My interview on KCCI-TV about the Iowa Tuition and Textbook (and prom) Credit can be seen here. It was at the end of my April 15 workday, so anything short of drooling on my shirt is a success.
Programming note: Tax Roundups will return next week. I’m taking a few days off, so it will be quiet around here.
- File or extend your 1040s today. Remember, it’s always better to extend than amend. If you are waiting on a K-1, or some other piece of information, just extend, and save yourself the trouble of redoing your return.
- File or extend any partnership returns due today. The penalty for late filing is $195 per late K-1, per month. The penalty still applies even if you don’t owe. Payments for Form 8804 withholding for non-U.S. partners are also due today.
- Document your filing. Certified Mail, Return Receipt Requested works great. If you can’t get to the post office on time, go to a late-night UPS or FedEx store and use an authorized private delivery service to send your filing to the IRS service center street address. Remember, few if any post offices stay open late to postmark last-minute filings anymore.
- E-file, saving yourself the headaches of documenting your filing.
- Today is the last day to make a 2013 IRA payment. If you haven’t made them yet, do so.
- If you are day trader, consider the “Section 475 election” today for 2014. It’s too late for 2013, but it could enable you to deduct 2014 losses that are otherwise limited to $3,000.
And finally, review all of our 2014 filing season tips, of which this is the last one, to make sure you haven’t missed something.
No Tax Roundup today, for reasons easily guessed by many readers.
As a green 25 year-old staff accountant, I was assigned to deliver a 1040 with a six-figure balance due to a local captain of industry who happened to be the biggest client in the local office of one of the national accounting firms. It was April 15. I was to collect his signature and his check and get the return to the post office.
One of the first things you learn at a national public accounting firm is the importance of covering your backside. After collecting the return and check I went down to the old Capitol Square post office and got the returns postmarked “certified mail, return receipt requested.” After getting a burger and malt at the late, lamented Stella’s, I went back to the office and carefully put the postmarked receipt in the client file.
Two weeks later the partner in charge calls me into his office to show me a penalty notice from the IRS saying the Captain of Industry’s return had been filed late. The postmarked receipt kept me from being fired that day, and I got to keep my job when the IRS reversed the penalties after we sent them a copy of the receipt.
Which is a long way of making a short point: document your return filing.
If you paper file at the post office, use Certified Mail, Return Receipt Requested. Get the postmarked paper receipt, because the postal service purges its computer records after two years. Certified mail adds $3.30 to the postage; the paper return receipt costs another $2.70. $6.00 isn’t usually too much to spend to save your job.
If you use a private carrier, use one of the IRS authorized private delivery services (be sure to use one listed by the IRS), and hold on to your shipping receipt. Be sure to send it to the proper street delivery address, as private services can’t deliver to post office boxes.
Come back tomorrow for our last 2014 filing season tip!
It happens every year. Sometimes there are even good reasons. The return is ready, the taxpayer owes a bunch, and the cash isn’t there. You don’t have any investments you can turn into cash immediately. What to do?
DON’T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don’t file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes a car title lender look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.
FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can’t pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% monthly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.
Also, the tax regulations don’t impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments – currently 3%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.
BORROW (but not from a car-title or payday-loan shop. The IRS is likely a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a kindly relative, that can help.
NOWHERE TO BORROW? Then it’s time to fill out Form 9465, Installment Agreement Request. You can do this online. If you owe more than $25,000, you may need to file additional information on Form 433f. Of course, if you owe that much, you may need professional tax help.
Once you get the installment agreement in place, live up to it. The IRS gets ugly in a hurry if you fall behind on an installment plan.
Whatever you do, don’t bounce a check. It only makes your penalties worse. And start doing your 2014 planning now so you don’t get caught short next April.
2014 filing season tips – one daily through April 15!
Prom season coincides with tax season. If you are up late doing your tax return tonight while waiting for your daughter to come home, don’t forget that some of the money she’s spending tonight may reduce your Iowa taxes.
Iowa offers a Tuition and Textbook Credit of 25% of the first $1,000 of qualifying expenses. Check out what we consider “textbooks” in Iowa:
“Textbooks” means books and other instructional materials used in teaching those same subjects. This includes fees, books, and materials for extracurricular activities.
Examples of extracurricular activities
Sporting events, speech activities, musical or dramatic events, driver’s education (if paid to the K-12 school), awards banquets, homecoming, prom (clothing does not qualify), and other school-related social events.
Whatever your kids are learning on prom night, it might help with your Iowa tax bill.
2014 filing season tips – one daily through April 15!
Some folks just don’t like extensions. Maybe they want their refund NOW. Maybe they have never extended their return before, and they think it is somehow against the rules. Some people believe an extension invites the IRS to come in and audit them. And some people think they are just so special that they can bring in a complex return missing K-1s on April 10th and the preparers should just drop everything and get them filed somehow.
There isn’t much to do for the last category, except perhaps medication, or a thrashing by a crazed sleep-deprived preparer, but for more sensible folks, a basic understanding of extensions might help.
Extensions aren’t against the rules; the rules specifically provide for them. Even in simpler times, tax administrators knew that it isn’t always possible for a busy person to put together all of the pieces of a tax return by April 15.
You still should pay up. While extensions give you more time to file your tax return, they don’t give you extra time to pay. The tax law asks you to estimate your tax liability and penalizes you if you don’t have at least 90% of your taxes paid in by the April 15 deadline; the penalty is 1/2 percent per month.
Why bother with an extension if I can’t delay payment? Probably the most important one is that if you are short of cash, the penalty for late payment on a return that you didn’t bother to extend is 5% per month — ten times the penalty for late payment on an extended return. It forces you to at least take a stab at guessing your liability, helping you identify what pieces you have to gather to complete your extended return. It also keeps you in compliance, and once you stop filing on time, it can be a hard habit to break.
But won’t it get me audited? There’s no evidence that an accurate extended return filed during the extension period is any more likely to be audited than it would be filed on April 15. The IRS selects returns based on what’s on them, now on whether they are extended.
There’s plenty of evidence that returns with errors are more likely to get extra IRS attention. A return thrown together at the last minute is more likely to have errors than an extended return done during normal working hours by somebody who’s had some sleep. For what it’s worth, I have extended my own return every year since 1991 with no IRS examination (knock wood).
How do I extend? You file Form 4868 either on paper or electronically, along with any necessary payment, by April 15. The IRS has more details here. It’s common to pay in enough to also cover your first quarter estimated tax payment with the extension. It gives you some cushion in case you find more 2013 income while completing your return, and you can apply your return overpayment to your 2014 estimated tax when you do file your 2013 1040.
States have their own rules. Iowa automatically extends your return without the need to file an extension form if you are at least 90% paid-in by the April 30 due date. If you need to send them some money to get to 90%, you send it with Form IA 1040-V.
Our series of 2014 Filing Season Tips goes right through April 15. Check back tomorrow for another one!
Russ Fox, Bozo Tax Tip #3: Be Suspicious!
Belief in the Tax Fairy peaks at tax time. The Tax Fairy is that magical sprite who will make all of your taxes go away painlessly while your sucker friends still send checks to the tax man. It’s amazing what Tax Fairy adherents will believe. Consider a Californian who worked as a software consultant. He was put in touch with a “Tax Doctor” (my emphasis):
Early in 2006 petitioner’s friends recommended that he talk to the “Tax Doctor Corporation” (Tax Doctor) operated by a person representing himself to be Dr. Lawrence Murray (Murray). Petitioner spoke with Murray and members of Murray’s staff. Petitioner’s discussions with Murray and his staff consisted mostly of “a bit of a sales pitch”. They explained how they would handle his tax return preparation, what the tax savings would be, and the “structure” they would use.
