In its usual last-minute frenzy, the Iowa General Assembly passed a bill (HF 625) to extend the popular School Tuition Organization credit. The credit is 65% of the amount contributed to organizations that subsidize private elementary and secondary tuition. When combined with the federal tax deduction for the donation, there is very little out-of-pocket cost for the donations. The amount of the credit is limited, so it has been oversubscribed in recent years. the bill increases the cap starting in 2013.
The bill has a surprising amendment that passed yesterday: it now creates “affiliate nexus” in Iowa (my emphasis):
(1) A retailer shall be presumed to be maintaining a place of business in this state, as defined in paragraph “a”, if any person that has substantial nexus in this state, other than a person acting in its capacity as a common carrier, does any of the following: (a) Sells a similar line of products as the retailer and does so under the same or similar business name. (b) Maintains an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery of property or services sold by the retailer to the retailer’s customers. (c) Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the retailer. (d) Delivers, installs, assembles, or performs maintenance services for the retailer’s customers. (e) Facilitates the retailer’s delivery of property to customers in this state by allowing the retailer’s customers to take delivery of property sold by the retailer at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state. (f) Conducts any other activities in this state that are significantly associated with the retailer’s ability to establish and maintain a market in this state for the retailer’s sales. (2) The presumption established in this paragraph may be rebutted by a showing of proof that the person’s activities in this state are not significantly associated with the retailer’s ability to establish or maintain a market in this state for the retailer’s sales.
This ratifies the aggressive approach of the Iowa Department of Revenue on intangible nexus, and will likely trigger more audits of out of state companies. The Supreme Court and Congress really need to either reaffirm the Quill decision or set new rules.
The IRS is broken, that’s for sure. But the IRS is a symptom. The “disease” is the tax code. I think that’s absolutely right. And for me, this latest “scandal” concerning the IRS is going to make it impossible to reform our tax code anytime soon.
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.
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.
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.
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.
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.
24 current and former employees of the Internal Revenue Service have been charged for crimes relating to fraudulently obtaining more than $250,000 in government benefits. Thirteen of the current and former IRS employees have been charged federally with making false statements to obtain unemployment insurance payments, food stamps, welfare, and housing vouchers. All thirteen, individually charged in separate indictments, are alleged to have falsely stated that they were unemployed while applying for or recertifying those government benefits.
They may have been right about being unemployed, just wrong about the timing.
The headline producing data in the report was that revenue loss – about $181 billion – from corporate tax expenditures in 2011 was “approximately the same size as the amount of corporate income tax revenue the federal government collected that year.” That makes a headline grabber; here would be my version: “Corporations Got More in Tax Breaks Than They Paid in Taxes, Government Says.”
It’s almost like the tax exists only so the politicians can carve loopholes for their friends.
Iowa Senate Republicans advance income tax plan. TheGazette.com reports:
Sen. Randy Feenstra, R-Hull, said all 24 minority Senate Republicans have signed onto a proposal to significantly lower state personal income tax rates and simplify the Iowa tax code by offering a two-pronged approach that would eliminate federal deductibility and benefit most Iowans.
…
The Hull Republican said the proposed new tax structure would flatten the current nine income tax brackets into three, elimination of federal deductibility as a competitive impediment, enhance the current standard deduction for all taxpayers and provide an extra boost for blind, elderly and dependent Iowans, eliminate itemized deduction, increase personal exemption credits, and raise filing thresholds.
So far I have been unable to find the bill (though it being April 11, I’m not going to spend a lot of time looking for it today). As Senate Republicans have no chance of advancing a bill in the face of majority Democratic opposition, it’s really a gesture. Still, it’s nice to see that income tax reform remains alive, in spite of the Governor’s indifference this year. It’s also nice to see that the insistence on keeping the deduction for federal taxes is eroding. Much better to build it into a lower rate.
This is a bit weird given that President Obama rides on what is essentially the nicest corporate jet in the world. To be fair, the President is quite right that companies do not need a tax break to buy corporate jets. But since they don’t really get a tax break for buying corporate jets, we probably don’t need to spend this much valuable presidential time worrying about this non-problem.
Anything to make life difficult for a high-tech U.S. manufacturer. As long as the President continues to beat dead horses like this and the “Buffett Rule,” we know he is not at all serious.
