The global market in government bonds has been bleeding red lately. “Bond market screams for help but no one answers”, says Bloomberg. It is “the worst start to a year in bonds since 2015”, according to the Financial Times.Though bonds have been declining since last summer, the sell-off became a lot more violent in February.
This meant that the yield on ten-year US Treasury bonds, which is inversely related to the price, rose by around 60% to peak at over 1.6% a couple of days ago, before falling back to 1.5% at the time of writing.The US ten-year strongly influences the price of everything from mortgages to business loans in the US, and by extension around the world, so such a sharp rise has the potential to reduce borrowing and weaken the economic recovery from COVID –especially when there is so much debt in the global system.
The world’s rampant stock markets responded by going into reverse in February as they factored in higher interest rates, as well as higher production costs because of surging commodity prices.
Bond prices can fall for several reasons. It can mean that the market thinks that economic growth is going to pick up (meaning investors shift their money into riskier investments). But it can also reflect fears that inflation is on the way without much accompanying economic growth, meaning that interest rates need to go higher so that lending is still profitable.
In the present case, it is a bit of both: the rollout of the vaccination programmes has made many observers more optimistic about the prospects of a recovery. But the rise in the price of commodities like oil, copper and coffee is more about pandemic-related supply issues than because this optimism has prompted a step-change in demand.
When Fed Reserve Chairman Jay Powell failed to announce any immediate intervention to put a floor under the sell-off in bonds during a public appearance in early March, it appeared to trigger more selling – a sign that falling bond prices have been more a reflection of fears than optimism.
Interestingly, in the hours since the new US$1.9 trillion (£1.4 trillion) US stimulus package has been agreed by Congress, the bond market and stock market have both been rising. Though there have been fears that sending US$1,400 stimulus cheques to most Americans will cause a further surge in inflation, the extra consumer demand will also prop up the economy. On balance, then, this appears to have been received as a net positive by the markets.
QE and perverse consequences
Any attempt to explain what is happening in the markets needs to be in the context of quantitative easing (QE). Shortly after the first wave of lockdowns in early 2020, central banks stepped in to help their national economies. They announced huge new QE plans in which they would create new money with which to buy government bonds and other financial assets. This drove up bond prices and hence kept yields (and interest rates) at very low levels to encourage as much borrowing from consumers and businesses as possible.
Most central banks originally began QE programmes after the 2007-09 financial crisis (besides the Bank of Japan, which began a few years earlier). This was primarily to help companies get access to capital to boost their business, in the hope that they would then hire staff, which would help to reduce unemployment rates that had been sent soaring after the crisis.
However, some companies took advantage of these low interest rates in another way: they borrowed cheaply and invested it in the stock market. With investors doing likewise, this has helped to drive the relentless rise in global stock markets over the past decade. It also helps to explain why these markets have been mainly climbing ever since the COVID panic sell-off of March 2020.
In the coming months, economies are going to reopen, but interest rates are to stay low. Fed Reserve Chairman Jay Powell may have declined to announce any new interventions to date, but it is fairly clear that he will only let yields rise so far.
This gives investors a great opportunity to continue taking advantage of the situation. So long as the gain from your investment in stocks is greater than the interest rate you have to pay on your borrowings, you are a winner. Better still, buy stocks in a company such as Apple whose bonds central banks have been buying as part of their QE activities. Apple is still trading at over double the lows of March 2020, even after the February correction.
But if you are not in a position to take advantage of this one-way bet, you are a loser. The central banks have already created a situation where major institutions like the biggest hedge funds and investment banks are achieving record earnings while many families are sinking into poverty on the back of the pandemic.
The endless stimulus is in danger of creating an ever more divided society. While it is true that the latest US package (and the support measures announced in the UK budget) will temporarily help those struggling during the pandemic, the shot in the arm is also another way of propping up markets that seem too overvalued to fail.
And if they can no longer survive without central bank life-support to keep bond yields low, the question is how to prop up the markets without exacerbating inequality. It’s not clear that anyone has the answer. It might be that a shift to a much more redistributive politics to offset the widening gap between rich and poor is about the best that we can hope for.
Arman Hassanniakalager does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
When the Senate added a new corporate minimum tax to the Inflation Reduction Act (IRA), it almost added a clarification that private equity is a business that would be subject to the new tax. But two key Senators blocked the clarification.
Now, as Treasury writes regulations to accompany the new law, it must decide whether private equity is a business. The legal answer is easy: Yes, private equity is a business. But the policy answer is harder: Does Treasury want to potentially apply the minimum tax to thousands of smaller companies that are owned by private equity?
But Treasury also has a solution: It can require private equity firms to consolidate the many smaller companies in their portfolios into one tax return, and collect the new tax from their owners, the private equity funds.