Murray proposed setting up two corporations and preparing petitioner’s individual and corporate Federal income tax returns. Murray explained to petitioner that one corporation would be “operational” and the other would focus on “management”. Petitioner was unsure at trial which corporation was the operations entity and which was the management entity. Under the agreement with Murray petitioner would pay the Tax Doctor, as a fee for setting up the structure, the amount of the tax savings generated by the use of the structure.
What could go wrong?
His C.P.A. told him that she was willing to incorporate his business activity but she would not do what the Tax Doctor had proposed because it was very aggressive. Petitioner, despite the advice of his C.P.A., decided to accept the proposal of the Tax Doctor.
I don’t need a CPA, I have a Tax Doctor!
Petitioner filed his 2006 Form 1040, U.S. Individual Income Tax Return, showing taxable income of zero. Nev Edel, one of the corporations the Tax Doctor formed for petitioner, filed a Form 1120, U.S. Corporation Income Tax Return, for the fiscal year ending (FYE) November 30, 2007. Nev Edel reported gross receipts of $285,785, total income of $291,669, and total deductions of $295,214. The largest single deduction was $237,600 for “contracted services”. Smoge Corp., the other corporation the Tax Doctor formed for petitioner, filed a 2006 Form 1120S, U.S. Income Tax Return for an S Corporation. Smoge Corp. reported total income of $186,640 and total deductions of $188,644. The largest single deduction was $172,166 for “contracted services”.
Somehow things went awry.
Murray was prosecuted and convicted in 2010 of Federal crimes associated with the preparation of his own returns and the returns of others.
This presumably led to IRS attention to our consultant’s returns, and a big assessment. The taxpayer tried to avoid penalties because he relied on the Tax Doctor in good faith. The Tax Court thought otherwise:
The advice of the C.P.A., who had no financial stake in the outcome of petitioner’s return positions, should have put petitioner on notice that additional scrutiny of Murray’s advice was required.
The moral? If your tax professional, who does this for a living, says something is bogus, they just might be right. And there is no Tax Fairy.
William Perez, Six Things to Do Before April 15th
TaxProf, The IRS Scandal, Day 337. More a boatload than a smidgen today.
That’s OK, you can just send me a gift card. Christopher Bergin, The Gift That Is Lois Lerner (Tax Analysts Blog):
Something bad happened here. And however bad her behavior, the problem isn’t Lerner. The problem is a culture that allows what she did to continue and that probably allows behavior that’s much, much worse.
Andrew Lundeen, What Could Americans Buy with the $4.5 Trillion They Pay in Taxes? (Tax Policy Blog). A nice gift card, perhaps.
Joseph Thorndike, How Dave Camp’s Failure Might Be Michael Graetz’s Victory (Tax Analysts Blog)
Peter Reilly, Clergy Out In Force To Defend Their Housing Tax Break
Sports Corner: David Cay Johnston vs. Tax Girl on Twitter: PLACE YOUR BETS (Going Concern)
When the tax deadline is looming, taxpayers looking for the Tax Fairy to wish away their tax problems often overlook the old-fashioned IRA. You can still make 2013 IRA contributions through April 15. An Individual Retirement Account contribution may be able to score you a 2013 deduction (or even a tax credit) for 2013; even if you don’t qualify for current tax savings, they are a nice and cheap way to build-up tax-sheltered savings.
IRAs come in two flavors: “traditional” and “Roth.” Traditional IRAs build up their income tax-free, but earnings on them are taxable when they come out. If you meet certain conditions, your traditional IRAs come with sprinkles: – a tax deduction. If you don’t get the deduction going in, your principal is tax-free going out.
Roth IRAs never offer a deduction, but they leave a sweeter aftertaste: if you hold them long enough, income on Roth IRA assets is never taxed. And unlike traditional IRAs, you are never forced to start withdrawing funds from the IRA, so the tax-free build-up can go on indefinitely.
Both traditional and Roth IRAs require you to have wage or self-employment net income. The limits for contributions are the lesser of your taxable compensation or $5,500 ($6,500 if you were 50 by December 31, 2013). You can contribute to a traditional IRA at any income level, but deductions phase out at higher income levels if you (or your spouse) are covered by a retirement plan at work. The availability of Roth IRA contributions phases out at higher income levels regardless of whether you participate in another retirement plan.
One very useful way to use Roth IRAs is for teenagers and young adults. A parent can fund a Roth IRA for them based on part-time job income — no matter what parent income is. This starts a tax-free retirement fund for the young earner at a very age, giving the power of compound interest lots of time to do its magic. And from what I’ve seen, parental Roth funding is much appreciated by the recipients.
While time is short, you can still fund a 2013 IRA if you make your contribution no later than April 15. You can set one up at your friendly community bank or online with a mutual fund company on you lunch hour. No, it probably won’t make your 2013 taxes go away, but it can be a nice step towards financial security for you or your kids.
This is the latest of our 2014 Filing Season Tips — a new one every day thorugh April 15!
Russ Fox, Bozo Tax Tip #4: Honey, You Don’t Exist!: “Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married.”
Kyle Pomerleau, When is My State’s Tax Freedom Day? (Tax Policy Bl0g) Iowa’s is this Sunday.
Kristy Maitre, How to Report National Mortgage Settlement Payments
TaxGrrrl, Taxes From A To Z (2014): X Is For XD
Paul Neiffer, Trusts Can Get You in Trouble
Hey, preparers: are you ready to trust the IRS to regulate your livelihood? A Week Before Tax Day, IRS Misses Crucial Windows XP Deadline (Washington Post, via the TaxProf)
Alan Cole, Mainstream Economics Support Low Taxes on Capital Income (Tax Policy Bl0g): “The overwhelming bulk of the evidence is that taxes have a negative effect on economic growth, and that the effect is particularly strong on tax bases that include capital income.” But, the rich! Inequality!
Donald Marron, Seven Tax Issues Facing Small Business (TaxVox): “America’s tax system is needlessly complex, economically harmful, and often unfair.”
Cara Griffith, Guidance Today, Gone Tomorrow (Tax Analysts Blog). ”A recent Arkansas court opinion points out what might be a troubling trend in state taxation: the inability of taxpayers to rely on administrative guidance because the state can retract or supersede it on a moment’s notice.”
TaxProf, The IRS Scandal, Day 336. It was a big day, with evidence that Lois Lerner was working behind the scenes with the ranking Democrat on the Ways and Means Committee to harass the opposition.
William Perez, Tax Reform Act of 2014, Part 4, Tax Credits
David Brunori: I’ll Raise a Glass to Lower Booze Taxes (Tax Analysts Blog) ”Jack Daniels is not bourbon, by the way, but Tennessee whiskey. There is apparently a difference, but frankly, after the first glass, I can never tell.”
Next: legislators are terrible at legislating. GAO Went Undercover to Discover Tax Preparers Are Terrible at Tax Preparing (Going Concern)
Tax Roundup, 4/9/14: Common K-1 problems. And: if the preparer doesn’t have a brain, give him a diploma!April 9th, 2014 by Joe Kristan
So you read yesterday’s post and you’re still preparing your own return? You’ve answered the questions you need to ask yourself before starting to put numbers from your S corporation/Partnership/Trust (collectively, “thing”) K-1 onto your 1040 schedules? OK, if you are intrepid enough to be doing your own return here, you are mostly on your own. Don’t shortcut it. This is one chore where you really should read the instructions (S corporation, Partnership, Trust), rather than just opening the box and putting pieces together.
There’s no point in me trying to walk through the whole K-1 with you; that’s what the instructions are for. I will point out a few items on the K-1 (or left out) that frequently cause errors and trigger questions.
On the partnership K-1 the ending capital account is probably not your “basis.” The capital account is frequently useless in measuring basis. It might be the same as your basis if the “Tax basis” box is checked, but the only sure way to track your basis is to keep your own running basis schedule year-by-year. S corporation shareholders can find their basis computation schedule here.