Sure, Democrats pay lip-service to infrastructure, education, and the like. But for the most part, they are profoundly unwilling to make a wholistic case for activist, progressive government.
Actually, they probably wouldn’t get very far making the case honestly.
Flickr image by Samat Jain under Creative Commons license
Should we just get a bill from the IRS, instead of filing returns? That’s something Janet Novack seems to be thinking about. She has two guest posts on the issue:
Some people fear return-free filing will separate citizens further from the costs of government. I think that is caused by an income tax that now is effectively only on high-income earners. When 51% can send the bill to the other 49%, bad policy seems inevitable.
It makes me wonder: if there are “Errors to avoid,” are there errors we should seek out, or at least not sweat? I can’t think of errors I’d want to make on a tax return, but I can think of some that I wouldn’t lose sleep over:
1. Forgetting to check the “presidential election campaign fund” box. After all, your entire tax bill is basically the federal election campaign fund.
2. Misspelling the name of a stock on Schedule D.
3. Writing a “smiley face” next to the tax refund line.
4. Forgetting to update your “occupation” on the signature line when you change jobs.
The core problem is that the IRS cannot look into the hearts of companies and see which of them really needs to provide free lunch to their employees in order to have a healthy, vibrant company, and which of them is doing this in order to provide a tax-free boon to their workers.
In case anyone asks, donuts are critical to a healthy, vibrant tax practice.
With less than three weeks left in filing season, the US Federal Circuit Court of Appeals has denied the IRS attempt to overturn the injunction against their preparer regulation scheme. From the Wall Street Journal Total Return blog:
This doesn’t mean the IRS has permanently lost its case, but it does mean that the IRS cannot move forward with its power grab unless and until it convinces the appeals court that it has the authority to regulate preparers.
Meanwhile, filing season continues, with no evidence that taxpayers have been harmed by the availability of preparers who haven’t passed an IRS open-book exam on Publication 17.
Iowa preparer indicted – for helping clients report too much income. From KCRG.com (my emphasis):
Keith Rath, of Shellsburg, was arrested last week by IRS agents after a grand jury indicted him on eight counts of aiding in the preparation and presentation of a false tax return.
The indictment says that on eight occasions over the years 2008, 2009 and 2010, Rath helped clients falsely claim thousands of dollars in business income that he knew they did not earn.
Mr. Rath has pleaded not guilty.
You might wonder why anyone would claim business income they didn’t earn. The answer, of course, would be to claim refundable earned income tax credits. A taxpayer with no “earned income” is ineligible for the credit. The EITC is “refundable,” which means that when there is the credit exceeds the computed tax, the IRS will send you a check for the difference. By reporting imaginary Schedule C income, taxpayers can (illegally) increase their refund check.
In fact, the OECD itself recently issued a report – known as the BEPS report – on how these techniques create base erosion and profit shifting. The problem is so serious, according to the report, “What is at stake is the integrity of the corporate income tax.”
The “integrity of the corporate income tax” is in the third aisle next to the chastity of the bordello.
Film tax credit scams are big news in the U.K. right now. An Irish actress, Aoife Madden, yesterday received a 54-month sentence in her role in scamming a U.K. film tax credit scheme. Irish Times reports:
The group successfully claimed £1.5 million in film tax breaks after they said they intended to make a film titled Landscape of Lives with a £19 million budget, funded by Jordanian backers.
Once they were arrested two years ago, the five hurriedly produced a film called, ironically, Landscape of Lies for just £90,000, which went on to win a Silver Ace award from last year’s Las Vegas Film Festival.
The film, which starred former EastEnders actor Marc Bannerman and Andrea McClean, told the story of a former British soldier’s attempts to discover the truth behind his friend’s murder in an apparent mugging.
Before suspicions had been aroused, Madden’s London film company, Evolved Pictures, told revenue and customs that millions had been spent on Hollywood A-list actors and film crew when it lodged a value added tax repayment application for £1.48 million. It received more than £1 million.
