Posts Tagged ‘Anthony Nitti’

Tax roundup, 8/26/14: Oh, that backup file. You can’t have that one. And lots more!

Tuesday, August 26th, 2014 by Joe Kristan

perryheadOh, that email backup?  From Today’s TaxProf IRA scandal roundup, The IRS Scandal, Day 474, comes this dazer:

Department of Justice attorneys for the Internal Revenue Service told Judicial Watch on Friday that Lois Lerner’s emails, indeed all government computer records, are backed up by the federal government in case of a government-wide catastrophe.  The Obama administration attorneys said that this back-up system would be too onerous to search. 

Tremendous.  After telling the court that there just was no way on earth those emails survived, now they say there is a backup, but it’s just too much of a hassle for them to use it to comply with the court’s orders.  I find it hard to imagine the brashest private-sector lawyer saying something like that, at least more than once.

But wait, there’s more:

The IRS filing in federal Judge Emmet Sullivan’s court reveals shocking new information. The IRS destroyed Lerner’s Blackberry AFTER it knew her computer had crashed and after a Congressional inquiry was well underway. As an IRS official declared under the penalty of perjury, the destroyed Blackberry would have contained the same emails (both sent and received) as Lois Lerner’s hard drive. 

Yet Commissioner Koskinen says we should just stop bugging him about this silly abuse of power stuff and give him money instead.  Because we can trust the IRS.

Related: TaxGrrrl, Judicial Watch Claims IRS Attorneys Admit Lois Lerner’s ‘Missing’ Emails Exist;  Russ Fox, Remember Those Missing IRS Emails? They Appear to Exist….

 

Peter Reilly, Home Sweet RV Does Not Always Produce Best Tax Result.  Peter discusses the recreational vehicle tax Catch-22 we noted recently.

harvestPaul Neiffer, How to Sell Your Land and Pay No Tax – MAYBE.  It involves stretching out the payments and keeping your other income down.

Jason Dinesen, More Commentary About Year-Round Proactive Services to Clients.  “Those of us who are good professionals rarely demand the respect we have earned. And then we wonder why clients seemingly don’t respect us, don’t value us, don’t listen to our advice, or jump ship the moment you breathe about a rate increase.”

Tony Nitti, Tax Geek Tuesday: Computing Earnings and Profits.  “The primary purpose for computing E&P is to determine whether a distribution represents a taxable dividend, a nontaxable return of shareholder capital, or capital gain to the recipient shareholders.”

 

Leslie Book, A Stolen Check, Mistaken Identity and Prisoners (Procedurally Taxing):

This post considers Hill v US, a case from the Court of Federal Claims involving a prisoner named Mark Hill whose $1182 tax refund was stolen and cashed by another prisoner with the same name after the prison system mistakenly delivered an IRS letter relating to the missing refund check to the wrong Mark Hill. With time on his hands, but no check, the right Mark Hill sought justice in the form of a new check. After getting the runaround from the IRS, the right Mark Hill sued the US to force it to issue a new refund check. For good measure, he also wanted interest and punitive damages.

Turns out the IRS doesn’t get any more helpful if you are behind bars.

 

20140826-1Robert D. Flach serves your fresh Tuesday Buzz, with links about smart giving, educational savings options, and what you can earn working tax season at a national return prep franchise.

That’s a long time.  Cobb County man sentenced to 20 years for ID theft, tax fraud (ajc.com).  The guy is also supposed to pay back $5 million he stole.  Good luck on that.  Sure, the guy should go away for a long time, but the real crime is that the IRS let him steal that much from the taxpayers.

Jeremy Scott, Fracking Taxes Help States Now, but What About the Future?  (Tax Analysts Blog)  “North Dakota has been transformed by its rapidly growing energy sector, but it should be cautious about staking too much of its fiscal future on continually increasing severance taxes.”

 

Andrew Lundeen, Solutions on Inversions and Corporate Tax Reform (Tax Policy Blog).

Steve Warnhoff, Will Congress Let Burger King’s Shareholders Have It Their Way?  (Tax Justice Blog).  If it means we get Tim Horton’s donuts, I’m all for the proposed merger.

 

Renu Zaretsky,  Tax Rates: Growth, Competition, and Debt.  The TaxVox headline roundup ponders the effects of individual rate cuts, the badness of corporate rates in the U.S., and film credits in North Carolina, among other things.

lizard20140826Have a nice day.  1.2 Billion Reasons to Worry: Security firm reports Russian crime ring compromised 1.2 billion usernames and passwords (John Lande, Iowa Banking Law Blog)

News from the Profession.  Extra-Marital Affairs Site Claims Accountants are Kings of Romance Because Their Jobs are Boring (Adrienne GonzalezGoing Concern).

 

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Tax Roundup, 8/25/14: Tax Credits for not killing a puppy. Well, another puppy. And: mind your spelling!

Monday, August 25th, 2014 by Joe Kristan
Flickr Image courtisy Llima under Creative Commons license

Flickr Image courtesy Llima under Creative Commons license

Wisconsin finds a new frontier in incentive tax credits.  From madison.com:

The board overseeing the state’s flagship job-creation agency has quietly approved a $6 million tax credit for Ashley Furniture Industries with a condition allowing the company to eliminate half of its state workforce.

As approved by the Wisconsin Economic Development Corp. board, the award would allow the Arcadia-based global furniture maker to move ahead with a $35 million expansion of its headquarters and keep 1,924 jobs in the state.

Stop me with tax incentives, or I’ll fire some more people!

Of course, all of these tax credits are paid for by people who, by definition, aren’t getting their taxes wiped out with special tax breaks that allow politicians to show up for a ribbon cutting.  Politicians know that they’ll get attaboys for “creating jobs,” and nobody will call then out for the jobs they cost by taxing people to give money to their special friends.

Thanks to an alert reader for the tip.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

 

Peter Reilly reports on tax pro who thinks a case we discussed last week may have been wrongly decided.  I think the court probably got it right, but it’s a good read.  If the taxpayer wins on appeal, it will be very helpful for tax planning.

 

Does that make this a tax shelter?

Does that make this a tax shelter?

Audit the Pope, then?  New Tax Head Says She Knows Why Italians Don’t Pay Taxes: They’re Catholic (TaxGrrrl)

Kay Bell, Coverdell Education Savings Account’s pre-college options.

Jason Dinesen, Bridging the Gap Between What Clients Want … And What They’ll Pay For. “Sure, people “want” a proactive approach. But it seems to me like few are actually willing to PAY for the service.”

Russ Fox, Tax Preparers Behaving Badly, “There’s a common thread among these tax professionals: You’ll be getting a refund. That sounds good until you realize that you really shouldn’t have, and that you will likely get in trouble later.”

Robert D. Flach,  OOPS! THEY DID IT AGAIN.  “The State wants taxpayers, and preparers, to submit income tax returns electronically – but when they do the returns and payments therefor are not properly processed.”

Jack Townsend, Criminal Justice Article of U.S. Global Tax Enforcement

Tony Nitti, Your Complete Guide To Every Tax Reference In ‘The Simpsons’ Marathon 

 

TaxProf, The IRS Scandal, Day 473

Ajay Gupta, Carbon Taxes and the White Man’s Burden (Tax Analysts  Blog):

 China, which surpassed the United States as the world’s largest emitter of CO2 in 2006, has made it clear that it has no intention of agreeing to any reduction quotas “because this country is still at an early stage of development.” India, which now ranks third, behind China and the United States in total CO2 emissions, has similarly rejected the notion of subjecting itself to binding reductions.

Yet the carbon tax lobby in the West remains unfazed in the face of this repudiation of responsibility by the developing world. Among the grounds advanced for pressing ahead with unilateral action is one that relies on the residence time of CO2. For several decades, the West pumped much more CO2 into the earth’s atmosphere than China, India, or any other developing county. Unilateralists argue that those historical emissions and their persisting warming effects ensure that the West will remain the largest contributor to climate change for years to come.

That argument has more than a whiff of reparations.

Frack away.

 

2140731-3Matt Gardiner, Kinder Morgan Doesn’t Want to Be a Limited Partnership Anymore–But They’re One of the Few (Tax Justice Blog).  Paying one tax is better than paying two, other things being equal.

William McBride, More Jobs versus More Children:

I, like most humans, think that children are blessing. I am also one to think we as a society should have more kids. I also think that in the very long run, say decades, demographics are destiny, i.e. we cannot expect to be a large, flourishing economy a generation from now if our birth rate continues to be at or below the replacement rate.

However, boosting the birth rate is not as simple as boosting the child credit. 

Not every problem can be solved with a tax credit.

 

Howard Gleckman, How Much Would An Individual Tax Rate Cut Add to the Deficit, and Who Would Benefit? (TaxVox).  “A one percentage point across-the-board reduction in tax rates would add $662 billion to the budget deficit over 10 years—about $40 billion in 2015 rising to more than $85 billion by 2024.”

 

Donald Boudreax is not a happy taxpayer:

 I pay what I “owe” in taxes not because I have a “responsibility” to do so but, instead, only because government threatens to use violence against me if I don’t pay what it demands.  I stand in the same relation to the tax-gatherer as I stand in relation to any common thug who points a gun, knife, or fist at me demanding my money.  [I actually prefer the common thug, for he neither insults my intelligence by telling me that his predation is for my own good nor spends the money he takes from me to fund schemes to further interfere in my life.] 

I suppose that illusion-free approach probably applies to most of us, if you think about it.

 

Career Corner.  Use All Your Vacation Days, Even If It Means Making Less Money (Caleb Newquist, Going Concern)

 

dictionarySpelling is important.  Even for identity theives.  From Dispatch.com:

A $3.5 million bogus tax-refund scheme that unraveled because the conspirators couldn’t spell the names of well-known cities has resulted in a federal-prison sentence of more than eight years for the scam’s mastermind.

Sims and Towns misspelled the names of several cities when they listed return addresses, including “Louieville” and “Pittsburg.” That caught the attention of Internal Revenue Service investigators.

I love how they call somebody who committed a stupid crime in a stupid way — and showed up for a sentencing hearing drunk, apparently —  a “mastermind.”

 

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Tax Roundup, 8/21/14: IRS says saving the company still “passive;” Tax Court says otherwise And: the $105.82 c-note!

Thursday, August 21st, 2014 by Joe Kristan

Programming note: No Tax Roundup will appear tomorrow, August 22.   I will be up in Ames helping teach the ISU Center for Agricultural Law and Taxation class “Affordable Care Act (ACA): What Practitioners Need to Know in the morning.  Webinar registration is closed, but you can still  attend as a walk-in.

 

S imageS imageS-SidewalkYou saved the company.  Big deal.  Apparently pulling the company you started from the brink of failure wasn’t enough to convince the IRS that a taxpayer “materially participated” and could deduct losses on his tax return.