Don’t double-count your gains. The “Unrecaptured Section 1250 gain” in Box 8c of your S corporation K-1 (9c of the partnership return) is a part of the “Net Section 1231 gain” (S corporation box 9, partnership box 10). The total income is the Section 1231 gain, not the sum of the unrecaptured 1250 and 1231 amounts. You use the “Unrecaptured 1250 gain” on your Schedule D worksheet to figure out how much of your Section 1231 gain is taxed at a 25% rate, rather than the normal 20% top capital gain rate.
Don’t double count “investment income.” If you have interest, dividends or capital gains on your K-1, the partnerships is required to tell you how much of that is “investment income” with a code “A” in the “other information” box on the K-1. You only need that number if you are computing an investment interest expense deduction on Form 4952. You don’t add it as additional income on your return.
Beware the “net investment income” disclosure, code “Y” in the “other information” section. The partnership and S corporation instructions for computing this came out late, and this number is likely to be wrong. If you have to fill out Form 8960 to compute your Obamacare net investment income tax, you shouldn’t count on this number, especially for a K-1 with trade or business income. Use instead the separate items from the K-1 that are investment income for Form 8960 purposes.
Be careful out there, and come back tomorrow for a new 2014 filing season tip!
Russ Fox, Bozo Tax Tip #5: Procrastinate. You mean waiting won’t solve my tax problems?
William Perez, Tax Freedom Day 2014. April 21.
Kay Bell, Being DIFferent could prompt a tax audit. Kay points out things that can attract IRS attention on your 1040.
Jeremy Scott, Audit Electability (Tax Analysts Blog). ”However, a taxpayer’s choice of entity can have broad tax ramifications, including some consequences unintended even by the complicated U.S. tax regime.”
Stephen Olsen, Summary Opinions for 4/4/2014. (Procedurally Taxing), A good roundup of some recent tax cases, including coverage of the Ohio accounting firm’s unpleasant breakup that we covered last week.
The idea is no more than what the Wizard of Oz told the scarecrow: regulated preparers wouldn’t be any smarter, but they would have a diploma. An IRS-issued Doctorate in Thinkology doesn’t make an inept preparer competent, any more than granting a CPA or a JD makes somebody a good tax preparer. I would much sooner have uncredentailed Robert D. Flach do my 1040 than any number of fully-credentialed CPAs and attorneys I know. All regulation would accomplish would be to raise prices, lining the pockets of the big tax prep franchises while driving many taxpayers to self-prepare or stop filing.
TaxProf, The IRS Scandal, Day 335
Roberton Williams, If You Have High Income, Your Taxes Are Going Up (TaxVox)
Tax Justice Blog, “Tax Extenders” Would Mean Even Lower Revenue than the Ryan Plan
Jim Maule, How Shocking is Tax Evasion?
Radio Iowa, Senator Grassley says fouled up tax system is depressing. He’s depressed? As a senior taxwriter for most of the last three decades, he’s answerable for a lot of the depression.
So the K-1 finally showed up from my partnership or S corporation investment. Now what?
Remember that the K-1 represents your share of the income and expenses of the partnership/S corporation/trust (henceforth “thing”) that issued it. Different pieces of income and expense are treated differently on your tax return, and the K-1 tells you where your pieces go. Sort of. Before you get started plugging in your numbers, you should answer some questions for yourself.
- Do I “materially participate” in this thing? Your level of participation determines the forms you start with in preparing your returns, whether you can deduct losses, and whether your income from the thing is is subject to the Obamacare 3.8% Net Investment Income Tax. If you spent more than 500 hours working in the thing, that usually means you materially participate; a more complete discussion of material participation is found here.
- Did the thing lose money? If it lost money, then you have to clear three hurdles to deduct the losses:
1. You have to have basis. This starts with your investment in the thing. If you loaned money directly to the thing, you will get basis for the loan. If you have a partnership, you will get basis for your share of the partnership debt, shown in part L of your K-1. S corporation shareholders don’t get basis for their share of the corporation’s debt, even if it is guaranteed by hte shareholder. Your basis is increased for your share of the thing’s income, and it is reduced for losses and distributions. If you have no basis, you can’t take losses.
2. Your basis has to be “at-risk.” This normally means that you are out-of-pocket for the investment. If your basis comes from borrowed funds, you have to be personally on the hook for the debt — but if you borrowed from somebody with an interest in your thing, you might not be “at-risk” even if you will have to pay up if thing defaults.
If your basis comes from a share of the partnership debt, you are normally considered “at-risk” for debt shown on the “Recourse” and “Qualified Nonrecourse financing” lines on part K of your partnership K-1. Your at-risk amount is computed on Form 6198,
3. You have to materially participate (see above), or have “passive” income from other activities. If you don’t materially participate, you need to go to Form 8582 to figure how much, if any, of your loss is deductible this year.
Got that? Tomorrow we’ll look at what you have to do after you answer these questions. Come back every day through April 15 for more 2014 filing season tips!
At issue is the fact that Houser, a Republican from Carson in southwest Iowa, hasn’t resigned. He has simply stopped coming to the Statehouse, saying he isn’t needed as a minority caucus member and doesn’t have a role in any legislation. He says it’s more important for him to spend time on his family’s farm, where he is expanding the livestock facilities.
Houser was not present in the Senate chamber again on Monday.
Secretary of the Senate Michael Marshall said Monday that Houser is still receiving his annual salary of $25,000.
The coverage implies that Sen. Houser is doing a bad thing. Considering the dubious accomplishments of the ones that do show up, I can’t agree. We’d be better off if they all went home. The legislators should get all of their pay on Day 1 of the session, and they should get docked if it goes past a month.
Of course they do. Iowa House panel OKs $2 million tax break for Knoxville Raceway. (Des Moines Register)
Queen of IRS tax fraud needs a break. Rashia Wilson, who famously held up big wads of cash on her Facebook page and taunted the feds to come and get her, is less liquid nowadays, according to a report by tampabay.com:
Busted down to a federal prison in Aliceville, Ala., she earns just $5.25 a month, she declares in newly filed court papers. That’s a problem because Wilson, 28, was ordered to pay a token $25 per calendar quarter toward the $3.1 million in restitution that she owes the IRS for filing false tax returns using stolen identities. She needs money to buy vitamins and hygiene items, too, she says. So she’s asking U.S. District Judge James S. Moody Jr. to suspend restitution payments until after her release date: Jan. 5, 2031.
Then she’ll really get after it, I’m sure.
Peter Reilly, No Money For April 15 1040 Balance Due? Don’t Panic!
Jason Dinesen, Tax Court Case Involving Radio DJ Strikes Close to Home for Me. ”I used to work in radio. I was the news director at KNOD radio station in Harlan, over in the western part of Iowa.”
I had a brief stint as an unpaid intern for KHAK, a country station in Cedar Rapids, in 1980. I learned that I have a face for radio and a voice for print.
Roger McEowen and Kristine Tidgren, Understand That Easement Agreement Before You Sign It
TaxGrrrl, New IRS Commissioner Talks Tax, Scandal and Congress. She gives him more credit than I do.
Andrew Lundeen, Kyle Pomerleau, Americans Pay More in Taxes than on Food, Clothing, and Housing Combined (Tax Policy Blog)
Renu Zaretsky, Ethics and Fairness, Growth and the Environment, Retirement and Tax Shelters. The TaxVox headline roundup ponders, among other things, whether we should subsidize wind turbines forever.
TaxProf, The IRS Scandal, Day 334
News you can use. How to Cheat on Your Taxes. (David Cay Johnston, via The Taxprof)
News from the Profession. According to Research, You Are Fat Because Busy Season (Going Concern)
Many folks arrive here with a search engine query that goes something like “why don’t I have my K-1, should the partnership go to jail?” A quick reminder of what a K-1 does, and why they often arrive late in the tax season.