Lost in the coverage is Iowa’s pioneering role in film tax credit scams. A little-known film producer from Minnesota came here and showed the Brits just how it’s done:
Take Iowa. A start-up called Polynation Pictures came looking for backing for a sci-fi flick so lame it would have embarrassed Ed Wood. With a financing scheme worthy of Max Bialystock, the con these folks pulled was nearly as inept as the film they made, but Iowa’s film office was too starry eyed to notice.
…
The $767,250 production Polynation Pictures proposed eventually came in at $3.7 million. This was achieved in part with preposterous expenses. Producers claimed they paid $1,350 to rent six orange road cones. The use of two 6-foot ladders supposedly cost the company $900 (a bargain, as Polynation claimed to have spent another $900 to rent a single 8-foot ladder). Among production necessities was a new Mercedes. The partners set up an array of separate companies and used them to bill themselves extravagantly for work supposedly done on the picture. These were presented to Iowa as “deferred payments”—to be paid if the movie made money (which the enterprise was sure to do when Iowa handed the tax credits over). The only thing missing was a staged rendition of “Springtime for Hitler.”
Polynation mastermind Wendy Weiner Runge received 10 years for her star turn in the film credit program.
The film credit program was touted as a way to make Iowa a leader in the film world. And, in a way, it did.
You might be interested in this interview with Ms. Madden about her role in the film, knowing what we know now. She said this:
This project has been a crazy but wonderful challenge!! I’ve always wanted to produce a feature, and have a number of projects in development, but this was the one I just wanted to lift off the page. I think the biggest challenge was sourcing finance, which is no surprise for an independent film company. We were extremely lucky to find international investors and lobby them to back the project, but this was a lengthy process and has always been a challenge.
A challenge, yes, but I’m not sure they turned out lucky.
Snatching defeat from the jaws of victory. Now that the courts have saved the IRS from itself by shutting down the misguided preparer regulation system, the Senate rides to the rescue to screw everything up again, Accounting Today reports:
The two leaders of the Senate Finance Committee, Chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, have begun developing proposals for reforming the U.S. Tax Code, including giving the Internal Revenue Service the clear statutory authority to regulate tax preparers in case the IRS loses its appeal of a recent court case invalidating its Registered Tax Return Preparer regime.
The IRS can’t answer its phones. Its pockets are being picked to the tune of billions by semi-literate South Florida grifters. And the Senate thinks that preparers are the problem? Preparer regulation is a market-share enhancement program for the national franchise tax prep outfits; the rules were written by a former H&R Block CEO. If Senators Baucus and Hatch want to re-enact these anti-competitive and useless rules, it just shows who they really represent. (Via Going Concern).
Ceremonial cross of John Frum cargo cult, Tanna island, New Hebrides (now Vanuatu), 1967 (via Wikipedia)
Heresies of the Cargo Cult. When some remote societies encountered the industrial world in World War II, they had trouble grasping what they were seeing. Wikipedia explains:
Cargo cult activity in the Pacific region increased significantly during and immediately after World War II, when the residents of these regions observed the Japanese and American combatants bringing in large amounts of matériel. When the war ended, the military bases closed and the flow of goods and materials ceased. In an attempt to attract further deliveries of goods, followers of the cults engaged in ritualistic practices such as building crude imitation landing strips, aircraft and faux radio equipment out of bamboo or whatever materials they had at hand, and mimicking the behavior that they had observed of the military personnel operating there.
While it’s easy to mock an islander for building a refrigerator-like box in hopes of conjuring up an icy six-pack, cargo cult behavior also occurs in modern societies. Without describing it as such, tax historian Joseph Thorndike writes about the cargo cult of the 1950s, where modern policy wonks try to conjure up 1950s-style growth through a ritualistic process of duplicating tailfin-era totems. For example, Timothy Noah thinks the crushing stated top marginal rates of that era might help generate those Happy Days results. Mr. Thorndike sees problems with that approach:
We still don’t know if high statutory rates and (relatively) high average rates were a drag on growth. And we can’t know, because we also can’t know what growth might have been in a different tax climate.
Moreover, a range of nontax factors were probably more important in shaping growth patterns in the 1950s. In particular, the economic disruptions of World War II had left the United States in a uniquely dominant position; by one estimate, U.S. manufacturing output constituted 60 percent of the world’s total in 1950.
In other words, it takes more than a bamboo box to conjure up that beer.
