Experts discuss tax and IRS changes affecting Rochester businesses

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In a virtual panel discussion presented Thursday by the Rochester Business Journal, a trio of experts explained tax and regulatory changes likely to affect businesses.

The event, sponsored by MMB+CO, a Fairport-based accounting firm, featured MMB+CO partner and CPA Anthony R. Scinto; Steve Mills, a CPA and partner emeritus at Insero Advisors LLC; and Kristina Stamatis, a partner and CPA at MMB+CO.

Scinto talked about how research and experimentation (R&E) expenditure deductions are handled.

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Prior to the passage of the One Big Beautiful Bill Act (OBBBA) and the preceding Tax Cuts and Jobs Act, research and experimentation expenditures were always simply deductible in the year that they were incurred or accrued.

That changed with the Tax Cuts and Jobs Act starting in 2022, and those experimentation expenditures were required to be capitalized and amortized over either five years, if domestic, or 15 years, if foreign, Scinto said.

“For a lot of taxpayers, especially those with significant R&E, this was pretty impactful,” he said.

For many clients in certain industries … some of the tax bills that resulted, especially in 2022, the first year of implementation of this new rule, was “pretty significant,” he said.

“So much so that in some cases taxpayers needed to fund payment of the tax bill with new debt,” he said.

That law was in effect from 2022 through 2024, but the OBBBA provided relief, he said.

The new law means a return to immediate expensing of R&E. Small business taxpayers — those with an average of $31 million in gross receipts over the last three years —have the option of going back to 2022 through 2024 to amend tax returns to claim full deductions and potentially get refunds in those years.

All other taxpayers are now able to deduct those unamortized costs that remain in either 2025 or evenly across 2025 and 2026.

The small business taxpayers have until July 6 to make a decision on whether to amend past returns.

Scinto also talked about changes at the Internal Revenue Service.

“They are faced with more and more budgetary cuts. These budgetary cuts are limiting their ability to hire and retain agents and personnel, and, because of that, we’re seeing a significant decline in customer service within the IRS,” Scinto said.

“I can tell you from my own experience as a tax professional working for my clients, getting through to the IRS to help handle client matters is very very difficult,” he said.

“We even have dedicated practitioner lines, and I have found it personally difficult to get through to the IRS on those lines, which, prior to this year, has not really been the case,” Scinto said.

The IRS is using technology to help solve that problem, he said.

The IRS is using a “data-driven, AI-targeted approach to enforcement,” triggering automated notices, which are becoming more difficult to resolve.

The IRS focus is now on high-net-worth individuals, partnerships and pass-through structures, and various topics related to that, plus credits and incentives, Scinto said.

“So, it’s really important, and becoming even more important for taxpayers and tax practitioners to really look at all their sources of data, bring them together, and kind of connect the dots to make sure that, your informational reporting matches up with your income tax reporting,” Scinto said.

“I certainly echo Anthony’s comments about the difficulties of dealing with the IRS these days,” Steve Mills said.

“It is very difficult to try and get someone on the phone. Then it is very difficult to get them to answer your issue, or understand your issue, and then it is difficult to get them to solve it,” Mills said.

“However, I think we do have to give the IRS credit where credit is due. There has been some pretty good activity over the last six months in issuing some guidance on some of these things from OB3, because many of the concepts in the legislation were brand new,” Mills said.

Stamatis explained the history of how the IRS has treated cryptocurrency.

“Early on, the IRS didn’t have infrastructure or data. Everything relied on taxpayers reporting crypto gains and transactions voluntarily,” she said.

Although there was some Bitcoin trading starting in 2009, the IRS paid very little attention to it until 2014. At that time, the government issued a notice saying cryptocurrency would be treated as property, not currency, and taxpayers were left to self-report.

In 2016, widespread under-reporting was recognized, so the IRS went directly to Coinbase, the trading platform, to obtain data through the use of a “John Doe” summons, which allowed the IRS to, ask for information on a group of unidentified individuals.

After Coinbase resisted, the IRS narrowed the scope, but still got transactions on about 14,000 users, which they used to identify non-compliance patterns.

In 2019, the IRS issued a “crypto letter campaign” of targeted enforcement.

The most serious version of the letter suggested noncompliance and required a response. The other two types of letters were more educational. They didn’t require a response but amounted to a warning or a reminder to report crypto transactions.

“We saw a lot of activity after that letter campaign came out, mostly by amending returns or, voluntary disclosures,” Stamatis said.

Starting in 2020, Form 1040 has included the question: At any time during the year, did you receive, sell, send, or exchange a digital asset?

“So, what this did was create a perjury-level declaration. It increased voluntary compliance and also served as an audit-data trigger point,” Stamatis said.

Now there also is full third-party reporting with the form 1099-DA (Digital Asset Proceeds from Broker Transactions).

“So, we have gone from an honor system of voluntary reporting to full transparency in about 10 years. And this is really the turning point,” she said.

“Until now, the IRS had to piece things together with letters and analytics, but with the 1099-DA, they’re going to get standardized reporting directly from exchanges, just like they do with stock trades,” she said.

The International Organization for Economic Cooperation (OECD) has created the Crypto Asset Reporting Framework (CARF) that allows countries to automatically share crypto transaction data across borders, which eliminates the ability to avoid reporting by using offshore exchanges.

This starts to roll out in 2026 with first global data exchanges expected around 2027. In addition, the European Union created the DAC8, which is similar to CARF.

The most common audit risks related to crypto are misclassifying crypto income as capital gain versus ordinary income, she said.

“Selling crypto for cash is just like selling your Apple stock. That’s capital gains treatment. But then there’s other crypto transactions, such as mining and staking. That are ordinary income,” Stamatis said.

Another audit risk is not reporting crypto-to-crypto trades.

“That still is a taxable transaction. So, if you sell Ethereum and buy Bitcoin, you’ve got a taxable transaction there that needs to be reported,” Stamatis said.

Mills discussed effective dates of federal legislation.

“To listen to a tax professional say effective dates are important is kind of redundant, it seems to me, but I think it’s a very important message in that there are so many different dates,” Mills said.

“I’ve been doing this a long time, and effective dates have always been around, but it seems like in the last 10 or 15 years, they have become more prevalent with sunsets, and budget reconciliation bills require certain requirements for the legislation to be passed,” Mills said.

“There are just all kinds of dates that showed up in the legislation itself, as well as, in the guidance that has come out since then,” he said.

The IRS has recently issued new guidance on several tax topics which will be shared with clients, Mills said.

“It’s part of what we do as advisers … We keep our eyes on this stuff so that we can push this information out as best we can to everybody, so that we can make informed decisions, and taxpayers and our clients can make informed decisions about their tax positions,” Mills said.

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