K-1s come from partnerships, S corporations and trusts. Partnerships and S corporation businesses don’t pay the tax on their income. The income is instead taxed on your 1040. They have to compute their own taxable income first — as you might imagine, a more complex process than doing the average 1040. They then have to sort the income into a bunch of different bins so that all the pieces end up on the right spot on the owner 1040s. The K-1 is best understood as the collection bins for your shares of the various pieces of the business’ income and expense items.
Furthermore, many businesses and trusts that issue K-1s are awaiting K-1s of their own. Even if they have their own tax information ready, if the business is still waiting on a K-1, it can’t issue yours.
But, but! Aren’t K-1s supposed to be out by January 1? You’re thinking of 1099s. K-1s are due with the S corporation returns (March 15) or the partnership returns (April 15), but they can be, and often are, extended to as late as September 15 — legally.
So what to do? If you don’t have your K-1 yet, try to at least get an idea of what the income will be, and extend your own return accordingly. It’s always better to extend than to amend.
This is the first 2014 filing season tip — come back for one each day through April 15!
Russ Fox, Bozo Tax Tip #6: Just Don’t File
The campus could take up to 6 weeks to process a [paper] extension, and it will not show up on the transcript until processed. With that time delay, it is helpful to have the acknowledgement of an e-filed extension.
With the delay in processing of the extensions, remember if you file a return within that 6 week timeframe, it may not show the extension on the module, and your client could get a penalty for filing late if there is a balance due. This will also have an impact on refund returns if they are later picked up for audit, a balance due results, and the extension was not processed properly.
And why, if you do paper file, you shouldn’t bundle extensions for your family or clients to save postage.
Jana Luttenegger, DIY Will is a ‘Cautionary Tale’ (Davis Brown Tax Law Blog). “As a result, two of Ann’s nieces received property that it appears clearly from the will and attempted amendment was meant for Ann’s brother instead.”
Kay Bell, 3 popular refundable tax credits: Are they worth it? Good question, and no.
Peter Reilly, Easement Valuations Not So Easy Anymore
Keith Fogg, Reliance on Counsel to Avoid Tax Liability. (Procedurally Taxing). Not likely to work.
TaxProf, The IRS Scandal, Day 333. Featuring the Washington Post “fact checker” calling shenanigans on IRS Commissioner Koskinen for denying that IRS had “targeted” Tea Party groups. It’s safe to say Mr. Koskinen has botched his entrance.
Andrew Lundeen, Senate Finance Committee Passes $85 Billion Tax Extenders Bill (Tax Policy Blog)
Tax Justice Blog, Five Key Tax Facts About Healthcare Reform. Ones they like that I despise: “Only two percent of Americans will pay the tax penalty for not having insurance“ and “95 percent of the tax increases included to pay for health reform apply solely to businesses or married couples making over $250,000 and single people making over $200,000.”
This attitude is exactly what is awful about the TJB mindset. No matter how fickle, arbitrary, unworkable or economically harmful a tax is — and the Obamacare taxes are all of those — we’re supposed to be OK with them as long as they apply only to “the rich.” Carried to the logical conclusion, it would be just fine to execute the 1-percenters, confiscate their property, and sell their families into slavery — it only affects the rich anyway, and they don’t count.
Arnold Kling has a little reminder for folks hung up on inequality, quoting Lawrence Kotlikoff:
The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.
And remember, the rich guy isn’t picking up the tab.
O. Kay Henderson, No traction for increasing state gas tax. Not happening this year, apparently.
The film industry and lawmakers doubtless believe that film credits are a great deal for everyone involved — and that would be fantastic if it were true — but the most credible studies don’t reflect that.
Her article (unfortunately available only to State Tax Notes subscribers) discusses the funky analysis that film credit boosters use to justify the subsidies. The boosters like to overstate the tourism effects of films and assume fantastical “multiplier” effects of film spending. They also ignore opportunity costs — assuming that if the taxpayer money was not spent on Hollywood, it would just crawl in a hole and die.
Career Corner. Crime May Not Pay But Whistleblowing Certainly Does (Going Concern)
The man had claimed $5,309 in vehicle expenses for his real estate sales business. Vehicle and travel expenses are subject to the special rules of Section 274, which requires corroborating records of the amount, time, place and business purpose of travel expenses. The judge found the taxpayer’s evidence wanting (my emphasis):
Petitioner provided his 2009 Mileage Chart and Itemized Categories documents, which appear to be reconstructions asserting the places he traveled to for business and the vehicle expenses he incurred in 2009. Petitioner, however, failed to provide any corroborating receipts or other records that substantiated the statements made in these two documents. Moreover, neither document identifies a business purpose for each trip, and both fail to show mileage. (While the Itemized Categories does have a handwritten note of “mileage for 2009 11,135″, this note alone does not substantiate the mileage of each trip or show how the mileage was allocated between business and personal use.) Additionally, the 2009 Mileage Chart provides a log for only three weeks for 2009 and fails to show the amount of each trip expense. Because petitioners failed to substantiate the claimed expenses as required by section 274(d), the vehicle expense deduction must be disallowed.
The IRS asserted negligence penalties for claiming an undocumented deduction. The taxpayer tried to tell the judge that nobody does that stuff:
Petitioner did not argue reasonable cause or good faith. Instead, petitioner argued at trial that no one keeps records in accordance with the “IRS code”.
Well, OK, then, screw Section 274! Well, no:
That argument is unpersuasive, and the section 6662(a) penalty will be sustained.
The IRS is serious about documenting business miles. If you have them, keep a log, a calendar, or use a smart-phone app to record the time, place, cost and business purposes of your travels as you go. If “no one keeps records in accordance with the ‘IRS code,’” no one is going to be happy with the results when they get audited.
The Senate Finance Committee voted to revive almost all of the 55 tax breaks that expired Dec. 31, providing benefits for wind energy, U.S.-based multinational corporations and motor sports track owners.
Motor sports track owners have lots of friends in high places.
It’s not just motor sports lobbyists who did will in the Finance Committee. Almost all
“expired” provisions of this lobbyist right-to-work vehicle were renewed, including the renewable fuel credits. The only expiring provisions that actually expire are the credit for energy-efficient appliances and a provison for oil refinery property, so there remains some lobbying to do.
But wait, there’s more! Tax Analysts reports ($link) that this Christmas in April bill includes a provision to “expand the research credit to allow passthroughs with no income tax liability to apply the credit, up to $250,000, to their payroll tax liability.” It also would renew the reduction of the S corporation built-in gain tax “recognition period” at five years through 2015.
While the House still hasn’t acted on any of this, the passage of all of this stuff on a bipartisan basis would seem to indicate that something like this is likely to pass. Still, Kay Bell thinks the House tax leadership may be reluctant to follow the Senate’s lead.
The reason Congress pretends these provisions are “temporary” is that under their rules, Congress can pretend that they will only cost as much as they will cost before they are renewed again, regardless of the probability that they will be renewed forever. It’s the kind of accounting that would get us thrown in jail if we tried it with the IRS or SEC, but it’s just another Thursday in Congress.
Link: “Summary of Modified Chairman’s Mark.”
Kristy Maitre, E-Filed Return Rejected at Deadline? Don’t Panic
Leslie Book, ACA and Victims of Domestic Abuse (Procedurally Taxing)
Russ Fox, Yes, Online Poker Players Must Pay Taxes
TaxProf, The IRS Scandal, Day 330
Lyman Stone, Missouri Senate Passes Problematic Income Tax Cut Plan (Tax Policy Blog). ”Missouri’s state Senate this week passed a $621 million tax cut including a 0.5 percentage point income tax reduction and a special carveout to deduct up to 25 percent of business income.”
Howard Gleckman, Two Ways to Fix the Corporate Income Tax: Internationalize it or Kill It. (TaxVox). I vote “kill.”
