If Iowa’s income tax were a car, it would look like this.
The Iowa General Assembly nears the end of its annual rampage. While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.
The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses. Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.
As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out. They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.
Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.
While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting. Yes, lower rates for commercial property are needed. But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.
Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.
Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.
Former IRS Commissioner Shulman, showing how bad he feels about politcal harassment under his watch.
The Worst Commissioner Ever returned to Washington yesterday to testify before a Senate committee on the IRS scandal. He bravely took responsibility for the targeting of disfavored political groups and apologized to the victims.
I certainly am not personally responsible for creating a list that had inappropriate criteria on it. And what I know, with the full facts that are out, is from the inspector general’s report, which doesn’t say that I’m responsible for that. With that said, this happened on my watch. And I very much regret that it happened on my watch.
In other words, I was just the boss, and you can’t blame me for what those crazy kids in Cincinnati do.
Lois Lerner, the head of the Internal Revenue Service office that targeted conservative groups, intends to invoke her constitutional right against self-incrimination and decline to answer questions about the matter when questioned by a congressional committee Wednesday.
Ms. Lerner, director of the tax-exempt-organizations division at the IRS, notified the House Committee on Oversight and Government Reform through her attorney that she wouldn’t answer questions on the matter, according to a committee spokesman.
When it comes to the Bill of Rights, better late than never.
On Friday, May 17, 2013, the Maryland Court of Appeals denied the comptroller’s motion for reconsideration in Comptroller v. Wynne, which struck down the state’s application of credits against pass through income from S corporations; however, the court stayed implementation of the ruling to allow the comptroller to petition the U.S. Supreme Court for certiorari.
It’s too bad that the cost of a sensible property tax is a big increase in a program that is a poverty trap for honest taxpayers and a pinata for thieves. The phase-outs of the EITC result in shockingly-high marginal tax rates on each additional dollar earned by relatively low-income taxpayers.
The EITC is refundable, which means it is really a welfare program run through tax returns. About 25% of the EITC is claimed “improperly,” which is a nice way to say it’s stolen. The annual cost of the Iowa EITC boost is estimated at $35 million, so the price of fixing a broken commercial property tax regime is an $8 million annual thief subsidy. So while the politicians celebrate their great compromise, Iowa’s petty thieves also have occasion to raise a glass, filled by you.
It is unlikely that Republicans will find Paul’s smoking gun, but the IRS scandal is almost certainly the result of political bias on some level. It is hard to believe that a group of officials would innocently pick terms like “Tea Party,” “patriot,” and “9/12” to single out organizations for additional scrutiny. It would be incredible to find such disinterested tone-deafness even in the most politically insulated of civil servants (and the IRS is far from insulated).
I doubt the White House left fingerprints on IRS efforts to harass political opponents (though it didn’t lift a finger to stop it). That leads to an even more depressing possibility: that the IRS went out its way to beat up on the President’s opponents on its own. Nobody blew the whistle. That means IRS management is so corrupt and political that it would go after the administration’s political opponents with only a wink and a nudge. And anybody who doesn’t think this was politically-motivated is kidding themselves.
And the IRS scandal was a subversion of democracy on a massive scale. The most fearsome and coercive arm of the administrative state embarked on a systematic effort to suppress citizen dissent against the party in power. Thomas Friedman is famous for musing that he wishes America could be China for a day. It turns out we’ve been China for a while.
President Barack Obama forced the resignation Wednesday of the acting commissioner of the Internal Revenue Service in connection with the inappropriate targeting of conservative political groups.
“Americans are right to be angry about it and I’m angry about it,” Mr. Obama said in announcing the departure of acting IRS Commissioner Steven Miller, who took over the post in November. “The IRS has to operate with absolute integrity.”
Mr. Miller’s resignation is necessary, given the evidence that he hasn’t been honest about IRS harassment of right-side political organizations, but it won’t be sufficient to quell the scandal. Yesterday’s line, that the scandal was the work of “two rogue employees” in Cincinnati, is risible in light of the involvement of the D.C. and Laguna Niguel offices in the harassment. That is, unless the two rogue employees were Doug Shulman and Steven Miller.
The TaxProf rounds up a big day in big media coverage: The IRS Scandal, Day 7. Other blog coverage:
So in my view, the problem here isn’t so much that the IRS “targeted” a particular type of taxpayer — because that’s what the IRS does – but rather that in targeting the Tea Party, the Service is reflecting a political bias, something an arm of the government simply cannot do.
I think that’s about right. Given the long delays in Tea Party applications, while similar applications by left-side groups were routinely approved, it’s pretty hard to believe that it wasn’t discrimination against right-side viewpoints.
