Weinberg & Company

Best Practice Newsletter – November 2023

By November 14, 2023 No Comments

Fraudulent ERC Claims Targeted –

The Employee Retention Tax Credit (ERC) is a refundable tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order, or they had a significant decline in gross receipts during the eligibility periods.

A flood of claims forced the IRS in September to put a moratorium on the processing of ERC claims through at least the end of this year amid assertions of massive fraud in the program, according to the IRS. The halt in processing was due to “growing concerns inside the tax agency from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing,” said the IRS.

With the moratorium in place, the IRS introduced “a special withdrawal process to help those who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy.”

“The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest,” said the IRS. Those who received a refund check, but haven’t cashed or deposited it, can still withdraw their claim.

However, employers who willfully filed a fraudulent claim, or those who assisted or conspired in such conduct, “should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.”

The IRS said it will continue payouts for claims submitted before September 14, but will do so at a slower pace due to more detailed compliance reviews. With stricter compliance reviews in place, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit. The IRS may also seek additional documentation from the taxpayer to ensure the claim is legitimate.

For more information about withdrawing an ERC claim see: Fact Sheet 2023-24

IPO Poor Performance Stunts New Offerings

More than 80 percent of the initial public offerings which went to market since 2020 are currently trading below their initial offering price, causing investors to take a pause on investing in new deals.

That’s according to the Wall Street Journal, which reported that poor IPO aftermarket performance, combined with higher interest rates are causing investors to turn to investments such as money market funds which offer safer, guaranteed returns.

The WSJ’s analysis of IPO aftermarket performance focused solely on traditional IPOs from 2020 to November 10, 2023, and excluded Special Purpose Acquisition Companies (SPACs).

In 2020 and 2021, more than 600 traditional IPOs went to market. As the Fed began its steady hike of interest rates in an effort to curb inflation, those deals have dropped to fewer than 200 for combined 2022 and 2023, to date.

Shoemaker Birkenstock made headlines with its October IPO as its stock dropped 20% below its $46 offering price in the first three days following its market debut. According to Bloomberg, Birkenstock’s “$1.5 billion IPO ranks third largest on US exchanges this year, but the stock has yet to trade above its offer price”.

With lackluster performances such as these, investors may be waiting to see if 2023 IPOs will recover before allocating additional funds to what have been disappointing investments.

SEC’s Examination Priorities for 2024

Crypto assets again are at the top of the priorities list for SEC scrutiny, according to the just announced list of top priorities for fiscal 2024. The SEC’s Division of Examinations said it “continues to observe the proliferation of certain types of investments, including crypto assets and their associated products and services, and emerging financial technology, such as broker-dealer mobile applications and advisers choosing to provide automated investment advice to their clients.”

The Division said it also will focus on SEC-registered investment advisers, investment companies, broker-dealers, transfer agents, municipal advisors, securities-based swap dealers, clearing agencies, and other self-regulatory organizations.

Specifically, the Division’s examination of investment advisors will focus on advisers’ compliance programs, including whether their policies and procedures reflect the various aspects of the advisers’ business, compensation structure, services, client base, and operations, and address applicable current market risks.

It will “continue to focus on investment advisers to private funds,” said the SEC in its press release, and will be prioritizing portfolio management risks, adherence to contractual requirements regarding limited partnerships advisory committees, private fund fees and expenses, to name a few.

The examiners will continue “to prioritize examinations of registered investment companies, including mutual funds and ETFs, due to their importance to retail investors, particularly those saving for retirement.”

When examining broker dealers, the SEC will review whether broker dealers are adhering to the Regulation Best Interest, which establishes the standard of conduct for broker dealers at the time they recommend to a retail customer a securities transaction or investment strategy.

For a detailed look into the 2024 SEC Examination priorities, please see: https://www.sec.gov/files/2024-exam-priorities.pdf

New Short Sale Reporting Rules Finalized

As part of its push to complete the provisions outlined in the Dodd-Frank Act of 2010, the SEC has adopted new rules that require certain institutional money managers to provide more transparency regarding short sale-related data.

Under Rule 13f-2, institutional investment managers that meet or exceed certain prescribed reporting thresholds will report on a new Form SHO certain short position and short activity data for equity securities.

The new rules require managers to file short activity and short position data within 14 calendar days after the end of each calendar month with regard to certain equity securities.

For each reported equity security, managers will be required to report on Form SHO:

·    their end-of-month gross short position in the equity security at the close of regular trading hours on the last settlement date of the calendar month.

·    each individual settlement date during the calendar month, the Manager’s “net” activity in the reported equity security, which includes activity in derivatives, such as options.

The SEC will then publish, through EDGAR, certain aggregated short sale related information regarding each equity security reported by Managers on Form SHO.

The final rule will become effective 60 days following the date of publication of the adopting release in the Federal Register. The compliance date for Rule 13f-2 and Form SHO will be 12 months after the effective date, with public aggregated reporting to follow 3 months later.

For a comprehensive overview of the new rule requirements, see the SEC Fact Sheet: https://www.sec.gov/files/34-98738-fact-sheet.pdf

Worst States for Business Taxes

New Jersey once again has earned the distinction of being the worst state in the Union when it comes to business tax friendliness, ranking #50, preceded only by New York (#49) and California (#48).

The Garden State has maintained this dubious last place distinction continuously for the past six years, according to the Tax Foundation, which has been ranking states in its State Business Tax Climate Index since 2014. Between 2014 and 2016, NJ ranked either 49th or 50th.

Joining New Jersey, New York and California in the bottom ten are Connecticut (#47), Massachusetts (#46), Maryland (#45), Minnesota (#44), Vermont (#43), Hawaii (#42) and Rhode Island #41).

“The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates,” said the Tax Foundation. “New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the highest-rate corporate income taxes in the country and has one of the highest-rate individual income taxes,” adding that the Garden State also “has a particularly aggressive treatment of international income, levies an inheritance tax and maintains some of the nation’s worst-structured individual income taxes.”

Which states made it to the Tax Foundation’s Top 10? Wyoming maintains the #1 ranking it has earned consistently since 2014, followed by South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, Utah, North Carolina, and Indiana.

“The absence of a major tax is a common factor among many of the top 10 states,” said the Tax Foundation. “Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: corporate income tax, the individual income tax, or the sales tax.”

For a detailed overview of how each state ranked in the Tax Foundation Index, please see: Tax Foundation.org state business tax climate

Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.