It’s time to return to the ancestral homestead for the holiday traditions of family, food and dysfunction, so it will be quiet around here for the next few days.
Have a great Thanksgiving!
Kyle Orton’s old lawyer fails to find the Tax Fairy, departs the tax business. From a Department of Justice press release:
A federal court has permanently barred Gary J. Stern from promoting tax fraud schemes and from preparing related tax returns, the Justice Department announced today. The civil injunction order, to which Stern consented without admitting the allegations against him, was entered by Judge Robert Gettleman of the U.S. District Court for the Northern District of Illinois. The order permanently bars Stern from preparing various types of tax returns for individuals, estates and trusts, partnerships or corporations (IRS Forms 1040, 1041, 1065, and 1120), among others.
According to the complaint, Stern designed at least three tax-fraud schemes that helped hundreds of customers falsely claim over $16 million in improper tax credits and avoid paying income tax on at least $3.4 million. Stern allegedly promoted the schemes to customers, colleagues, and business associates. The complaint alleges that his customers included lawyers, entrepreneurs and professional football players, and some of the latter, including NFL quarterback Kyle Orton, have sued Stern in connection with the tax scheme, alleging fraud, breach of fiduciary duty and professional malpractice.
Mr. Stern seems to have led his clients on a merry chase after the Tax Fairy, the legendary sprite who can wave her wand and make your taxes disappear. Kyle Orton is a graduate of Southeast Polk High School near Des Moines, where the truth about the Tax Fairy apparently was not in the syllabus.
Related: Jack Townsend, Chicago Lawyer Enjoined From Promoting Fraudulent Tax Schemes
The Internal Revenue Service sent 655 tax refunds to a single address in Kaunas, Lithuania — failing to recognize that the refunds were likely part of an identity theft scheme. Another 343 tax refunds went to a single address in Shanghai, China.
Thousands more potentially fraudulent refunds — totaling millions of dollars — went to places in Bulgaria, Ireland and Canada in 2011.
In all, a report from the Treasury Inspector General for Tax Administration today found 1.5 million potentially fraudulent tax returns that went undetected by the IRS, costing taxpayers $3.2 billion.
When your controls don’t notice something like that, you have a lot more urgent problems than regulating preparers. Yet Congress and the Administration think the IRS is ready to take on overseeing your health insurance purchases. What could go wrong?
Tony Nitti is moved to offer the IRS a proposition:
REQUEST FOR URGENT BUSINESS RELATIONSHIP
FIRST, I MUST SOLICIT YOUR STRICTEST CONFIDENCE IN THIS TRANSACTION. THIS IS BY VIRTUE OF ITS NATURE AS BEING UTTERLY CONFIDENTIAL AND ‘TOP SECRET’.
Democrats seeking to raise revenue in ongoing budget talks have circulated a list of tax preferences they would like to see eliminated, including a provision that allows some wealthy individuals to avoid large payroll taxes, the carried interest preference, and the tax break for expenses businesses incur when moving operations overseas.
The “provision that allows some wealthy individuals to avoid large payroll taxes” is called Subchapter S. Form 1120-S K-1 income has never been subject to payroll or self-employment tax. This bothers the congresscritters (my emphasis):
Commonly known as the “Newt Gingrich/John Edwards” loophole, it is most often used by owners of Subchapter S corporations to avoid the 3.9% Medicare tax on earnings, which costs taxpayers hundreds of millions of dollars every year. Many S corporation shareholders receive both wages from the S corporation and a share of the S corporation’s profits, but they pay payroll tax only on their wages.
“Costs” taxpayers? From my point of view, and from that of my S corporation clients, it saves taxpayers hundreds of millions of dollars every year — but keeps it out of the hands of grasping politicians, so it’s perceived as a bad thing, by grasping politicians.
The versions of this “loophole closer” proposed in the past have been lame. When all they have to offer on tax policy is warmed over lameness like these, they aren’t serious.
The IRS can act in ways that violate both the letter and the intent of the tax law. Where such violations either provide benefits to select groups of taxpayers without directly harming others, or where the harm to taxpayers is de minimis, nobody has the ability or incentive to challenge the IRS and require it to enforce the tax law as written.
Congress could control the IRS’s abuse of the tax law. Using insights from the literature of administrative oversight, this Article proposes that Congress provide standing on third parties to challenge IRS actions. If properly designed and implemented, such “fire-alarm oversight” would permit oversight at a significantly lower cost than creating another oversight board. At the same time, it would be more effective at finding and responding to IRS abuse of the tax system and would generally preserve the IRS’s administrative discretion in deciding how to enforce the tax law.
Right now the IRS — and by extension the administration in power — can pick and choose what parts of the law it wants to apply. For example, the current administration has chosen to allow tax credits for participants in federal insurance exchanges, which the law does not authorize, while unilaterally delaying the employer insurance mandate but not the individual mandate. Somebody should be able to challenge this sort of fiat government.
More on the shutdown of Instant Tax Service, a story we covered yesterday:
Department of Justice press release: Federal Court in Ohio Shuts Down Nation’s Fourth-Largest Tax-Preparation Firm and Bars CEO from Tax-Preparation Business
Peter Reilly, Ninth Circuit Rules Against Irwin Schiff Sentence Appeal:
Irwin Schiff is probably one of the more famous alternate tax thinkers. His seminal work “How Anyone Can Stop Paying Income Taxes” is available in hardcover on Amazon for one cent.
Mr. Schiff appealed his sentence on tax crimes on the basis that his attorney failed to raise a “bipolar disorder” defense and what an attorney I know calls the “good faith fraud” defense — the Cheek argument that you really thought the wacky stuff you were saying is true. Peter wisely notes:
The problem with the Cheek defense is that you have to be smart to raise it, but if you show that you are too smart, then it does not work.
Its a fine line — smart enough to spend “thousands of hours” researching the tax law, but not smart enough to avoid a massive misunderstanding of it.
Jana Luttenegger, IRS Change to Use-Or-Lose Rule for FSA Accounts (Davis Brown Tax Law Blog): “New IRS rules permit employers to allow participants in a health Flexible Spending Arrangement (FSA) to carry over unused amounts up to $500 from one plan year to the next.”
Paul Neiffer, Trusts Get Hit with New 3.8% Tax too. And hard.
Brian Strahle, IGNORANCE MAY NOT BE BLISS WHEN IT COMES TO ‘ZAPPERS’ These are software apps designed to hide point-of-sale receipts from the taxman.
Phil Hodgen’s Exit Tax Book: Chapter 9 – Estate and Gift Tax for the Covered Expatriate
Catch your Friday Buzz with Robert D. Flach!
Leslie Book, TIGTA Report on VITA Errors (Procedurally Taxing)
Howard Gleckman, Can Expiring Tax Provisions Save the Budget Talks? (TaxVox). ”Sadly, it is hard to see how.”
Not strictly tax-related, but good reading anyway: How to Put the Brakes on Consumers’ Debt. (Megan McArdle). Megan points out the wisdom of spending less than you take in, in preference to trying to get the government to cover your shortfalls.
News you can use: 3 ways to screw up your next website (Josh Larson at IowaBiz.com)
News from the Profession: Failed PwC Auditor Finds Success in Burning Bridges With This Ridiculous Farewell Email (Going Concern)
Quick thinking. From The Des Moines Register:
A Des Moines man awoke to find a stranger in his living room Thursday afternoon, police said. When the victim confronted the burglar, the suspect reportedly offered to mow the victim’s lawn for $5.
Guy needs to work on his pricing model.
Yesterday a federal judge in Ohio slapped ITS and its owner with an order “permanently enjoining” them “FROM OPERATING, OR BEING INVOLVED WITH IN ANY WAY, ANY BUSINESS RELATING IN ANY WAY TO PREPARATION OF TAX RETURNS.” Lest you think I’m shouting, the judge was the one who went all-caps.