Charles Wade was a founder of Thermoplastic Services, Inc. and Paragon Plastic Sheeting, both S corporations.  After his son Ashley took over daily management of the business, he still owned a significant stake in the company.  He never really retired, though.  From the Tax Court (my emphasis, footnotes omitted in all Tax Court quotes):

With Ashley there to handle day-to-day management, Mr. Wade became more focused on product and customer development. He did not have to live near business operations to perform these duties, so petitioners moved to Navarre, Florida. After the move he continued to make periodic visits to the facilities in Louisiana and regularly spoke on the phone with plant personnel.

In 2008 TSI and Paragon began struggling financially as prices for their products plummeted and revenues declined significantly. Mr. Wade’s involvement in the businesses became crucial during this crisis. To boost employee morale, he made three trips to the companies’ industrial facility in DeQuincy, Louisiana, during which he assured the employees that operations would continue. He also redoubled his research and development efforts to help TSI and Paragon recover from the financial downturn. During this time Mr. Wade invented a new technique for fireproofing polyethylene partitions, and he developed a method for treating plastics that would allow them to destroy common viruses and bacteria on contact. In addition to his research efforts, Mr. Wade ensured the companies’ financial viability by securing a new line of credit. Without Mr. Wade’s involvement in the companies, TSI and Paragon likely would not have survived.

Slacker.  At least according to the IRS, who said that this participation failed to rise to the level of “material participation” and disallowed over $3 million in pass-through losses on Mr. Wade’s return.

The Tax Court took a different view.  Judge Goeke explains :

A taxpayer materially participates in an activity for a given year if, “[b]ased on all of the facts and circumstances * * * the individual participates in the activity on a regular, continuous, and substantial basis during such year.” A taxpayer who participates in the activity for 100 hours or less during the year cannot satisfy this test, and more stringent requirements apply to those who participate in a management or investment capacity.  The record reflects that Mr. Wade spent over 100 hours participating in TSI and Paragon during 2008, and his participation consisted primarily of nonmanagement and noninvestment activities. Ashley managed the day-to-day operations of the companies; Mr. Wade focused more on product development and customer retention.

Although Mr. Wade took a step back when Ashley became involved in the companies’ management, he still played a major role in their 2008 activities. He researched and developed new technology that allowed TSI and Paragon to improve their products. He also secured financing for the companies that allowed them to continue operations, and he visited the industrial facilities throughout the year to meet with employees about their futures. These efforts were continuous,  regular, and substantial during 2008, and we accordingly hold that Mr. Wade materially participated in TSI and Paragon. 

20120801-2It’s notable that the judge did not require Mr. Wade to produce a daily log.  Apparently there was enough testimony and evidence to show that his participation crossed the 100 hour threshold.

The 100 hours might not have been considered enough under some circumstances.  Usually the IRS holds taxpayers to the default 500-hour test for material participation.  This case is unusual in its use of the fall-back 100-hour “facts and circumstances” test. It’s good to see the Tax Court use it, as the IRS seems to think this test never applies.

It’s also interesting that the efforts at “customer retention” were counted.  This could be useful in planning for the 3.8% Obamacare Net Investment Income Tax.  The NIIT taxes “passive” income, defined the same way as the passive loss rules.  A semi-retired S corporation owner who still calls on some of old accounts after turning daily operations over to successors might be able to avoid the NIIT under the logic of this case.  If so, though, it would be wise to keep a calendar to prove it.

Cite: Wade, T.C. Memo. 2014-169

Related:

Russ Fox, A Passive Activity Case Goes to the Taxpayers.  “Hopefully the IRS can get more of these cases right at audit and appeals–they’ll be dealing with many more of these over the coming years.”

Paul Neiffer, More than 100 but Less than 500.  “It is nice to see that a subjective test went in the taxpayer’s favor.”

Material participation basics.

 

How far does $100 go in your city?  Last week the Tax Foundation issued a map showing how far $100 goes in different states.  Now they have issued a new map in The Real Value of $100 in Metropolitan Areas (Tax Policy Bl0g).  It is wonderful — just scroll your cursor over your town.

In Des Moines, $100 is good for $105.82.  In New York, it gets you $81.83.

 

TaxGrrrl, Anna Nicole Smith’s Estate Loses Yet Another Run At The Marshall Fortune

Tony Nitti, Could The IRS Disallow Ice Bucket Challenge Charitable Contributions?  Go ahead, IRS, just try it.  You’re just too popular.

William McBride, Earnings Stripping, Competitiveness, and the Drive to Further Complicate the Corporate Tax (Tax Policy Blog)

Roberton Williams, One Downside Of Inversions: Higher Tax Bills For Stockholders (TaxVox)

Kay Bell, How does the U.S. corporate tax rate compare to other countries?  Poorly.

TaxProf, The IRS Scandal, Day 469

 

David Brunori, Using Local Cigarette Taxes for Schools Is Silly (Tax Analysts Blog).  Smoke ‘em if you got ‘em.  For the children!

Cara Griffith, Was Oregon’s Tax Incentive Deal With Intel Unnecessary? (Tax Analysts Blog).  No, it was absolutely necessary to enable the Governor of Oregon to issue this press release and YouTube announcement.  That’s the point, after all.

 

Quotable:

The United States gets little tax from Americans overseas today. Most of them live in high-tax countries and have no U.S. income tax in any event because of FTCs and the section 911 foreign earned income exclusion. But as we all know, Congress couldn’t care less about this subject, and this is all a non-starter. Better to place your money on a genetically modified flying pig.

Robert L. Williams in Tax Analysts ($link)

 

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Tax Roundup, 8/18/14: Tax Credits for housing. And for Elvis!

Monday, August 18th, 2014 by Joe Kristan

The Des Moines Register is running a series on Jack Hatch, the Democratic nominee for Iowa Governor, focusing on subsidized housing projects he developed.  The stories include Jack Hatch’s record shows no clear conflicts of interest and Review shows Hatch followed public financing rules.

The Register finds no evidence of illegality in Sen. Hatch’s tax credit-driven deals.  That’s unsurprising, as the tax credits are shared with investors, who want clean tax projects and impeccable tax breaks.  As usual with tax incentives, though, the scandal is what is perfectly legal.

The series describes the financing of some projects.  For example:

20140816-1

 

A $6.5 million development with over $8 million in government aid.  A sweet deal, if you are one of the lucky participants of an oversubscribed subsidy program.

While such projects are touted as achieving “affordable housing,” the real beneficiaries are arguably well-connected developers and tax shelter investors.  It’s all legal, and all paid for by the rest of us.

If the real goal is to help the poor, there are better ways than a Rube Goldberg tax credit system running the aid through tax shelter developers and investors.  Arnold Kling’s idea to provide the poor with a universal flexible benefit “to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit,”  is a more promising approach.  It is what a program designed to help the poor, rather than the connected, would look like.

 

Elvis20140818-3Kay Bell, Elvis estate seeks tax breaks for Graceland expansion.  Or what?  Graceland is going to leave Tennessee?  Elvis will leave the building?  But, but, jobs!  Or something.

Robert D. Flach, KEEP COPIES OF YOUR W-2s FOREVER!  Robert explains how he was able to use old W-2s to help a client show that his retirement contributions were “after tax” for New Jersey purposes, preventing a second tax on withdrawal.

Tony Nitti, New Opportunities Exist For S Corporation Shareholders To Deduct Losses

William Perez, Got a Call From the IRS? It’s Probably Not the IRS.  A client of our office got such a scam call last week.  We told them to hang up if they call back.

Jack Townsend, Tidbits on the New Streamlined Procedures

Annette Nellen, Better identity theft efforts – S. 2736

 

20140818-1Jason Dinesen, Why an LPA?  Jason answers the question “Why did I pursue an Iowa “Licensed Public Accountant” designation? LPAs are an obscure lot, in that we only really exist in 3 states (Iowa, Delaware and Minnesota).”

Peter Reilly, IRS Stampedes A Cattle Shelter.  Peter explains why losing a hobby loss case is extra bad.  With a bonus quote from me (Thanks, Peter!).

Tax Trials, Record Your Easement: Tax Court Adjusts Timing & Valuation of New York Facade Easement

 

TaxGrrrl, From AR-15s To Rubber Bullets: How Did Police End Up With Military Gear On American Streets?  Your tax dollars at work.  Amazingly, no tax credits appear to be involved.

TaxProf, The IRS Scandal, Day 466.  It appears the judge who told the IRS to explain what happened to the Lois Lerner emails isn’t yet satisfied with the IRS response.  More from Russ Fox: Judge Sullivan Not Impressed by the “Dog Ate my Homework” Excuse.

20140818-2Ajay Gupta, Demagoguing the ‘I’ Words. (Tax Analysts Blog) “If an inversion exploits a loophole, then so does every other corporate reorganization that painstakingly adheres to the requirements of the code and regs.”

Steven Rosenthal, Can Obama slow corporate inversions? Yes he can.  Silly rabbit.  The idea isn’t to slow corporate diversions; it’s to demonize them for political fun and profit.  And his idea of reviving the moribund Sec. 385 debt-equity regulations for this purpose shows how much the inversion panic has parted from reality.

 

News from the Profession.  Here’s Further Proof That Accounting Firms Need a Charge Code for “Wasting Time on Internet” (Caleb Newquist, Going Concern)

 

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Tax Roundup, 8/13/14: Tax Fairies in the graveyard? And: another payroll service goes bad.

Wednesday, August 13th, 2014 by Joe Kristan

Funeral home signOf course cemetery lots are shooting up in value.  People are dying to get in!  Taxpayers seek the Tax Fairy in the strangest places.  The Tax Fairy is the mythical spirit who can make taxes go away magically, for a reasonable price to a tax wizard who claims to be able to summon her.  A Tax Court case yesterday found taxpayers looking for her in cemeteries (Emphasis mine; slightly edited for readability).

Judge Nega’s overview:

Heritage Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3 , and Heritage Memorial Park Associates 1995-4 (collectively, partnerships) are Maryland general partnerships. The partnerships were established to acquire cemetery sites, to hold the sites for over one year, and then to contribute the sites to qualified charitable organizations, with the aim to provide individuals who invested in the partnerships with charitable contribution deductions equal to the appraised values of the sites as of the times of the contributions. Glenn R. Johnston and his colleagues promoted the partnerships to wealthy individuals as a way for them to receive a return of tax benefits in the form of passthrough deductions or losses worth significantly more than the amounts invested. 

What sort of deductions?

…(petitioner) invested $37,500 in each partnership. He made these investments to increase the amounts of his charitable contributions for the subject years and, more particularly, to receive promoted tax benefits worth significantly more than his investments. He expected that his investments would return him tax benefits worth $50,000 for each subject year. 

HMPA 1995-2 claimed the $1,864,850 charitable contribution deduction on that return. Petitioner was allocated $135,127 of that deduction, and petitioners deducted the $135,127 on their 1996 individual return as a charitable contribution. HMPA 1995-2 reported on its 1996 Form 1065 that HMPA 1995-2 had no income or expenses for 1996 (but for the charitable contribution deduction).

So: invest $35,000, deduct $135,000, save (conservatively) 1/3 of $135,000, or $45,000.  What could go wrong?