Starting next year, the corporate minimum tax will apply to any corporation with more than $1 billion of book earnings that are reported on financial statements. The new tax also will apply to affiliated corporations with book earnings that aggregate to more than $1 billion. A corporate holding company typically owns these businesses and files a single, consolidated tax return on their behalf.
But partnerships such as private equity funds also own and operate sprawling groups of corporations that combined may have book earnings in excess of $1 billion. And partnerships, unlike corporations, do not file consolidated tax returns. So, the open question is whether Treasury will treat the many corporations a private equity firm owns as affiliated—and subject to the corporate minimum tax. And that question turns on whether a fund is a business or merely a passive investor.
While private equity funds treat themselves as passive investors, Congress tried to explicitly clarify the definition of business to ensure their companies were subject to the new tax. However, Senators Krysten Sinema (D-AZ) and John Thune (R-SD) blocked the effort, leaving current law in place.
But the proposed clarification was unnecessary, since current law establishes that private equity is a business. Private equity funds acquire, develop, and eventually sell the businesses they own. The funds’ operations fit the common definition of a business: They are continuous, regular, and substantial. And their large fees and immense profits reflect the size of their undertakings.
But, by taking the position they are merely passive investors, private equity funds, their investors, and the companies they own, gain a wide range of tax advantages. Exempting the funds and their companies from the minimum tax would add another. As Lee Sheppard, a leading tax analyst observed, private equity “groups could be competing with publicly traded corporate groups. Private equity funds already have tax advantages as business owners; they don’t need a new one.”
Treasury can, and should, clarify that private equity is a business that is subject to the minimum tax. By doing so, Treasury could treat a private equity fund’s group of portfolio companies like a holding corporation’s group of companies for purposes of the tax.
But subjecting a sprawling group of corporations to the tax could raise administrative and practical challenges. Poorly designed, a tax meant to apply to 150 corporations could hit, potentially, thousands.
However, Congress granted Treasury authority to create a “simplified method” to determine the scope of the new tax. Treasury can address the administrative problems by permitting private equity funds to consolidate their portfolio companies into one—and pay the resulting tax. That election would respect both law and policy. And, if a fund prefers to allow its corporations to be subject to the minimum tax separately, it still could do so.
The federal income tax rules that apply to private equity funds and investors have been the subject of much debate, mainly due to the perception by some members of Congress and the public that the rules include tax benefits that unfairly favor the wealthy.
Although President Biden’s campaign and Green Book agendas and recent House and Senate tax proposals included targeted changes that would have generally increased taxes on private equity investors, not all such proposed changes are included in the version of the Build Back Better Act (H.R. 5376) passed by the House on November 19, 2021 or the proposed updated text of H.R. 5376 released by the Senate Finance Committee on December 11.
As discussed below, H.R. 5376 would, if enacted, still make certain changes to the taxation of private equity. The current bill would also impose a 5% or 8% surtax on wealthy individuals – including wealthy fund investors (i.e., a 5% surtax on individual incomes over $10 million and an additional 3% surtax on incomes over $25 million).
As of the time of writing, H.R. 5376 is stalled in the Senate and the fate of the bill is uncertain. Private equity funds and fund investors should continue to monitor the proposed legislation – in particular, as it relates to the following tax considerations:
Taxation of Carried Interests
Managers of investment funds are typically compensated via allocations of gain upon the disposition of underlying investment property. Under current law, these “carried interest” allocations are generally taxed as capital gains at favorable capital gains rates (currently, at a top rate of 20% as opposed to 37% for non-capital gain compensation income).
The Tax Cuts and Jobs Act (TCJA) extended the holding period for long-term capital gain treatment of carried interest allocations from one year to three years beginning in 2018. Recent proposals in both the House and Senate have sought to either further extend the holding period requirement for long-term capital gain treatment from three to five years or effectively tax all carried interest allocations as ordinary income, except in the case of taxpayers with taxable income below $400,000.
These and other proposals to end the perceived carried interest “loophole,” however, are currently not included in H.R. 5376 as passed by the House or in the updates proposed by the Senate Finance Committee. Funds and investors should continue to monitor H.R. 5376 and other proposed legislation as bills make their way through Congress.
Regardless of proposals to change the rules for taxing carried interest allocations, there may be strategies available to minimize federal tax on carried interest allocations. These may include:
Limiting fund investments solely to operating partnership portfolio companies.
Waiving carried interest allocations in favor of subsequent appreciation in other portfolio investments.
Investing in Section 1202 qualified small business stock (QSBS), gain from the sale or exchange of which could qualify for a capital gain exclusion (see below).