After all, the tax system of the Eisenhower era was not a very good one: It paired notionally sky-high rates with a deeply flawed tax base and created distortions both coming and going.
I understand that progressives like Noah are fighting a different battle: They are trying to beat back the rate-cutting mania that often serves as a definition of tax reform these days. But I think we might take a lesson from the tax experts of the 1950s, who understood the problems bedeviling their own tax system. As economist Harold Groves said at the time, “The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that makes these rates specious.”
Mr. Thorndike is more sympathetic to high rates than I ever will be. Doing taxes for a living, I see first-hand how high rates affect behavior, and I have no patience for academics who say otherwise. But he wisely notes that simply trying to recreate the totems of the 1950s, like high tax rates, misses all of the other things that put cold beer in the refrigerator. Same thing goes for other 1950s fetishes like tail fins, industrial unionism and defined benefit pension plans.
Former Pittsburgh Police Chief Nathan E. Harper has been indicted by a federal grand jury in Pittsburgh on charges of conspiracy and willful failure to file income tax returns, U.S. Attorney David J. Hickton announced today.
The five-count indictment named Harper, 60, of Pittsburgh.
According to the indictment, Harper was the chief of the city of Pittsburgh Police Department. From 2009 to 2012, he caused at least $70,628.92 in checks and cash received by the special events office of the department to be diverted to two accounts at the Greater Pittsburgh Police Federal Credit Union. Using Visa debit cards, Harper obtained more than $31,000 in ATM withdrawals and debit purchases, all for his personal benefit. Harper also failed to file federal tax returns for the years 2008 through 2011.
If he’s convicted, maybe the special events office can throw a little party for the occasion.
What could possibly go wrong? James Timothy Turner was convicted last week of masterminding a cunning plan. DothanEagle.com reports:
According to a U.S. Department of Justice press release, Turner was convicted of conspiracy to defraud the U.S., attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the Internal Revenue Service, failing to file a 2009 federal income tax return and falsely testifying under oath in a bankruptcy proceeding.
The FBI began investigating Turner in 2010 after he and three other people sent packages to all 50 governors demanding they leave office.
Turner is the president of a group of what prosecutors called “sovereign citizens” known as the “Republic for the united States of America.”
Send “packages” to all of the governors telling them to resign? Well, at least they weren’t trying to hide what they were doing.
Turner toured the country in 2008 and 2009 teaching seminars that instructed attendees how to submit bonds to pay off tax debt.
According to prosecutors, these bonds were completely fictitious and often written for amounts in excess of $1 billion.
Silly man. Only the Federal Reserve can do that. Unless we’re talking about the $1 trillion magic coin…
So, for those tax professionals engaging in such transactions that they know violated a known legal duty, their conduct is illegal and unethical. For those transactions engaging in such transactions where they don’t know (perhaps are willfully ignorant) that the conduct is illegal (ultimately most of the b—-t tax shelters are found to be illegal), then at least the ethical issues arise. These are smart professionals, paid (supposedly) to predict what a court will do with the b—–t tax shelter. Yet, in the prominent civil cases that swat down b—–t tax shelters, they fail miserably in their predictions.
Calendar-year corporation returns are due today! They are easy to extend on Form 7004 if you can’t finish them today. If you don’t extend an S corporation return and you file late, the penalty starts at $195 for each late K-1, and $195 each for every additional month the return is late.
If Iowa’s tax law were a car, it would look like this.
I’ve never filled out an Iowa income tax form but it looks like one of the harder state tax returns. Iowa allows you to deduct what you pay in federal income tax, which is nice but is that much more calculation work (and probably drives up tax rates). There are lines for the lump-sum tax, the minimum tax, the K-12 textbook credit, the school district surtax, the motor fuel tax credit, and the earned income tax credit. I’m sure each one of these has their explanations of necessity but together it sounds like a lot of paperwork, record-keeping, and Tax Filing Day frustration.
…
Hence, I’m impressed by a bill passed yesterday (House File 478) by the Iowa House which would offer an alternative to all Iowa taxpayers: a 4.5 percent tax on all income above about $15,000, which no further deductions or exemptions. It’s not perfect: our friend Joe Kristan pointed out that a credit for taxes paid to another state and a deduction for federal interest are probably constitutionally required, and offsetting deductions to certain kinds of income (allowing gambling losses if you tax gambling winnings) is good policy. But as Joe said, the bill “is a welcome step towards improving Iowa’s income tax.”