On September 29, 2005, Mr. Johnston was indicted on (1) one count of conspiracy to defraud the United States by selling, claiming, and causing others to sell and claim millions of dollars in false and fraudulent tax deductions for charitable contributions and concealing from the IRS income from the sales of the fraudulent deductions and (2) multiple counts of aiding and assisting in the filing of false returns by investors in the partnerships so that the investors claimed charitable contribution deductions in amounts substantially greater than allowable. These charges involved the partnerships, among one or more other entities. Mr. Johnston pleaded guilty to the first count on April 12, 2007.

Sure, it’s a criminal enterprise, but the deductions are still good, right?  And didn’t the statute run?  Nope.  The court ruled that the IRS met the procedural requirements to keep the statute of limitations open by properly initiating partnership-level proceedings.  The court also ruled that the taxpayer couldn’t claim a business loss for the partnership investments:

tax fairyPetitioners argue secondarily that they may deduct a $37,500 loss for each year as to petitioner’s investments in the partnerships. To that end, petitioners assert, petitioner’s ownership interests in the partnerships were worthless as of the end of the corresponding years in which the partnerships operated, and he knew that the interests were worthless as of those times and abandoned his interests as of those times. Petitioners add that petitioner invested in the partnerships to make a profit and in furtherance of a legislative intent to encourage charitable contributions.

But the court ruled that seeking charitable deductions isn’t a “trade or business,” and that no business loss was available.  $35,000 spent to net a tax savings of nothing.

The Moral?  This thing should never have passed the “too good to be true” test.  The deductions depended on incredible post-contribution appreciation in graves.  Anybody thinking this sort of thing might actually work really needs to get out more.  And there is no tax fairy.

Cite: McElroy, T.C. Memo 2014-163.

Related:  Three Years is the Normal Statute of Limitations, But Not Always (Paul Neiffer).

 

EFTPSAnother payroll service makes off with employers’ payroll tax payments.  From emissourian.com:

 

A Washington man pleaded guilty this week to federal mail fraud and money laundering charges.

Bradley Ferguson, 48, owner of Paymaster Business Solutions in Fenton, is scheduled to be sentenced Nov. 6 in U.S. District Court. 

He pleaded guilty to one felony count of mail fraud and one felony count of money laundering before U.S. District Judge E. Richard Webber.

Ferguson is accused of withdrawing money from the bank accounts of business clients to pay federal, state and local taxes but did not make the payments, according to a federal grand jury indictment.

While it makes sense for many taxpayers to outsource payroll functions, the tax law still holds the employers responsible for getting withholdings to the IRS.  If you outsource your payroll taxes, you should use Electronic Federal Tax Payment System (EFTPS) online access to make sure your payroll tax remittances are actually hitting your account.  If you use a service that doesn’t allow you to do this — like many “professional employer organizations” who “co-employ” their clients’ workers — you need to make other arrangements, like bonding, to protect yourself.

 

Peter Reilly, Alimony Deduction Requires Good Substantiation.  “It turns out that taxpayers are routinely whipsawing the IRS.”

William Perez, How to Get a Federal Tax Credit for the Cost of Child Care.

Kay Bell, James-Love NBA combo is tax boon to two Cleveland towns.

TaxGrrrl, Think Before You Post: The Dangers Of Seeking Tax Advice On The Internet:

I was pretty shocked at how much information folks were willing to share on the internet about their tax evasion questions, strategies and justifications. Sometimes, these folks are regular forum posters who happily share their location and other identifying information while others clearly try to remain somewhat anonymous.

In case you were wondering, the IRS has internet access.

 

Jason Dinesen, Rare Home Office Deduction Win in Tax Court

Carl Smith, In Some Cases IRS Seeks to Conflict Out Lawyers Who Represented Taxpayers in CDP Hearings (Procedurally Taxing).  CDP stands for “collections due process.”  The IRS is bigger than you, peasant.

 

Tony Nitti, Final IRS Rules On Partnership Technical Terminations Will Surprise Some Tax Pros

 

20140813-1David Brunori: Congress Shouldn’t Make State Tax Systems Worse (Tax Analysts Blog)

As my colleague Maria Koklanaris reported, 29 Democratic members of Congress asked leaders of the California State Legislature to reauthorize and expand the state’s film tax credit. Led by Rep. Adam B. Schiff, D-Calif., the federal lawmakers asked California to extend a very bad tax policy, saying that if it doesn’t, film jobs will be lost forever to other states. 

Why film credits? Why not some other industry? Politicians are the worst at determining what’s best for the marketplace. Despite the studies funded by the Motion Picture Association of America that say otherwise, film tax credits don’t work. In virtually every state that has them, there’s no discernible economic effect — that is, the tax giveaway did not result in more economic activity than would have occurred without it.

Iowa has some lessons to teach here.

 

TaxProf, The IRS Scandal, Day 461

 

There’s only one left? Owner of the Pickle pleads guilty to federal tax fraud.

Because you invited clients?   PwC’s Bob Moritz on Why You Shouldn’t Miss Your Kid’s Birthday Party for Work (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 7/10/14: The sordid history of temporary tax provisions. And: NOLA mayor wins 10-year term!

Thursday, July 10th, 2014 by Joe Kristan

taxanalystslogoLindsey McPherson of Tax Analysts has a great, but unfortunately gated, article today, “Things to Know About the Tax Extenders’ History” ($link) Update: Tax Analysts has ungated the article, so read it all here for free! ( It details four points:

1. Two-Year Retroactive Extensions Are Often Passed Late in Election Years

2. Extenders Are Often Attached to Larger Bills

3. Congress Has Never Fully Offset Extenders Legislation

4. Most Extenders Have Been Renewed at Least 3 Times

What does “most” mean? “Of the 55 expired provisions that are the focus of the current debate, 39 have been around since 2008 or longer and thus have been extended at least three times…”

This implies that Congress has no intention of letting the extenders expire.  It only passes them temporarily to hide their real cost, because Congressional funky accounting doesn’t treat them as permanent.  It also requires lobbyists to come to fund-raising golf outings every year to ensure that they get their pet provisions extended.  Honest accounting would at least treat any provision extended twice as permanent, but accounting you and I would do time for is business as usual on the Hill.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 427.  It has this interesting bit, from the New York Times, Republicans Say Ex-I.R.S. Official May Have Circumvented Email:

Lois Lerner, the former Internal Revenue Service official at the center of an investigation into the agency’s treatment of conservative political groups, may have used an internal instant-messaging system instead of email so that her communications could not be retrieved by investigators, Republican lawmakers said Wednesday.

But the crashed hard drive epidemic is perfectly normal, isn’t it, Commissioner Koskinen?

 

Tony Nitti, Tax Geek Tuesday(?): The IRS Finally Figures Out The Real Estate Professional Rules.  Tony covers the IRS walk-back from its untenable position on the amount of participation required to be a “real estate professional.”  My coverage is here.

Paul Neiffer, Watch Out for Spousal Inherited IRAs.  “Spouses who inherited IRAs have a couple of elections available to them that non-spouses do not have.  However, care must be taken to make sure that the 10% early withdrawal penalty does not apply when distributions are finally taken.”

Kay Bell, Home sales provide most owners a major tax break

 

 

Accounting Today, IRS Loses Billions on Erroneous Amended Tax Returns.  A report from the Treasury Inspector General for Tax Administration faults IRS procedures to review amended returns.

 

Cara Griffith, The Criminal Side of Sales Tax Compliance (Tax Analysts Blog):

Imagine this scenario: In the middle of an acquisition deal, the due diligence review of a company being acquired reveals that the company has underremitted its sales tax liability. The deal is never finalized because of the problem. The company approaches its tax adviser with the news that it failed to remit some of the sales tax it collected and asks for advice. On hearing that, most state and local tax practitioners would cringe. It doesn’t matter why the company failed to remit the sales tax it collected from customers — the company is in serious trouble and could face both civil collection penalties and criminal prosecution.

You have to be special to legally keep sales tax you collect.

 

20140505-1Len Burman, “Pension Smoothing” is a Sham (TaxVox):

In a nutshell, here’s what it does: Companies can postpone contributions to their pension funds. This means that their tax deductions for pension contributions are lower now, but the actual pension obligations don’t change, so contributions later will have to be higher—by the same amount plus interest. In present value terms (that is, accounting for interest costs), this raises exactly zero revenue over the long run. 

More of that Congressional accounting.

 

Jack Townsend, Interesting Article from the Swiss Bankers Side.

Leslie Book, Recent Tax Court Case Shows Challenges Administering Civil Penalties and the EITC Ban (Procedurally Taxing)

Overnight, if you leave the cap off.  When Will the Soda Tax Go Flat? (Joseph Thorndike, Tax Analysts Blog)

Scott Eastman, $21,000 Tax Bill Just for Some Potato Salad (Tax Policy Bl0g).  I’ve had potato salad that should have been charged more than that.

Adrienne Gonzalez, Tax Superhero and George Michael Among Those Caught Using Tax Shelter in the UK.  This is a different type of shelter than the one that caused Mr. Michael’s prior legal troubles.

 

When they say it’s not about the money, it’s about the money.  From the Washington Post,  Former New Orleans mayor Ray Nagin sentenced to 10 years in prison:

“I’m not in it for the money,” Nagin said after he was elected to the first of two terms in 2002.

Mayor Nagin was convicted on 20 charges, including four charges of filing false tax returns.  Mayor Nagin’s indictment tells a story of pervasive fraud involving kickbacks and bribes for city business, and third-party payment of limo rides and private jet services.  But he did a heck of a job with Hurricane Katrina.

20140710-1

One interesting thing about the Post piece: it never mentions that Mayor Nagin is a member of a political party.  Unusual, for a politician.  Someone should look into that.

 

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Tax Roundup 6/24/14: Koskinen’s political gifts. And: in case you didn’t think Hitler was bad already…

Tuesday, June 24th, 2014 by Joe Kristan

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Just the man to build bridges to Republicans who fund the IRS.  From Bryan Preston, IRS Chief Koskinen Has Donated Big to Democrats Over the Years:

According to the Washington Free Beacon, Koskinen has donated about $100,000 to Democrat candidates and committees since his first donation in 1979. His donor recipients include Gary Hart, the Democratic National Committee, the Democratic nominee in each presidential campaign since 1980 (which would even include Walter Mondale, who stood no chance of beating President Ronald Reagan in 1984), the Democratic Congressional Campaign Committee, and Hillary Clinton’s and Barack Obama’s campaigns. He most recently donated $2,500 to Sen. Mark Warner (D-VA) in 2013.

He has given no money to Republicans.

It’s hard to believe how tone-deaf he is to the Tea Party scandal, but this helps explain it.  (Via Instapundit)

 

Jeremy Scott, Lost Lerner E-mails Latest Example of IRS Death Wish (Tax Analysts Blog), my emphasis:

In contrast to their GOP colleagues, Democrats rushed to Koskinen’s defense. That is, perhaps, understandable, even though much of what the IRS has done during this scandal is indefensible. Democrats probably want to defend their president’s pick to head the IRS, and maybe they want to try to change the narrative heading into a potentially disastrous midterm election. But the reality is that the IRS isn’t doing them any favors. There’s only so much incompetence and disingenuous behavior that can be run through a political spin machine. The Democrats’ reflexive defense of Lerner (whose conduct can’t be excused) and their apparent willingness to accept any explanation from Koskinen (who didn’t even try to adequately explain why he hid information on the lost e-mails from February until late June) is baffling. Democrats weakly attempted to paint the GOP as on a witch hunt for a conspiracy, as though the IRS’s mismanagement and appearance of bias weren’t enough to justify congressional inquiry.