Dispositions of Qualified Small Business Stock
Internal Revenue Code Section 1202 currently permits a qualified taxpayer other than a corporation to exclude up to 100% of the gain from the sale or exchange of QSBS held for more than five years. Dispositions of QSBS by a private equity fund (which is taxed as a partnership) may qualify for gain exclusion assuming all qualifications are met.
However, while the QSBS rules apply to capital interests in a partnership, there is less certainty surrounding the application of the rules to profits interests and, thus, carried interests. Private equity funds and investors should consult their tax advisors when determining whether it is possible to exclude gain from dispositions of QSBS allocated to carried interests.
Note that H.R. 5376 in its current form would limit the gain exclusion for QSBS to 50% for dispositions occurring after September 13, 2021, subject to a binding contract exception. Under the current 50% exclusion rules, the remaining 50% QSBS gain is taxed at 28%. The excluded QSBS gain is considered an alternative minimum tax (AMT) preference item, which when considered along with the net investment income tax on the taxable half of the gain, would result in an effective rate of 16.88% (plus any surcharge attributable to high-income taxpayers) for QSBS acquired after February 17, 2009 and sold after September 13, 2021.
Self-employment tax / Net Investment Income tax
Under current law, limited partners are not subject to self-employment tax on their distributive shares of partnership income, and limited partners who materially participate in a trade or business are not subject to the net investment income tax (NIIT). However, neither the tax code nor regulations define the term “limited partner.”
Private equity funds and fund investors should be aware that the IRS has successfully challenged positions that members of limited liability companies and limited liability partnerships were limited partners for purposes of self-employment tax and NIIT. In addition, the IRS has routinely disagreed with positions that a partner in a state law limited partnership should, by definition, be considered a limited partner.
H.R. 5376 would resolve these issues by ensuring that all trade or business income earned by high-income taxpayers (taxpayers with adjusted gross income in excess of $400,000) is subject to either the NIIT or self-employment tax. Under the proposed legislation, trade or business income that is not subject to self-employment tax would be treated as net investment income subject to the NIIT.
If enacted, the proposed legislation would result in fund managers earning more than $400,000 paying either self-employment tax or NIIT (which under the current proposal would be unlimited) on their distributive shares of partnership income at a likely rate of 3.8%. Additionally, as proposed, H.R. 5376 would result in incremental NIIT upon the disposition of trade or business assets.
State Pass-through Entity Elections
The Tax Cuts and Jobs Act introduced a $10,000 annual cap beginning in 2018 on itemized deductions of state and local taxes paid by individuals, also known as the “SALT cap.” The SALT cap does not, however, apply to state and local taxes imposed at the entity (e.g., partnership or S corporation) level that are reflected as a reduction in the partner’s (or shareholder’s) distributive share of income or loss.
Based on this distinction, at least 20 states have enacted potential workarounds to the SALT cap for their resident partners, by allowing a partnership to make an election (PTE tax election) to be taxed at the entity level. PTE tax elections present both state and federal tax issues for partners. Before making an election, care should be exercised to avoid state tax traps, especially for nonresident partners, that could exceed any potential federal tax savings. Considerations include:
If the PTE election is made at the fund level, would the expense be classified as an ordinary or necessary trade or business expense (under Section 162) or a nontrade or nonbusiness expense (under Section 212)?
Would the classification as a Section 162 or Section 212 expense call into question the characterization of other expenses at the fund level?
Is it possible to make special allocations of the partnership-level tax expense?
Notice 2020-75 states that a partnership is allowed a deduction for an entity-level tax “for the taxable year in which the payment is made.” Does this mean that even if a partnership is on the accrual method for income tax purposes, it cannot deduct PTE taxes until they are paid?
Are there negative consequences to partners who may not benefit from the PTE tax deduction?
When deciding whether to make a state PTE election, private equity funds and investors should also pay close attention to proposals in Congress that would increase or completely lift the SALT cap for certain individuals.
Schedules K-2 / K-3 Reporting
Partnerships, including private equity funds, that have items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of their partners under the international provisions of the Internal Revenue Code must complete the relevant parts of new Schedules K-2 and K-3 beginning with the 2021 tax year. Penalties may apply for filing Form 1065 or furnishing Schedule K-3 to partners without all of the required information. Notice 2021-39 released on June 30, 2021 provides transition relief for tax years beginning in 2021 for eligible taxpayers.
How BDO Can Help
As discussed above, the taxation of private equity funds and their investors continues to receive scrutiny in Congress. BDO professionals can help taxpayers monitor and understand the various legislative proposals, as well as plan for the tax implications that arise from new developments. For more information, contact BDO.