And reading the 233-page ruling, you can understand why the judge might raise his voice. The opinion outlines dozens of outrageous alleged acts by the folks at ITS that would make a normal practitioner resign and contact counsel if they saw them at work. Just a few, er, instances… (footnotes and citations omitted) from the opinion:
On the same day the company deposited the $32,000 in forged customer checks into its payroll account, the company immediately used $14,000 from the forged checks (leaving $18,000 in the company’s payroll account). One week later, the company had used another $12,000 from the forged checks (leaving only $6,650 in the account).
When customers first approached Defendants about the fraud, Defendants made up stories to cover-up the forgeries. Defendants told Taneika Grady that the forged checks were the result of a rogue employee, whom ITS Financial fired due to the misconduct. Only Ogbazion [the owner of ITS], who devised and ordered this check fraud, had motive to ensure that Defendants lied to Grady. Ogbazion also lied to Davis after she discovered the forgeries, telling her that ITS CFO Pete Samborsky was taking care of it
The judge says ITS made a practice of filing “stub returns,” using only pay stubs rather than W-2s, to claim refunds for clients. As the opinion notes, you can only do this if the employer fails to issue a W-2, and only after you have contacted the employer asking for one. No problem!
In November 2008, ITS Financial held a paystub training session for Instant Tax Service franchisees and area developers. ITS called the training session the “Stub
The purpose of ITS Financial’s “Stub Shop” training was to instruct Instant Tax Service franchisees and area developers how to both prepare as well as transmit tax returns to the IRS based on paystubs, instead of Forms W-2. Attendees at the Stub Shop were also instructed how to avoid detection by the IRS.
But can’t you get in trouble for that?
During the “Stub Shop” training, David Franklin, an Instant Tax Service franchisee from Indianapolis and Ogbazion’s close friend, instructed attendees that any Instant Tax Service store caught paystub filing might have its EFIN suspended during the tax filing season by the IRS or by the bank providing ITS Financial loan products. Franklin instructed attendees that they should have backup EFINs that, with ITS Financial’s assistance, can be “turn[ed] on” to replace suspended EFINs and allow the store to keep filing tax returns electronically.
In case you’re wondering, that’s not typical in the tax business.
The opinion said that ITS
preyed on primarily served low income individuals, adding that “Instant Tax Service specifically targets African-American single mothers.”
So Fesum Ogbazion is out of the tax-prep business, absent a successful appeal — which seems unlikely. Given the behavior outlined in the injunction opinion, criminal charges may follow. Unfortunately the financial chaos inflicted on ITS customers will linger.
Well, that’s reassuring. Tax Analysts reports ($link) that David Kirk, an IRS official involved in drafting the final rules on the 3.8% Obamacare “Net Investment Income Tax” that took effect January 1, says the rules are still “in flux” with filing season only two months away:
As for additional NII tax guidance, Kirk said the final regs will contain “overflow valves, breakers” that will allow the IRS to issue subregulatory guidance to address problems that arise, given that opening a new regulatory project “is a very painful and long process.”
“We’re just going to have to roll this out. We’re going to see how these rules work . . . and there’s always fine-tuning,” Kirk said.
They’ve had over three years to do this, and now “we’re going to see how these rules work”? Sounds like another recent Obamacare roll-out. It makes me really excited about the upcoming filing season.
Roberton Williams, How Big is the Penalty if You Don’t Get Health Insurance? (TaxVox)
The basic penalty is $95 in 2014—if you’re unmarried with no dependents and your income is less than $19,500. If your income is higher, you’ll owe more: 1 percent of the amount by which your income exceeds the sum of a single person’s personal exemption and standard deduction in the federal income tax. That’s $10,000 in 2013. But be warned: Income equals adjusted gross income (AGI—that number on the last line on page 1 of your tax return) plus any tax-exempt interest and excluded income earned abroad. If you make $30,000, your penalty will be $200.
Still with me? Good, because it is about to get more confusing.
If you like the penalty you have, you can keep the penalty you have. Until next year, anyway.
Christopher Bergin, ACA + IRS = Perfect Storm (Tax Analysts Blog)
And what lies ahead? The perfect storm: The IRS and the ACA brought together by a hapless Congress that tasked the nation’s tax collector with administering portions of our new healthcare system.
I can see a day coming when a taxpayer gets a letter from her insurance provider canceling her healthcare coverage and then a letter from the IRS informing her that she owes additional taxes under the ACA. Apparently our government thinks that two nightmare bureaucracies must be better for us than one.
You think this is about “us,” friend?
Ron Isley is a lot better at music than he is at taxes. He has served time on federal tax charges, and yesterday he lost a Tax Court bid to get his back taxes reduced under an “offer of compromise” he agreed to, but which the IRS rejected before it became final. The ruling turns on a lot of technicalities involving the rules for accepting compromises in criminal tax cases.
The Tax Court decision wasn’t a total loss, in that they are allowing Mr. Isley to argue against tax levies and to pursue a compromise of his 2009 and 2010 taxes.
Cite: Isley, 141 TC No. 11.
Prior coverage here.
Jason Dinesen, Life After DOMA: Watch Your Withholding
Annette Nellen, Many tax questions on same-sex federal tax filings
William Perez, The Additional Medicare Tax, Part 4
Tony Nitti, On Eve Of Twitter IPO, Misguided Senators (Again) Attack Tax Deduction For Stock Option Compensation Exercising stock options convert corporation income taxed at 35% to individual income taxed at 40.5%, plus payroll taxes. And yet the congresscritters act like this is some kind of loophole.
Russ Fox congratulates The Real Winners of the 2013 World Series of Poker. It’s not the guys with the cards in their hands.
Now there’s a business plan! BlackBerry Pins Recovery Hopes On Rumored $1 Billion In Tax Refunds (TaxGrrrl)
Wouldn’t you? Colorado Voters Reject $1 Billion Income Tax Increase (Elizabeth Malm, Tax Policy Blog).
But other taxes… Coloradans agree to a high tax to get high (Kay Bell)
Tax Justice Blog, Tax Policy Roundup for the 2013 Election
Phil Hodgen’s Exit Tax Book, Chapter 8 – Taxation of Nongrantor Trust Interests
The Critical Question. Is There One ‘Right’ Apportionment Formula? (Cara Griffith, Tax Analysts Blog):
It could almost be a case in which one state adopted it on the grounds that it would create jobs and increase investment in the state. Then other states followed suit, not because single-sales-factor apportionment produced more accurate results, but because it was perceived as making a state’s tax laws more competitive or business friendly. But while single-sales-factor apportionment may benefit some businesses, it is far from being universally beneficial for taxpayers. In the end, if state officials are truly concerned with making their state more attractive to businesses, perhaps they should consider retaining — or returning to — the three-factor apportionment method and focus on a less burdensome corporate tax system overall.
Iowa was the first state to adopt single-factor apportionment. It applies to the highest tax rate in the nation, helping make Iowa’s corporation tax both onerous and useless. A repeal of the corporation income tax would be the best way of making the corporation tax “less burdensome.”
Because they may one day make money? Why Twitter May Have to Pay Income Taxes One Day (Victor Fleisher, via The TaxProf)
The IRS has announced the inflation adjustments to retirement plans for 2014. Some highlights:
- Maximum contributions to 401(k) and 403(b) plans stays at $17,500. Taxpayers who are 50 years old by the end of 2014 will be able to contribute and additional $5,500, for a combined maximum of $23,000.
The maximum 2014 IRA contriubtion remains at $5,500, plus the additional $1,000 “catch-up” for taxpayers who are 50 or older by the end of 2014.