The IRS isn’t doing Democratic congresscritters any favors, nor are they doing any for the IRS.  They are just making the IRS look more like a partisan agency, which could cripple tax administration for years.

 

TaxProf, The IRS Scandal, Day 411

 

20140507-1Kay Bell, Save space and trees: Digitize your tax records.  That way if you lose them, the IRS will surely understand.

Russ Fox has some valuable information for online gamblers trying to stay FBAR compliant: Online Gambling Addresses (Updated for 2014)

Robert D. Flach has a Tuesday Buzz for you!

Tony Nitti, How State Taxes Could Play A Role In Carmelo Anthony’s Landing Spot.  Nah, state taxes don’t matter…

Peter Reilly, Step Kids Remain Step Kids After Divorce.  So you may still have a dependent, if not a spouse.

Jack Townsend, Comments by IRS Personnel on New Streamlined and OVDP Procedures.  “The new procedures were designed to ‘encourage folks who are considering quiet disclosures to come in with their hands up’ and avoid taxpayers coming into OVDP with the intention to opt out.”

Annette Nellen, Bitcoin Taxation – Clarity and Mystery, “If you are a tax practitioner and don’t think you need to deal with it, I’d be surprised if none of your clients uses bitcoin.”

William Perez, Backup Withholding.

 

Tyler Dennis, The Clinton’s Estate Tax Planning Demonstrates the Arcane Nature of the Estate Tax (Tax Policy Blog):

When the Clintons created the trust in 2011, their property’s assessed value was $1.8 million.  Without a residential trust, the future appreciation between 2011 and 2021 would count against the gift tax. If the property appreciated at a 4% annual rate and reached $2.6 million by 2021, that’s the amount that would count. With the residential trust, though, the Clintons were able to “lock in” the value of the home at its 2011 value of $1.8 million without actually relinquishing the property to the beneficiary of the trust.

Most supporters of higher taxes assume that they won’t have to pay them.

 

Renu Zaretsky, Disbelief, Devolution, and Death Benefits.  The TaxVox headline roundup talks about the Koskinen appearance before the Issa committee, and about how a surprising proportion of new life insurance is taken out on employees.

Andrew Lundeen, The Average U.S. Worker Pays over $16,000 in Income and Payroll Taxes (Tax Policy Blog):

The tax burden is a combination of income taxes at the federal, state, and local levels as well as the employee and the employer payroll taxes. Of the 31.3 percent tax burden, 15.4 percent is due to income taxes and 15.9 percent is due to payroll taxes, over half of which is paid by the employer on the employee’s behalf. (Workers pay the cost of the employer-side payroll taxes through lower wages.) 

Heck of a deal.

 

Stephanie Hoffer, Kuretski, the Tax Court, and the Administrative Procedure Act (Procedurally Taxing).

 

Another great tax planning idea down the tubes.  Kidnapping Prostitutes Is Not a Good Way to Claim Dependents for Tax Purposes (Greg Kyte, Going Concern)

If you didn’t think he was a bad guy already…  Adolf Hitler: Billionaire tax-dodger?

 

 

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Tax Roundup, 6/11/14: IRS Bill of Rights: just words? And: when your state got its income tax.

Wednesday, June 11th, 2014 by Joe Kristan

billofrightsTalk is cheap.  The North Korean constitution has a whole bunch of rights,  per Wikisource.  For example:

Article 70. Citizens have the right to work. All able-bodied citizens choose occupations in accordance with their wishes and skills and are provided with stable jobs and working conditions. Citizens work according to their abilities and are paid in accordance with the quantity and quality of their work.

Article 75. Citizens have freedom of residence and travel.

Article 78. Marriage and the family shall be protected by the State. The State pays great attention to consolidating the family, the basic unit of social life.

 

So written declaration of rights are just empty words when there is nothing behind them. That’s why I can’t get too excited about the big Taxpayer Bill of Rights announced by IRS Commissioner Koskinen and Taxpayer Advocate Olson yesterday.

Nothing to disagree with on the list, but what will the IRS do to make it more than empty words?  Going down the list:

The Right to Be Informed.  The IRS is infamously secretive.  Will they no longer require Tax Analysts to sue them to make public their positions and procedures?  Will the required compensation for S corproation employee- shareholders be only known to the whim of the examining agent?

The Right to Quality Service.  The IRS continues to get worse at answering taxpayer questions.  It seems like they are worse than ever at dealing with correspondence.  It has become nearly impossible to reach IRS personnel in D.C. by phone to ask technical questions. Is the Commissioner going to change any of this?

The Right to Pay No More than the Correct Amount of Tax.  The nearly-automatic assertion of penalties for every asserted deficiency will have to end for this to mean anything.

The Right to Challenge the IRS’s Position and Be Heard.  The consolidation of appeals offices and their seeming loss of independence will have to be reversed for this to mean something.

The Right to Appeal an IRS Decision in an Independent Forum.  See you in Tax Court…

The Right to Finality.  Does this mean IRS will enable offshore FBAR foot-faulters to come into compliance without facing financial ruin?

The Right to Privacy and The Right to Confidentiality. These are a big ones, and the IRS hasn’t been doing so well at them lately.

The Right to Retain Representation.  Yet the IRS wants to choose who gets to do this for you. When the IRS can shut down your representative, he may not be a really zealous advocate.

The Right to a Fair and Just Tax System.  This is something that the IRS can’t ultimately reach on its own — Congress designs the system — but it could sure do a lot better.  When the IRS routinely assesses $10,000 penalties for filing Form 5271 one day late, when they effectively loot foreign pension accounts of expats for inconsequential paperwork violations, it’s hard to see the fairness and justice.

Taxpayer Advocate Nina Olsen

Taxpayer Advocate Nina Olsen

Other coverage:

TaxProf has a roundup.

Kay Bell, Would the newly adopted Taxpayer Bill of Rights have prevented the IRS Tea Party scandal?

Robert W. Wood, IRS Reveals Taxpayer Bill Of Rights

Joseph Henchman, IRS Approves List of Taxpayer Rights (Tax Policy Blog).  “My own addition is that much as requiring police to know and inform arrestees of “Miranda” warnings has increased awareness of those rights, so too will this.”

TaxGrrrl,  IRS Releases Much Anticipated ‘Taxpayer Bill Of Rights’  “With the wrap up of filing season, the IRS is now in its peak correspondence mailing season. This was, according to Koskinen and Olson, the perfect time to introduce the rights since they will be mailed out together with those correspondences.”

Russ Fox, IRS Adopts “Taxpayer Bill of Rights;” Will Anything Change?  “Until the IRS comes clean on the IRS scandal, what was released today makes a great sound bite but is otherwise nothing new. The IRS appears to have violated six of the ten rights, and is still stonewalling Congress on the scandal. The IRS’s budget won’t be increased because of today’s press release.”

 

Scott Drenkard, Richard Borean, When Did Your State Adopt Its Income Tax? (Tax Policy Blog):

20140611-1

No, they haven’t been around forever, it just feels that way.  Wisconsin was first.

 

Jason Dinesen, Same-Sex Marriage and Amending Prior-Year Returns.  “A broader way of asking the question is: if someone who’s in a same-sex marriage amends a prior-year return that they had previously filed as a single person due to the Defense of Marriage Act, must that amended return show a filing status of married?”

Tony Nitti, District Court: Lone Sale Of Undeveloped Land Generates Ordinary Income, Jeopardizing Land Banking Transactions   

William Perez, Home Office Deduction

Keith Fogg, Government Drops Appeal in Rand Case (Procedurally Taxing).  This is the case where the Tax Court ruled that a recovery of refundable credits in excess of income tax was not a “deficiency” for computing penalties.

Jack Townsend, Reminder: Category 2 Banks Will Serve Up Their U.S. Depositors .  Consider banking secrecy dead.

Brian Strahle provides a list of state and local tax blog resources. 

 

20140611-2Alan Cole, Japan’s Tax Reforms and its Blockbuster GDP Growth (Tax Policy Blog):

Paired together, theory would predict that these two tax changes create a structural shift in the Japanese economy; the more favorable corporate tax climate would encourage investment, and some income would be spent on that new investment instead of immediate consumption. Over the long term, this will boost Japanese wealth and productivity, and eventually allow for a higher standard of living than before.

The data fit this theory so far; private nonresidential investment grew at a “blockbuster” rate of 7.6% in the first quarter of 2014. 

 

David Brunori, A Coke and a Smile and a Tax (Tax Analysts Blog). ” It would tax a can of Coke, but if you went to Starbucks and dumped five teaspoons of sugar into your latte, there would be no additional tax.”

TaxProf, The IRS Scandal, Day 398

Going Concern, Ex-BDO Vice Chairman Given 16 Months to Think About His Choices. He will retire to a Bureau of Prisons meditation facility.

He was ashen after the sentence was announced.  Gray man sentenced to 18 months for tax evasion

 

 

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Tax Roundup, 6/2/14: Tax moralism and moral panics. And: IRS, abetter of theives, scourge of victims!

Monday, June 2nd, 2014 by Joe Kristan

taxanalystslogoTax Analysts’ Tax Notes and State Tax Notes are part of my healthy breakfast, and today they are especially delicious.  The only bad part, for me, is that they are subscription publications, making them hard to share in full.  I can give you morsels, though.

Joseph Thorndike has an excellent discussion of the hollow moralism of tax debates, though he ends up defending it.  In the course of discussing an article by Allison Christians on the role of moralism in tax debates, he comes up with gem after gem.  He quotes Learned Hand’s discussion of the issue, which I find conclusive:

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

That never stops politicians, as Joseph points out:

     More recently, President Obama’s proposal for a “Buffett rule” clearly falls within that tradition of tax moralism (although in this version of the morality play, the billionaire plays the hero rather than the villain). Like the AMT, the Buffett rule is a rear-guard action to defend the fisc against the predations of aggressive avoiders.

But those sorts of Rube Goldberg tax contraptions are an admission of failure. They take for granted that the existing tax base and its statutory rate structure cannot be defended. But the efficacy of those second-best tax systems — at least when measured in terms of fairness — is anything but self-evident. And their costs in terms of complexity and opacity are substantial. 

If you move away from the law, to a system of “morality” in paying taxes, you lose your way.  Who decides what is moral?  Politicians?  Don’t make me laugh.  It’s hard enough to follow the law, given its ridiculous complexity.  If you then require taxpayers to meet subjective standards of whatever pressure group feels like calling a press conference that day, you make taxes pretty much impossible.