Among the many ridiculous tasks our politicians pile on the tax collector, the agency has been charged with determining whether political organizations applying for 501(c)(4) status are too political and to do that without getting political. Sounds like a winner to me. Last Friday, the IRS admitted it failed in performing that task. What a surprise. The IRS also fails in administering a social welfare program known as the earned income tax credit. And just think of how well it will administer the myriad of rules it will have to deal with once the new health care system becomes fully operational.
But we can trust them to regulate preparers, right?
Victor Fleischer raises related point in a New York Times piece. While I think some of the focus on “institutional” issues is a way to change the subject from political bullying, I don’t mind if it leads people to realize that the tax law is for collecting taxes, not the Swiss Army Knife of public policy.
The budget adds another income tax bracket on single filers earning $150,000 or more annually. The state’s top rate will now be 9.85 percent, making it the fourth highest top rate in the country. Politicians are spinning this as only affecting the “top 2 percent,” but that misses the point.
Pushing more of the tax burden onto a smaller, wealthier group is poor policy, not because I care about rich people more (an absurd and inaccurate, but unfortunately common, assertion), but because those incomes are volatile. Income tax revenues that derive a large share of receipts from the wealthiest are unstable, and there’s a lot of research to back that up (a few examples can be found here and here). This point is exacerbated by the fact that lawmakers might also throw in an additional temporary income tax surcharge on those earning $500,000 or more.
This will do more for Iowa’s economic development than anything the Iowa economic development bureaucracy ever will.
With all the excitement over tax-exempt entities, it’s worth remembering that their returns — the 990 series — are due today for calendar-year filers. And if an organization fails to file 990s for three years, its exempt status lapses. Extensions are available, but they have to be filed today.
Late filing can be expensive. For small organizations, the penalty is $20 per day of late filing; for those with receipts over $1 million, its $100 per day. That adds up fast.
So let’s get started with this morning’s IRS Scandal news. The TIGTA report whose imminent release triggered the IRS announcement of the scandal last Friday came out yesterday. I covered it in a post last night. Other coverage:
It is no secret. This may hurt my libertarian credentials, but I believe the U.S. Congress should pass the Marketplace Fairness Act. The tax system is sound when built on a broad base and low rates. Broad base means you tax everything without regard to who is lobbying the legislature. It follows – and it really does follow – that the sales tax should be imposed on all personal consumption.
I can see a need for something like this, but I think it should be done by having a single point of compliance for sellers under a uniform set of rules, rather than subjecting internet sellers to the thousands of local tax systems. David minimizes the compliance burden. As somebody who makes a living off of the compliance burden, I can say with confidence that he is mistaken.
We need a name for the scandal of the IRS leaning on right-side political organizations. “501(c)(4) – gate” doesn’t do it. Tea-Gate? Tea-Party Dome? Something must be done! I invite you to do in the comments.
The blog world is going nuts on this today, so here is an extra roundup so I can maybe talk some about other things tomorrow.
The TIGTA report is out! Full text here. From the Summary (my emphasis)
The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax‑exempt status based upon their names or policy positions instead of indications of potential political campaign intervention. Ineffective management: 1) allowed inappropriate criteria to be developed and stay in place for more than 18 months, 2) resulted in substantial delays in processing certain applications, and 3) allowed unnecessary information requests to be issued.
Although the processing of some applications with potential significant political campaign intervention was started soon after receipt, no work was completed on the majority of these applications for 13 months. This was due to delays in receiving assistance from the Exempt Organizations function Headquarters office.
That means a big part of the problem was in Washington, not just in Cincinnati, as the spinners would like us to believe.
There is no smoking gun — no email from the President telling reviewers to give them Tea Partiers hell. But there is enough to make it pretty clear that Doug Shulman and Steven Miller were lying when they said Tea Partiers weren’t targeted. From the report, my emphasis:
Determinations Unit employees stated that they considered the Tea Party criterion as a shorthand term for all potential political cases. Whether the inappropriate criterion was shorthand for all potential political cases or not, developing and using criteria that focuses on organization names and policy positions instead of the activities permitted under the Treasury Regulations does not promote public confidence that tax-exempt laws are being adhered to impartially. In addition, the applications for those organizations that were identified for processing by the team of specialists experienced significant delays and requests for unnecessary information that is detailed later in this report.
