Tax Roundup, 11/5/13: IRS makes audits even more fun. And: the 400!.

November 5th, 2013 by Joe Kristan

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It’s not the same people every year.  High Income, Low Taxes and Never a Bad Year (James B. Stewart, New York Times, via the TaxProf.  A New York Times columnist comes through with all of the cliches about “the rich” in one column.

 Plenty of people did get hit in 2009, including people at the very top. But all things are relative. The fortunate 400 people with the highest adjusted gross incomes still made, on average, $202 million each in 2009, according to Internal Revenue Service data. And this doesn’t even count income that doesn’t show up as adjusted gross income, such as tax-exempt interest.

Yet the top 400 paid an average federal income tax rate of less than 20 percent, far lower than the top rate of 35 percent then in effect.

They also paid a lower rate than the top 1 percent, which were people with adjusted gross incomes in 2009 of at least $344,000. These affluent but hardly superrich taxpayers paid on average just over 24 percent of their adjusted gross income in federal income tax. Even the top 0.01 percent, people earning at least $1.4 million, paid 24 percent.        

You’d get the impression that this is the same top 400 every year, paying low taxes as they go.  That’s a wrong impression.

Most people who have spectacular incomes do so only once, usually because they sell their business or take it public.  That normally is how you hit that top 400.  Yet the “never a bad year” line implies that they have this kind of income year after year.

That income is capital gains, which are taxed at a lower rate.  That’s no mystery or conspiracy, that’s just math.

Furthermore, those capital gains are often one of two taxes on the income.  C corporation income is taxed twice — first on the corporation tax return, and again when retained earnings are distributed as dividends or recovered as capital gains.  And to the extent the capital gains reflect inflation, they are aren’t a tax on income at all; they are a confiscation of principal.

Mr. Stewart is rehashing numbers from 2009, when the top federal rate on capital gains was 15%.  It was increased for 2013 to 23.8%, nearly a 60% increase.   Yet because ordinary income rates went up too, the Famous 400 will always have lower rates, and Mr. Stewart will be able to write the same lame column five years from now.

Of course, many economists think that capital gain rates were too high even before the rate increase.  But maybe that’s true only unless it really matters.


20130419-1The IRS has figured out a way to make audits even more fun!  Tax Analysts reports ($link) “The IRS Large Business and International Division on November 4 released mandatory, stringent new procedures for enforcing information document requests (IDRs) and issuing summonses, allowing examiners almost no discretion even at the manager level.”

The new procedure requires the IRS to issue a summons on a tight deadline when an “information document request” (IDR) isn’t promptly met:

If the IDR response remains incomplete by the delinquency notice deadline, the examiner is required — again without exception — to issue a pre-summons letter within 14 calendar days of the delinquency notice deadline. The pre-summons letter sets another new deadline, which can’t be more than 10 calendar days away unless the director of field operations grants approval.

Former IRS official Larry Langdon warns:

Taxpayers who may have trouble meeting proposed deadlines in a draft IDR “need to immediately escalate that draft IDR before it goes final, because in effect if it goes final, they’re stuck with those dates,” Langdon said. At that point, he added, no amount of negotiation will stop the new enforcement process from proceeding.

Lovely.  Of course the IRS won’t stop conducting audits during busy season, or during client reporting deadline periods, but that’s just too bad, apparently.

Link: LB&I-04-1113-009.

 

Paul Neiffer,  Everything You Want to Know About Net Investment Income Tax (or Not)

If you have 1,000 acres of good farmland, it only takes $250 per acre cash rent to put you over the threshold.  Then, after a few years of cash renting, the farmer elects to sell his farmland.  In this case, almost all of the gain will be both subject to the 3.8% net investment income tax and the 20% maximum federal tax plus state income taxes.

But that year the farmer will be “rich,” so he’s fair game, right?

 

Jason Dinesen, Nebraska Tax Guidance for Same-Sex Married Couples   

William Perez, Estate and Gift Tax Figures for 2014

 

Russ Fox, The Wrong Kind of Education Leads to ClubFed

 A California tax preparer decided he wanted to increase refunds for his clients. There’s absolutely nothing wrong with that–I want my clients to get the maximum possible refund allowed under the law. It appears that Kenyon Williams forgot those last three words; he was found guilty of two counts of wire fraud and two counts of aggravated identity theft earlier today.

That “under the law” thing gets in the way of so many great ideas…

 

TaxGrrrl, Saying ‘I Do’ To Tax Planning   What the tax-savvy bride is wearing, and when.

Andrew Lundeen, Scott Hodge, Individuals Receive 91 Percent of Tax Expenditures (Tax Policy Blog):

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Tax Justice Blog, More Illinois Companies Trying to Extort Tax Breaks.  Given Illinois’ newly-increased taxes, it’s partly self-defense, but you can bet they’re shaking down Iowa too.

Donald Marron, Time to Fix the Budget Process (TaxVox)

 

tack shelterJeremy Scott, What the Daugerdas Verdict Means for Tax Shelter Promotion (Tax Analysts Blog):

While it might have secured a few convictions, and even jail time, in the KPMG and Daugerdas cases, it also lost face, along with time and resources, for its relatively modest success. Instead of spending many years to secure partial convictions on a few practitioners, perhaps the government’s time would be better spent attacking tax shelter transactions on the front end, at the exam and regulatory drafting levels.

If tax planning and compliance get you prosecuted, you’ll have a hard time getting people to perform tax planning and compliance.

 

Phil Hodgen’s Exit Tax Book: Chapter 6 – Taxation of Specified Tax-Deferred Accounts

Jack Townsend,  India Signs OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  Bank secrecy isn’t.

 

Peter Reilly,  SPLC Calls Family Research Council Hate Group – Should IRS Take Action?  I think SPLC has done quite enough for the FRC already, thank you.  Peter wisely notes “The IRS teaming up with the FBI to identify hate groups does not sound like a confidence inspiring plan to me.”

Carnival Time at Kay Bell’s Place!  Tax Carnival #122: Return to Standard Tax Time

 

Things you didn’t learn in Geography Class: Ireland Is a Bagel (Martin Sullivan, Tax Analysts Blog)

 

News From the Profession: Guess Which Big 4 Firm Allegedly Just Punked Its Rejectees (Going Concern).  When I was interviewing out of school, I knew one visit went badly when they sent me a bill for my hotel room.

 

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