One point not mentioned is the conflicting moral obligations of taxpayers.  A rich individual has moral responsibilities to his children, his business and his own community.  The IRS can’t be the supreme moral agent.  And a corporation has moral and legal obligations to its shareholders, customers and employees that conflict with any “moral” obligation to the fisc.  Given that pensions are mostly invested in corporation stock and bonds, their “moral” obligation to give politicians more money for buying votes is hard to take seriously.

 

e-cigFor dessert, David Brunori chimes in on e-cigarettes and politicians

 I get the rationale for tobacco taxes. You smoke, you get sick, society has to pay for your medical care. That’s consistent with the classic rationale for excise taxes. Those taxes are legitimate only if used to pay for externalities — that is, the societal costs that aren’t borne by the market.

Of course, cigarette taxes in particular have never really been about externalities. If they were, every penny of revenue would go to smoking-related healthcare. Instead, dozens of states earmark some cigarette tax revenue for education (I still can’t believe teachers who rely on cigarette tax revenue for their raises aren’t leaving cartons of Lucky Strikes on their kids’ desks). 

Ah, but giving away cartons of cigarettes on a teacher’s salary?  Of course, my mom was a teacher, and I remember as a kid buying her cigarettes at the store.  But she never shared them, and I never picked up the habit.

David adds:

Taxing e-cigarettes is a money grab. If people use e-cigarettes instead of real cigarettes, the state loses money. The vested interests like the public employee unions and the myriad government contractors can’t have that. But proponents won’t admit the money-grabbing motive.

Iowa, like many other states, is a partner in the tobacco industry as a result of a shakedown settlement agreement with the big tobacco companies.  The industry continues to operate, with the politicians getting a cut of the revenue (nice vice racket you got there, hate to see something bad happen to it).  The moral panic over e-cigarettes is really about protecting this franchise.

 

20130419-1We’ll let them steal your money, and then we’ll punish you for it.  IRS freezes tax ID theft victims’ return – then hits them with late penalties. (Cleveland.com)

Pat Pekarek and her husband, Roger, discovered someone filed taxes using Roger’s Social Security number last year, after the IRS rejected their e-filed joint return.

The Pekareks, who live in Parma Heights, dutifully followed the IRS’ instructions to send their return by mail with documentation proving they were the real Pekareks. The IRS immediately froze their account, along with a credit that Pat Pekarek expected to use toward this year’s taxes.

A year later, the account remains in the IRS deep freeze – along with the credit. And now, even though it was the IRS freeze that kept the credit on ice, the agency is demanding the Pekareks cough up back taxes and pay late penalties.

The IRS has let identity theft get completely out of control, while spending its time and energy trying to regulate law-abiding preparers and harassing uncongenial political groups.  And they’ve managed to neglect and abuse the victims while doing so.  Good thing they are responsible for our health insurance system too.

 

William Perez, Foreign Bank Accounts due June 30th.  New form, and now you have to e-file.

TaxGrrrl, Las Vegas Man Cheated IRS, Taxpayers Using False Home Buyer Credits:  “Refundable credits are traditionally a magnet for fraudulent claims and this one was no different: initial reports indicated that nearly 100,000 refunds were perhaps inappropriately distributed, with $600 million of taxpayer credits labelled “suspicious” in 2009 (despite those numbers, Congress kept extending the credit).”

Jack Townsend, Accountant Sentenced For Tax Crimes; Conduct Included FBAR violations .  “The gravamen of Duban’s conduct is that he assisted the persons related to the automobile dealership in running nondeductible personal expenses through the corporation.”

Scott Schumacher, Winning the He-Said-She-Said Case (Procedurally Taxing)

Tony Nitti, S Corporation Shareholder Must Reduce Basis For Non-Deductible Corporate Loss 

 

20140401-1Lyman Stone, Response to Politico: Taxes and the Texas Miracle (Tax Policy Blog):

But long-term tax policies do matter. Stable, neutral, non-distortionary tax policies, offering low tax rates on broad tax bases, can support economic growth. Firm site selection is one channel, through which taxes affect economic decisions on the margin. There is robust evidence that taxes (while certainly not the only or even the largest factor) do matter for site selection. And, as one of the few site selection variables policymakers can directly control, it makes sense for them to be concerned about the role of taxes.

But not in the form of paying people to be your friends via tax credits.

 

Annette Nellen, Is tax reform on or off? Odd activities in the House last week

Kay Bell, Debate continues about tax havens and punishment fairness

 

Renu Zaretsky, Holes, Holidays, Hurricanes, and Tax Bills (TaxVox).  “The Illinois legislature passed a budget with revenue holes and no spending cuts.”

 

TaxProf, The IRS Scandal, Day 388

Me, 2 million served.  An arbitrary milestone, achieved!

 

Russ Fox, No, Fido & Lulu Can’t Own Your Business:

All corporations have to have a Board of Directors. That board handles various business items of the corporation. Now, in a tightly controlled corporation you might just have one board member–yourself. But Mr. Zuckerman elected a strategy that I haven’t seen before (and I doubt I’ll see again): He named his pets as board members.

They were probably as independent as any number of human board members.

 

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Tax Roundup, 5/28/14: Tax Fairy isn’t handicap-accessible. And: Why you should let your tax guy do the talking.

Wednesday, May 28th, 2014 by Joe Kristan


tax fairy
Audit defenders can’t defend themselves.  
There is something deep in our DNA that enables us to believe in the supernatural, at least when it comes to taxes. Otherwise sensible people act as if they believe in a Tax Fairy who can wave a magic wand to make taxes go away.  Operators offer themselves as intermediaries to the tax spirit world, taking real money to generate pretend tax breaks.

It had to take a real leap of faith to pay good money to the National Audit Defense Network.  Members of this Nevada group were convicted in Las Vegas yesterday of tax charges that included an implausible tax credit scheme.  They set up a “shopping” web site called Tax Break 2000 that was inaccessible to handicapped users.  They would then sell Tax Fairy adherents a “modification kit” to make the web site handicap-accessible for $10,475 — 20% down, and the rest payable on a promissory note “when they had no expectation that the customers would make payments on the promissory notes.”  They then told their clients that this generated a $5,000 tax credit.

How many Taxafarieans paid the $10,475 tithe?  According to the indictment, they sold 21,610 kits.  Assuming they collected 20% of the sales price, that grossed them $45,272,950.

Any attempt to commune with the Tax Fairy runs into snags.  The first big snag here was a letter from their own internal “dream team” of tax advisors telling them this wouldn’t work.  The indictment says the NADNers went opinion shopping and found accommodating attorneys who said it might work.  Good enough!

They had more difficulty clearing the next obstacle: a permanent injunction against selling Tax Fairy access.  But that’s the least of their problems now.

This case has attracted a little extra attention because of the involvement of a former NFL punter, who apparently decided to ignore his professional training and go for it.  When trick plays fail, they fail badly, and the participants now may face long prison terms.

And there is no tax fairy.

 

Wind turbineTony Nitti, Tax Geek Tuesday: Hot Assets And The Sale Of Partnership Interests

Kay Bell, Federal workers, including members of Congress and Treasury employees, owe Uncle Sam $3.3 billion in back taxes

No.  Does Warren Buffett Practice What He Preaches? (Paul Neiffer)  “The cost to Warren individually of raising his individual income tax bracket by 10% annually may cost him personally a couple of million or less, while his company saves over $400 million in tax by using energy tax credits.  I would make the trade-off any time.”

 

 

TaxProf, The IRS Scandal, Day 384

Joseph Thorndike, Bad Ideas Are Like Bad Pennies (Tax Analysts Blog).  He’s talking about private collection of IRS debts.  Considering that the IRS isn’t exactly blemish-free in its debt collection practices, I don’t share the objections to private collection of undisputed tax debts.

Joseph also raises this point: “But it’s also expensive to pander, since every dollar invested in IRS collection can return up to $20 in new revenue.”  I think that’s hugely unlikely as a marginal return, based on what I see in the field and the way the IRS misdeploys resources (preparer regulation, anyone?).

 

Not Senator Wyden

If there is something wrong with our tax exemption, then there is something wrong with America.  I won’t stand here while you badmouth our country!

David Brunori, Taxing Togas and Keggers (Tax Analysts Blog).  “States should consider ending the absurd practice of granting property tax exemptions to charitable organizations.”

Andrew Lundeen, The Economic Effects of Bonus Depreciation (Tax Policy Blog). “Permanently extending bonus depreciation would spur investment, lift wages, grow the economy, and increase federal revenue.”

Howard Gleckman, Turning Carbon Tax Theory Into Reality (TaxVox).  Don’t hold your breath for this to be enacted, even if it would keep that carbon in your lungs.

 

Do you ever wonder why practitioners like to do the talking when the IRS gets involved? Yes, by all means stand up for your rights when dealing with the IRS.  But there’s a line where you should stop.  Going Concern tells us of a Mr. Calcione who went way over the line:

Three days after the agent left the voicemail, Calcione left a couple voicemails of his own. One of the messages contained a threat made by Andrew Calcione that if the agent called him again he would show up at the agent’s home and torture the agent, then rape and kill his wife and injure his daughter while the agent watched, before killing the agent. A second message left by Calcione requested that Calcione disregard the first message, which Calcione said was left in error.

Oh, you didn’ t mean my wife and daughter?  Well, OK, then!

Mr. Calcione was convicted of threatening an IRS agent.  Whatever tax problems he had before, that voice mail made things much, much worse.

Related: Man Convicted Of Threatening To Assault & Kill IRS Agent, Family Over Audit Proceedings  (TaxGrrrl)

 

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Tax Roundup, 5/6/14. Welcome back, loyal client. IRS says I have to verify that you aren’t a shape-shifting alien.

Tuesday, May 6th, 2014 by Joe Kristan


e-file logo
It’s not enough that you’ve done business with me forever.  I need some ID.  
The invaluable Russ Fox yesterday threw light on new requirements for electronic filing from the IRS.  These requirements, found in their new Publication 1345, were issued with no public comment period or consultation with practitioners, as far as I can tell, and they sure look that way.

Let’s start with clients who come into our office – a minority of my clients, by the way, as most of my clients either mail in tax information or send it electronically.  Words are from Publication 1345, but emphasis is mine:

The ERO must inspect a valid government picture identification; compare picture to applicant; and record the name, social security number, address and date of birth. Verify that the name, social security number, address, date of birth and other personal information on record are consistent with the information provided through record checks with the applicable agency or institution or through credit bureaus or similar databases.

So I have clients I have been working with since 1985.  When retired gentleman comes in, a little slower than last year, with his cane, but still as charming as ever, I have to say “hold it right there, partner.  You may look like the client I’ve been working with for 28 years, but you might be a clever shape-shifting alien scum looking to defraud our government.  I need to see some picture ID.  Then excuse me while I call the credit bureau.”

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Oh, but it isn’t that bad:

For in-person transactions, the record checks with the applicable agency or institution or through credit bureaus or similar databases are optional.

Oh, I only have to run credit checks on my long-time clients who don’t come into the office.  Gee, that’s mighty kind of you, IRS.

Examples of government picture identification (ID) include a driver’s license, employer ID, school ID, state ID, military ID, national ID, voter ID, visa or passport.

“National ID?”  I guess that must be next in the IRS off-plan business plan.