After being briefed on the expanded criteria in June 2011, the Director, EO, immediately directed that the criteria be changed. In July 2011, the criteria were changed to focus on the potential “political, lobbying, or [general] advocacy” activities of the organization. These criteria were an improvement over using organization names and policy positions. However, the team of specialists subsequently changed the criteria in January 2012 without executive approval because they believed the July 2011 criteria were too broad. The January 2012 criteria again focused on the policy positions of organizations instead of tax-exempt laws and Treasury Regulations. After three months, the Director, Rulings and Agreements, learned the criteria had been changed by the team of specialists and subsequently revised the criteria again in May 2012. (See Appendix VI for a complete timeline of criteria used to identify potential political cases). The May 2012 criteria more clearly focus on activities permitted under the Treasury Regulations. As a result of changes made to the criteria without management knowledge, the Director, Rulings and Agreements, issued a memorandum requiring all original entries and changes to criteria included on the BOLO listing be approved at the executive level prior to implementation.
So a person immediately below the Commissioner on the organization chart new what was going on, but the WCE, and his successor, both continued to deny ideological targeting.
The report does not address involvement of people in other offices in political targeting, which has been revealed in other stories. TIGTA still has work to do.
According to The Washington Post, “although some of the groups were explicitly labeled ‘tea party’ or ‘patriot,’ others that came under intense scrutiny were focused on challenging the Affordable Care Act — known by many as Obamacare — or the integrity of federal elections.”
In other words, the agency has singled out Obamacare opponents for unusual treatment. That does not speak well of the agency’s ability to fairly carry out its duties under the law.
Now, maybe 501(c) organizations are a big scam and don’t promote social welfare and we should get rid of them, as I’ve seen some columnists complain. But this doesn’t actually seem like the right time to have that conversation. Rather, it seems like a distraction from the fact that IRS employees decided that groups that advocated for smaller government were somehow specially untrustworthy, and acted on this opinion by singling them out for extra bureaucratic hassles.
Having that “conversation” is just a way to change the subject.
Steven Miller, acting head of the IRS since Doug Shulman left office, apparently hasn’t been any more honest than The Worst Commissioner Ever about IRS harassment of right-side political groups. AP reports:
Miller was first informed on May, 3, 2012, that applications for tax-exempt status by tea party groups were inappropriately singled out for extra scrutiny, the IRS said Monday.
At least twice after the briefing, Miller wrote letters to members of Congress to explain the process of reviewing applications for tax-exempt status without disclosing that tea party groups had been targeted.
We’re supposed to tell the truth when we file our returns. It’s not asking too much for them to return the favor.
The incompetence boggles the mind. It’s also bewildering how the Service could sit in front of GOP lawmakers and chastise them for underfunding tax enforcement when employees were using some of those supposedly precious funds to conduct a politically charged vendetta against conservative exempt organizations.
I think the perpetrators were quite competent in doing what they set out to do. The only incompetence was in getting caught. But he’s absolutely right that the agency’s poor-mouthing, including next week’s furloughs, will no longer convince anybody.
But it still disturbs me that no one in Washington really seemed to care until the behavior went public.
Many of us didn’t believe the IRS would really do something so outrageous. I had seen some of the questions that IRS was asking Tea Party outfits, and they seemed out of line, but I figured the IRS was being an equal-opportunity annoyance. That they did it politically is what is triggering the outrage.
Tax.com has moved. For reasons that elude me, Tax Analysts has apparently given up the handy Tax.com domain and moved their excellent group blog to a tab on their home page, Tax.org. I think that’s a mistake, but it’s worth going out of your way to find it.
It’s Tuesday, so it’s Buzz Day at Robert D. Flach’s place.
Career Advice. Protip: Threatening to Kill Your Colleagues, Even in the Midst of a Brutal Busy Season, Is Never Cool(Going Concern). OK, I take it back. Mistakes were made. There was no threat intended in my overzealous pursuit of tax return excellence. It was just an administrative shortcut. OK, incompetent, but not evil. I vow to find out exactly what happened. If I threatened anyone, it was outrageous.
If the IRS hoped Friday’s “apology” for giving extra special attention to tax-exemption applications of right-side groups would settle things, they’re very disappointed this weekend. The Washington Post reports that the Treasury Inspector General for Tax Administration will soon issue a report saying Friday’s apologizer, IRS Director, Exempt Organizations, knew this was going on in 2011. Meanwhile, in 2012 IRS Commissioner Doug Shulman was still testifying that IRS was not picking on the Tea Party.
So not only was the Shulman era at IRS grasping, incompetent and casually cruel, it was dishonest.
The documents, obtained by The Washington Post from a congressional aide with knowledge of the findings, show that the IRS field office in charge of evaluating applications for tax-exempt status decided to focus on groups making statements that “criticize how the country is being run” and those that were involved in educating Americans “on the Constitution and Bill of Rights.”
Yes, we sure need to keep an eye on those wingnuts who want to educate people on the Constitution and Bill of Rights. Dangerous lunatics, they are!
