in Trump agenda bill
Republicans are debating whether to allow tax rates to increase on top earners when major parts of the 2017 tax law expire at the end of this year.
This discussion has emerged as GOP lawmakers look for ways to fund their massive budget bill, which includes additional funding for immigration enforcement and the military. The debate reflects a shift in the party's electoral coalition, with Republicans attracting lower-income voters while higher-income Americans drift toward Democrats.
Some GOP members, including Sen. Kevin Cramer and Sen. Mike Crapo, have shown openness to the idea, while others, like Sen. Ted Cruz and House Majority Leader Steve Scalise, oppose it. The discussion highlights a potential shift in the party's long-standing commitment to reducing taxes on high earners, driven by changing voter demographics and the need to address budgetary concerns.
April 15: Almost 20,000 IRS employees taking second Trump buyout offer: Bloomberg
Nearly 20,000 Internal Revenue Service (IRS) employees are taking the Trump administration’s second deferred buyout offer, according to Bloomberg. This number represents one-fifth of the agency.
Earlier this year, about 4,700 employees accepted the first deferred resignation offer, and nearly 7,000 probationary employees were placed on administrative leave. The IRS has already begun its reduction-in-force plan, directed by the administration and Elon Musk’s Department of Government Efficiency (DOGE). Employees involved in the 2025 tax season were previously told they could not accept the buyout until the filing deadline passed.
Those who accept the deal will continue to receive a paycheck and benefits through the end of September. The agency plans to relocate workers from other areas to assist during tax filing seasons. The buyouts come after the IRS received $80 billion under the Biden-era Inflation Reduction Act to boost staffing and efficiency, which the number of departures will effectively undo.
Several top IRS officials have already taken the buyout offer, including Acting IRS Commissioner Melanie Krause and her predecessor, Acting Commissioner Douglas O’Donnell.
April 15: IRS agreement with ICE to share immigrants' info could lead to billions less in tax revenue
The IRS has announced an agreement to share certain tax information filed by undocumented immigrants with Immigration and Customs Enforcement (ICE), which could result in a significant decrease in tax compliance among this group.
Experts warn that this could lead to a reduction of $9.5 billion annually in tax revenue if just 10% fewer undocumented immigrants file their taxes. This agreement breaks with the longstanding precedent that tax information would not be used for immigration enforcement, causing fear and uncertainty among undocumented immigrants.
Critics argue that this policy could erode public trust in the government and have widespread financial implications, including reduced funding for federal programs like Social Security and Medicare. The policy has been described as a betrayal by those who have been encouraged to file taxes to demonstrate financial responsibility and integrate into American society.
Economic News/Policy:
April 22: IMF warns of ‘major negative shock’ from Trump’s tariffs
The International Monetary Fund (IMF) has warned that President Donald Trump’s tariffs have unleashed a “major negative shock” on the global economy, leading to a significant slowdown in growth.
The IMF has cut its forecast for global GDP growth to 2.8% for this year, down from 3.3% predicted in January. The US is expected to see a sharper deterioration, with growth forecasts reduced from 2.7% to 1.8%. The UK’s growth forecast has also been cut from 1.6% to 1.1%.
The IMF highlighted that increased uncertainty and tightening financial conditions are causing companies to pause investments and reduce spending, which will weigh on economic activity. Emerging economies may be hit particularly hard due to unfavorable global financial conditions and potential cuts in international development assistance.
The IMF called for coordinated action to reduce trade tensions and address shared challenges, but it is unclear what role the US will take given its “America first” approach. The IMF also expressed concern about the volatility in financial markets and the risk of a recession in the US, with the probability of a recession increasing to nearly 40%.
April 16: ‘We’re in a New Reality’: Small-Business Owners Suffering From Tariffs Are Speaking Out
Small business owners are expressing confusion and concern on social media about President Trump's ever-changing slate of foreign import tariffs and their impact on supply chains.
Steven Borrelli, founder and CEO of the clothing company Cuts, voiced his frustration over the rapid tariff changes, which he believes will be detrimental to thousands of e-commerce companies. Chitra Agrawal, founder of Brooklyn Delhi, highlighted the impact of tariffs on Indian ingredients essential for her products, warning that consumers will ultimately bear the cost.
Jing Gao, CEO of Fly By Jing, discussed the significant increase in tariffs on her Chinese food products, emphasizing the importance of maintaining the integrity of her ingredients sourced from Sichuan. Beth Benike, entrepreneur of Busy Baby, shared her struggles with manufacturing in China and the prohibitive costs of importing her products due to rising tariffs. These small business owners are grappling with uncertainty and fear for their businesses as they navigate the new tariff landscape.
Energy and Environmental Policy/News:
April 18: Final regulations for the Inflation Reduction Act’s Section 45V Clean Hydrogen Production Tax Credit
The U.S. Department of the Treasury and the Internal Revenue Service released final regulations in January 2025 for the Clean Hydrogen Production Tax Credit under Section 45V of the Internal Revenue Code.
This policy update outlines changes in the final regulation compared with the original proposal, focusing on changes to the calculation and accounting of hydrogen life-cycle emissions.
Key changes include new rules for the use of the 45VH2-GREET model for determining life-cycle emissions, updated rules for the use of energy attribute certificates (EACs) with hourly accounting of electrolysis-hydrogen life cycle emissions beginning in 2030, and final rules for the life-cycle accounting of methane-derived hydrogen pathways.