The maximum contribution to defined contribution plans increases from $51,000 to $52,000.
The annual defined benefit plan annual benefit limit increases from $205,000 to $210,000.
More details are available from the IRS news release.
Related: William Perez, Retirement Plan Contribution Limits for 2014
The Social Security Administration has announced that the maximum earnings subject to the 6.2% FICA tax rises to $117,000 for 2014. It has been $113,700 for 2013. That same cap applies to the 12.4% retirement portion of self-employment tax.
The maximum FICA withholding for 2013 will be $7,254.00 for 2014, up from the 2013 maximum of $7049.40.
The 2.9% medicare tax, split between employees and employers, has no wage or self-employment income cap. There is also no maximum for the .9% additional medicare tax under Obamacare that applies when adjusted gross income exceeds $250,000 for joint filers, $200,000 for single filers, or $125,000 on married-filing-separate returns
The Internal Revenue Code of 1986 celebrates its 27th birthday today.
The authors of the Tax Reform Act of 1986 felt so good about their work amending the Internal Revenue Code of 1954 that they gave it a new name. And it had some wonderful features compared to what we have now:
- Top marginal rate of 28%, with no stupid phase-outs of itemized deductions or exemptions.
- No capital gain-ordinary income rate differential – tolerable with low marginal rates, and a great simplifier of tax planning.
- It eliminated a whole bunch of complexity, including investment tax credits, and it simplified the life of preparers everywhere by making miscellaneous itemized deductions subject to a 2% of AGI floor, saving us the pain of telling clients they can’t deduct the Swimsuit Issue as an investment expense.
Sure, it had more complexity than I’d care for. The complicated passive loss rules came in then, on top of existing complicated at-risk rules. Phase-outs of the passive loss rules imposed hidden marginal tax brackets that helped inspire many awful imitations, like the phase-outs reenacted this year of itemized deductions and personal exemptions. The 1986 Act brought us inventory capitalization rules, and it left in place the alternative minimum tax. But at the time, it looked like a good start at much better tax policy. Now it looks like a high-water mark.
The skeptical accounting profession rarely allows worker training, brand-building, software, and business restructuring to be capitalized, but in so doing it is unwittingly keeping the most important sources of value out of view of managers and stockholders.
Actually, smart managers and investors know about these things, but financial statements aren’t very good at measuring them.
Tax Court leaps back to work, releasing seven new cases on its first day back after the shutdown. They include a Judge Holmes case illustrating how good news on the estate tax return can mean bad news on a later income tax return; that case will get its own post this week.
TaxGrrrl, Losing Your Identity In Five Easy Steps. Step One: Go To The Doctor. ”And it can all start out with something as simple as handing out your Social Security number at the doctor’s office”
Jason Dinesen, Incorporate Your Life? Not So Fast ”…simply having a business entity DOES NOT make everything in your life tax deductible.”
William Perez, Payment Plan Options. “The IRS will automatically grant a payment plan if your balance owed is under $50,000 and the monthly payments will fully pay the outstanding balance in 72 months or less.”
TaxProf, The IRS Scandal, Day 166
Jack Townsend, Ex Top UBS Banker Arrested; Likely to be Extradited
Not only is it the birthday of The Code, it’s Buzz Day at Robert D. Flach’s place!
The Critical Question (Really): Is Obamacare in a Death Spiral? (Megan McArdle): “Another week has passed, which apparently means that it’s time for another terrifying article from Sharon LaFraniere, Ian Austen and Robert Pear on the federal health-care exchanges.”
Voss said Monday that he tried more than 100 times before finally being able to sign onto healthcare.gov, type in his personal information, compare insurance plans, and purchase a policy.
I wonder if Amazon.com ever tried that?
Speaking of train wrecks, McCoy gives up on train funds (Des Moines Register). An Iowa legislator gives up on spending $310 million to build a money-losing, slower and more expensive competitor to the Megabus. Now he can concentrate on getting that downtown zeppelin port that is so critical to the economic future of Des Moines.
The Cougars of Madison County. No, Francesca Johnson isn’t back on the prowl.
Hey, I said I’m sorry! That you want to put me in jail. A New Mexico man convicted of tax crimes and of collecting fraudulent farm payments maybe should have left well enough alone, if you can think a five-year prison sentence is well-enough. But Billy Melot appealed, with potentially dire consequences. DailyJournal.net reports:
A southern New Mexico farmer and businessman could face more time in prison because a federal appeals court on Monday tossed out his five-year sentence for failing to pay more than $25 million in federal taxes and fraudulently collecting farm subsidies.
However, the court said a federal district court judge erred in calculating Melot’s sentence by concluding that he had accepted responsibility for his crimes. Judges have the discretion of imposing a less severe sentence when they make that determination.
Under federal sentencing guidelines, the court said, Melot had potentially faced more than 20 years in prison.
The appeals court opinion noted that if Mr. Melot accepted responsibility, he had a funny way of showing it:
Since his conviction, Melot has tenaciously opposed the Government’s efforts to collect the restitution he was ordered to pay by the district court, attempting to thwart the collection of more than $18 million in outstanding income tax assessments and more than $6.5 million in outstanding excise tax assessments. In 2012, a federal magistrate judge issued a certification of criminal contempt against him in the ancillary collection proceedings, finding he “actively and intentionally participated in a scheme to fraudulently create a third party interest in his properties with the intention of defrauding the Court, sabotaging the orderly administration of justice and delaying the United States’ lawful efforts to recover the judgment as ordered by the Court.”
Mr. Melot is 61 years old. If his sentence is stretched to 20 years, he won’t have much time to enjoy any money he keeps away from the feds.
Tomorrow is the 27th Anniversary of the Internal Revenue Code of 1986. I assume many of you will leave work early today to prepare for the festivities.
Things may not be going well for Obamacare when the Des Moines Register finds itself coping with the concept of unintended consequences, in Few small businesses sign up for tax credits:
The Affordable Care Act offers a tax credit to entice more small businesses to offer health insurance. But few small-business owners have taken advantage of it so far. And the law could have the unintended effect of prompting small businesses to drop coverage, which would make their employees eligible for individual subsidies on the new health insurance exchanges, insurance experts and business owners told The Des Moines Register.
The article gives a surprisingly realistic view of how Obamacare looks to employers, and why the much-touted small employer tax credit doesn’t work for many employers:
Jesse Patton, a West Des Moines insurance broker and president-elect of the Iowa Association of Health Underwriters, said the tax credit’s confusing rules narrow its appeal.
The credit is available for employers that have fewer than 25 employees making an average of less than $50,000.
“But you start to get a reduction in that credit if you’re over 10 employees and over $25,000 income,” he said.
Also, business owners can’t take the credit for any family members, and many small firms include relatives. Patton’s eight employees include himself, his wife, his son and his daughter-in-law.
“That’s typical for a small business,” he said.
And jumping through the hoops isn’t free:
“Unfortunately, when everybody gets through all of that formula, which is complicated, and pay their accountant $600 to do it, they’d be better off to just take the normal tax deduction versus the credit,” Patton said.
When even the Des Moines Register is starting to get the point about the unintended consequences of Obamacare, it’s in trouble.
Megan McArdle has an excellent summary of the current state of the Affordable Care Act in Four Things We Think We Know About Obamacare. It’s worth reading the whole thing, but this tax nugget is important:
The penalty for being uninsured next year is $95. Again, this is partly true. In fact, the penalty for being uninsured next year is $95 or 1 percent of your income, whichever is higher. So if you make $75,000 a year and you decide to go without insurance, the penalty will be $750. There are a number of things you can do to avoid having to pay it, from deliberately getting your utilities shut off to under-withholding taxes from your paycheck so that they don’t have a refund from which to take out the penalty. But that number is what will go on the books at the Internal Revenue Service, not the $95 you’ve probably heard.