You’re thinking, “calm down, Joe.  Surely you are overreacting.  The IRS doesn’t really want you to card your longtime clients, right?”  Well, wrong:

If there is a multi-year business relationship, you should identify and authenticate the taxpayer.

You may think they are longtime clients, but you don’t know if you’ve been fooled by imposters all along!

Of course, this is all a reaction to the identity theft epidemic that the IRS has allowed to spread virtually unchecked for years.  The IRS, an agency too clueless to notice that 655 refunds are going to the same apartment in Lithuania, is now responding to the riot it incited by firing at the bystandersqea0hm77.  It is creating an enormous new and uncompensated burden on preparers and their clients that will do nothing to eliminate ID theft.

Rashia didn't use these bundles of cash at a CPA office.

Rashia didn’t use these bundles of cash to pay preparers.

Why won’t this work?  Most ID thieves work like Rashia Wilson, the self-proclaimed “Queen of IRS Tax Fraud.”  She used store-bought software to claim millions in tax refunds belonging to other people whose identities she had stolen.  ID thieves don’t walk into legitimate tax shops and pay to have fraudulent refunds claimed.  

 

Oddly, none of this applies to paper filings.  If the IRS is really serious about these rules, they can expect preparers  to sabotage the e-file process in self-defense by charging for the non-trivial new time and hassle of e-filing.  While preparers are required to e-file unless otherwise directed, taxpayers are allowed to choose paper.  Nothing says we can’t inform them of that right.  If even 10% of taxpayers respond by choosing to revert to paper, it will badly strain IRS facilities.  If 20% revert to paper, it will be a debacle for the agency.  And they’ll richly deserve it.

 

Other Coverage:

Russ Fox follows up with A Better Idea on Identity Theft. “The IRS should check each tax return’s address to verify it matches the address on file for the taxpayer.”  What a radical thought.

Robert D. Flach notes the Russ Fox post in today’s Buzz and adds, “Thankfully I am not an ERO – and after reading this I never will be!”

 

Flickr image by Christian under Creative Commons license.

Flickr image by Christian under Creative Commons license.

Kay Bell, 5 tax tips for Cinco de Mayo

Tony Nitti, Tax Geek Tuesday: Determining A Shareholder’s Basis In S Corporation Stock and Debt

TaxGrrrl, She’s Just Not That Into You: 11 Reasons Your Tax Pro Wants To Call It Off .  ” You need to tell your tax professional the truth. No matter how ugly it is.”

Keith Fogg, When One Spouse Files Bankruptcy How Should the Court Split the Refund Resulting from a Joint Return between the Estate of the Debtor Spouse and the non-Debtor Spouse (Procedurally Taxing)

Jason Dinesen, Tax Refunds and “Not Owing Tax”, Part 2 . “So if you get a refund, it’s possible that you “didn’t owe taxes,” but only if your “total tax” before refundable credits equaled zero.”

Margaret Van Houten, Anti Money Laundering Initiatives and Lawyers: What We Need to Know (Davis Brown Tax Law Blog).  “Unfortunately, however, not all well-intended actions are effective.”

 

20140506-1TaxProf, The IRS Scandal, Day 362.  What the IRS was busy with while the ID-theft fraud epidemic was getting rolling.

Howard Gleckman, Special Tax Penalties on Donald Sterling are a Personal Foul (TaxVox).  Not every foul has to be a tax issue.

Mindy Herzfeld, International Tax Trending (Tax Analysts Blog)

I reject this false choice.  Investment, GDP Slow in First Quarter: Bad Weather or Bad Tax Policy? (Stephen J. Entin, Tax Policy Blog)

 

News from the Profession.  BREAKING: CPA Exam Candidate Passes AUD  (Going Concern)

 

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Tax Roundup, 4/29/14: Funding what we do anyway edition. And: the real IRS crisis.

Tuesday, April 29th, 2014 by Joe Kristan

Remember, Iowa 1040s are due tomorrow!  They extend automatically, with no need to file an extension, to October 30 if you have at least 90% of your 2013 tax paid in.  If you need to pay in some more, use Iowa 1040-V.

 

Via Wikipedia

Via Wikipedia

O. Kay Henderson reports on a New state tax break proposed for Iowa parents who adopt:

The legislature has voted to establish a new tax credit for Iowa parents who adopt a child. If the governor signs the bill into law, Iowans could claim a credit of up to $2500 per child for adoption-related expenses.

The bill would allow the credit for expenses like legal fees and the medical bills for the birth mother.

So the legislature is boldly addressing the lack of available parents wanting to adopt children by subsidizing the process.  Except there is no lack of willing prospective adoptive parents.  In fact, the high cost of adoptions is largely driven by the lack of U.S. babies available, forcing parents wanting to adopt to pursue expensive overseas adoptions.

Adoptive parents do a wonderful thing, taking a stranger’s child into their house as their own.  But all good things don’t necessarily need their own tax break.  This break pays people to do what they are already doing.  If the tax law needs to encourage something, is this the most important thing to do?  Should it instead encourage something people wouldn’t do otherwise?  Should people choose what to do without tax law involvement?  Is it really worth making the Department of Revenue an overseer of the adoption process?  Nobody cares, apparently, as HF 2468 flew through the Iowa Senate 48-0, and the Iowa House, 95-1.  Governor Branstad will come out against farmers before he vetoes this one.

 

I’m sure they are.  Iowa Renewable Fuels Group Pleased With Biofuels Bill Approval. More special favors for special friends.

 

A scene from the heydey of Iowa energy independence.

A scene from the heydey of Iowa energy independence.

 

Kay Bell, Maryland pays $11.5 million to keep House of Cards.  Some people never learn.

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Janet NovackThere’s A Crisis At The IRS And It’s Not What You Think:

The IRS is, however, an insular, often tone deaf and sometimes bumbling bureaucracy which is being starved of the resources it needs to do its job.  Since 2010, its Congressional appropriations have fallen 7% —-and that’s in nominal dollars, before any adjustment for inflation. During the same period, its appropriations funded workforce has shrunk by 10%, with enforcement staff down 15%, according to numbers Congress’ Government Accountability Office released last week. Meanwhile, the tax agency’s workload has increased with the explosion of identity theft tax refund fraud; a 4% growth in returns filed; and new laws to administer, including the Affordable Care Act  (a.k.a. Obamacare).

That is precisely true.  It’s also mostly the agency’s own fault.   The agency been shown to have used its powers against political opponents of the administration.  It refuses to back off of proposed regulations that would make its political role permanent.  Until it swears off that approach, it can only expect short funding.  The House GOP would be fools to fund an agency dedicated to the other party.  Untill Commissioner Koskinen can rise above pro-administration partisanship and pull the proposed regulations, the agency will continue to be shorted.

 

Annals of Public Service.  Rep. Grimm charged with tax fraud, says he won’t quit (USA Today):

Republican Rep. Michael Grimm was indicted Monday on federal charges of tax evasion and perjury for allegedly hiding more than $1 million in revenue from a New York City restaurant he owned where, prosecutors said, he also hired undocumented immigrants.

Grimm, a former FBI agent who has been under federal investigation regarding campaign contributions, said he is the victim of a “political witch hunt” and said he would not resign his seat.

While you can’t rule out a political explanation, the man is a politician, so the charges are at least plausible.  If it is an unsupported political prosecution, that will become apparent quickly.

Even if the charges are supported, that doesn’t rule out political bias.  After all, Democrat Charlie Rangel was never indicted, in spite of failing to pay his taxes for years.  That’s why arguments that the Tea Party persecution was OK, because some Tea Party groups didn’t qualify for exempt status, are unconvincing.  When a law is enforced only against opponents,  it is a gross injustice, even if the selective enforcement catches some actual violators.

 

IMG_1944Peter Reilly, Tax Court Denies Amway Losses – Again.  Peter ponders the Amway couple I discussed last week.  Peter has actually attended an Amway presentation, and he explains how the program works – or doesn’t.

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part II.  This post discusses the tax-free kind.

TaxGrrrl, Let’s Go Places: Toyota Workers Could Save Big Tax Dollars With Move.  Food for thought for those who think state taxes are irrelevant.

 

TaxProf, The IRS Scandal, Day 355

Tyler Cowen, Accounting for U.S. Earnings and Wealth Inequality.  “So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.”

Richard Borean, Does a Flat Income Tax Create Income Inequality? (Tax Policy Blog).  Short answer: no.

20140429-1

 

Jeremy ScottThe Most Expensive Extenders (Tax Analysts Blog).  “Temporary tax policy is generally bad, but temporary policy that is designed to encourage long-term investment decisions is even worse. ”

 

It’s Tuesday!  That makes it Robert D. Flach Buzzday!

 

Russ Fox, It’s Probably Not Good for Your Case When the Court Considers Sanctioning Your Attorney.  When  your lawyer angers the judge, he may not be helping.

News from the Profession.  This Off-Kilter Accounting Firm Just Launched a New Website Begging to Be Judged (Going Concern)

 

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Tax Roundup, 4/21/14: Clearing the wreckage edition. And: Tax Court penalty abuse.

Monday, April 21st, 2014 by Joe Kristan

20140330-2So I took a five-day weekend.  I needed the sleep, and to see something besides the office, my bed, and my commuting route.  So now to clear the debris of the last few weeks from my desk, and my email inbox.

And I come back to see perhaps the dumbest thing ever to come out of the Tax Court.  Janet Novack reports:

“Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered  on April 15th —an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590,  Individual Retirement Arrangements (IRAs), says is allowed.

Which is more astounding: he IRS decision to seek penalties against a taxpayer for following IRS guidance, or the Tax Court going along?  A great deal of what we do as professionals, and what taxpayers do, is in reliance on IRS guidance, because often that’s all there is to go on.  If you can get hit with a penalty for following IRS guidance if the IRS changes its mind, we’re all avoiding disaster only as long as the IRS is in a good mood.

This unwittingly goes to the heart of the IRS non-enforcement of the Obamacare employer mandate. The statute provides that the penalty tax on those with 50 or more employees starts this year if they fail to provide specified health insurance.  Nothing in the statute provides otherwise.  The only thing standing between all these employers and massive penalties is IRS guidance — y0u know, the guidance that Judge Nega just said taxpayers rely on “at their own peril.”

The whole Tax Court should reconsider this order.  If they decide that something that stupid really is the law, Congress should reverse with legislation providing that taxpayers relying on written IRS guidance should never be penalized for it.

 

20130419-1Megan McArdle kindly linked to me last week in You Can’t Fight the IRS – specifically, to Tax season tip: when you owe and can’t pay.  She added some thoughtful commentary, including:

 There are basically three types of tax trouble. There is “I was underwithheld at work because my salary changed over the course of the year but didn’t realize it” or “I’m a freelancer or small-business owner, and I forgot to put away enough money for taxes, or I incorrectly estimated what my tax bill would be.” Then there is “I am a small-business owner or otherwise self-employed, and I am on the brink of financial collapse; the money with which I hoped to pay the taxes had to go to keep my creditors (barely) at bay.” And, of course, though I hope this is not you, there is “I have been cheating on my taxes.”