Iowa city prepares to give mystery company millions. (Foxnews.com) “West Des Moines city officials have cued up $36 million in local and state tax incentives for a company, but won’t tell its citizens who that company is.”
Iowa View: From wind to solar, clean power is good for Iowa (Joe Bolkcom, Mike Breitbach). Green corporate welfare is still corporate welfare.
News from the Profession: Deloitte Declares Weekends Are Not For Working, Unless You Are Working (Going Concern)
The Tax Foundation yesterday released its annual ranking of “State-Local Tax Burdens.” Iowa came in at 29th highest.
The Tax Foundation explains:
For each state, we compute this measure of tax burden by totaling the amount of state and local taxes paid by state residents to both their own and other governments and then divide these totals by each state’s total income. We not only make this calculation for the most recent year, but also for earlier years due to the fact that income and tax revenue data are periodically revised by government agencies.
In this annual study, our goal is to move the focus from the tax collector (how much revenue is collected) to the taxpayer (how much income is foregone).
This ranking differs from the Tax Foundation’s State Business Climate Index, where Iowa ranks a dismal 40th in business tax congeniality. While the two sets of rankings have different purposes, together they tell us that Iowa’s tax system is very poorly designed. It collects a middling amount of revenue with a system of very high rates, a boatload of preferences for the well-connected, and baroque complexity. You could collect the same revenue with a much simpler system with lower rates, and without the inherent corruption of special breaks for special friends of the politicians. That’s the approach of The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
Corporate welfare watch:
Senator fumes at idea to cancel tax credit (Des Moines Register)
Koskinen bemoans IRS funding, but doesn’t commit to taking the obvious step to restore it. IRS Commissioner John Koskinen gave a little speech yesterday at the National Press Club. He pointed out how the IRS is being given massive new responsibilities for running Obamacare and implementing FATCA, but faces funding cuts. What he didn’t point out was that the GOP-controlled house isn’t likely to change that as long as it thinks the IRS is acting as an arm of the other party. He defended the plodding IRS response to Congressional investigators in the Tea Party matter, and he offered what looks to me like a defense of the new Section 501(c)(4) rules proposed by the prior Commisioner:
While I was not involved in the issuance of this draft proposal, because it happened before I was confirmed as Commissioner, I believe it is extremely important to make this area of regulation as clear as possible. Not only does that help the IRS properly enforce the law, but clearer regulations will also give a better roadmap to applicants, and will help those that already have 501(c)(4) status properly administer their organizations without unnecessary fears of losing their tax-exempt status.
That’s too cute. The provisions of the proposal mirror the rules overturned by the Supreme Court in Citizens United, including a rule preventing any political activity in the run-up to an election. These items show that the current rules are an attempt to get around the Supreme Court to restrict political speech. That’s why they are poison to the Tea Party set.
Either he doesn’t get it, or he pretends not to. If the Commissioner wants to restore trust, the minimum he needs to do is to withdraw the proposed rules and start over, and to stop slow walking the investigation. Until he does, it’s futile to expect the GOP-controlled House to give him more funding. He’s quickly running out of time to do so.
Update: Washington Post gives Koskinen 3 Pinoccios: IRS chief: No ‘targeting’ of tea party groups, just ‘inappropriate criteria’ (Via Instapundit)
Kay Bell, 7 tax tasks to take care of by April 15
Annette Nellen, Filing season and rental activities
William Perez, Tax Reform Act of 2014, Part 3, Deductions
Stephen Olsen, Summary Opinions for 03/28/14, a roundup of tax procedure news, with a much-appreciated mention of the Tax Update post on the recent case on trusts and material participation.
Jim Maule, Tax Court and Eleventh Circuit Disagree on Interpretation of Section 36 Language. I think the couple got a raw deal, but I’m sure glad the first-time homebuyer credit has gone away.
Cara Griffith, Proceeding Cautiously With a Taxpayer Bill of Rights (Tax Analysts Blog):
The IRS is already struggling with administering our tax system. Perhaps issues of funding and employee training should be addressed before delving into a taxpayer bill of rights.
I disagree. Rights come before enforcement. We can start by a sauce-for-the-gander rule that requires the IRS to pay penalties it asserts to taxpayers if the taxpayers win on the contested issue.
Renu Zaretsky, Expirations, Compliance and Corporations. The TaxVox headline roundup talks about Commissioner Koskinen’s speech and the status of the expiring provisions.
Russ Fox, Bozo Tax Tip #8: Nevada Corporations. ”Now, if you’re planning on moving to Nevada incorporating in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada corporation is, well, bozo.”
News from the Profession. Sweatshop Saturdays: Rethinking Where We Work (Going Concern)
Mutually assured destruction. Accounting firm breakups can generate bad feelings. Bad feelings can generate bad ideas — like filing bogus 1099′s on your erstwhile colleagues. That went badly for an Ohioan in a U.S. District Court case reported in today’s Tax Notes ($link).
When Waldman, Pitcher and Co. broke up, it wasn’t amicable. Lawrence Waldman felt ill-used by departing partners Kenneth Pitcher and Michael Enders. Some background from the District Court judge:
This case arises from the acrimonious break-up of the successful accounting firm Waldman, Pitcher, and Co., P.S.C. The individual parties in the present case were formerly partners in that firm. The break-up has spawned numerous related lawsuits, various audits by the Internal Revenue Service (“IRS”), numerous complaints of improper conduct to various professional oversight groups, and protracted contentious litigation of the present case.
Mr. Waldman apparently attempted to enlist the IRS in his fight, using an assignment of uncollected receivables in the break-up agreement (footnotes and other references omitted):
In January 2010, Waldman & Co. issued 1099-MISC forms to Pitcher and Enders personally for tax year 2009, for non-employee compensation in the amount of $111,535.00 for Pitcher and $13,260.00 for Enders. It is undisputed that Waldman and his company had not collected any of the AR/WIP money reflected on those 1099 forms (doc. no. 134, ¶¶ 18-19). Waldman was admittedly angry at Pitcher and Enders and has repeatedly characterized their departure as effectively “stealing” two million dollars from him. As a prominent and experienced CPA, Waldman was familiar with the matching program of the IRS and knew that issuing these 1099s to Pitcher and Enders personally would likely result in IRS audits of their personal income tax returns. Waldman & Co. benefitted by taking a corresponding tax deduction for the reported amounts.
The unhappy 1099 recipients fought back:
In February and March of 2010, Pitcher and Enders complained to the IRS’s Office of Professional Responsibility (“OPR”) that Waldman had issued 1099s containing information that Waldman knew to be inaccurate. They asserted that Waldman had done this “to exact a revenge that he couldn’t otherwise exact during our negotiations.” They filed similar complaints with the Accountancy Board of Ohio and Ohio Society of CPAs . Those groups declined to take disciplinary action against Waldman.
In February 2011, Waldman & Co. issued “corrected” 2009 1099s to the plaintiffs, reflecting “zero” for their nonemployee compensation. At the same time, he issued “corrected” W-2s to Pitcher and Enders reflecting increased amounts in Box 1 . For Pitcher, an additional $199,290.00 of reported income was included, reflecting the $111,535.00 for the accounts receivable assigned to KPE, $27,755 for the amount paid to KPE by Waldman & Co., and $60,000.00 for attorney fees paid by Waldman & Co. to plaintiffs’ attorneys… For Enders, an additional $13,260.00 was included, consisting of $13,260.00 for the accounts receivable assigned to KPE. Waldman & Co. took a tax deduction for the increased amounts listed on the corrected W-2s, even though such returns indicated that no federal income taxes had been withheld.
I suppose if you are going to make up compensation on W-2s, you may as well be consistent and deduct the pretend expense.