The Inflation Reduction Act is the Walt Whitman of federal legislation: like the great American poet, the bill contradicts itself; it is large and contains multitudes. It represents the most significant climate investment in U.S. history, but it also paves the way for a massive expansion of oil and gas drilling on federal lands and in federal waters.
It includes a new minimum tax designed to ensure that large corporations pay at least 15 percent of their profits to the federal government, but it also showers corporations in tax subsidies that will push many more firms’ tax rates below 15 percent (and in some cases below zero). It is disappointingly modest in its aspirations, but it will arguably be—along with the Affordable Care Act—the most ambitious piece of legislation signed by a Democratic president in more than a half century.
Advocates for climate action and tax fairness should celebrate the bill’s enactment, which will likely occur later this week, after the House votes on the measure. But they should not exaggerate the bill’s accomplishments or sugarcoat the compromises that Democrats made to secure the support of swing senators. Glorifying the Inflation Reduction Act would, moreover, lead Democrats to draw the wrong lessons from the bill’s phoenix-like rise out of the legislative ashes. The bill succeeded not in spite of its shortcomings, but because of them.
Emissions and Prescriptions
The sprawling legislation—spanning more than 700 pages—is difficult to summarize succinctly, but if one had to choose a three-word phrase to describe the bill, “Inflation Reduction Act” would not be it. Moody’s Analytics, whose estimates are oftencitedby President Biden, projects that the Consumer Price Index, a key inflation gauge, will be 0.33 percent lower at the end of 2031 on account of the legislation—a reduction in the inflation rate of approximately 0.03 percentage points per year.
For comparison’s sake, CPI inflation was 9.1 percent in the twelve months ending in June 2022. So the bill will likely reduce inflation (as advertised), but the effect will be a drop in the bucket—a very small drop in a very large bucket. A better three-word summary would be “Climate, Medicine, Taxes.” To a first approximation, the bill amounts to a $370 billion climate investment paid for by prescription drug savings and tax changes. The bill’s three baskets can be analyzed separately, but the baskets are so tightly woven together that any normative assessment of the legislation must account for all three.
Let’s start with climate. The bill lays out a smorgasbord of tax credits for clean energy, nuclear power production, electric vehicles, and other technologies that will accelerate the transition to a low-carbon economy. According to estimates from the Rhodium Group, U.S. greenhouse gas emissions in 2030 will be 40 percent below 2005 levels if Congress enacts the bill—compared to 30 percent below 2005 levels if Congress does not act. That’s a meaningful difference. It implies that U.S. emissions will be approximately 14 percent lower in 2030 with the bill than without.
But the claim by Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. Joe Manchin III (D-W.V.)—repeated by House Speaker Nancy Pelosi (D-Cal.) on Sunday—that the bill will “reduce carbon emissions by roughly 40 percent by 2030” is misleading at best. Three-quarters of that 40 percent reduction has nothing to do with the bill. And the legislation still falls short of fulfilling the United States’ commitment under the Paris Agreement to cut emissions to half of 2005 levels by the end of this decade. In other words, the Inflation Reduction Act is a down payment on our Paris pledge, but a large balance remains due.
Most troublingly, the bill bars the Interior Department from issuing any new right-of-way for wind or solar energy development for a decade unless the department also offers up a total of 20 million acres of land and 600 million acres of ocean area for oil and gas leasing. To put those acreages in perspective, 20 million acres is roughly the size of South Carolina; 600 million acres is more than Alaska and Texas combined. “Drill, baby, drill”—once a slogan of Republican vice presidential candidate Sarah Palin—is about to become official federal policy.
If there is a saving grace, it’s that the giveaway to oil and gas firms is so extravagant that most of the acres offered for leasing won’t attract any bids. Still, the irony of an oil and gas drilling expansion in a bill that aims to reduce U.S. carbon emissions is rich. If this was the price of Manchin’s backing, then it was a price worth paying. But Manchin’s support certainly did not come cheap.
An Offer that Drug Companies Can’t Refuse
The medical portion of the bill represents a real achievement—though again, it is an achievement that comes with caveats. The bill extends a pandemic program that reduced health insurance premiums for 13 million low- and middle-income Americans, but the extension lasts only three years, after which individuals and families who purchase health insurance through Obamacare exchanges will face another benefits cliff.
The bill also facilitates free access to adult vaccines for Medicare and Medicaid beneficiaries, and it imposes a $2,000-per-year cap on out-of-pocket drug costs under Medicare Part D. But even as it makes federally subsidized health insurance more generous to current enrollees, the bill still leaves more than 2 million low-income adults in a “coverage gap”—too poor to claim credits on the Obamacare exchanges, but ineligible for Medicaid under their own state’s laws.
