Federal tax law firms are experiencing a surge in business and could benefits from hiring former federal employees.
In the current economic climate, state and local governments are feeling the pinch and are stepping up their own investigations to boost revenues, according to Caroline Ciraolo, a partner at Kostelanetz LLP. Meanwhile, the Internal Revenue Service (IRS) continues its active scrutiny of employment tax compliance, with a particular focus on the classification of workers and Section 530 relief eligibility.
Employment tax cases are on the rise, as observed by Bryan Skarlatos, another partner at Kostelanetz LLP. Skarlatos has noticed trends in his work, including increases in employment tax cases, crypto-related actions, and refund suits, including Employee Retention Credit (ERC) litigation. Penalties for violations remain severe, with both civil and criminal sanctions actively pursued.
The Employee Retention Credit (ERC) was designed to help eligible employers keep the lights on and pay employees during the pandemic. To qualify for the ERC, businesses must have been able to demonstrate that their operations were shut down by a government order or that they experienced a specific decline in gross receipts during the eligibility periods. However, recent developments have complicated matters. The One Big Beautiful Bill Act disallows pending ERC claims submitted after January 31, 2024, for the third and fourth quarter of 2021. Additionally, litigation concerning refund claims, such as disputes over the ERC, is ongoing. Courts are clarifying jurisdictional limits and procedural requirements, making refund suits more complex.
Crypto-related actions are another area of focus for the IRS. While no direct recent enforcement updates were found, the IRS has generally escalated enforcement in this area, consistent with its broad stepped-up efforts. The increased scrutiny aligns with the agency’s overall intensified monitoring and investigation efforts despite staffing challenges.
Despite IRS staffing cutbacks, particularly in back-office areas, frontline audit and enforcement activities continue. For example, the IRS inspector general uncovered a $93 million refund fraud scheme due to failed fraud detection protocols, signaling persistent vulnerabilities and enforcement challenges. Social Security Administration (SSA) staffing adjustments have not significantly disrupted front-line service but reflect a general environment of resource constraints.
Notably, Karen Kelly, the immediate past head of the Department of Justice's Tax Division, is joining Kostelanetz LLP as a partner in their Washington, D.C., office. Kelly has served all over the country during her nearly thirty-year tenure at the Department of Justice (DOJ) and was the recipient of the Attorney General's Award for Outstanding Service for her contributions to the Jack Abramoff task force. At Kostelanetz, Kelly will focus on state and federal civil tax controversies, criminal tax and white collar investigations, internal investigations, representing legal and tax professionals and their firms in license and regulatory matters, and complex civil and criminal litigation.
In summary, the IRS balances reduced staffing with elevated enforcement, particularly focusing on employment tax compliance, refund fraud detection, and continued litigation over pandemic relief credits. Employment tax violations now carry substantial criminal penalties, refund suits face procedural rigor, and refund fraud remains a significant enforcement concern. Attorneys are staying busy due to no slowdown in tax enforcement.
[1] IRS Announces Moratorium on Processing New Employee Retention Credit (ERC) Claims [2] IRS Inspector General Uncovers $93 Million Refund Fraud Scheme [3] Criminal Sanctions for Employment Tax Evasion and False Returns [4] Social Security Administration Staffing Adjustments [5] Courts Clarify Jurisdictional Limits and Procedural Requirements for Refund Suits
Tax attorneys Karen Kelly and Bryan Skarlatos, both partners at Kostelanetz LLP, have noticed an influx of tax cases, including employment tax cases, crypto-related actions, and refund suits, such as Employee Retention Credit (ERC) litigation. The Department of Justice's former head of the Tax Division, Karen Kelly, has joined Kostelanetz LLP to focus on state and federal civil tax controversies, criminal tax and white collar investigations, and complex civil and criminal litigation. In the business world, finance is a crucial aspect, and adherence to tax law firms like Kostelanetz is essential to avoid tax crimes, especially in the area of payroll taxes, as the IRS continues its active scrutiny of employment tax compliance.