There is so much blog coverage of this that I won’t even try to round it all up. A few links from our blogroll:
The report doesn’t shay whether or not Shulman was informed about the Tea Party questioning, but it does show the IRS’s chief counsel was. It’s standard procedure for the counsel and commissioner to discuss this sort of thing before a Congressional hearing.
If so, The Worst Commissioner Ever can only plead incompetence instead of lying to Congress.
Nina Olson, IRS Taxpayer Advocate, has an article in Tax Analysts (via the TaxProf) affirming her support for taxpayer regulation. Ms. Olson has done much good work as Taxpayer Advocate, but her support for increased preparer regulation is economically uninformed and hopelessly wrongheaded.
I’d like to report a hijacking. It looks like somebody at Tax Analysts forgot to renew their ownership of the tax.com domain name. Going there this morning gets this:
Tax.com is (has been?) home to the great group blog featuring, among others, David Brunori, Christopher Bergin, David Cay Johnston, Martin Sullivan, Cara Griffith and Clint Stretch. I hope this is only a temporary hijacking.
Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
“FATCA’s harmful impacts cover the spectrum,” Paul said. “It is a violation of Americans’ constitutional protections, oversteps the limits of Executive power, disregards the mutual respect of sovereignty among nations and drains money from the federal treasury under the guise of replenishing it, and discourages overseas investment in the United States.”
“Tax evasion is a problem that should be addressed, but not in such an egregious way,” Paul added.
Good Jobs First is just hiding the ball a little bit by trying to get rid of reports on business climate. The Good Jobs First report says that the real issue we should be focusing on is “how to build a tax system that is fair, modern and relevant.” Yes, that’s exactly what needs to be done, but I would argue that reports on business climate add to the debate. And while I do think that such reports must be examined with a critical eye, “business climate” matters.
“When economists are not listened to, that often means strong special interests and/or strong voter sentiment stand on the other side of the equation. The numerous special deductions in the tax code, most of which have no efficiency justification, are examples.”
Hence, it appears that this Act would apply to any business (not just Internet Retailers) that makes sales into a state in which it does not have nexus. Therefore, manufacturers or other non-Internet retailers who sell directly to retail customers who do not have sales representatives or any other physical connection with a state may (under this Act) be required to collect sales tax on its remote sales.
It’s not just the e-Bay sellers who would have to deal with this. If you really want to create “market fairness,” there are two ways that are much simpler: either a straight national sales tax collection regime with uniform rules and rate where the proceeds are allocated to the states based on the sales to the state, or a sales tax based on shipping location.
Traditional bricks and mortar retailers squander their immediacy edge with indifferent/uninformed sales help, who look even worse compared to the information now available on the web. But they can do well if they integrate their online and in-store services, carry enough inventory and price competitively.
Search for the Tax Fairy leads to federal prison. The Tax Fairy, in the imagination of believers, appears in the form of magical legal maneuvers that make your taxes all go away. Your drinking buddies may even claim to have seen it, or that their tax guy knows her.
It can hurt when you find that there is no Tax Fairy. It must hurt for one South Dakota surgeon. From RapidCityJournal.com:
Friends and family described Dr. Edward Picardi as a compassionate, highly skilled surgeon, but the accolades failed to spare the doctor a five-year prison sentence for income tax evasion on Tuesday.
Despite the good the Sturgis man was proclaimed to have done in his life, Picardi, 56, is the same man a federal jury convicted of 13 felonies last October, U.S. Chief District Judge Jeffrey Viken said when he sentenced the doctor.
Picardi was charged with income tax evasion after an exhaustive federal investigation of his financial practices spanning 10 years from 1999 through 2009. He used an elaborate network of dummy corporations and several foreign banks to divert thousands of dollars in income.
The indictment says the scheme was hatched with the aid of a Maryland attorney who set up a phony employee leasing scheme to suck taxable income to shell companies, which the surgeon tapped for cash as needed. This worked fine, until one day it didn’t, and now it’s a five-year unpaid vacation, plus tax, interest and penalties.
There is no Tax Fairy.
Jana Luttenegger, Disclaiming an Inheritance (Davis Brown Tax Law Blog). Sometimes it’s better estate planning to turn down an inheritance and let it go to your kids or some other beneficiary. But you have to do it right:
Most importantly, the disclaimer must be made before you accept any benefit in the gift, and it must be an unqualified disclaimer. (No, you can’t have a party at the house and then decide you don’t want it.) Once the disclaimer is made, it is irrevocable — you can’t change your mind. If you properly disclaim, the property will pass as if you predeceased (you do not get to direct where the property goes).