The bill’s medical cost savings come primarily from a provision that requires pharmaceutical and biotechnology companies to accept steep price cuts for a handful of prescription drugs purchased through Medicare. The bill describes this as the “Drug Price Negotiation Program,” but “negotiation” is somewhat of a euphemism. The manufacturer of a drug selected for “negotiation” must accede to Medicare’s proposed price or else pay a 1,900 percent excise tax on all sales of the drug. That’s a negotiation only in the Vito Corleone sense—an offer one can’t refuse.
Drugmakers complain that the Medicare price cuts will discourage investment, resulting in fewer new cures and treatments. That’s about as true as the claim that the Inflation Reduction Act will reduce inflation—it’s probably correct, but the effect is likely to be marginal. The Congressional Budget Office estimates that the number of new drugs approved over the next 30 years will be approximately 1 percent lower as a result of the legislation.
Without trivializing the consequences for patients who would otherwise stand to benefit from those drugs, that’s a cost worth bearing if it makes space in the budget for transformative climate investments.
Tax Changes and an IRS Infusion
The biggest revenue raiser in the bill—according to the Congressional Budget Office’s analysis—is a new 15 percent minimum tax on the “book income” of large corporations. “Book income” refers to the earnings that corporations report to investors under generally accepted accounting principles. If large corporations pay less than 15 percent of their accounting profits under normal tax rules, then the 15 percent minimum tax potentially kicks in.
Manchin told Fox News Sunday that the new 15 percent minimum tax “does not raise taxes.” He added: “I’ve made sure that there are no tax increases in this whatsoever.” That’s an absurd claim. Corporations often pay less than 15 percent of their profits in taxes for entirely legitimate reasons—for example, because the tax code allows writeoffs for depreciation and stock compensation in different years than when those deductions are permitted for accounting purposes. For those corporations, the Inflation Reduction Act certainly does raise taxes—to the tune of $313 billion over 10 years.
The burden of the new corporate minimum tax will be borne in large part by high-income households that own stock. Raising taxes on large corporations and using the revenue to help avert a climate catastrophe is, on balance, a good trade. But President Biden’s claim that the bill “ends” the practice of profitable Fortune 500 companies paying no corporate income tax is just not correct. Carveouts for various business tax credits ensure that many corporations will continue to pay sub-15 percent rates. Indeed, the clean energy credits in the Inflation Reduction Act will likely cause many profitable electric utilities to pay zero or less in federal income tax.
Other tax provisions in the bill are more praiseworthy. A new 1 percent excise tax on corporate stock buybacks marks an important step toward plugging a gap in current law that allows foreign investors—and some U.S. shareholders—to avoid U.S. tax on corporate cash distributions when those payouts take the form of stock repurchases rather than traditional dividends. An $80 billion increase to the budget of the Internal Revenue Service will help to restore an agency that has been starved for cash in recent years, and the expenditure will likely pay for itself several times over.
But the bill fails to deliver on Democrats’ larger tax reform ambitions. A last-minute decision to preserve a tax preference for the private equity industry—part of a deal to win over Sen. Kyrsten Sinema (D-Ariz.)—was just the latest way in which Democrats scaled back the bill’s tax components. Ultimately, the Inflation Reduction Act does virtually nothing to curtail the strategies that enable some billionaires to pay near-zero personal income tax rates.
If there is one lesson to be drawn from the Inflation Reduction Act, it’s that passing major legislation through a closely divided Congress will often require self-contradiction. The bill is a devil’s bargain, but if it were ideologically pure, it would also be a dead letter. That’s no justification for making misleading statements about the bill’s contents, as top Democrats unfortunately have. But a clear-eyed view of the bill’s achievements and shortcomings serves to emphasize the fact that here, as elsewhere, the perfect and the good are enemies. Thankfully, the good appears to have won out this time.
Internal Revenue Service computers keep spitting out perplexing letters and notices to taxpayers, and today the agency announced that it’s going to stop the machines, at least temporarily, in an effort to help taxpayers and tax pros. The 2022 tax season kicked off on January 24 for filing 2021 tax year returns, but millions of taxpayers are still waiting for the IRS to process last year’s returns.
Example: You filed your 2020 tax return last April. The IRS cashed your check. Why are you getting an alarming CP-80 Unfiled Tax Return notice that says: “We haven’t received your tax return. What must you do immediately? If you’re required to file, please file today. If you’ve already filed, please send a newly-signed copy.”
Savvy tax pros know that the IRS is woefully backlogged, and the best response is to wait it out. A California tax preparer who filed on paper with a check attached last April emailed me that he got a CP-80 notice last month. The IRS cashed the check, but hasn’t gotten to his return—10 months later.