Much litigation later, the District Court ruled for the departing accountants Pitcher and Enders:
Given his education, knowledge, and business experience as a CPA, [Mr. Waldman] could not have reasonably believed that these information returns were proper to file. He filed these information returns “willfully” in order to obtain tax benefits and harass the plaintiffs. Despite having “settled” a previous lawsuit over the plaintiffs’ departure from the firm, Waldman was dissatisfied and stubbornly believed the plaintiffs had “stolen” two million dollars from him by leaving his firm with clients. In taking on the role of whistleblower, he deliberately misused the IRS reporting system.
A lot of good it did them. They were each awarded $15,000 in damages, but not attorney fees:
In light of the unusually hostile litigation history between the parties, the Court observes that plaintiffs have certainly played a significant role in creating the bitter circumstances of this case. This case has also been marked by needlessly contentious discovery battles, repetitive briefing, and unfortunate personal attacks. In view of the animosity between the parties, the Court in its discretion declines to award attorneys’ fees to the plaintiffs. The Court is aware that, absent such an award, this may be a Pyrrhic victory for plaintiffs. Nonetheless, the Court is convinced that this is a just result under the unusual circumstances of this case.
It’s hard to believe that the plaintiffs came out ahead on this, especially when their time is taken into account.
The Moral: breaking up is hard to do, even for accountants.
Jason Dinesen, Life After DOMA: Estate Tax
Leslie Book, What is a Fair CDP Hearing: Courts Push Back on IRS
William McBride, French Economist Wants Top Tax Rate of 80 Percent to Fix Inequality (Tax Policy Blog). No, it’s not an April Fools joke, and some people who should know better take this serously. The “French economist” is Thomas Picketty, who is big into the whole “inequality” hand-waving being used to distract us from our real problems. The post illustrates the folly of the whole war on millionaires with this chart:
He could have added that an increasingly progressive tax system has coincided with increasing inequality.
Howard Gleckman, House Republicans Punt on Tax Reform (TaxVox): “…it effectively turns its back on the tax reform plan drafted by Dave Camp, the GOP chairman of the House Ways & Means Committee.”
Tax Justice Blog, ITEP Predicts Illinois Tax Reform Debate…and Then Puts Crystal Ball Away
TaxProf, The IRS Scandal, Day 328
Name that Party!, tax edition. Instapundit has a recurring gag poking fun at news stories of corrupt politicians whose political affiliation is left mysteriously unstated. Here’s an example from the tax world: Gary councilman sentenced to prison.
Even an extension isn’t a free lunch. As Trish McIntire explains below, extensions extend the filing deadline, not the payment deadline, so you need to have at least an idea of your current tax situation even to extend.
Start with your 2012 return. Make sure you have all of the items you reported on that return — W-2s, K-1s, 1099s. Then think through what might have changed since last year. New kid? New spouse? Lose an old spouse? Won the lottery?
Then pencil out a return, or hurry down to your preparer. If your preparer tells you to extend, don’t fight it. An extended return is not a “red flag” to the IRS. And when figuring out how much to pay with your Form 4868, round up. This time of year, it seems most surprises are the bad kind, so assume the worst.
If you want to know what does work as a red flag for the IRS, the Tax Court yesterday had a good example:
Petitioner’s 2010 Form 1040, U.S. Individual Income Tax Return, was prepared by H and R Block. On Schedule C, Profit or Loss From Business, petitioner reported gross income of $1,274, office expense of $142, and car and truck expenses of $17,978, for a net loss of $16,846.
A schedule C with just a little income and a big loss caused mostly by car and truck expenses probably goes straight to the “audit me” bin, because the IRS knows that many taxpayers are like this one:
Although petitioner provided his 2009-10 mileage log, he nevertheless failed to provide any corroborating receipts or other records that substantiated the statements made in the log. Petitioner’s mileage log did not address the business purpose of each trip. Guessing as to where he may have gone in 2010, petitioner added the places of business travel to his log in 2012. The log was thus not contemporaneous, and the reconstruction was not reliable.
If you want to take car deductions, you need to keep track of them as you go, in a log, a calendar, or a smart-phone app. Otherwise you, like the taxpayer in this case, won’t stand much of a chance against the IRS.
William Perez, Retroactive Charitable Donations for Typhoon Haiyan Relief:
Taxpayers can take a deduction on their 2013 tax return for cash donations made between March 26, 2014, and April 14, 2014, to charities providing disaster relief to areas impacted by Typhoon Haiyan.
Normally, charitable donations can be deducted only if the donation is made by the end of the year. But the recently enacted Philippines Charitable Giving Assistance Act (HR 3771) gives taxpayers the option of deducting donations for Typhoon Haiyan relief on their 2013 tax returns.
William explains what you need to do to claim the retroactive deduction.
TaxGrrrl, Taxes From A To Z (2014): Q Is For QDRO
So what if you can’t get your return done in time to file by then? You can file an extension. It can be done electronically or by filing a paper Form 4868 by April 15th. And it does have to be postmarked or electronically filed by April 15th. After that time, the extension won’t help you.
Remember, an extended return does not attract IRS attention; a late or erroneous return does.
Ways and Means Chairman Dave Camp Won’t Seek Reelection (Accounting Today). That can’t be a good sign for his misconceived tax reform plan.
Jeremy Scott, Fair Shot for Everyone’ Contains Details for No One (Tax Analysts Blog):
Setting a new low for lack of detail and specificity, Senate Democrats unveiled their “Fair Shot for Everyone” agenda last week. Only loosely a set of real proposals, the agenda is merely a series of talking points designed to distract voters from President Obama’s lagging approval numbers and the continuing unpopularity of the Affordable Care Act.
Not a glowing review.
Howard Gleckman, Should Tax Reform Be Sold on Values Instead of Economics?
Paul Brennan, In Iowa, your taxes help corporations not pay theirs (Iowa Watchdog.org):
Of course, $950,000 isn’t much more than chicken feed to a company like Tyson, which posted $583 million in profits in 2013. It also doesn’t compare with the tens of millions of tax dollars the state paid out to big companies through the Research Activities Credit last year.
But it is probably enough to leave tax payers feel well and truly plucked.
Nobody notices a few missing feathers.
Des Moines Register, Branstad will sign Iowa Speedway tax break in Newton ceremony Wednesday. Because NASCAR has better lobbyists than you do.
Tax Justice Blog, State News Quick Hits: State Lawmakers Not Getting the Message
Alan Cole, Bitcoin’s IRS Troubles (Tax Policy Blog:
The price of the virtual currency Bitcoin has fallen to about $461 from a closing price of $586 last Monday. This decline of about 21% came in the wake of an IRS ruling that net gains from Bitcoin transactions will be taxed as capital gains.
Nobody wants a Schedule D item for every purchase.
TaxProf, The IRS Scandal, Day 328. April Fools edition, unfortunately.
News from the Profession: The Forgotten Spouses of Public Accounting (Going Concern). I’m sure mine is around here somewhere.
There was a little disruption around the Tax Update neighborhood over the weekend. The 115 year-old Younkers Building, kitty-corner from our quarters in The Financial Center, burned over the weekend. It was being renovated into apartments and shops when it caught fire early Saturday morning. Here’s how it looked yesterday from one of our conference rooms:
While our neighbors in Hub Tower and the EMC Building are closed today, Roth & Company is open for business. If you need to visit us, you have to enter on the Mulberry Street side; the Walnut side is closed by police order. You can still reach the parking garage, but you have to come from Mulberry and turn north onto the little stub of Seventh Street left open to allow garage access (it’s normally one-way, Southbound, but it’s one-way northbound until they can re-open Seventh Street, and that doesn’t seem likely for awhile). We are cut off from the skywalk system, for now. (Update, 8:54: we have Skywalks! Both to Hub Tower and the EMC building).
Other Tax Update coverage:
And some sound advice from Brian Gongol: “Make sure you have an offsite, offline backup of your critical work and personal files. You never know when a catastrophe will strike.”