If it remains somewhere between difficult and impossible to buy through the exchanges, this poses an obvious problem.
Joseph Henchman, Illinois Supreme Court Strikes Down “Amazon Tax” (Tax Policy Blog):
Most of the legal challenges to these laws have focused on whether the state power exceeds constitutional limits under the Commerce Clause, but the Illinois Supreme Court focused on this disparity between Internet advertisers and traditional advertisers. Ultimately, the court concluded that because the law requires Internet-based performance marketers to collect tax, but does not require that of traditional performance marketers, it is a discriminatory tax on Internet-based commerce in violation of the federal Internet Tax Freedom Act…
Kay Bell, IRS is back and asks for patience as it reopens its doors. Hey, IRS, do unto others…
Jana Luttenegger, IRS Back to Work, What to Expect (Davis Brown Tax Law Blog):
After 16 days of not opening mail, not processing returns, and not answering phone calls, the IRS is expecting it will take some time to get back to “normal” operations. In fact, the IRS issued a statement urging taxpayers with non-urgent matters to wait to call the IRS. I can only imagine what the call traffic will be like after a 16-day shutdown.
Not to mention whether the answers you get when you call will be any more accurate.
Howard Gleckman, One Modest Path to a No-Drama Budget Deal (TaxVox)
Jack Townsend, Swiss Bank Frey to Close
Brian Mahany, FATCA, FBAR and Opt Outs
Leslie Book, Larry Gibbs on Loving v IRS. Shockingly, a former IRS commissioner thinks IRS commissioners should have all the power they want.
One of the more humorous (to me) aspects of the Loving case was hearing the IRS argue that it has no means of disciplining rogue tax preparers. That’s just not true. If I deliberately prepare a bad return, I can be sanctioned and penalized. If I prepare a series of bad returns, the Department of Justice can attempt to have me barred from preparing federal tax returns. As noted at the end of one of the two press releases I’m linking to in this article, “In the past decade, the Justice Department’s Tax Division has obtained more than 500 injunctions to stop tax fraud promoters and tax return preparers.”
They just want to be able to do it by themselves without any of that messy due process stuff.
Peter Reilly, Was JD Salinger Facing A Major Estate Tax Problem ?
TaxGrrrl, How Twitter Hopes To Reduce Its Tax Bill (In 140 Characters Or Less)
The cobbler’s children always go barefoot. Attorney Who Claimed Tax Expertise Sentenced to 20 Months in Jail for Understating His Income (TaxProf)
The Critical Question: Would You Prepare Your Home For A Disaster If It Were Tax Deductible? (Tony Nitti)
The sacred side of earned income tax credit fraud. A Washington tax preparer found an unusual way to get in touch with the spirit world, reports seattlepi.com. Cleo Reed is scheduled to be sentenced today for preparing fraudulent returns claiming imaginary earned income credits:
Writing the court, Assistant U.S. Attorney Arlen Storm noted Reed had many of his clients claim income for “household help” while claiming to be self-employed. Reed did so for two undercover IRS agents and three fake clients.
During their encounter, Reed explained he pays his recruiters $500 for each young woman with a new child they bring to him, Storm told the court. Agents identified three recruiters who’d brought Reed dozens of clients.
Investigators later determined Reed filed at least 1,305 fraudulent returns in three years, and that the IRS paid out $4.3 million on those claims, Storm continued.
Refundable tax credits are a magnet for fraud, but they are also a path to holiness, it seems:
Writing the court, Reed has denied paying others to recruit clients and claimed he operated in “an ethical manner.” He went on to claim he was only helping his clients “achieve the American dream.”
“I had a spiritual calling to give aid, support, and guidance to the underemployed, disabled, and veterans of this great land,” Reed said in his letter to the court.
Somehow I think this is one religious belief system that the Bureau of Prisons won’t feel compelled to accommodate.
The shutdown is over! The Republic is saved! That means the IRS can resume sending nonsensical notices and attempting to run the small players out of the tax-prep business. Audits can resume. Didn’t you miss them?
It’s all good for the Tax Update, as the Tax Court will resume issuing cases and the IRS will issue new guidance — the grist for this mill. It will be interesting if we see large batches of cases issued today and early next week, or if the Tax Court really stopped altogether.
Howard Gleckman, The Un-Default: Congress Has Become A Seinfeld Episode. That explains why the show was cancelled. (TaxVox)
Linda Beale, Senate passes debt increase/shutdown ending bill
Paul Neiffer, Watch Out for Distributions from Coops:
A qualified distribution is treated as a deduction on the cooperative return and the producer picks up the income amount. On the contrary, the cooperative does not get a tax deduction when a non-qualified distribution is given and the producer does not pay tax on that amount.
Extending the dividends-paid deduction for co-ops to all dividends from all corporations is an obvious method of tax reform that nobody but me seems to support.
Jack Townsend, Supreme Court Denies Certiorari in Coplan
Kyle Pomerleau, Obamacare’s Shaky Funding Sources (Tax Policy Blog)
These include a new 3.8 percent “unearned income Medicare contribution” (UIMC) and a new tax on “Cadillac” health insurance plans. The income thresholds for the UIMC are not indexed for inflation, so under law most workers would eventually be subject to the tax-over 80 percent of workers within 75 years, according to the Medicare trustees.”
Due to the fact that the income threshold for the new Medicare tax on unearned income will remain static and incomes will continue to rise, more and more people will eventually be hit by this tax. It will no longer be a tax just on the rich.
You can’t fund a mass welfare benefit with a class tax.
There’s a new Cavalcade of Risk up at Terms + Conditions! The Cavalcade is a roundup of insurance and risk management posts. As you might expect, there’s lots of Obamacare there. Meanwhile Insureblog has been all over this, including Adventures On The Marketplace, on one man’s attempt to enroll.
Oh, boy. Happy Centennial, Income Tax! (Benjamin J. Gehlhausen, Tax Policy Blog): “There is nothing simple about a work that approaches 74,000 pages and currently requires 6 billion hours of work by professionals to prepare return forms and comply with tax laws.”
The Critical Question: Are States Addicted to Revenue from Unclaimed Property? (Cara Griffith, Tax Analysts Blog). “According to the COST score card, revenue from unclaimed property is the state’s third largest revenue source, generating 16 percent of the general revenue fund in fiscal 2013.” So they have to modify the old joke about the economist explaining why he left a $20 bill on the ground. The old punchline is “if that really were money, somebody would have already picked it up.” The new version is “If it really were lost, the State would have it already.”
News you can use. When Liberals Preach Fairness, Hold On to Your Wallet (David Brunori, Tax Analysts Blog) ”I am sure those hardworking, middle-class wage earners who will pay more are very happy that the bored liberal billionaires are looking out for them.”
TaxProf, Freakonomics: Is Charitable Giving Affected by the Attractiveness of Tax Preparers? Come on. If that were true, all of my clients would have contribution carryforwards.
News from the profession. Accounting Career Conundrums: Aspiring CPA Concerned Background Check Will Uncover Revealing Past (Going Concern). It’s about a former stripper. I suspect she already knows more CPA firm hiring partners than she realizes.
Tomorrow’s is it. Extended 1040s are due tomorrow. There are no further extensions available. Get ‘er done! As Russ Fox says, It’s One Minute Before Midnight…. Russ has some excellent advice for last minute filers.
Some folks have, well, unorthodox ideas of how the tax law works. Destry James Marcotte of Illinois, for example. Mr. Marcotte was indicted on charges of claiming improper tax refunds. As part of his defense he filed an “AFFIDAVIT” that testifies to his approach to taxes. It starts off:
There are 14 pages of this sort of thing, including:
The Pope Francis thing is an innovation in the tax law, but too much of one for the U.S. District Court of Illinois, where Mr. Marcotte was found guilty of tax charges.