Far be it from me to let either the Internal Revenue Service or tax prep giant H&R Block off the hook for the current mess which has delayed refunds for more than 600,000 taxpayers claiming college tax credits by up to eight weeks. In addition to their operational missteps, both did a poor job (at least initially) of communicating with taxpayers who desperately need those refunds to pay tuition or other bills.
But let’s put some of the blame where it rightly belongs: on the Washington politicians. For more than two decades, Congress has been expanding “tax expenditures” with little regard for how complicated such provisions might be for taxpayers to use and for the IRS to administer, let alone for whether they do enough good to justify their cost and the economic distortions they create. A new 1065-page Congressional Research Service compendium lists 250 different tax expenditures. Happy reading.
Every little break like this diverts IRS resources from actually collecting income taxes and makes the income tax a little less effective and useful. Yet Congress still sees the tax law as the Swiss Army Knife of public policy.
No matter how well a student in the basic tax course masters the depreciation deduction to the extent it is studied, that student knows that the total depreciation with respect to a property cannot exceed its cost. All of the students would find themselves bewildered by the proposition that depreciation deductions on a property that cost $34,799 would total $56,000.
Argo pay your taxes. It turns out Iowa isn’t the only government whose film tax credits attract scammers. From London comes this via Boston.com:
In some ways ‘‘A Landscape of Lies’’ was a typical indie film, with a tiny budget, a B-list cast and an award from an American film festival.
What made it special is that it was created solely to cover up a huge tax fraud.
…
In fact, officials say, the project was a sham, set up to claim almost 1.5 million pounds in goods and services tax for work that had not been done, as well as 1.3 million pounds under a government program that allows filmmakers to claim back up to 25 percent of their expenditure as tax relief.
No word on whether Leo Bloom prepared the fraudulent returns.
Will there be tax reform? I think there has to be. But I don’t think it will look like theTax Reform Act of 1986 because, in short, it’s not 1986, and we don’t have the same problems or even the same tax system. That doesn’t mean there aren’t a lot of lessons to be learned from the ’86 experience. But I don’t think tax reform will happen soon. And a few of the reasons I think that come right out of “Gucci Gulch.”
I have a copy of Showdown at Gucci Gulch, the book about how the 1986 tax reforms were enacted. I haven’t brought myself to open it; it seems too much like reading about my job.
The 4.5% tax on AGI, with no credits and no deduction for federal income taxes, would be an alternative to the current multi-rate, high-loophole system. Taxpayers could choose which way to file.
Of course, taxpayers would compute their taxes both ways and pay the lower amount — making it an Alternative Maximum Tax. With the Alternative Minimum Tax, taxpayers compute their tax two ways and pay the higher amount. It would add one more complication to an already complex system. And, as I have noted, AGI is a flawed measure of taxable income.
The bill has just about no chance in the Iowa Senate, absent some incriminating photos of Democratic senators falling into Republican hands. Bill opponents made dreary but predictable soak-the-rich arguments against the bill:
Democrats, however, criticized the bill for affecting just a fraction of Iowa taxpayers or for providing far more benefits to high-income earners.
Citing the Department of Revenue data, they noted about 5,000 income earners making more than $500,000 stand to save as much from the flat tax – around $90 million – as the 326,000 earners making less than $90,000 a year.
They aren’t saying that the lower earners don’t benefit. They are just saying that the high earners benefit too much. Of course, it means the high income earners pay a lot more tax than the lower earners right now. It’s a silly argument — even sillier if you consider that state taxes are an awful tool for income redistribution. My analysis indicates the bill would benefit most filers, not just the “rich.”
I don’t believe the Alt Max Tax was seriously intended to become law. I think it was designed to try to keep the cause of income tax reform alive in a year that the Governor has no interest in it. It may also be a trial balloon to see if a proposal that lacks federal tax deductibility would draw fatal fire from the powerful lobbying group Iowans for Tax Relief. So far, no. While the bill (formerly HF 3, now HF 478) is flawed, maybe it advances the debate. Maybe next year, they’ll take up something like The Quick and Dirty Iowa Tax Reform Plan.