The looming debate over the federal debt limit is a depressing reminder that we’re living in the Age of the Manufactured Crisis. And it encourages a sort of political nostalgia – a yearning for that bygone era when tough lawmakers made the tough decisions that kept federal debt at manageable levels. Well, sorry to tell you, but there were never any fiscal heroes.
Just politicians who show by their actions that they are happy to spend us to Greece.
Jason Dinesen, Same-Sex Marriage, Community Property, And Multi-State Income — Part 1. ”Indeed, some of the most complicated tax returns I’ve ever prepared have been for same-sex couples that moved from California (a community property state) to Iowa (not a community property state) during the middle of the year.”
Think of it as the ballpark program you pick up before a baseball game. You can watch the game without it, but it is much more fun if you can keep score and know a little something about who plays for the visiting team.
Except much less interesting than baseball, and the players are uglier and less skilled.
Lauryn Hill’s parents are 150 years old! The singer received a three-month prison sentence yesterday for failing to file tax returns, but the New Jersey native still may struggle with math, according to the reliable source of tax news, TMZ.com:
“I was put into a system I didn’t know the nature of. … I’m a child of former slaves. I got into an economic paradigm and had that imposed on me,” Hill said.
She continued, “I sold 50 million units … now I’m up here paying a tax debt. If that’s not likened to slavery, I don’t know what is.”
As slavery was eliminated nearly 150 years ago with the passage of the 13th Amendment, Ms. Hill either has difficulty with arithmetic or remarkable parents. The slavery analogy is interesting. So if tax is slavery, is President Obama the chief slave driver? The IRS Commissioner? Can we be sold down the river? To who?
Ideas that would work perfectly well in song lyrics can sound so wrong in court. The artist describes feelings, impressionistically. It’s in no way an excuse or justification. But sometimes artists/politicos use court as a forum for expression without any expectation that it will advance their legal cause. One can intelligently and consciously eschew persuasion and victory.
Perhaps. Still, sometimes celebrities just say strange things.
David Brunori doesn’t think much of the tax wisdom of the Iowa House of Representatives ($link):
The Iowa House of Representatives recently passed the Iowa Reinvestment Act, which would allow companies to keep sales tax revenue they collect rather than turning it over to the general fund as the citizens think will happen. Basically, the act is designed to allow businesses to recoup the cost of development. The state has done that before to allow the public to help finance a speedway and other projects that apparently can’t be justified in the free market. The vote for that abomination of tax policy was 87 to 9. That’s what we call bipartisan bad tax policy.
Just more of using your money to subsidize the well-lobbied and well-connected.
The idea of the IRS preparing individuals’ returns is a classic example of a theory that cannot survive in a practical world. Like most theories, it deserved an experiment. It had that chance, in California, and it failed, with only a tiny portion of the eligible population deciding to participate.
Making taxpayers’ lives easier is a matter of simplifying the tax law, not enabling the complexities by turning tax preparation over to the IRS.
This strikes me as wise. I just can’t imagine IRS data processing ever making this possible, considering the complexity of the income tax and the way Congress changes it all the time.
On one hand, $3.4 million is a lot of money — nobody should doubt that. But we’re also nearly completely blind in America to how much is “enough” for retirement. Many people would say the word “millionaire” and imagine Uncle Pennybags or Uncle Scrooge. But consider this: If you wanted to get $40,000 a year in retirement income and do it just on interest payments alone (in other words, if you were trying to avoid taking anything out of your nest egg and just live on the interest), then if you had your money in “safe” 10-year Treasuries earning 1.78%, then you’d have to have more than $2.2 million in the bank. Under those conditions, “rich” doesn’t really look so rich anymore.
I don’t think the nation’s biggest problem is people saving too much.
Holding your breath for tax reform? Exhale. Martin Sullivan says tax reform is on the Fast Track to Nowhere. (Tax.com)
We have written several times about the dangers of nontraded or thinly traded REITs. They are a popular way of investing in real estate but they can be difficult to sell or liquidate if an investor suddenly needs cash.
I saw an elderly, ill client with severe cash problems while holding a private REIT investment that he couldn’t cash out. This really does happen. This is not a problem with widely-traded REITs, which are as liquid as any stock.
Jim Maule, Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad. I never throw away tax returns, and you need to keep records to support the cost of shares and big assets. If you have loss carryforwards, you need to keep the records that support the losses as long as you are using the carryforwards.
Potassium forever? An accused embezzler apparently was in no hurry to stand trial. From StarTribune.com:
A Texas man faces more than 16 years in federal prison for his role in a scheme to bilk nearly $400,000 from his former Eagan employer, Advantage Transportation.