The Moral: Mr. Marcotte went through a lot of work here. All in all, it would have been easier to file his returns correctly. No matter how much crazy he put into his tax filings, it wasn’t enough. He’s likely to get some time in federal prison to ponder his next tax planning moves.
Lyman Stone, Taxes and Economic Outcomes: Indiana and Wyoming Edition (Tax Policy Blog)
At least for this sample, when we look at apples-to-apples comparisons of similar states, taxes matter. They aren’t the only variable, something we make clear in the Index report, but they are a significant variable that legislators can control directly.
Taxes may not be everything, but it defies everything we know about economics to say they are nothing.
TaxProf, The IRS Scandal, Day 158
Jack Townsend, HSBC Depositor Convicted. Bank secrecy isn’t what it once was.
Brian Mahany, It’s Too Late To Close Your Foreign Account – FATCA Post
Stephen Olsen, Procedure Roundup for 10/11/2013 (Procedurally Taxing)
Robert D. Flach has a special Monday Edition Buzz.
The Critical Question: Judge Orders Man To Stay Dead Despite His Insistence He’s Alive: Could You Be Next? (TaxGrrrl) and Jim Maule, Do Dead People Pay Taxes?
It’s the last weekend of 1040 season! Some folks think that happened six months ago, but many of us know that extension season is when you are up against it. Extended 1040s are due on Tuesday, and anything filed after that is late. Only people out of the country on a long-term basis might have any more time.
So what’s at stake? Is it really such a big deal to file your 1040 late? Especially if you have a refund?
First, let’s take a look at the penalties for late filing: five percent of any tax owed, up to 25% of the balance due, and interest on the unpaid balances.
But there are other drawbacks. You never start the statute of limitations if you don’t file. That means the IRS has pretty much forever to look at the year you haven’t filed for.
It doesn’t work that way if you have refunds coming. From IRS Publication 17:
Time for filing a claim for refund. Generally, you must file your claim for a credit or refund within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date (even if the due date was a Saturday, Sunday, or legal holiday). These time periods are suspended while you are financially disabled, discussed later.
If the last day for claiming a credit or refund is a Saturday, Sunday, or legal holiday, you can file the claim on the next business day.
If you do not file a claim within this period, you may not be entitled to a credit or a refund.
So if you don’t file, its two years and out for getting that withholding back. Each year stands on its own. If you didn’t file for, say, 2007-2009, and you only owed tax in 2009, you still owe it, but you get no benefit for the 2008 and 2007 refunds you didn’t claim.
So file on time. If you are missing information, file with what you have and amend later if necessary. Don’t let the perfect be the enemy of the good. Not filing can quickly become a habit, and it’s often a very expensive one.
Related: Penalties on Late 2012 Tax Payments (William Perez)
William McBride, The Long Goodbye to U.S. Corporations (tax Policy Blog):
If not moving abroad, many U.S. businesses have been moving to the individual tax code, where they are taxed once on profits that are passed-through to owners, rather than twice through the corporate tax and shareholder taxes. The end result is there are now fewer corporations than at any time since the 1970s. The chart below shows standard C corporations peaked in 1986 at 2.6 million, and declined to 1.8 million as of 2008, according to the IRS. Preliminary IRS data indicates the number of C corporations dropped further to 1.6 million as of 2010. The trend shows no sign of slowing down.
This has two important implications for tax policy:
1. Increasing the individual rate means increasing the tax load on business, as more taxes are run through 1040s.
2. While corporate tax reform is important, it misses a lot.
Christopher Bergin, The IRS Is Shut Down – And We Will All Pay (Tax Analysts Blog)
Tax Justice Blog, Paul Ryan’s Latest Idea: Enact the Spending Cuts Proposed by Obama, Ignore His Revenue Proposals. I’m good with that.
Janet Novack, As IRS Shutdown Drags On, Some Taxpayers Face Big Problems:
The IRS has said that once the shutdown was “fully complete” it stopped its computers from automatically generating new liens and levies on taxpayers’ property and that it is now seizing taxpayers’ property in only rare cases. But that’s no help to the taxpayers who had their funds frozen immediately before the shutdown or who were hit by notices that had already been printed and were mailed after the shutdown.
The government needs to use its money to chase people out of public parks, rather than to free your frozen funds.
Peter Reilly, Are CVS Stores Actually Good 1031 Targets ?
Detroit is back! Judge Hands Down Very Nearly The Longest Sentence Ever To Public Official For Corruption And Tax Fraud (TaxGrrrl)
TaxProf, The IRS Scandal, Day 155. This edition features reports that the IRS exchanged confidential taxpayer information with the White House. Anybody who doesn’t think this is a real scandal should share somebody’s confidential tax information sometime with your favorite Republican official and see what happens.
Jack Townsend, Article on DOJ’s Swiss Bank Initiative.
Leslie Book, Supreme Court: Woods Oral Argument This Week. ”As many tax procedure buffs know, the case presents an opportunity for the Court to decide whether the 40% gross valuation misstatement penalty applies in a variety of tax shelter transactions when partnerships have sought to concede the underlying liability on grounds that do not directly relate to valuation misstatements, such as the at-risk rules or the economic substance doctrine.”
Robert D. Flach brings your Friday Buzz!
The Critical Question: Should We Eliminate the Extraordinary Measures? (Donald Marron):
You’ve probably heard that Treasury will hit the debt limit on October 17 and soon thereafter it won’t be able to pay all of America’s bills. That second part is true: Congress needs to act soon—preferably before the 17th—so Treasury doesn’t miss any payments. But the first part isn’t: Treasury actually hit the debt limit way back on May 19.
So how did Treasury keep paying our bills? Extraordinary measures.
Interesting. It’s fiscal sleight of hand of the sort that would get you or me jailed.
The inventory capitalization rules of Code Section 263A often come as an unhappy surprise to clients. It’s especially true when a client has bought a bunch of new fixed assets and expects bonus depreciation to make their tax go away. If that bonus depreciation is attributable to manufacturing or production assets, a lot of it might end up as part of year-end inventory for tax purposes, pushing off the deduction for a year — and causing unexpected tax this year.
All “producers,” and retailers with receipts over $10 million, are subject to the Sec. 263A “uniform capitalization,” or “UNICAP” rules. Costs subject to 263A have to be capitalized as part of the cost of inventory or constructed property, and are only recovered when that property is sold. Costs commonly added to inventory under Sec. 263A include tax depreciation in excess of financial statement depreciation, indirect labor, and overhead costs that the tax law considers attributable to production activities.
A Texas custom homebuilder, Frontier Custom Homes, took a creative approach to getting around these rules. The Tax Court takes up the story:
As a preliminary matter, we must decide whether Frontier, as a custom homebuilder, is subject to the UNICAP rules under section 263A. Frontier contends its business model is centered around sales and marketing, not production-related services. The thrust of its argument is that custom homebuilders differ from speculation homebuilders because their price premiums and profitability come not from cost control, but rather from the creativity of their salespeople, designers, decorators, and marketing employees.
Section 263A requires taxpayers that produce real property to capitalize certain costs. The term “produce” includes “construct, build, install, manufacture, develop, or improve.” Sec. 263A(g)(1).
Frontier contends it is outside the scope of section 263A because it does not employ the tradesmen — e.g., carpenters, welders, and plumbers — who actually build the homes. All of those activities are subcontracted out. It therefore claims its actual employees’ services, and the related costs incurred, are more reflective of a sales and marketing company that manages the creation of a custom product rather than a construction company producing streamlined goods.