His plan: “IRS thinks I have overpaid; I can wait 6 months to see if they catch up on paper.” In the meantime, the IRS has updated its web site, Understanding Your CP80 Notice, to tell folks who are getting CP-80 Notices who have already filed their 2020 returns: “DO NOT refile.”
That’s all the IRS needs—more paper! As of the February 7 update to the IRS Operations page, the IRS has made some progress on whittling down the number of amended tax returns for tax year 2020 in processing (2.3 million as of January 8), but it hadn’t updated the number of outstanding individual returns for 2020 (6 million as of December 31).
“The IRS is opening mail within normal timeframes and all paper and electronic individual refund returns received prior (emphasis added) to April 2021 have been processed if the return had no errors or did not require further review.”
That backlog is causing problems down the line. Hence, the decision — after outcry from tax professionals and members of Congress — to stop sending some taxpayer notices and letters for now.
The IRS announcement notes that these automatic notices have been temporarily stopped until the backlog is worked through, and that the agency will continue to assess the inventory of prior year returns to determine the appropriate time to resume the notices. Some taxpayers might still get these notices and letters in the next few weeks. “Generally, there is no need to call or respond.” But watch out: If you believe a notice is accurate and you have a balance due, the IRS says that interest and penalties can continue to accrue.
Here’s the rundown of suspended notices and letters:
CP-80 Unfiled Tax Return(s) 1st Notice: This notice is generally sent when the IRS credited payments and/or other credits to a taxpayer’s account for the tax period shown on the notice, but the IRS hasn’t received a tax return for that tax period.
CP-59 and CP 758 (Spanish version): The IRS sends this notice when there is no record of a prior year return being filed.
CP-516 and CP-616 (Spanish) Unfiled Tax Return(s) – 2nd Notice: This notice is a request for information on a delinquent return as there is no record of a return filed.
CP518 and CP618 (Spanish) Final Notice -Return Delinquency: This is a final reminder notice that the IRS still has no record of a prior year tax return(s)
CP-501 Balance Due — 1st Notice: This notice is a reminder that there is an outstanding balance on a taxpayer’s accounts.
CP-503 Balance Due — 2nd Notice: This notice is the second reminder that a there is an outstanding balance on a taxpayer’s accounts.
CP-504 Final Balance Due Notice/3rd Notice/Intent to Levy: The IRS sends this notice when a payment has not been received for an unpaid balance. This notice is a Notice of Intent to Levy (Internal Revenue Code Section 6331 (d)).
2802C Withholding Compliance Letter: This letter is mailed to taxpayers who have been identified as having under-withholding of Federal tax from their wages. This letter provides instructions to the taxpayer on how to properly correct their tax withholding.
Two business notices are also being temporarily paused.
CP259 and CP959 (Spanish) Return Delinquency: IRS sends this notice when there is no record of a prior year return being filed.
CP518 and CP618 (Spanish) Final Notice -Return Delinquency: This is a final reminder notice that the IRS still has no record of a prior year tax return(s)
A coalition of taxpayer professionals, the Tax Professionals United for Taxpayer Relief Coalition, including the AICPA and H&R Block, is calling for more. They’ve asked the IRS to pause all automated compliance actions and provide relief from underpayment and late payment penalties. Stay tuned.
I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997. Follow me on Twitter: @ashleaebeling and contact me by email: ashleaebeling — at — gmail — dot — com
Starbucks is sort of America’s bathroom. In cities like New York, where public restrooms are hard to come by, it’s the de facto spot to stop and pee. Mike Bloomberg, who tried to set up a network of public toilets when he was mayor, once reportedly shrugged that perhaps “there’s enough Starbucks” to address the city’s bathroom needs anyway.
But Starbucks is an imperfect public toilet because providing a public toilet is not the point of Starbucks. It has tried in the past to limit its facilities to employees, or, at the very least, to require people using those facilities to buy something first. That proved to be a problematic system after employees at a Philadelphia Starbucks in 2018 called the police on two Black men who asked to use the bathroom while waiting for a business associate. And so, the coffee giant has begrudgingly accepted its fate as many passersby’s emergency loo.
The solution is far from ideal. But in many places in the US, there aren’t many immediate alternatives. The government has failed to meet a very basic biological need, and so a private company fills part of the gap.
Across various segments of American life, the private sector has begun to take on tasks big and small that one might think should be tackled by the public sector. Domino’s filled in potholes. Dawn’s dish soap saved ducks. American Express pitched in on historic preservation. Walmart started selling low-priced insulin. A slew of companies help workers pay for school. Much of America’s health care system is still handled through private insurers and your job.