Roger McEowen, U.S. Tax Court Deals Blow to IRS on Application of Passive Loss Rules to Trusts: “The case represents a complete rejection of the IRS position that trust aren’t “individuals” for passive loss purposes and the notion that only the trustee acting in the capacity of trustee can satisfy the test.”
Individuals who reached age 70 and a half years old in 2013 are required to begin withdrawing funds from their tax-deferred retirement plans no later than April 1, 2014. This applies to traditional individual retirement accounts (IRAs) and employer-based retirement accounts, such as a section 401(k), 403(b) or 457 plan.
You can get hit with a 50% excise tax on the required distribution amount if you fail to take it.
Jana Luttenegger, FICA Taxes on Severance Payments (Davis Brown Tax Law Blog)
Kay Bell, Selfies used as tax claim documentation, audit defense. Not a bad idea.
Arden Dale, A New Reason to Hoard Assets (WSJ):
In particular, taxpayers are taking advantage of a tax break known as the “step-up in basis,” in which the cost basis of a house, stock or other asset is determined by its current market price rather than when the deceased person acquired it.
Heirs get the step-up when they inherit the asset, and it can save them a lot in capital-gains taxes when they sell.
Gift recipients get only the donor’s basis, while the basis of inherited property is the value at the date of death. Now that couples can die with over $10 million without incurring estate tax, it often makes tax sense to hold low-basis assets until death so heirs can dispose of them without incurring capital gains taxes.
Greg Mankiw, The Growth of Pass-Through Entities:
Over the past few decades, there has been an amazing shift in how businesses are taxed. See the figure below, which is from CBO. Businesses are more and more taxed as pass-through entities, where the income shows up on personal tax returns rather than on corporate returns. (Here is an article discussing how the mutual giant Fidelity recently switched from one form to the other.)
This phenomenon complicates the interpretation of tax return data. For example, when one looks at the growth of the 1 percent, or the 0.1 percent, in the Piketty-Saez data, that growth is likely exaggerated because some income is merely being shifted from corporate returns. I don’t know how much. If someone has already quantified the magnitude of this effect, please email me the answer. If not, someone should write that paper.
This is clearly true. While I can’t quantify the effect on inequality statistics, it has to make a difference, now that a majority of business income is reported on 1040s:
In 1980, corporate returns reported about 2/3 of all business income; by 2010, the Form 1120-share of business income was down to about 43%.
Lyman Stone, Maryland Threatens to Confiscate “House of Cards” Set (Tax Policy Blog). ”High taxes and big incentives don’t seem to be working very well in Maryland right now.” They should follow Iowa’s example and limit filmmaker subsidies to three hots and a cot.
Megan McArdle, The IRS Takes a Bite Out of Bitcoin
Annette Nellen, Guidance on taxation of virtual currency
TaxProf, The IRS Scandal, Day 326
Tax Justice Blog, Grover Norquist cares a lot about Tennessee taxes. You should too.
Renu Zaretsky, Tax Reform, Tax Expenditures, and Kevin Spacey (TaxVox). A roundup of tax headlines.
I oppose regulation of tax preparers. But yet, I will tout my own licensing at the expense of an unlicensed preparer if the situation presents itself.
But nobody makes Jason do this, and if somebody wants to pay less for an unlicensed preparer, Jason isn’t preventing that. If he replaced “but yet, I will” with “I prefer to,” it would be correct.
News from the Profession. Per Criminal, PwC is Preferred Audit Firm for Criminals (Going Concern)
The aftermath of yesterday’s fire at the old Younkers building in Des Moines:
The Walnut Street side:
And the Seventh Street side:
Des Moines Register, Younkers fire: History gives way to questions and Firefighters recount floor collapse at Younkers fire
It’s a sad day in Downtown Des Moines.
Sometime early this morning the 115 year-old Younkers Department Store building caught fire. It looks like a total loss. The building is (was) on the northwest corner of Seventh and Walnut, kitty-corner from our offices. This picture was taken from our 14th-floor conference room. You can still see flames on lower floors. Compare this to an older street-level picture of this corner of the building at the end of this post.
Our building still works, with power and water, though it smells a bit smoky.
The building was in the middle of a rehabilitation project. The store had shuttered in 2005, and was being repurposed into apartments and shops, with a revived Younkers Tea Room restaurant. That doesn’t look like it will happen now.
I took some pictures there the day they announced the closing; here are a few of them.
The famous “electric stairs.”
The elevator key bank, with the unusual button for floor 3 1/2.
The corner of the building at Seventh and Walnut, on the left side of the picture.
Downtown Des Moines has lost an old friend.
Related: A VISIT(ATION) TO DOWNTOWN YOUNKERS
Trusts won big over the IRS yesterday. The Tax Court ruled that trusts can “materially participate” in business activities. Taxpayers who materially participate in an activity don’t have to pay the Obamacare net investment income tax on income from the activity. I have a full writeup, Tax Court decision cuts 3.8% Obamacare Net Investment Income Tax for many trusts.
We submit these comments in the hope that they will help lawmakers and the public understand that FATCA, while intended to catch tax evaders, is poised instead to impose serious and unjustified harms on people who live around the world as non-resident U.S. citizens and green card holders, as well as their family members and business associates.
After all, you have to shoot the jaywalkers so you can slap the real international tax evaders on the wrist.
Quoted text from “Submission to Finance Department on Implementation of FATCA in Canada” by Allison Christians and Arthur Cockfield, via the TaxProf.
William Perez, Tips for Same Sex Married Couples Filing Their Tax Returns.
Steven Rosenthal, You Could Owe Capital Gains Taxes When You Spend Bitcoin (TaxVox)
Scott Schumacher, Does Equity Have a Role in Offers in Compromise? (Procedurally Taxing)
William McBride,New Study Finds U.S. Multinationals Pay Extremely High Effective Tax Rate. (Tax Policy Blog). Since Iowa corporate rates are the highest in the U.S., that makes us number 1 in the world, baby!
TaxProf, The IRS Scandal, Day 323
Tax Justice Blog, Tax Cuts Fall Flat in Idaho
False choice. The Drive for Tax Reform: Hitting the Breaks or the Gas? (Renu Zaretsky, TaxVox)
Career Corner. The More Money Your Parents Made, the Less Likely You Are to Become an Accountant (Going Concern)
If all poverty were like this, monasteries would be more popular. A Pennsylvania taxpayer is accused of trying the old “I’m a church” dodge. From Lehighvalleylive.com:
Erik Von Kiel, formerly of Macungie, falsely told the federal government he was a minister with a Utah-based religious organization, and that he had renounced any interest in property or income, authorities said.
He did so while concealing his salary and assets, including a seven-bedroom Macungie home he bought with his wife in 2006 and later sold for $175,000, according to court documents.
Seven bedrooms? Not bad for poverty. Probably more accessible than many monastic residences, too.
The Tax Court reduced 2013 income taxes for a lot of trusts yesterday. The court ruled that trustees can “materially participate” in rental real estate activities, and by extension in other activities. If a taxpayer “materially participates” in an activity, it is not subject to the Obamacare 3.8% “Net investment Income Tax” on that activity’s income.
This is a big deal for trusts because they are subject to this tax at a very low income level — starting at $11,950 in 2013. The IRS has said that it considers it nearly impossible for trusts to materially participate. Yesterday’s decision flatly rejects the IRS approach.
