Stay informed on the latest tax news and developments, including legislation and rule changes, for effective tax planning and compliance.
Demand for mortgages plummets when interest rates return to above 7%
Last week, mortgage interest rates soared to their peak since early December, resulting in a significant 10.6% drop in mortgage demand, as reported by the Mortgage Bankers Association. The average rate for 30-year fixed-rate mortgages on loans up to $766,550 escalated to 7.06% from 6.87%, with the cost points increasing slightly to 0.66. This surge was attributed to January's inflation uptick, dampening hopes for an imminent rate cut. Refinance applications fell by 11%, barely surpassing the volume from the same period last year, despite previously outpacing year-ago levels. The rate a year ago stood at 6.62%. The spike in rates last week rendered refinancing less appealing for most. Purchase applications also declined by 10%, reaching a low unseen since November 2023, and stood 13% below last year's figures, highlighting affordability challenges amid rising rates and home values in a tight market. The share of adjustable-rate mortgages (ARMs), known for their initial lower rates but higher risk, rose to 7.4% of all applications. A subsequent rate increase on Friday, following a report on persistent inflation, suggests continued market volatility, with little change observed at the beginning of this week.
The IRS wants to close the tax debt "inequity gap." How the firm selects high earners for examination
The IRS is intensifying its efforts to target top earners and large entities for unpaid taxes, with particular attention on reversing the decline in audit rates for wealthy individuals, large corporations, and complex partnerships. IRS Commissioner Danny Werfel highlighted this shift in focus during a recent House Ways and Means Committee hearing, noting a stark contrast in audit rates: only 0.7% for individuals earning $1 million or more in 2019 compared to 7.2% in 2011. With additional funding from the Inflation Reduction Act, the IRS has already recovered over $482 million from delinquent millionaires, aiming to address the tax inequity gap. The tax gap for 2021 was estimated at $688 billion.
Specific areas under increased scrutiny include partnerships, especially "tiered partnerships" that can obscure income, with ongoing examinations of 76 large U.S. partnerships. The IRS plans to leverage data analytics and artificial intelligence more effectively. Other red flags for higher earners involve residency issues, international tax evasion, cryptocurrency dealings, and estate and gift tax returns employing aggressive valuation discounts. The focus also extends to scrutinizing business income reported on Schedule C and passive losses. The agency's use of data analytics is expected to guide future audits, indicating a broader strategy to ensure compliance among high earners and complex business structures.
Based on preliminary IRS data, this tax season's average tax refund is about 29% less
The IRS is intensifying efforts to audit high earners, large corporations, and complex partnerships, reversing the low audit rates observed in recent years. IRS Commissioner Danny Werfel highlighted this shift, noting a significant drop in audit rates for individuals earning $1 million or more, from 7.2% in 2011 to just 0.7% in 2019. With Inflation Reduction Act funds, the IRS has already reclaimed over $482 million from delinquent millionaires, aiming to address the tax inequity gap. The tax gap was estimated at $688 billion for 2021. The focus will particularly be on "tiered partnerships" and the use of data analytics to uncover hidden income. Additionally, the IRS will scrutinize areas such as residency in Puerto Rico, international tax evasion, cryptocurrency, and aggressive asset valuation in estate and gift taxes, targeting traditional audit issues and leveraging artificial intelligence for future examinations.
The IRS is considering changing the "audit selection algorithm" for the low-income taxpayer credit
In a move to address tax audit inequities, the IRS, under Commissioner Danny Werfel's direction, announced a significant decrease in audits for Earned Income Tax Credit (EITC) recipients this tax year. This decision, revealed at a House Ways and Means Committee hearing, aligns with efforts to amend the audit selection algorithm to mitigate its disparate impact, notably on Black Americans, who studies show are audited three to five times more frequently than others. Research by economists from prestigious institutions identified a biased software algorithm and highlighted the EITC's role in these disparities. The IRS has allocated considerable resources to rectify these issues, focusing on automated examination processes. By reducing correspondence audits for EITC claimants, the IRS aims to lessen the program's high "improper payments rate," despite the challenge of its complex eligibility criteria. In 2022, the EITC provided $57 billion to about 23 million filers, with an average benefit of $2,541, yet nearly 20% of eligible individuals fail to claim this refundable credit, potentially due to oversight. For 2023, the credit amounts up to $7,430 for families with three or more children, and up to $600 for eligible workers without children.
The year began with a 3% increase in existing house sales, but rising mortgage rates are already having a negative impact
In January, sales of previously owned homes increased by 3.1% to 4 million units, though they were 1.7% lower than the previous year, as reported by the National Association of Realtors. This improvement follows a dip in mortgage rates from an October high of 8% to around 6.6% by mid-December, although rates have since risen above 7%. The inventory of available homes rose to 1.01 million, a 3.1% increase from last year, yet still below the balanced market standard. The median home price reached a January record of $379,100, up 5.1% year-over-year, with 16% of homes selling above the listing price. Cash purchases accounted for 32% of sales, the highest in nearly a decade, and first-time buyers constituted only 28% of sales, impacted by the scarcity of affordable homes. Despite January's sales boost, rising mortgage rates threaten future market activity, evidenced by a recent Redfin report showing a 10% increase in new listings but a 7% drop in signed contracts.