It’s not a bad thing for brands and companies to try to make the world better. Starting a business often involves identifying a problem to solve, and it’s much better for companies to help than to do harm. Corporate social responsibility is fine. There are, however, limits.
“Of course we want businesses to be responsible,” said Suzanne Kahn, managing director of research and policy at the Roosevelt Institute. But she emphasized that this does not constitute a plan for how to organize society. “Private companies don’t, can’t, or won’t plan with the same values that we demand and expect the government to.”
Companies have a profit motive and are ultimately accountable to shareholders. Doing what’s lucrative often doesn’t align with what’s best for most people, and when they do nice things, it’s often because they know it will play well with consumers and workers. Domino’s helped fill some potholes because it was good advertising for pizza pickup customers, not because it’s overly concerned about the future of America’s bridges and roads. The issue is, the entity that should be driving the bus on America’s bridges is kind of asleep at the wheel.
The private sector is increasingly encroaching on the government’s space because the government is leaving so much space to begin with. Corporations are swooping in with solutions because the solutions coming from public officials and entities aren’t working or are nonexistent.
“I don’t think it’s bad for a company to say we’re going to do the Paris climate accord,” Kahn said. “It’s bad when we as a country say we’re going to let companies do what should be a public responsibility.”
Corporate America wants to be here for you … to a point
At the start of the pandemic, the airwaves were filled with commercials from brands promising solidarity and support. Corporate America was eager to reassure us “we’re all in this together” and highlight the myriad ways they were supporting their customers and workers. Insurers paused policy cancellations. Telecom companies gave away extra data. Retailers started calling their workers “heroes” and, in some cases, giving them hazard pay.
But many companies were here for us on Covid-19 until about the summer of 2020, after which many of those pandemic-related perks and benefits expired. Stores halted hazard pay for workers even though the hazard was far from over. Creditors wound down debt deferrals. We were all in this together for a limited time only. Ultimately, it was big government programs, such as stimulus checks, unemployment insurance, and eviction moratoriums, that would make the biggest difference in people’s pandemic lives.
“It’s bad when we as a country say we’re going to let companies do what should be a public responsibility”
It’s illustrative of the greater landscape: The private sector can and should play a role in addressing society’s issues, but it will only do so to a point. Kroger just isn’t going to pay its workers an extra couple of dollars an hour forever if it doesn’t have to. The airlines started laying off workers the minute government funding dried up. Operation Warp Speed for the vaccines wasn’t going to be undertaken by pharmaceutical companies on their own.
Companies are under increasing pressure from their workers and consumers to do the right thing. According to a report from Kantar Monitor, more than two-thirds of consumers expect brands to be clear about their values, and nearly half of millennials and Gen Z expect brands to be brave and speak out. Research suggests that when companies do a good deed, their products are perceived as safer and consumers are drawn in.
Employees also have high expectations of their workplaces — being on the “right side” of issues such as climate and race can be a useful recruiting tool. But what matters more than companies talking a big game on helping their communities is whether they’re backing that up, or what else they’re doing in the background.
Companies have money and power, and major multinational corporations are often the only entities besides government with the clout to influence societal forces, said Jerry Davis, a professor of management at the University of Michigan’s Ross School of Business. “It’s very clear that some of the problems that we want to have solved are going to take scale, and that’s the kind of scale that only a government or a really big business can pull off. And if we don’t trust the government to do it, that just leaves Walmart and Amazon,” Davis said.
Alice Korngold, a corporate governance consultant, echoed the idea that companies are often the ones with the weight to tackle major global issues — though sometimes, once you dig deeper, the situation becomes much more muddled. “I’d never say, ‘This company is doing a particular thing, then this company is great!’ And it’s really industries that are often culpable for creating situations that need to be addressed,” she said.
She explains that, far from alleviating collective problems, some industries are complicit in creating them, pointing to the fossil fuel industry, a notorious driver of pollution and waste. If Walmart were to decide to stop selling factory-farmed meat or were to commit to selling only LED lighting, it could have a real impact on the environment. But companies can’t always, or even often, be trusted to wield all of their powers for good.
“We need big to do some good things, and yet big can be really bad,” Davis said. “Big in the hands of Mark Zuckerberg is a nightmare.”
If the government’s in the back seat, who do you expect to drive?
The cynical view of companies acting as a benevolent force in the world is that they’ll only do so to the extent that it somehow benefits their bottom line or is good marketing. That cynical view is sometimes borne out in reality.
And yet, we keep looking to private companies to help fix America’s broadband problem because the government isn’t there to do it. The government doesn’t think about the internet the way it does, say, electricity — as in something everyone should have. It’s hardly the only example of the public sector ceding territory or leaving to the private sector tasks reasonable minds might think it should take on.