Clayton “Craig” Hogeland, 43, also obstructed justice by faking a life-threatening medical condition, U.S. District Judge Patrick Schiltz found. That caused delays for both his trial and sentencing hearing.
How did he delay his trial?
Further health-related delays stretched out the trial before his conviction on Dec. 6, 2011. He was placed in custody Jan. 8, 2013, and the erratic blood potassium readings stopped. Six days later, his wife reported to federal authorities that she found in his belongings four zip-top bags of what turned out to be potassium chloride.
Despite his continuing complaints about symptoms after being jailed, tests revealed no abnormal blood potassium levels, the prosecution said.
I’m not sure this was well thought-out. What’s the next move? More potassium? Maybe when you are looking at 16 years in federal prison, delay is its own reward.
A reporter for a nationally prominent publication has contacted me to help him get in touch with people who have gone through one of the OVDI/P programs to discuss their experiences and thoughts about the programs. If you are interested and/or willing to do that, please contact me at jack@tjtaxlaw.com and I will put you in touch with the reporter.
So maybe it’s a chance for those of you who’ve been put through the ringer for a foot-fault violation to get a little justice.
The opposite of a sales tax holiday: Retailer Target Jumps The Gun On Sales Tax (TaxGrrrl). A South Carolina Target store probably made few friends when it started charging a higher sales tax rate a month early.
Are you irritable? Sleeping less? Impatient with your friends? Putting on weight? Thinking about divorce? Yes? Sorry to hear, you must be going through a stressful time.
Oh, wait, are you an American? Yes?! Whew, you’re behaving normally then. If you were to read this AICPA press release, you might be inclined to believe that your take home pay being 2% lower than last year would have been the cause of all those things…
Cage Match: Iowan Peter Fisher takes on the Tax Foundation. Mr. Fisher has written a study for Good Jobs First, a left side advocacy group. Mr. Fisher who shows up in The Tax Update occasionally, doesn’t care for the Tax Foundation’s Business Tax Climate Index:
The TF, on the other hand, despite claims to the contrary, ignores the consensus approach to assessing business taxes in the economic literature and attempts to portray the effect of state and local tax law on business profits in an entirely different fashion: by stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number. That number turns out to bear very little relationship to what businesses actually pay.
A good business tax climate, to the Tax Foundation, doesn’t take money from some businesses and give most of it to other businesses; good policy is based on “simplicity, neutrality, transparency, and stability.” I agree.
The problem here is that we do not claim to measure business tax burdens. We measure and rank tax structures, and this because the size of a tax is less important than the economic distortions it creates. This is a fundamental error in Fisher’s understanding of tax policy.
Mr. Fisher seems more focused on “equity,” whatever that means. But even if you think the tax law should be used to punish the rich and reward low incomes, cross-border mobility makes state tax systems an awful place to to that.
Trish McIntire, First Time Penalty Abatement. The IRS will usually abate minor penalties for first-time infractions, but they don’t like to talk about it.
Jen Carrigan, Should You Expect an Audit? A guest poster at Missouri Tax Guy’s place explains the IRS exam process.
Video! The Iowa Bar Association now is selling DVDs of “Notes from the Fiscal Cliff,” a January webcast I did with Roger McEowen of the ISU Center for Agricultural Law and Taxation. The outline is here. Supply your own popcorn.
New U.K. film tax credit indictments. It appears that the Brits are slowly moving towards the Iowa approach of jailing filmmakers instead of subsidizing them. Ic.Scotland.co.uk reports:
Five people are to be charged in connection with a film industry tax relief fraud which cost the public purse around £125 million, the Crown Prosecution Service said.
The group allegedly abused a tax relief that allows investors in the British film industry to offset losses against other tax liabilities in order to cheat the public revenue.
“Around £125 million” translates to around $194 million. And in Iowa film producers are serving time for stealing merely single digits of millions. It just goes to show what you can accomplish with a national effort.
Boo. House bill would give IRS authority to regulate tax pros(Kay Bell) The power grabbers at IRS and their buddies at the national franchise tax prep firms have been thwarted by the courts. Now they are using their congresscritter friends to put in the fix.
Kay sadly falls for it:
The quality independent tax professionals are following tax law changes, staying up to date and providing their clients with reliable tax services. Down the street, however, an inept preparer is undercutting their prices and mucking up the system for all of us — the IRS, tax pros and taxpayers alike.
The IRS can’t regulate anybody into competency. They can make people pass a “competency” test that really is a literacy test. They can make people pay for CPE. But they can’t make anybody competent who wouldn’t be otherwise. What they can do is drive little preparers out of the business with nagging paperwork, red tape and hassles that the big boys can just assign to their compliance departments, and, when necessary, to their lobbyists. This reduces the supply of preparers, increasing the cost of preparation for taxpayers.