She notes that different troubles require different solutions.

Thanks to her link, and to one from Instapundit to the same post, last week was the busiest around here all year.  My thanks to them, and to everyone who takes the time to link here.  You rock my little world.  If you ever want to link to just a piece of a Tax Roundup, you can do so if it starts in blue bold letters, like the words “Megan McArdle” at the beginning of this segment.

 

While I was too busy to do Tax Roundups at the end of tax season, I missed some excellent Bozo Tax Tips from Russ Fox, including Bozo Tax Tip #1: The Eternal Hobby Loss

 

Greg Mankiw,Transitory Income and the One Percent:

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution….  

-Quoting a NY Times article by Mark Rank

Occupy… yourselves!

 

Jason Dinesen, Another Tax Season Down — 2014 Tax Season Recap 

Paul Neiffer, Another Tax Season Bites the Dust.  “This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with).”

TaxGrrrl, IRS Reports Tax Filing Numbers As Expected, Issues Statement On Refund Delays 

Robert D. Flach, THAT WAS THE TAX SEASON THAT WAS.  “43 down – 7 to go!”  I hope to stop before 43, myself.  Robert is tougher than I am.

In case you missed it, you can see my April 15 interview with local TV station KCCI here.

 

 

Locust Street, Des Moines

Locust Street, Des Moines

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part I.  “…if we spend the time necessary to uncover and understand our clients’ non-tax and tax goals, we will typically find that choosing an ideal transaction structure is largely a process of elimination, and when the dust settles, there will often be only one option that works.”

Peter Reilly, Sawyer Taxi Heirs Midcoast Fortrend Deal – Could Have Been Worse.  It involves a C corporation attempting to have its cake while eating it too, by paying stock-deal tax on an asset sale.

Christopher Bergin, Tax Day – It Just Isn’t Fair (Tax Analysts Blog)  “I suppose the only good news is that in the last several days, there have been dozens of items in the news reporting that the IRS is doing fewer audits.”

Tax Justice Blog, Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits

Kyle Pomerleau, Why Many People are Wrong about Executive Pay and the Corporate Tax Code.  “A neutral tax code that properly defines business income would place no restriction on how much a business can deduct in compensation.”

Howard Gleckman, If Congress Lets Firms Expense Investments, It Should Take Away Their Interest Deduction.  Fine, if you let them deduct dividends.

 

Going Concern, Utah Man Discovers Liberty Tax Not as Effective as Maury Povich in Determining Paternity.

 

 

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Tax Roundup, 4/9/14: Common K-1 problems. And: if the preparer doesn’t have a brain, give him a diploma!

Wednesday, April 9th, 2014 by Joe Kristan

S-SidewalkSo you read yesterday’s post and you’re still preparing your own return?  You’ve answered the questions you need to ask yourself before starting to put numbers from your S corporation/Partnership/Trust (collectively, “thing”) K-1 onto your 1040 schedules?  OK, if you are intrepid enough to be doing your own return here, you are mostly on your own.  Don’t shortcut it.  This is one chore where you really should read the instructions (S corporation, Partnership, Trust), rather than just opening the box and putting pieces together.

There’s no point in me trying to walk through the whole K-1 with you; that’s what the instructions are for.  I will point out a few items on the K-1 (or left out) that frequently cause errors and trigger questions.

On the partnership K-1 the ending capital account is probably not your “basis.” The capital account is frequently useless in measuring basis.  It might be the same as your basis if the “Tax basis” box is checked, but the only sure way to track your basis is to keep your own running basis schedule year-by-year.  S corporation shareholders can find their basis computation schedule here.

Don’t double-count your gains.  The “Unrecaptured Section 1250 gain” in Box 8c of your S corporation K-1  (9c of the partnership return) is a part of the “Net Section 1231 gain” (S corporation box 9, partnership box 10).  The total income is the Section 1231 gain, not the sum of the unrecaptured 1250 and 1231 amounts.  You use the “Unrecaptured 1250 gain” on your Schedule D worksheet to figure out how much of your Section 1231 gain is taxed at a 25% rate, rather than the normal 20% top capital gain rate.

Don’t double count “investment income.”  If you have interest, dividends or capital gains on your K-1, the partnerships is required to tell you how much of that is “investment income” with a code “A” in the “other information” box on the K-1.  You only need that number if you are computing an investment interest expense deduction on Form 4952.  You don’t add it as additional income on your return.

Beware the “net investment income” disclosure, code “Y” in the “other information” section.  The partnership and S corporation instructions for computing this came out late, and this number is likely to be wrong.  If you have to fill out Form 8960 to compute your Obamacare net investment income tax, you shouldn’t count on this number, especially for a K-1 with trade or business income.  Use instead the separate items from the K-1 that are investment income for Form 8960 purposes.

Be careful out there, and come back tomorrow for a new 2014 filing season tip!

 

20140307-1Russ Fox, Bozo Tax Tip #5: Procrastinate.  You mean waiting won’t solve my tax problems?

Tony Nitti, Tax Geek Tuesday: Are Those S Corporation Distributions Taxable?

 

William Perez, Tax Freedom Day 2014.  April 21.

Kay Bell, Being DIFferent could prompt a tax audit.  Kay points out things that can attract IRS attention on your 1040.

Jeremy Scott, Audit Electability (Tax Analysts Blog).  “However, a taxpayer’s choice of entity can have broad tax ramifications, including some consequences unintended even by the complicated U.S. tax regime.”

Stephen Olsen, Summary Opinions for 4/4/2014.  (Procedurally Taxing), A good roundup of some recent tax cases, including coverage of the Ohio accounting firm’s unpleasant breakup that we covered last week.

 

20140409-1The IRS Commissionerwho apparently can’t regulate his own employees sufficiently to provide subpoenaed documents to Congress, still wants to regulate tax preparers.

The idea is no more than what the Wizard of Oz told the scarecrow: regulated preparers wouldn’t be any smarter, but they would have a diploma.  An IRS-issued Doctorate in Thinkology doesn’t make an inept preparer competent, any more than granting a CPA or a JD makes somebody a good tax preparer.  I would much sooner have uncredentailed Robert D. Flach do my 1040 than any number of fully-credentialed CPAs and attorneys I know.   All regulation would accomplish would be to raise prices, lining the pockets of the big tax prep franchises while driving many taxpayers to self-prepare or stop filing.

TaxGrrrl, House Committee Gunning For Criminal Charges In IRS Scandal

TaxProf, The IRS Scandal, Day 335

 

Roberton Williams, If You Have High Income, Your Taxes Are Going Up (TaxVox)

Tax Justice Blog, “Tax Extenders” Would Mean Even Lower Revenue than the Ryan Plan

Jim Maule, How Shocking is Tax Evasion?

Radio Iowa, Senator Grassley says fouled up tax system is depressing.  He’s depressed?  As a senior taxwriter for most of the last three decades, he’s answerable for a lot of the depression.

 

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Tax Roundup, 4/8/14: So what do I do with the K-1? And: they also serve who go away!

Tuesday, April 8th, 2014 by Joe Kristan

So the K-1 finally showed up from my partnership or S corporation investment.  Now what?

Remember that the K-1 represents your share of the income and expenses of the partnership/S corporation/trust (henceforth “thing”) that issued it.  Different pieces of income and expense are treated differently on your tax return, and the K-1 tells you where your pieces go.  Sort of.  Before you get started plugging in your numbers, you should answer some questions for yourself.

- Do I “materially participate” in this thing? Your level of participation determines the forms you start with in preparing your returns, whether you can deduct losses, and whether your income from the thing is is subject to the Obamacare 3.8% Net Investment Income Tax.  If you spent more than 500 hours working in the thing, that usually means you materially participate; a more complete discussion of material participation is found here.

- Did the thing lose money?  If it lost money, then you have to clear three hurdles to deduct the losses:

1. You have to have basis.  This starts with your investment in the thing.  If you loaned money directly to the thing, you will get basis for the loan.  If you have a partnership, you will get basis for your share of the partnership debt, shown in part L of your K-1.  S corporation shareholders don’t get basis for their share of the corporation’s debt, even if it is guaranteed by hte shareholder.  Your basis is increased for your share of the thing’s income, and it is reduced for losses and distributions.  If you have no basis, you can’t take losses.

2. Your basis has to be “at-risk.”  This normally means that you are out-of-pocket for the investment.  If your basis comes from borrowed funds, you have to be personally on the hook for the debt — but if you borrowed from somebody with an interest in your thing, you might not be “at-risk” even if you will have to pay up if thing defaults.

If your basis comes from a share of the partnership debt, you are normally considered “at-risk” for debt shown on the “Recourse” and “Qualified Nonrecourse financing” lines on part K of your partnership K-1.  Your at-risk amount is computed on Form 6198,

3. You have to materially participate (see above), or have “passive” income from other activities.  If you don’t materially participate, you need to go to Form 8582 to figure how much, if any, of your loss is deductible this year.

 Got that?  Tomorrow we’ll look at what you have to do after you answer these questions.  Come back every day through April 15 for more !

 

Senator Hubert Houser

Senator Hubert Houser

Legislator of the Century.  Yes, the century is young, but it will be hard to beat the accomplishment of Iowa state senator Hubert Houser.  He went home.  From The Des Moines Register:

At issue is the fact that Houser, a Republican from Carson in southwest Iowa, hasn’t resigned. He has simply stopped coming to the Statehouse, saying he isn’t needed as a minority caucus member and doesn’t have a role in any legislation. He says it’s more important for him to spend time on his family’s farm, where he is expanding the livestock facilities.

Houser was not present in the Senate chamber again on Monday.

Secretary of the Senate Michael Marshall said Monday that Houser is still receiving his annual salary of $25,000.

The coverage implies that Sen. Houser is doing a bad thing.  Considering the dubious accomplishments of the ones that do show up, I can’t agree.  We’d be better off if they all went home.  The legislators should get all of their pay on Day 1 of the session, and they should get docked if it goes past a month.

 

Of course they do.  Iowa House panel OKs $2 million tax break for Knoxville Raceway.  (Des Moines Register)

 

RashiaQueen of IRS tax fraud needs a break.  Rashia Wilson, who famously held up big wads of cash on her Facebook page and taunted the feds to come and get her, is less liquid nowadays, according to a report by tampabay.com:

Busted down to a federal prison in Aliceville, Ala., she earns just $5.25 a month, she declares in newly filed court papers. That’s a problem because Wilson, 28, was ordered to pay a token $25 per calendar quarter toward the $3.1 million in restitution that she owes the IRS for filing false tax returns using stolen identities. She needs money to buy vitamins and hygiene items, too, she says. So she’s asking U.S. District Judge James S. Moody Jr. to suspend restitution payments until after her release date: Jan. 5, 2031. 

Then she’ll really get after it, I’m sure.

 

Peter ReillyNo Money For April 15 1040 Balance Due? Don’t Panic!

Tony Nitti, Where Is Your Tax Home When You Work In A Foreign Land?   