IRS extends certification rule, making Work Opportunity Credits available for all of 2012. Congress retroactively extended the Work Opportunity Credit to 2012 at the beginning of 2013. Unfortunately, one of the qualifications for taking the credit is to certify that an employee qualifies for the credit within 28 days of hiring. That made the credit useless for most of 2012.
The IRS has now given employers until April 29, 2013 to file the necessary paperwork with the local Job Service offices. Notice 2013-14 has the details. Accounting Todayhas more.
When you are running a big criminal tax conspiracy, never hit “reply all”. From Bloomberg News:
Everybody knows the danger of sending things inadvertently in an e-mail. Beda Singenberger’s case shows you also have to be pretty careful when you mail things the old-fashioned way.
Over an 11-year period, federal prosecutors charge, Swiss financial adviser Singenberger helped 60 people in the U.S. hide $184 million in secret offshore accounts bearing colorful names like Real Cool Investments Ltd. and Wanderlust Foundation.
Then, according to a prosecutor, Singenberger inadvertently mailed a list of his U.S. clients, including their names and incriminating details, which somehow wound up in the hands of federal authorities.
It just doesn’t work. The “Tax Honesty Movement” got excited a few years back when Louisiana attorney Tom Cryer was acquitted on criminal tax charges. For example:
The Internal Revenue Service has lost a lawyer’s challenge in front of a jury to prove a constitutional foundation for the nation’s income tax, and the victorious attorney now is setting his sights higher.
“I think now people are beginning to realize that this has got to be the largest fraud, backed up by intimidation and extortion and by the sheer force of taking peoples property and hard-earned money without any lawful authorization whatsoever,” lawyer Tom Cryer told WND just days after a jury in Louisiana acquitted him of two criminal tax counts.
There’s just one problem with the idea that this struck a death blow to the income tax: he still owes the taxes. Even though he’s dead. Being aquitted in a criminal tax case doesn’t make it legal to not pay taxes any more than the O.J. Simpson acquittal legalized multiple homicides in Brentwood.
The Tax Court yesterday ruled that Mr. Cryer owes taxes, interest and civil fraud penalties for tax years for which he didn’t file income tax returns. From the Tax Court:
In essence, Mr. Cryer claimed that the income he received during the tax years at issue from certain “sources” was taxable under Louisiana law, but not under Federal law. In United States v. Clayton, 506 F.3d 405, 412 (5th Cir. 2007), the Court to which an appeal would lie in this case, cited and followed its prior unpublished opinion holding that “the argument that income derived from sources within the United States” is not taxable under Federal law is “patently frivolous” and “absurd”.
The moral: No matter how convincing they are on the Internet, “Tax Honesty” arguments don’t work. They will not keep the IRS from taxing you. When “winning” means staying out of jail but paying 75% civil fraud penalties, you set the bar for victory too low.
If “carried interest” were really just a loophole it would not need such an elaborate fix. In fact, it is based on fundamental principles of partnership taxation.
Illegal procedure. Former Chicago Bear Chris Zorich has been flagged. CBS Chicago reports:
Zorich, 43, was charged Thursday with four misdemeanor counts of failing to file federal income tax returns, for the years 2006 through 2009, according to the U.S. Attorney’s office. During that time, he allegedly had an income of more than $1 million.
Federal prosecutors said Zorich was cooperating with the investigation and has agreed to plead guilty.
His lawyer says that he owes no more than $70,000 after withholding on the non-filed years is applied.
I wonder why he was charged. While it’s a bad idea, it’s not extremely rare for people to just get behind on filing their returns. It doesn’t usually lead to criminal charges. Much of his income for the years at issue was W-2 income, so it wasn’t as though the IRS would miss him.
Perhaps he did something to annoy an examiner enough to call in the Criminal Division. Maybe it’s because he is an attorney [update: he apparently never passed the bar exam]. Or maybe he’s just unlucky to be famous-enough for the IRS to use his celebrity to frighten the rest of us into getting our returns done. (Via Reason 24/7)
Update: This Chicago Tribune report suggests that self-dealing with his charitable foundation may have been a factor.