The real problem with tax errors isn’t preparers; it’s the horrendous tax law and the inept legislators who make it happen.
In a 2011 paper published by the Mercatus Center at George Mason University, Veronique de Rugy and Adam Thierer recommended “an ‘origin-based’ sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors.” Under that rule, which mirrors what happens when you buy something while visiting another state, each business collects sales tax on behalf of the state where it is based, no matter where the customer happens to be.
The beauty of this approach is that it treats all retailers equally, eliminates the daunting challenge of dealing with many different taxing authorities, and respects state policy choices while encouraging tax competition between jurisdictions. Evidently the idea makes too much sense for Congress to consider.
That would motivate online sellers to locate in low tax jurisdictions, which is why congresscritters from high-tax places will never allow it to happen.
Legislator insists that thieves get $11 million as price of property tax deal. As Iowans pay their 2012 balances due on today’s state income tax deadline, they may want to take a moment to ponder how careful the legislature is about spending the money they are sending in.
The Des Moines Register reports that Senator Joe Bolkcom demands an increase in the Iowa earned income credit as the price of a property tax bill:
Sen. Joe Bolkcom, D-Iowa City, chairman of the tax-writing Senate Ways and Means Committee, spoke at a Statehouse news conference sponsored by The Coalition for a Better Iowa, which released a booklet with the stories of Iowans who have been helped by the earned income tax credit. About 200,000 Iowa working families receive the tax credit, which assists households with incomes under $45,000.
Senate Democrats want to raise the earned income tax credit from 7 percent now to 20 percent at a cost of about $55 million annually.
Both Sen. Bolkcom and the Register fail to mention the massive fraud rate of the earned income tax credit. The Treasury Inspector General for Tax Administration this month reported:
The IRS estimates that 21 to 25 percent of EITC payments were issued improperly in Fiscal Year 2012. The dollar value of these improper payments was estimated to be between $11.6 billion and $13.6 billion.
Applying that fraud percentage to Sen. Bolkcom’s proposal will result in $11.5 million to $13.75 million in “improper” — mostly fraudulent — Iowa EITC payments. Remember that the EITC is a “refundable” credit, which means that if it exceeds your tax, the state writes you a check. It’s a spending program, a welfare program.
I would say it takes a special kind of legislator to demand $55 million in spending knowing that it’s an appropriation of at least $11 million to thieves, but really it just takes a run-of-the-mill legislator spending your money instead of his own.
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.
Only somebody who doesn’t prepare tax returns would say something this stupid. The TaxProf links to this from a University of Wisconsin academic:
This Article analyzes the ongoing structural transformation by observing and explaining the advantages that accrue from pursuing social and regulatory objectives through the tax code. In particular, this Article identifies a number of legislative and normative advantages that tax-embedded policies offer.
The tax law has one important job: to raise revenue. If this author had ever done business tax returns for a living, she would know what a challenge it is to simply determine taxable income. If she had ever helped a client through an IRS audit, she would know how difficult it is for the agents to simply work through the accounting, let alone run a bunch of social programs on the side. The author should be made to spend three years working at a storefront tax prep business to learn the chaos her views cause outside the faculty lounge.
Baucus’s shift to the right in the last few months (which people had assumed was positioning for the election next year) has antagonized more than just progressives. It seems his Senate colleagues are growing frustrated as well.
And that will severely hamper the chances that a major tax reform bill will make it to the Senate floor.
The tax, which took effect Jan. 1, applies to the “net investment income” of married joint filers who have more than $250,000 of income (or $200,000 for singles). Only investment income—such as dividends, interest and capital gains—above the thresholds is taxed. The rate is a flat 3.8% in addition to other taxes owed.
“Affluent investors who ignore this tax will be in for a total shock next April 15,” says David Lifson, a certified public accountant specializing in tax at Crowe Horwath in New York. Such income is typically not subject to withholding, and people won’t be factoring it into their estimated taxes. Lower-bracket taxpayers who receive a windfall large enough to owe the tax will also be in for a surprise.
This tax is shockingly complex, and it will surprise a lot of taxpayers next April.
Feds sue over Des Moines utility tax (Des Moines Register). Des Moines lost a long legal battle over its “utility tax” on electric bills. Now the federal government is after the city:
Federal prosecutors acting on behalf of the U.S. Department of Veteran Affairs sued the city of Des Moines and MidAmerican Energy Co. on Friday, alleging that the city’s longstanding surcharge on gas and electric customers in Des Moines constitutes an illegal tax when levied against Uncle Sam.