“We have to recognize that sometimes privatization arises because other systems don’t work”
The 1980s and ’90s saw a shift in political rhetoric to shrinking the reach of the government. Ronald Reagan told us, “Government is not the solution to our problem, government is the problem.” George H.W. Bush declared, “Read my lips, no new taxes.” Bill Clinton announced, “The era of big government is over.” The neoliberal idea took hold that the government should set the rules of the road and take on some challenges, but the private sector and marketplace are equipped to do much of the driving.
Lower the taxes paid by the rich and by corporations, the thinking goes, and hopefully their money will trickle down and they’ll put it to good use.“ The premise of a kind of market-leaning libertarian is that the pursuit of private self-interest in the marketplace, aggregated across many actors, will turn out to be socially beneficial,” said Rob Reich, a professor of political science and philosophy at Stanford.
That’s not, in practice, how the market often works. The US has left health care up to private insurers in the Affordable Care Act, ultimately leaving a public option by the wayside. The result: a health care system that is still exorbitantly expensive. There are countless stories of GoFundMe drives that are supposed to be heartwarming, where people raise billions of dollars through a private internet platform to cover expenses for health costs or other financial setbacks in their personal lives.
As to how heartwarming these stories actually are, well, your mileage may vary — it’s not ideal that a crowdfunding platform has taken the place of a more robust public system to cover health costs. “Privatization, I think, is a very bad solution to certain problems. But I do think we have to recognize that sometimes privatization arises because other systems don’t work,” said Chiara Cordelli, a political philosopher at the University of Chicago and author of The Privatized State, which makes the case that privatization and government outsourcing weaken the legitimacy of the state.
Americans are also losing faith in the ability of government to act. According to Gallup, just 18 percent of Americans say they have a great deal or quite a lot of confidence in big business. Their faith in Congress, however, is somehow even lower, at just 13 percent.
It’s understandable, given so much of the gridlock in Washington, DC. In the current balance of power, Democrats hold the White House, the House of Representatives, and the Senate — and they’re still struggling to get major legislation passed. Republicans won’t go along with much of what Democrats want to accomplish, and Democrats are unwilling to make the changes (as in, abolishing the filibuster) necessary to push their agenda through.
Capitol Hill has failed over and over to make real reforms on issues such as guns and immigration and climate. Many companies — which are subject to the pressures of their consumers and their employees — have at least tried. But, again, that trying has limits.
“We have these big, public, global and national problems that we need to address, and that’s not the length of time at which they think, it’s not the scale at which they think,” Kahn said. “And if they’re choosing to put some of these values front and center, we certainly cannot count on them to be thinking about how equitably their moves are affecting different communities.”
There’s a space for the private sector to fill public needs. But maybe not like this.
With threats as big and imminent as the Covid-19 outbreak or climate change, it’s important to have an all-hands-on-deck approach that draws in various players: the government, private companies, nonprofits, and philanthropy. And there are plenty of smart people who argue that while private entities are not the answer to the world’s problems, they need to play a role.
“You can look at almost every major issue of today … and it requires, to solve it, going across all these sectors and aligning interests, whether it’s homelessness, whether it’s climate action, whether it’s racial equity, what have you. None of this is going to be solved by government alone or by the private sector,” said William Eggers, the executive director of Deloitte’s Center for Government Insights.
“The role of government absolutely should be to protect our public interest,” Korngold said. “The problem is that so many problems are global, and the governments are national.”
Still, finding a balance is tricky. Take the example of billionaire philanthropy, which is often an outgrowth of extraordinary success in the corporate world. It’s nice that rich guys are trying to have a positive influence on the world. It’s also hard not to wonder whether said rich guys shouldn’t just be taxed more, or why the US and the world are in a spot where private entities, whether it be Bill Gates’s charity or his company, are filling in such obvious public spaces.
The government is by no means a perfect actor. But it is leaving problems to the private sector to address what it feels like should be directly in its purview, whether it be providing citizens basic health care or filling in a pothole in the street.
Even decent outcomes, like Starbucks as a forced public bathroom, can feel pretty uneasy. The pandemic gave it a good reason to shut those restrooms down, meaning suddenly a solution many people had adopted was no longer available. And even in normal times, it’s a little awkward to sneak by the barista without buying a coffee or muffin or water first. That’s because it is, and a private coffee company shouldn’t be standing in as a public restroom in the first place.
The Power of the Bull. London: Routledge. p. 13. ISBN978-1-317-72583-1. As the more advanced social institutions began to take shape they contributed to some counterbalancing of the essential insecurity of man’s condition. It was inevitable that ambitious and assertive men should see an opportunity for establishing for themselves positions of power and influence.