The U.S. Supreme Court will decide a case on whether states must allow a credit for taxes paid to municipalities. The Supreme Court yesterday agreed to hear an appeal of Maryland v. Wynne, where a Maryland court ruled that the state must allow a credit against Maryland taxes for taxes paid in non-Maryland cities by Maryland residents.
State generally allow their residents credits for taxes paid to other states, to the extent the taxes don’t exceed resident-state tax on the same income. Iowans compute this credit on Form 130. This keeps residents with out-of-state income from doubling-up their state taxes. Municipal taxes don’t necessarily get the same treatment. An Iowa Department of Revenue representative outlined the state’s position:
Iowa Code section 422.8(1), which provides for the out-of-state tax credit, only refers to tax paid to another state or foreign country. “State” is defined in Iowa Code section 4.1(32) as including the District of Columbia and its territories. Therefore, based on the Iowa statute, Iowa would take the position that the out-of-state tax credit is not allowed for municipal taxes.
I have no idea how the court will rule on this. Both Maryland and the Obama administration urged the court to take the case, which might indicate the court is sympathetic to them. Or it might not. For its own reasons, the Court may be looking for a vehicle to clarify the law of multistate income tax.
A brief from an organization of municipality attorneys describes the Maryland holding being appealed:
1. First, in order to avoid substantial interference in interstate commerce, the dormant Commerce Clause of the United States Constitution requires every state and subdivision thereof to give its residents a full tax credit for all income taxes paid in another state or subdivision; and
2. Second, the receipt of Subchapter S pass-through income in Maryland is “interstate commerce” which is being substantially affected by Maryland’s tax structure, in violation of the dormant Commerce Clause.
Both of those points seem perfectly reasonable to me. If the court rules against the taxpayer, states may try to raise money be limiting their credit for taxes paid to other states.
In any case, it would be prudent for Iowans who have paid taxes to non-Iowa municipalities to file protective refund claims for open years. For taxpayers who extended 2010 returns, that year is still open; otherwise, 2011 is the earliest open year. The court will hear the case in its term beginning in October.
The TaxProf has a coverage roundup. TaxGrrrl reports in Supreme Court Agrees To Hear Landmark Case On Whether States May Tax Income Earned In Other States, with a good discussion of the history of the case.
Another supporter of preparer regulation comes out against “voluntary” certification. The American Institute of Certified Public Accountants came out against the IRS “voluntary” preparer certification system this week. Now the National Association of Enrolled Agents, which like the AICPA was a fan of the now-defunct IRS mandatory preparer regulation scheme, has also come out against the “voluntary” program proposed by Commissioner Koskinen. Robert D. Flach reports:
It appears that the main objection of NAEA to the current IRS proposal is the replacement of the original initial competency test used in the pre-Loving mandatory RTRP program with a “50-question ‘knowledge based comprehension test’ to be created by individual CE providers”.
It goes on to say –
“CE by itself, even in combination with a ‘knowledge based comprehension test’, fails to provide a taxpayer with any assurance that the person preparing his or her return is even minimally competent to do so.”
I think this is just another way for the IRS to help its friends at the national tax prep franchises to get something to put on their windows without helping taxpayers. Considering its limited financial resources, it is absurd for the IRS to be taking on a new program. Taxpayers can already choose CPAs or Enrolled Agents if they want “certified” preparers, and nothing stops unenrolled preparers from setting up their own system. You have to have a lot of unwarranted faith in IRS goodwill to believe that the “voluntary” program won’t really be mandatory, as the IRS gives little perks to the “volunteers” and little hassles to everyone else.
William Perez, IRS.gov’s Direct Pay. “Unlike the Electronic Federal Tax Payment System (EFTPS), people using Direct Pay do not need to register to use the service.”
Cara Griffith, How Much Knowledge Is in an Audit Manual? (Tax Analysts Blog). “Yet while the IRS and several states make their audit manuals available online, other states, including Louisiana, do not. Taxpayers should not have to make a public records request to obtain manuals that will provide guidance on how a state conducts an audit. ”
Leslie Book, TEFRA Outside Basis and Tax Court Jurisdiction (Procedurally Taxing). “Periodically, like a kid forced to eat spinach, I will tackle TEFRA developments.”
Peter Reilly, Z Street Suit On IRS Israel Targeting Can Move Forward. “This lawsuit much like Teapartygate confirms me in my view, that the evaluation of whether an organizations purposes should allow it exempt status is not something that the IRS should be doing.”
Jack Townsend, Zwerner Jury Verdict — FBAR Willfulness for 3 Years
TaxProf, The IRS Scandal, Day 385
Andrew Lundeen, France’s 75 Percent Tax Rate Offers a Lesson in Revenue Estimating (Tax Policy Blog):
Since elected, French President Francois Hollande has raised the income tax, corporate tax and VAT. The government forecasted that these tax increases would lead to an increase in revenue of 30 billion euros.
As reported by the BBC, those estimates were off by about half:
“The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year.”
You can’t expect people just to stand still for something like that.
Adele Morris, Three Options for Better Climate Policy (TaxVox) Carbon Taxes, State carbon taxes, or no carbon tax.