The IRS had stated its position in a ruling involving an “Electing Small Business Trust,” which is a type of trust that can hold interests in S corporations — and which tend to get hit hard by the NII tax. The IRS said that a president of the corporation who was also a trustee of the ESBT was participating in the business not “as trustee,” but as a corporation employee — and therefore the trust didn’t materially participate. The Tax Court disagreed with IRS thinking yesterday:
The IRS argues that because Paul V. Aragona and Frank S. Aragona had minority ownership interests in all of the entities through which the trust operated real-estate holding and real-estate development projects and because they had minority interests in some of the entities through which the trust operated its rental real-estate business, some of these two trustees’ efforts in managing the jointly held entities are attributable to their personal portions of the businesses, not the trust’s portion. Despite two of the trustees’ holding ownership interests, we are convinced that the trust materially participated in the trust’s real-estate operations. First, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was not a majority interest — for no entity did their combined ownership interest exceed 50%. Second, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was never greater than the trust’s ownership interest. Third, Frank S. and Paul V. Aragona’s interests as owners were generally compatible with the trust’s goals — they and the trust wanted the jointly held enterprises to succeed. Fourth, Frank S. and Paul V. Aragona were involved in managing the day-to-day operations of the trust’s various real-estate businesses.
That would seem to put to rest the IRS “as trustees” catch-22.
The Tax Court decision doesn’t make the NII go away for all trusts. Trusts with only “investment” income, like interest and dividends, are not helped by this decision. Also, the decision by its terms only covers situations in which the trustee is materially participating in the trust activity; “We need not and do not decide whether the activities of the trust’s non-trustee employees should be disregarded.” In this respect the Tax Court doesn’t go as far as a Texas U.S. District Court did it the Mattie Carter Trust case, which counted participation of trust employees in determining whether the trust materially participated in an activity.
Still, even with limitations, the case is a big taxpayer win. It will especially help ESBTs avoid tax on operating income from S corporations when a trustee is also a corporation employee. Also, while the case doesn’t say that non-trustee employees can give trusts material participation, it doesn’t rule it out, either. That means bold trusts with employees that manage trust operations may be able to avoid the 3.8% tax, should the Tax Court adopt the Mattie Carter Trust approach. Future litigation will have to settle the issue. The IRS is also likely to appeal this case.
An aside: The IRS asserted its usual outrageously-routine 20% “accuracy-related” penalty — and it lost on its underlying argument. In a just tax system, the IRS would have to write a check to the taxpayer for the amount of the asserted penalties whenever this happens. The IRS assertion of penalties is far too routine, and should be reserved for cases in which the taxpayer is actually taking a flaky position, or doesn’t bother to substantiate deductions. When it asserts a penalty and the taxpayer actually wins on the merits, the IRS loses nothing under current law. Tax Analysts hosted a seminar yesterday on a Taxpayer Bill of Rights. Any bill worthy of the name would have a “sauce for the gander” rule that would make the IRS — and even IRS employees — as liable as taxpayers are for flaky positions.
Also: Paul Neiffer, Taxpayer Victory in Frank Aragona Trust Case, on the implications for farm interests held in trust.
When they built the big new racetrack in Newton, they had a unique deal: the track got to keep the sales tax it collected. The deal was crafted to require the track be partly owned by Iowans, and that it would expire at the end of 2015.
Then NASCAR bought the track. NASCAR is controlled by a wealthy North Carolina family , with nary an Iowan. No problem! The Iowa House sent a bill to the Governor yesterday (SF 2341) repealing the Iowa ownership rule and extending the subsidy through 2025.
Representative Tom Sands, a Republican from Wapello, said it’s a “performance based” tax break because NASCAR won’t get the rebate unless there are on-site sales.
“One of the questions might be: ‘What kind of return do we, taxpayers, get in the state of Iowa?’ And I drive on Interstate 80 twice every week like many of you do coming to Des Moines and have seen the construction that has happened around that Speedway just since it’s been there,” Sands said, “and we’ve got probably lots more of that we can expect into the future.”
The answer to that is: what makes this private business more worthy to keep its sales taxes than anyone else? It’s a special deal that every other Iowa business competing for leisure dollars doesn’t get. It’s the government allocating capital, and if anybody thinks the state is good at that, I’d like my Mercedes, please.
While this corporate welfare passed, at least some legislators are starting to wonder about this sort of thing. 14 representatives joined 9 state senators in opposing the bill. When the Iowa Film Tax Credit passed, there were only three lonely opponents. The 14 representatives who stood up for the rest of us: Baudler (R, Adair), Fisher (R, Tama), Heddens (D, Story), Highfill (R, Polk), Hunter (D, Polk), Jorgensen (R, Woodbury), Klein (R, Washington), Olson (D, Polk), Pettengill (R, Benton), Rayhons (R, Hancock), Salmon (R, Black Hawk), Schultz (R, Crawford), Shaw (R, Pocahontas) and Wessel-Kroeschell (D, Story). Maybe we have the makings of a bi-partisan anti-giveaway coalition.
Jason Dinesen, Iowa Tax Treatment of an Installment Sale of Farmland By a Non-Resident. ”The capital gain is recognized in the year of the sale and is taxable in Iowa. But what about the yearly interest income the taxpayer receives on the contract going forward?”
Paul Neiffer, Painful Form 8879 Process is on its Way. The IRS, which has forced us to go to e-filing, now plans to make it a time-consuming nightmare for practitioners and clients because of the IRS failure to prevent identity theft.
Margaret Van Houten, Digital Assets Development: IRS Characterizes Bitcoin as Property, Not Currency
William Perez, Tax Reform Act of 2014, Part 2, Income
These data indicate that:
54 percent of total partnership and S corporation taxable income in Illinois would be impacted by Speaker’s Madigan’s millionaire surcharge. That’s almost $10 billion of business income.
6 percent of sole proprietorships AGI would be impacted. Important to note here is that not all sole proprietorships earn small amounts of income. Over three thousand would be hit by the millionaire tax, impacting $674 million of income.
Taken together, this indicates that 36 percent of pass-through business income is earned at firms with AGI with $1 million or more.
I don’t think this will end well for Illinois. When you soak “the rich,” you soak employers. When states do this, it’s easy to escape.
Christopher Bergin, Good Grief! Tax Analysts v. Internal Revenue Service (Tax Analysts Blogs)
I have been involved in two Tax Analysts FOIA lawsuits against the IRS. Neither one of them should have gone to federal judges. But the IRS’s secrecy, paranoia, and belief that it has the absolute right to hide information drives it in this area. This lawsuit was a waste of time and money – against an agency that argues that it doesn’t have enough of either — over documents that should have been public from the beginning.
I’m left to quote Charlie Brown: Good grief! What an agency.
Commissioner Koskinen’s pokey response to Congressional document requests needs to be considered in this context. The IRS has not earned the benefit of the doubt.
Greg Mankiw, Not Class Warfare, Optimal Taxation:
Today’s column by Paul Krugman is classic Paul: It takes a policy favored by the right, attributes the most vile motives to those who advance the policy, and ignores all the reasonable arguments in favor of it.
In this case, the issue is the reduction in capital taxes during the George W. Bush administration. Paul says that the goal here was “defending the oligarchy’s interests.”
Note that when Barack Obama ran for President in 2008, he campaigned on only a small increase in the tax rate on dividends and capital gains. He did not suggest raising the rate on this income to the rate on ordinary income. Is this because Barack Obama also favors the oligarchy, or is it because his advisers also understood the case against high capital taxation?
Leigh Osofsky, When Can Concentrating Enforcement Resources Increase Compliance? (Procedurally Taxing)
Cara Griffith, Taxing Streaming Video (Tax Analysts Blog)
TaxProf, The IRS Scandal, Day 322
Renu Zaretsky, Friendly or Penalty? Taxes on Married Couples, Businesses, and the Uninsured (TaxV0x). Rounding up the tax headlines.
Jack Townsend, Scope and Limitations of this Blog: It Is a Tax Crimes Blog, not a Tax Crimes Policy Blog. ”I conceive my blog as a forum to discuss the law as it is, including how it develops. It is not a tax policy blog addressing issues of what the law ought to be.”
Russ Fox, Bozo Tax Tip #9: 300 Million Witnesses Can’t be Right. Richard Hatch is not widely considered a tax role model.
News from the Profession. Frustrated EY Employee Vandalizes Office Breakroom in Protest Over March Madness Blocking (Going Concern)