When a taxpayer wins a jackpot, the casino gives them the W-2G for the win at that time. It’s up to the taxpayer to keep the W-2G safe and bring it into me, or their preparer, when their taxes are done. What happens to the W-2G? It gets shoved into a purse or pocket, thrown in the glove compartment or on the desk at home or thrown in the trash by accident.
I support keeping the deduction for acquisition debt mortgage interest on one’s primary personal residence, and the deduction for real estate taxes on the same primary personal residence, not to encourage home ownership, but as a form of “geographical equalization”.
In other words, he wants to help out people who live in places where houses cost more. I think that’s misguided, as it also encourages people who live in low-cost locales like Des Moines to build palaces with help from the taxman.
Russ Fox, 1700 Miles and a 7% Difference. Joe Mauer of the Minnesota Twins tries to avoid Minnesota residency for low-tax Florida. It went about as well as this season will for the Florida Marlins (or the Twins, for that matter).
Paul Neiffer, Don’t Forget Your Retirement Plan. “I was talking with a new farm client the other day about his estate plan and what struck me the most was not how much farm land value he had accumulated but rather the amount he had tucked away into his retirement plans.”
Get some competent advice about how to handle the past years. If the advice is OVDI, then stand up and walk away, swearing the mightiest oaths that a drunken sailor could swear.
Perhaps the Offshore Voluntary Disclosure Initiative has somehow failed to gain the confidence of the tax bar?
Few of the commentators I’ve read have asked themselves what happens to the money after the software has collected the money. Do the sales tax fairies simply whisk it off to the nice folks at the state tax department?
Sadly, no. Rather, as an SBA guidebook for small businesses points out, you have to file a tax return with each and every locality for which you have collected tax. The bill streamlines this a bit, but you’ve still got to keep 50 states’ worth of records and file 40-odd states worth of returns.
…
For Amazon—the actual target of these laws—this is trivial. Its staff of crack accountants can probably roll these things out before their Monday-morning coffee break. For a small vendor, however, that’s a whole lot of paperwork.
Speaking as a cracked accountant, I am sure that while Amazon can handle its sales tax burden, it is far from trivial. It takes an expensive staff and a good organization with excellent systems in place to do reasonably well — and I expect they still get inexplicable notices from states quibbling over obscure tax issues. Good sales tax compliance functions are expensive, affordable only in a large organization. For some guy selling handmade N-scale boxcars out of his basement, it could be painfully expensive, if not ruinously so. Like any expanded regulation, requiring online sellers to collect Internet sales taxes inherently favors the big.
According to the Streamlined Sales Tax agreement, the definition of candy is a “preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. ‘Candy’ shall not include any preparation containing flour and shall require no refrigeration.”
So pursuant to that definition, a sweet with flour is not candy, while a sweet without flour is. For example, a Hershey’s chocolate bar is candy, while a Twix bar is not. Ditto for Kit Kat bars. Makes sense, right? But what about Twizzlers? Seems a solid bet that licorice is candy, but it isn’t because flour is a top ingredient.
In the past when a client got too big a refund I would scold him/her and say that he/she was making an interest free loan to the government. While this is still true, I do not scold any more, considering the pitiful amount of interest being paid on savings account today.
I’m not a big fan of excess withholding, but it’s a lot easier for a client to deal with a refund that’s too big than a tax bill they can’t pay.
Increasingly, I hear stories of relatively wealthy people contemplating moving to states that do not tax their assets upon death. These are not people with private jets or suites at Yankee Stadium. They are just people who had the good fortune to do better financially than most. Do New Jersey or Maryland or the other states with pretty onerous estate taxes really want their elderly wealthy to move?
While motivations for moving are complicated, taxes are one of them. Why do the same people who want higher cigarette taxes to discourage smoking believe that higher income and estate taxes don’t also affect behavior?
Winston Churchill said that Americans can be counted on to do the right thing, after we have exhausted all other possibilities. He might have added that we usually start with the least direct and most complex approach. So it is with the energy tax policy expressed in President Obama’s FY 2014 budget.
I like this sentence: “By their nature, tax credits add complexity to the law and often reward behavior that would occur even without the credits.”
So far two clients have contacted me to report an issue – one with a 2011 refund andone with a 2012 refund. In both cases the refund was not directly deposited to the requested account. Instead it was applied to the subsequent year’s estimated tax. It was as if the taxpayer, or I, had entered the full amount of the refund on Line 75, although we clearly did not.
This isn’t a problem I have seen. Robert famously doesn’t e-file his returns. I wonder if it’s a simple keypunch error at the service center.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
New U.K. film tax credit indictments. It appears that the Brits are slowly moving towards the Iowa approach of jailing filmmakers instead of subsidizing them. 
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