These wages cannot include wages paid to your children under age 18 (if a sole proprietor farmer) and commodity wages. However, wages paid in cash to spouses and children over age 17 are allowed as part of these wages.
If you are a schedule F farmer with no employees, the W-2 requirement makes the Section 199 deduction worthless.
Seventh, ask the tax professional about data security. Where and how is paper data stored while in the hands of the preparer? Where is the digital data stored? What precautions are in place to minimize the chances of a third party breaking into the office or the digital servers and obtaining information? If the individual hands over paper records without keeping copies, which is an unwise move, what happens if the tax professional’s office burns down?
Berkeley City Councilman Gordon Wozniak has tossed out the idea of an email tax to help save snail mail.
The financial straits of the U.S. Postal Service became an issue for Berkeley lawmakers when the paper mail delivery system proposed closing that northern California city’s downtown post office and selling the building.
It won’t happen, but a state where somebody who thinks it could happen can be elected to public office is pretty much doomed.
A tailor who counted star athletes including Rickey Henderson and Wilt Chamberlain among his clients has pleaded guilty to skirting about $2 million in sales and income taxes.
Mohanbhai Ramchandani pleaded guilty on Tuesday, state Attorney General Eric Schneiderman said. His company, Mohan’s Custom Tailors Inc., also has had local stars Patrick Ewing and Darryl Strawberry among its clients and made an appearance on Bravo’s “The Real Housewives of New York City.”
The charges say that he failed to pay $1.7 million in sales taxes starting in 2001, and he failed to pay $256,000 of income taxes from 2007 through 2009. I didn’t know tailoring could be so lucrative. But this is unusual:
Authorities said a whistle-blower first raised concerns over Ramchandani’s tax practices. They said one indication of fraud was the use of numbers on his tax forms that added up to multiples of 10, an outgrowth of his belief in numerology.
Once in a while you prepare a return that happens to foot to a round number somewhere. It looks funny, but it will happen occasionally just by chance. But when they are all round, apparently the tax people might notice.
As strange as Mr. Ramchandani’s approach to numbers is, Iowa gives him a run for his money. Iowa’s lead tax credit pusher, Debi Durham, has issued a press release touting the economic wonders of enormous tax credits granted Orascom, an Egyptian company, to build a fertilizer plant in Southeast Iowa. The release bases its conclusions on “ the Regional Economic Modeling Inc. (REMI) analysis for the Iowa Fertilizer Co. project.” From the release:
“The REMI analysis of the Iowa Fertilizer Co. project speaks for itself,” said Debi Durham, director of the Iowa Economic Development Authority (IEDA). “On the front end, Iowa Fertilizer Co. will inject $1.4 billion of capital investment into our state and create at least 165 permanent jobs and thousands of construction-related jobs. Now we know that the benefits of that project will serve Iowans for years to come.”
It speaks for itself and it says nothing. It says nothing about whether the project would have gone ahead without the credits, but Iowa’s claims that Illinois was hot after the plant with its own incentives lack credibility.
The analysis really betrays itself by omitting two key words: “opportunity cost.” It claims every projected benefit from the project without asking whether any benefits would be available if the money were used for something else. It certainly doesn’t say what Iowa loses by having a complex tax system with high rates to pay big subsidies to the well-connected.
I’ve said it before: using taxpayer money to lure businesses is like a guy taking his wife’s purse to the bar to buy drinks for the girls. It’s not impressive. They might let the guy buy the drinks, but they realize he’ll treat them like he is treating his wife if he gets the chance. And anybody he goes home with isn’t likely to be much of a prize.
Egypt taking a different approach to Orascom. The Orascom executives do better in Iowa than back home, reports SiouxCityJournal.com:
An Egyptian billionaire behind one of the largest and most controversial projects in the state is being investigated for tax evasion and has been barred from leaving his country.
According to an article published Tuesday in Construction Week Online, Orascom Construction CEO Nassef Sawiris and his father, Onsi Sawiris, are barred from travel until a resolution is reached regarding the sale of an Orascom subsidiary and the taxes from that sale.
As hard as it is to deal with Iowa and federal tax authorities, they are probably downright reasonable compared to Egyptian revenuers. I suspect that the “resolution” being sought is much like that sought by a kidnapper.