The Tax Court didn’t appreciate the creative approach (my emphasis, footnotes and citations omitted):
Speculative homebuilding is the classic production activity to which section 263A applies. Frontier’s argument is that custom homebuilding is different from speculative homebuilding and that this difference keeps its activities out of the reach of section 263A. Before Frontier sells a home, it builds it; before Frontier builds a home, it designs it. After Frontier creates the design for each custom home, it subcontracts out the physical labor to the tradesmen who actually build the home. Frontier’s use of subcontractors for the physical home construction is not enough to exempt Frontier from section 263A. The creative design of custom homes is ancillary to the actual physical work on the land and is as much a part of a development project as digging a foundation or completing a structure’s frame. The construction of a home cannot move forward if the design step is not taken. Therefore, we reject Frontier’s argument and find Frontier is a producer of real property subject to section 263A.
The court went on to uphold the IRS capitalization of specific costs attributable to production activities to the home inventory, including part of the owner’s salary, employee bonuses, design costs, salary for office employees, employee benefits, payroll taxes, insurance, and other office expenses. Because the taxpayer had not assigned costs to inventories, the court accepted the IRS numbers.
The moral? The IRS believes in Sec. 263A, and so does the Tax Court. There is no exception for creativity. Your Sec. 263A result is likely to be better if you make the computations and assign costs yourself to production activities. If you have gone through the effort to make a reasonable computation, the IRS agent is unlikely to quibble over the small stuff, in my experience. But if you don’t bother to capitalize costs under Sec. 263A at all, they’ll do it for you, and you won’t care for the results.
Bad Day for preparer regulation at appeals court? Tax Analysts reports ($link) that the judges hearing the IRS appeal of the D.C. District Court’s shutdown of Doug Shulman’s preparer regulation power grab do not appear inclined to reverse it:
The D.C. Circuit during September 24 oral arguments in Loving v. IRS, No. 13-5061 (D.C. Cir. 2013), expressed skepticism that the IRS possesses the statutory authority to implement its tax return preparer program. Stuart J. Bassin of Baker & Hostetler LLP said that the oral arguments did not go well for the government and that it didn’t appear as if the court was “buying what the government was selling.”
I’ve heard the same thing from two attorneys who attended the session. Preparers who have followed the story of selective enforcement of tax laws in the Tea Party scandal can’t relish the idea of giving the IRS more control over their practices. It looks as though we may be spared that, until and unless Congress does something stupid like authorizing such preparer regulation.
Incentives gone wild. While Iowa’s state-level politicians love taking your money to lure and subsidize your competitors, the politicians in Coralville have taken it to Detroit-like levels, reports IowaWatchdog.org:
The City Council of Coralville has piled up about $280 million in debt in recent years, the highest debt per capita for a city in Iowa.
The $14,511 burden for each of its 19,219 residents is seven times higher than Des Moines or Iowa City. It’s enough to pay for 38 Iowa Hawkeyes football season tickets or three semesters of tuition at the University of Iowa.
Moody’s Investors Service, after having downgraded the city’s debt four times, was, in a recent report, particularly tough on Coralville’s “history of issuing debt of non-essential government purposes, including the construction of a hotel, golf course, performing arts center and brewery, all of which are city owned.”
All in the name of “economic development,” of course. Or, as the department store ads used to say, the more you spend, the more you save! Unless you are one of the unlucky owners of the 60% of property in Coralville that isn’t in a tax-priviliged TIF district.
Jason Dinesen, IRS Guidance on FICA Refunds for Same-Sex Married Couples
Jack Townsend, Government Refusal to Grant Immunity Shifts Burden of Proof to IRS in Tax Court Case. But he isn’t sure it will do the taxpayer any good.
TaxProf, The IRS Scandal, Day 139
Tony Nitti, Understanding The Impact Of Legalized Recreational Marijuana On State Tax Revenue Well, it might not seem to matter so much.
William Perez, Average Child Tax Credit by State
William McBride, America Loses another Fortune 500 Company due to High Corporate Taxes (Tax Policy Blog). A US company, Applie Materials, Inc., acquires a Japanese company, and they move combined headquarters to… Holland:
The U.S. and Japan have the highest statutory corporate tax rates in the developed world, and by most measures the highest effective corporate tax rates as well. In contrast, the Netherlands has a statutory corporate tax rate of 25 percent, compared to 39 percent in the U.S. and 37 percent in Japan. The Netherlands also has the most generous capital allowances for plant and machinery in the developed world, which is particularly important for these two manufacturing firms. Lastly, unlike the U.S., which taxes foreign earnings on a worldwide basis, the Netherlands uses a territorial tax system, which largely exempts foreign earnings from domestic taxation.
Howard Gleckman, An Upcoming Debate on Whether Private Equity Should Pay Higher Taxes. (TaxVox) Yes, this country needs nothing more than lower returns to capital. Just ask the people at Applied Materials.
David Brunori, Marriage and Religious Freedom Act Promotes Neither (Tax Analysts Blog):
The tax laws should be neutral when it comes to politics. Personally, I would end all tax exemptions for all political groups — gay, straight, or in between. The IRS rightfully took considerable heat when it singled out conservative groups for scrutiny. But the Marriage and Religious Freedom Act isn’t the answer.
More legislation seldom is, unless it just repeals old legislation.
Is there anything tax law can’t do? Russians Consider Boosting Divorce Tax, Citing ‘Moral And Demographic Decline’ (TaxGrrrl)
Tax Justice Blog, ITEP Analysis: Cuccinelli Tax Plan Mostly Benefits Wealthy Virginians – and Cuccinelli. When the rich pay most of the taxes, any tax cut will “disproportionately benefit the wealthy.”
Taking a stand: Does the Economy Need Stimulus or Austerity? Yes. (Joseph Thorndike, Tax Analysts Blog)
He may have been her partner in crime, joining forces to steal millions from federal taxpayers.
He may have spent time at her house and shared “romantic liaisons.”
But Maurice Larry wants people to know he most definitely was not the boyfriend of Rashia Wilson, Tampa’s notorious self-dubbed Queen of Tax Fraud.
Just a good friend with benefits.
Wilson, who became known for her brazen Facebook postings taunting authorities about the millions she was stealing from taxpayers through stolen identity tax refund fraud, was sentenced in July to 21 years in federal prison.
Larry, who spent $100,000 covering a Camaro in chrome, was sentenced Tuesday to 14 1/2 years in federal prison, a sentence he is to serve at the same time as an 8-year, 5-month sentence he received Monday in another tax refund fraud case.
A chrome Camaro? I suppose it went well with Ms. Wilson’s platinum hairdo.
That means they aren’t eating at the right places. Deloitte Study: Accountants Don’t Have Fire in Their Bellies (Going Concern).
The IRS official at the center of the Tea Party scandal is retiring. Iowa Public Radio reports that Lois Lerner is retiring:
The IRS announced Monday that Lerner would step down after being placed on paid leave in May. She refused that month to answer questions at a congressional hearing, citing the Fifth Amendment right not to incriminate herself.
The scandal involved groups applying for 501(c)(4) status in the period 2010-2012. Organizations with the words “Tea Party” or “patriot” in their names faced more questions and bureaucratic delays, although some progressive groups also encountered bureaucratic hassles, according to an inspector general’s report.
In a statement emailed to NPR, the IRS said the problems identified with screening tax-exempt status requests were the result of “mismanagement and poor judgment.”
In a change of procedure, the IRS announced the retirement via a press release, rather than by planting a question at a continuing education event.
Tax Analysts ($link) reminds us of the compliance hassles that Ms. Lerner piled on all sorts of exempt organizations:
One of the more notable developments during Lerner’s tenure as exempt organizations director was the comprehensive redesign of Form 990, “Return of Organization Exempt From Income Tax.” The new version requires EOs to provide much more information about their activities than previously.
Anyone who works with exempt organizations, or who serves on an EO board, knows how much additional useless busywork costs the new 990 imposes.