The three-pillar framework for EACs—incrementality, time matching, and deliverability—remains the same as in the proposed rules, ensuring that hydrogen is produced with clean electricity and that existing sources of clean electricity are not diverted from other uses to make hydrogen.
April 17: Trump administration ordered to resume IRA funding
A federal judge has ordered the Trump administration to immediately reinstate funding from the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA), which had been frozen by executive order on President Trump's first day in office.
Judge Mary McElroy of the U.S. District Court for Rhode Island ruled that federal agencies lacked the authority to pause the funding, and directed the Departments of Energy, Housing and Urban Development, Interior, Agriculture, and the Environmental Protection Agency to release previously withheld awards.
The decision applies to all awardees nationwide and will remain in effect until the merits of the lawsuit are ruled upon. The ruling is a setback to Trump's plans to dismantle the Biden administration’s climate funding laws, which provide billions of dollars in direct funding, loan financing, and tax credits for clean energy projects. Six nonprofits had sued the agencies to access their awarded funding, and McElroy's preliminary injunction requires agencies to resume disbursements while the case is pending.
The judge emphasized that the freeze was arbitrary and capricious, and relief must be offered to awardees nationwide due to the significant impacts on their operations and reputations.
April 15: Universities sue over Energy Department research funding cuts
A group of universities, including Brown University and the Massachusetts Institute of Technology, along with education groups, filed a lawsuit seeking to halt the Energy Department's cuts to federal research grants.
The new policy reduces the funding of "indirect costs" of research grants to 15%, which plaintiffs argue will devastate scientific research at American universities and undermine the nation's status as a global leader in innovation. The lawsuit claims the policy change is unlawful and violates the Administrative Procedure Act, seeking an injunction.
The Energy Department argues that the new policy will generate over $405 million in annual cost savings, but universities contend that the cuts will have immediate and devastating effects on critical projects, staffing, and training programs. The complaint highlights the potential harm to advanced nuclear and cybersecurity technologies, arms control verification mechanisms, novel radioactive drugs, and electrical grid upgrades.
The American Council on Education and university officials emphasize that slashing funding would weaken America's economic opportunities and workforce pipeline, benefiting competitors like China. The lawsuit aims to protect essential funding for research and innovative solutions to critical problems.
Technology:
April 19: Famed AI researcher launches controversial startup to replace all human workers everywhere
Tamay Besiroglu, a renowned AI researcher, has launched a new startup called Mechanize, which aims to fully automate all work and the economy by replacing human workers with AI agent bots.
The startup has faced significant backlash on social media, with critics arguing that it tarnishes the reputation of Besiroglu's well-respected AI research institute, Epoch. Mechanize's mission is to provide the data, evaluations, and digital environments necessary for worker automation in any job, with an immediate focus on white-collar work.
Besiroglu calculated the market potential by aggregating all wages paid to human workers, estimating it to be around $18 trillion per year in the US and $60 trillion globally. Despite the controversy, Besiroglu argues that automating labor could lead to explosive economic growth and higher standards of living. However, critics point out that if humans don't have jobs, they won't have the income to purchase goods and services produced by AI agents.
Besiroglu believes that human wages should increase in an AI-automated world due to the value of complementary roles that AI cannot perform. Mechanize is backed by notable investors, including Nat Friedman, Daniel Gross, Patrick Collison, and Marcus Abramovitch, and is currently hiring.
The Trump administration's threat to withhold billions of dollars in federal funding from American colleges and universities could jeopardize the future of scientific and technological innovations that have become integral to daily life, such as the internet, GPS, mRNA vaccines, and iPhone touchscreens.
Experts warn that cutting federal funding for academic research could destroy a generation's worth of scientific progress and undermine America's global leadership in research and development.
Harvard University is currently in a standoff with the administration over $2 billion in multi-year grants and contracts, while other universities face similar threats. Federal funding has historically played a critical role in supporting research at universities, enabling groundbreaking discoveries and advancements in various fields. Without this funding, universities may struggle to maintain their research programs, and the US could lose its competitive edge in science and technology.
The potential loss of federal funding could also impact life-changing innovations, such as the chain model for kidney donations and neonatal care practices, which were developed through federally funded research.
For Fun:
April 15: OpenAI framework: AI now ‘on the cusp of doing new science’
OpenAI's latest "Preparedness Framework" signals a potential paradigm shift for the R&D ecosystem, suggesting that AI systems are on the verge of conducting new scientific research independently.
The framework warns of the risks associated with AI becoming "recursively self-improving," which could accelerate AI R&D and potentially outpace current safety measures. OpenAI CFO Sarah Friar reinforced this view, stating that models are already generating novel ideas and moving towards Artificial General Intelligence (AGI). Leading R&D institutions are developing autonomous research capabilities, with national laboratories like Argonne and Oak Ridge creating 'self-driving labs' for materials science and chemistry.
These labs are exploring AI's role in generating hypotheses, designing experiments, controlling robotic execution, and analyzing results with reduced human intervention. The transition towards AI as a researcher is also evident in software development, where AI models are demonstrating significant progress and approaching human-level coding abilities.
OpenAI uses a five-level framework to benchmark its progress towards AGI, with levels ranging from chatbots to AI systems capable of managing entire organizations. This evolution towards more autonomous capabilities could reshape various fields, including scientific research and software development.