The TaxProf links to this from the New York Times Dealbook: Why Carried Interest Is a Capital Gain. It is as good an explanation as I’ve seen of why capital gain on private equity isn’t a crime against humanity:
Typically private equity investors are paid a 2% management fee, on which they pay ordinary income tax rates, and a 20% carried interest of the partnership’s profits that is only paid after limited partners receive a preferred return of 8%.
Carried interest, therefore, is the profits share on the sale of a capital asset and not “ordinary income” as some would have it treated. In other words, it is a capital gain within a partnership and is rightfully taxed at the long-term capital gains rate — provided that the asset, or company, is held for more than one year.
…
The underlying principle is no different than two friends who partner together to purchase a restaurant. One might bring capital and the other brings expertise. The restaurant could be in disrepair or a great concept that needs additional capital to expand. The chef identifies the restaurant to buy and possesses the skills to manage the restaurant and add value to the enterprise over time. The friend has the capital to invest, but doesn’t possess the operational or investment skills to generate a return.
When they sell the restaurant years later, both partners receive capital gains treatment on their long-term investment. A private equity partnership works in the same way. This is Partnership Law 101.
Exactly. And it’s not like a salary, where somebody writes you a check. The private equity investor is taking a risk, and on any given investment is likely to get nothing. It’s not like, say, a tenured law school faculty paycheck that comes every two weeks.
ProTip: Don’t take your tax advice from rappers. This from Going Concern:
As you might expect, TMZ has the scoop and it quotes a number of artists who are currently considering tips for strippers as a legit deduction and therefore a serious tax strategy. And who doesn’t love creative tax planning? But how might they rationalize this idea?
Well, Bizzy Bone considers these young ladies to be like his family:
Bizzy Bone tells TMZ, “I’m giving charity to females who need their light bills paid. So, of course, that’s a write-off. You write off your kids, don’t you?”
Um, no. Mr. Bone might want to ponder the stories of Ja Rule, Fat Joe, and Beanie Sigel, to name a few, before he gets too smug about his tax deductions.
A federal judge Friday sentenced a key player in the once-lucrative Jenkens & Gilchrist tax shelter practice to eight years in prison. From the AP:
U.S. District Judge William H. Pauley III sentenced 52-year-old Donna Guerin, of Scottsdale, Ariz., after she pleaded guilty to conspiracy to defraud the United States and tax evasion. He ordered her to pay $190 million in restitution besides the $1.6 million she agreed to forfeit when she pleaded guilty in September.
Guerin, a former partner at Jenkens & Gilchrist, a Texas-based law firm with offices throughout the United States, had admitted that she helped market tax shelters from 1994 through 2004 to some of the world’s richest investors, including the late sports entrepreneur Lamar Hunt, trust fund recipients, investors, a grandson of the late industrialist Armand Hammer and one of the earliest investors in Microsoft Corp.
The biggest prosecution target at Jenkens, Paul Daugerdas, faces his second trial on the charges in September. His 2011 trial was voided because of juror misconduct.
Dare we attempt to guess what the income tax might look like in another 100 years?
Personally I think it will still exist, but it will have company. The big question for policymakers is whether it should operate as a “mass” tax — as it strives to do today — or whether it will function as a “class” tax that applies only to the upper income strata. Given that roughly 47% of American households currently don’t pay the income tax (distinguished from payroll taxes, which almost everyone pays), one could argue it is already starting to resemble a class tax. Perhaps the future is already here.
I can state with some confidence that if there is an income tax in 2113, I won’t be preparing returns.
There are many ways to get in trouble with tax law. As I have said in the past, if you want to get indicted it’s a bit harder. It helps to be a celebrity, have a very large tax debt, not report large amounts of funds in foreign financial accounts, or abscond with trust fund taxes. I need to add another item to that list: File liens against IRS employees who are investigating you.
Michael Giberson, Sequester Reporting Scavenger Hunt: Official Rules (Knowledge Problem): “If you find a news story emphasizing the pain of sequester budget cuts that also clearly indicates that alternatives such as raising taxes or increasing the national debt also cause pain, you are a winner.”
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.
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