Lerner also oversaw a massive IRS outreach to get EOs that had not filed information returns for three straight years to come into compliance to avoid automatic revocation of exemption.
By “outreach” they mean “revoked their tax-exempt status.” Thanks for leaving, Ms. Lerner, you’ve done quite enough.
Related: TaxGrrrl, Lesson Lerner-ed? Disgraced IRS Official Tenders Resignation
While we say good-bye to Ms. Lerner, let’s spare a moment to note a different sort of departure, one involving somebody who may have had more influence on tax administration than Ms. Lerner. TBO.com reports (my emphasis):
Three years after Tampa police stumbled on the first active tax-refund fraud operation they had seen, one of the suspects was sentenced Monday to eight years and five months in federal prison.
Maurice “Thirst” Larry faces even more prison time when he is sentenced today in another case in which his girlfriend, Rashia Wilson, is serving 21 years of federal time. Larry is expected to face a longer term in the second case because it involves the theft of millions of dollars, while the other case involved hundreds of thousands of dollars.
Larry and Wilson, along with Marterrance “Qat” Holloway, are viewed as pioneers in the wave of stolen identity tax-refund fraud that has flooded the streets of Tampa, dubbed the epicenter of a national epidemic that has cost U.S. taxpayers billions and left countless identity theft victims to pick up the pieces.
This sort of fraud costs the Treasury around $5 billion annually, while creating financial nightmares for taxpayers whose identities are stolen. The flat-footed IRS response is one of the greatest failures of tax administration since the tax law was enacted.
What sort of devious criminal geniuses could crack open the Treasury like a pinata?
Authorities said Larry, a high school dropout with five young children fathered out of wedlock, has been a jet-setter, flying between Miami, New York and Las Vegas. He and Holloway also drove expensive cars and wore pricey clothes.
Just like James Bond, then.
Jana Luttenegger, Deducting Clothing as a Business Expense:
Practically speaking, not many individuals can use the un-reimbursed clothing expense deduction. If your clothing expenses do qualify, in addition to providing receipts, be prepared to prove the apparel is not suitable for everyday wear.
Me, Dress for success, but don’t look to the IRS for any fashion help. My latest post at IowaBiz.com, the Des Moines Business Record blog for business professionals.
Paul Neiffer, How Zero Equals $380. How gambling losers can lose again at tax time under the new Obamacare Net Investment Income Tax.
Jim Maule, Deductions Require Evidence and a Bit of Care:
The first aspect of the case that caught my eye was the attempt of a tax return preparer to deduct a vacation as a business expense. She explained that she operated her tax return business from her home, and explained that “living in her neighborhood was stressful and that she felt harassed by her clients who would call her home at any hour.” Accordingly, she concluded that she needed to travel “just to get rest so that . . . [she] could function.” The Court, not surprisingly, denied the deduction, characterizing the cost of the vacation as a personal expense.
Peter Reilly, Musician Wins Hobby Loss Case Peter covers the Gullion case that I covered last month, but he went further by contacting the victorious taxpayer, getting a perspective that you can’t get from reading the Tax Court opinion.
TaxProf, The IRS Scandal, Day 138
Jack Townsend, Schedule UTP and Criminal Penalties. “Moreover, in almost all cases in which such behavior would be material, a knowingly incomplete or missing Schedule UTP could be used in support of the various penalties that might apply to the related underreported taxes — the 75 % civil fraud penalty and the accuracy related penalties.”
Jeremy Scott, Sun Capital Might Be Bigger Than You Think (Tax Analysts Blog)
Tax Justice Blog, When Congress Turns to Tax Reform, It Should Set These Goals. Not necessarily my goals.
Andrew Lundeen, Elimination of State and Local Tax Deduction Possible (Tax Policy Blog)
Clint Stretch, Shopping for Tax Reform (Tax Analysts Blog)
It’s Tuesday, so it’s a Buzz-day for Robert D. Flach!
Perhaps if people with low incomes made really good decisions about how to spend their money, then poverty would be near zero. However, over the course of their lifetimes, many people make many bad decisions, and as a result they will spend a lot of time dealing with financial adversity. The moral and practical implications of this view of poverty are not as clearcut as either a progressive or a conservative would like.
Career Corner: If You Can’t Admit You’ve Committed CPE Fraud, Then You Need to Take Another Ethics Course (Going Concern)
Three economic development opinions, each wrong in its own way. The Sioux City Journal, to its credit, had a special set of features on Iowa’s “Economic development” tax credits over the weekend, running two guest columns and an editorial on the topic:
Debi Durham, director of the Iowa Economic Development Authority State incentives are necessary to keep Iowa competitive.
Joe Bolkcom, Chairman of Iowa Senate Ways and Means Committee, Costly tax giveaways are not best way to grow Iowa’s economy.
Sioux City Journal editorial, OUR OPINION: Incentives help level playing field for Iowa.
Our tax climate puts Iowa at a competitive disadvantage.
She’s got that part right. Iowa has an extremely complex tax system, but one full of complexity and loopholes. Unfortunately, that’s as good as it gets.
Using tax incentives to reduce the high burden our current structure imposes on job creators is one way to balance the bottom line and keep Iowa in the running for these highly competitive new investments.
Lowering the rates and eliminating the loopholes to take the Iowa Economic Development Authority out of the picture is another way.
Ideally, we would reform our tax system in a comprehensive way (and I’m eager to work with Sen. Joe Bolkcom to do just that), but until then, incentives are essential.
Sen. Bolkcom contends the incentives we utilize to recruit and retain these projects are too large and that we don’t get enough in return. But incentives are a good investment. The state sets aside $170 million annually in tax incentives to invest in these proven economic development programs that pay Iowans back in new jobs, new capital investment, and increased revenues that can be put to work for Iowa’s taxpayers.
“Proven economic development programs?” If she’s talking about tax credits, the proof is thin. Back in the Culver administration, after the Film Tax Credit economic development program exploded in scandal, a blue-ribbon committee failed to find any solid evidence that any of the state’s dozens of “targeted” tax breaks did any good.
The state budgets for these incentives and the return on investment is calculated prior to every award, and each project must meet job creation and capital investment requirements before it is even considered.
The key word is “before.” The awards work because they are projected to. It’s self-fulfilling! There is no consideration that the projects might happen without taxpayer money, and no consideration that the money being spent on the recipients of these projects is coming out of the pocket of other taxpayers, eliminating just as much economic activity as is being “created” by the tax credits.
To cite the Orascom deal again, that corporation’s bottom line got a huge benefit because it won’t pay property taxes for the next 20 years. This will hurt Lee County’s existing local businesses and homeowners. They will pay Orascom’s share of increased road maintenance, fire, police, school and other costs.
Correct. And it’s not just Lee County. All other Iowa taxpayers have to pay more so Orascom can pay less. He’s coming close to getting it right. So close, but…
Third, the size of economic incentives should be based on the number of good jobs created, not the size of the capital investment. If Iowa had done that, we wouldn’t be paying Orascom more than three million federal, state and local dollars for each promised permanent job.
…not quite. The senator accepts the premise that the state has the ability to “target” companies to bring good jobs — that the state has the ability to wisely allocate investment capital. If you believe that, I have a film tax credit program to sell to you.
The mistake is the idea that Iowa is competing only with other states when it issues these credits. When an out-of-state business gets money from Iowa taxpayers to move here, it isn’t other states that write the checks — it’s Iowans. And the beneficiaries use their subsidies to compete with existing Iowa businesses for customers and for skilled workers. They take money from Iowa’s existing businesses and their employees to lure and subsidize their competitors.
And even looking at it from the perspective the companies Iowa is trying to seduce, it has to look dodgy. Iowa looks like a guy who walks into a bar with his wife’s purse, dipping into it to buy drinks for the girls. It’s not impressive, and girls he gets that way probably aren’t real prizes to begin with.
While the Governor and his economic development officials give lip service to fixing Iowa’s tax system, they haven’t done much to make it happen. They have pushed through property tax reform, but the income tax system has only added more loopholes and special interest carveouts. Every new tax break creates a new sworn enemy to real tax reform — drastic simplification, drastically lowered rates, and elimination of the futile Iowa corporation income tax.
It’s much easier to hold a press conference and hand out tax credits than to build the case for tax reform that helps taxpayers who lack lobbyists and fixers.
Wed in Iowa, still married in Utah. The IRS yesterday announced that same-sex couples married legally in any state will be treated as married for tax purposes, even if they reside in a state that does not recognize same-sex marriages.
The IRS also announced that couples that married in earlier years may amend their tax returns to claim joint filing status for open married tax years. However, they will not be required to. Couples who extended their 2009 returns have until October 15, 2013 to file amended 2009 returns. Otherwise, 2010 is the earliest possible open year.
The announcement cuts both ways. If the IRS says you are married, you no longer have the option of filing as a single taxpayer. Many couples find that marital bliss comes at a tax price. This chart from the Tax Foundation illustrates income situations where marriage can be more costly than single status:
The opportunity for same-sex couples to choose between single and joint status for open years is unique. This only goes one way, though; joint filers cannot amend their open years to file as single taxpayers.
Couples who have legal status short of marriage, such as “registered domestic partners” recognized in some states, are not considered married by the IRS.
Other IRS releases on the issue:
Lot’s of coverage of this in the tax blog world. Iowa’s own Jason Dinesen has long owned this issue, and he comes through with BREAKING: IRS Releases Guidance on Same-Sex Marriage , The IRS’s DOMA Guidance: How are Iowa Returns Affected?, What if One Spouse in a Same-Sex Marriage Hasn’t Filed Yet? and Will Same-Sex Married Couples Be Required to Amend?
The Tax Policy Blog has also flooded the zone:
Trish McIntire, The IRS and DOMA – part 1
Peter Reilly, IRS Recognizes All Marriages But Not Civil Unions
Tax Trials, IRS Recognizes Same-Sex Marriages in All States
The Iowa angle: IRS will recognize marriage of same-sex Iowa couples (Des Moines Register)
There is a little other news today:
43 percent is the new 47 percent. And Now for the Movie: Fewer Americans Pay No Federal Income Tax (Roberton Williams, TaxVox):
The percentage of Americans who pay no federal income tax is falling, thanks to an improving economy and the expiration of temporary Great Recession-era tax cuts. In 2009, the Tax Policy Center estimated that 47 percent of households paid no federal income tax. This year, just 43 percent will avoid the tax.
Tony Nitti, Tax Aspects Of The NFL Settlement Payments ”Well, if you’re a retired NFL football player, the Blue Book value has been set: your cognitive capacity is worth a cool $150,000.”
Andrew Lundeen, Why Eliminating Taxes on Capital Would Be Good for Workers (Tax Policy Blog)
Jack Townsend, Another Israeli Bank Depositor Plea to Conspiracy
Robert D. Flach tops off a heroic week with a third Buzz!
Perhaps this isn’t the best way to handle an IRS exam. Tax Analysts reports ($link) on a taxpayer who alleged that an IRS agent coerced him into sex:
Burroughs had sex with Abrahamson in September 2011 when she arrived at his home “provocatively attired,” according to the suit. U.S. Magistrate Judge Thomas Coffin concluded in the July 31 decision that Abrahamson was not acting in her official capacity, because the encounter occurred at Burroughs’s home during nonwork hours and “not in respect to the performance of official duties of the federal employee.”
One survivor of an IRS exam told me that she felt the least the IRS owed her for the experience was drinks and dinner.
One curiosity of the Great Housing Bubble was the emergence of the “down payment assistance” enterprise. These outfits, typically established as “non-profit” entities, purportedly helped home buyers come up with a down payment. Some of these didn’t look quite right.
Back in 2005 we noted an Illinois organization called “Partners in Charity”:
An Illinois organization known as “Partners in Charity” (PIC) has been helping home sellers close deals when the buyer is unable to come up with a down payment. PIC “gives” the down payment to the buyer, and the seller “reimburses” the downpayment to PIC, plus an “administration fee.” If the seller were to pay the down payment directly, that could make the lender walk away; running it through PIC gives everyone a fig leaf that there is a “down payment” and gets the deal closed.
Here’s the fun part, from a tax viewpoint: Partners in Charity claims to be a 501(c)(3) charity, and the Government says they tell house sellers that the “reimbursed” down payment and administrative fee qualify for a charitable contribution.
In other words, a charitable deduction for what amounts to a reduction in the sales price. Sweet. Too sweet. We looked at the documents that they helpfully posted on their website and found the whole thing a stretch:
Note that the seller is “obligated” to make the “contribution,” or PIC doesn’t play. This is an obvious quid pro quo, and the Eddie Haskell-like language “Seller understands that the contribution will not be used to provide down payment assistance to the Buyer of the Participating Home, and that the gift funds provided to the Buyer toward the purchase of the Seller’s home are derived from pre-existing PIC funds” isn’t going to fool anybody. If that worked, the only way you could ever stop somebody from running almost any expense through a purported charity would be if the charity used the exact same dollar bills that you gave them to pay the expense.
The Tax Court yesterday pondered Partners in Charity’s tax-exempt status and arrived at a similar conclusion (my emphasis, citations omitted):
PIC argues that it did not give seller funds to a buyer — an important requirement under the HUD guidelines. PIC contends that it received fees from sellers only after closing and that the fees were necessary for PIC to recoup the costs of its grants, and, therefore, the seller-paid fees furthered the grant-making purpose. This argument misses its mark. Before PIC gave funds to a buyer, PIC required a promise from the seller that, immediately after closing, the seller would pay PIC the buyer’s grant amount plus a fee-and the evidence shows that in fact the seller’s payment was made to PIC from the escrow, i.e., without risk that the seller would renege. In essence, a DPA grant went from PIC to the buyer, to the seller, and right back to PIC.
The Tax Court upheld the revocation of Partners In Charity’s exempt status retroactively to inception. As the company had accumulated over $3.5 million in assets, according to the decision, that will result in an ugly corporate tax bill.
The Moral? If you find yourself sounding like Eddie Haskell when explaining a transaction, maybe it’s not such a great idea.
Clive last week resumed its revenue camera program, on the grounds that the municipality needed the money. Apparently that’s true even at a cost in safety:
A review of data provided the council shows:
• Twenty-six accidents occurred at red-light camera intersections in 2012; 13 occurred in 2008.
• Six personal injury accidents occurred at the red-light intersections in 2012; three occurred in 2008. No fatalities occurred over the period.
• Citywide, accidents overall have decreased. In 2012, there were 244 property damage accidents, compared with 330 in 2008.
• Eighty-six personal injury accidents occurred citywide in 2012; in 2008, there were 91.
That apparently doesn’t mean anything:
Evaluating the effectiveness of the red-light camera program based on the number of accidents at camera intersections would be misguided, Police Chief Michael Venema said. “What I caution people is — you’re talking about a very small sample size,” he said.
It’s funny how small sample sizes weren’t mentioned when Des Moines police released cherry-picked data that seemed to show the cameras reduced accidents. I guess sample reliability varies based on the results you want.
There’s no doubt that red light cameras would never have been tried if they didn’t have the potential to make money for municipalities. Arguments that they are for safety would have more credibility if they were trying other approaches, like longer yellows, all-red phases, and traffic circles, and comparing the results. As it is, they are really a tax on right turns on red.