Jason Dinesen, Tax Court Case Involving Radio DJ Strikes Close to Home for Me.  “I used to work in radio. I was the news director at KNOD radio station in Harlan, over in the western part of Iowa.”

I had a brief stint as an unpaid intern for KHAK, a country station in Cedar Rapids, in 1980.  I learned that I have a face for radio and a voice for print.

 

Roger McEowen and Kristine Tidgren, Understand That Easement Agreement Before You Sign It

 

Locust Street, Des Moines

Locust Street, Des Moines

TaxGrrrl, New IRS Commissioner Talks Tax, Scandal and Congress.  She gives him more credit than I do.

Andrew Lundeen, Kyle Pomerleau, Americans Pay More in Taxes than on Food, Clothing, and Housing Combined (Tax Policy Blog)

Renu Zaretsky, Ethics and Fairness, Growth and the Environment, Retirement and Tax Shelters.  The TaxVox headline roundup ponders, among other things, whether we should subsidize wind turbines forever.

Kay Bell, Energy efficient home improvement tax break might be back

TaxProf, The IRS Scandal, Day 334

News you can use. How to Cheat on Your Taxes. (David Cay Johnston, via The Taxprof)

News from the Profession.  According to Research, You Are Fat Because Busy Season (Going Concern)

 

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Tax Roundup, 3/26/14: Using Bitcoins regularly will get you a really long Form 8949. And: underpants!

Wednesday, March 26th, 2014 by Joe Kristan


Bitcoin
Bitcoins may act like money, but IRS says they aren’t.  
The IRS yesterday announced how that it will treat Bitcoin “virtual currency” as property, rather than currency, for tax purposes.  Notice 2014-21 lays out the IRS treatment of Bitcoin and similar virtual money.  Some key points:

- As property, gains and losses on Bitcoin are normally capital gains and losses, unless the taxpayer is a dealer in Bitcoins.  That means losses are limited to capital gains plus $3,000 for individuals.  This contrasts with currency transactions, which normally generate ordinary income and loss under Section 988.

Transactions in virtual currency will normally generate gains and losses:

If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

That makes using Bitcoins a hassle for taxpayers who try to follow the law.  Everytime you buy something with Bitcoin, you will have a capital gain or loss, depending on fluctuations in the Bitcoin market.  Imagine if you had to record a little capital gain or loss based on the currency markets anytime you bought anything with cash.  If you use Bitcoins every day you’ll have a horrifying Form 8949 to report all of your gains and losses.

The basis in virtual currency is its value on date of receipt, if you acquire it in a transaction.  That same value is the amount you use to compute income if you are paid in virtual currency

- They point out the obvious:  “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Also, payments in virtual currency are subject to information reporting, same as cash.

Virtual currency “miners” generate ordinary income.  If they do it as a trade or business, it’s subject to self-employment tax.

The TaxProf has more; Accounting Today also has coverage.  Peter Reilly has Bitcoins Not Tax Fairy Dust – Second Life Still A Tax Haven?, wisely noting that the virtual currency isn’t generated by the Tax Fairy.  And TaxGrrrl weighs in with IRS Says Bitcoin, Other Convertible Virtual Currency To Be Taxed Like Stock .

 

Ashlea Ebeling, Supreme Court Says FICA Tax Due On Severance Pay:

What the Supreme Court decision means for employers is that what had long been the case –severance pay is subject to FICA tax—remains the case. And for employees who are laid off, it means that they will continue to get a little less in “take-home” severance because it’s dinged for their share of FICA tax.

It seemed like a reach to say otherwise, but now it’s not even that.

 

 

A hard-working fictional student.

A hard-working fictional student.

O. Kay Henderson, Legislators ponder tax credit for student loan payments.  A truly awful idea.  This credit doesn’t encourage getting higher education; it encourages borrowing to pay for higher education.  As an unintended but obvious consequence, it discourages saving to pay for college — there’s no tax credit for foregoing current consumption to pay for college later.  It’s stunning that lawmakers actually want to encourage more student debt when many students already are entering a brutal job market with crushing loan obligations.

Joseph Henchman has two posts at Tax Policy Blog that should be read together: Wisconsin Approves Income Tax Reduction, Business Tax Reforms and Who Would Pay a Higher Illinois Income Tax?  Not the folks that move to Wisconsin, for sure.

 

Jason Dinesen, More on the 0.9% Medicare Tax and Iowa Tax Returns

Paul Neiffer, Schedule F Reporting Update:

I got some feedback on my previous post on Tax Reform and low Schedule F reporting of income. Several sources of farm income does not show up on a Schedule F. This includes many common sales of farm assets such as breeding stock and equipment. Most of the expenses associated with this income is deducted on Schedule F, however when these assets are sold, none of the gains appears on Schedule F.  Rather, this income is usually reported on Form 4797.

That still doesn’t change the fact that these simple farmers play the cash method like a violin to achieve tax results other businesses can only dream of.

Tony Nitti, Tax Geek Tuesday: Demystifying The Deduction Rules For Accrued Liabilities   

William Perez, Identity Theft and Your Income Taxes

Kay Bell, IRS gives Colorado flood victims until Oct. 15 to file 2012 or 2013 tax returns claiming disaster losses

Janet Novack, Gotcha! Tax Court Penalizes IRA Rollover That IRS Publication Says Is Allowed   

 

David Brunori, Hang On to Your Wallets (Tax Analysts Blog)

Howard Gleckman, Dave Camp’s Plan for the Expired Tax Provisions: An Almost-Good Idea (TaxVox)

TaxProf, The IRS Scandal, Day 321

Tax Justice Blog, State News Quick Hits: To Cut or Not to Cut?

 

Joseph ThorndikeRaising Taxes on the Rich Won’t Balance the Budget — But It’s Still Important (Tax Analysts Blog):

 The modern American fiscal state is predicated on a bargain. During World War II, lawmakers were forced to expand the personal income tax to help pay for the fighting. Over the course of just a few years, they added millions of middle-class Americans to the tax rolls for the first time, transforming the income tax from a rich man’s burden to a middle-class millstone. In return, however, these same lawmakers offered the middle class an implicit (and sometimes nearly explicit) guarantee — rich people would be asked to pony up, too.

Cool story.  Let’s see how that works nowadays:

Top 1 pays more than bottom 90

Chart by Tax Foundation

So now the “rich” aren’t paying their “fair share,” they’re picking up most of the tab.  How does it work if you break it down further?

20131030-2

So not only do “the rich” pay their share of the freight, they pay a lot more than their share of earnings.  And when you take government benefits into account, the whole “fair share” argument is tough to support:

givers and takers

Chart by Tax Foundation

I don’t buy Joseph’s “social contract” thinking.  The whole emphasis on inequality being peddled by the administration is a diversion, an attempt to change the subject from the manifest failures of Obamacare and foreign policy blundering.  No matter how hard they hit “the rich,” or how bad doing so is for the overall economy, there is never a point where the politicians will say the rich are being hit enough.

To the extent “inequality” persists, it’s clearly not a direct function of the tax code or government spending.  Politicians, though, find it useful to encourage the belief that they can spend on whatever pleases the crowd by just by making the rich pay their “fair share” — as if they weren’t already.  It’s the flip side of the widespread belief that the government can just balance the budget by cutting foreign aid.   It’s just an attempt to fool the gullible long enough to win another election.

 

Going Concern, Thrift Shops Issue Specific Guidance on Deduction Amounts for Used Underpants.  I didn’t know there was a deduction for toxic waste.

 

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Tax Roundup, 3/20/14: An optional mandate? And: baseball-tax convergence!

Thursday, March 20th, 2014 by Joe Kristan


20121120-2
Is the Obamacare individual mandate penalty now optional?  
 A couple of weeks ago the Wall Street Journal editorial page published ObamaCare’s Secret Mandate Exemption; HHS quietly repeals the individual purchase rule for two more years.  That’s a pretty bold statement, especially because the Administration has adamantly rejected calls for a delay in the individual mandate, after having delayed the business mandate twice.  If there is no mandate, Obamacare will likely lead to huge losses for insurers (to be subsidized by taxpayers), who need the forced patronage of the healthy to cover the sick that they can no longer exclude or charge risk-adjusted premiums.  Did they really do that and not tell anyone?

Here’s what WSJ says happened:

But amid the post-rollout political backlash, last week the agency created a new category: Now all you need to do is fill out a form attesting that your plan was cancelled and that you “believe that the plan options available in the [ObamaCare] Marketplace in your area are more expensive than your cancelled health insurance policy” or “you consider other available policies unaffordable.”

This lax standard—no formula or hard test beyond a person’s belief—at least ostensibly requires proof such as an insurer termination notice. But people can also qualify for hardships for the unspecified nonreason that “you experienced another hardship in obtaining health insurance,” which only requires “documentation if possible.” And yet another waiver is available to those who say they are merely unable to afford coverage, regardless of their prior insurance. In a word, these shifting legal benchmarks offer an exemption to everyone who conceivably wants one.

Did this really happen? The IRS has just issued Tax Tip 2014-04, The Individual Shared Responsibility Payment – An Overview.  It says:

You may be exempt from the requirement to maintain qualified coverage if you:

  • Have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income,

  • Have a gap in coverage for less than three consecutive months, or

  • Qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement.

So what kind of “hardship” would that involve?  The list of eligible hardships at Healthcare.gov provides a long list of qualifying hardships, including “You recently experienced the death of a close family member.”  I’m sure you can come up with one, but if that doesn’t work, try “You experienced another hardship in obtaining health insurance.”  Like, “Healthcare.gov” crashed, for example?  It’s your word against — whose?

So how do you claim “hardship?”  The first way is “You can claim these exemptions when you fill out your 2014 federal tax return, which is due in April 2015.”   

So somebody fills out the form and finds out the government wants hundreds of dollars in penalties for not buying insurance.  I bet they’ll come up with either a loss in the family or a hardship in a hurry.  There will be tens of thousands of these.  The IRS can’t possibly police this.

It appears the Wall Street Journal is on to something.  Considering the high cost of policies on the exchanges, a struggling young single really would incur hardship buying mandated coverage.  And if you feel it’s a hardship, they are practically inviting you to opt out.  It’s hard to see this ending well.

This also poses ethical issues for practitioners, which I’ll address another time.

 

IRS Bars Appraisers from Valuing Facade Easements for Federal Tax Purposes for Five Years (IRS Press Release):

The appraisers prepared reports valuing facade easements donated over several tax years. On behalf of each donating taxpayer, an appraiser completed Part III, Declaration of Appraiser, of Form 8283, Noncash Charitable Contributions, certifying that the appraiser did not fraudulently or falsely overstate the value of such facade easement. In valuing the facade easements, the appraisers applied a flat percentage diminution, generally 15 percent, to the fair market values of the underlying properties prior to the easement’s donation.

There’s a lot of interesting things here.  For example, they never mention the name of the appraiser group.  It would seem like that would be useful information to taxpayers.  Sometimes people who seem to be barred from a line of work apparently neglect to mention that to prospective clients.

It also shows that you can’t count on a too-good-to-be-true result just because a lot of other people have gotten it.  They just might not have been caught yet.  You can be sure the IRS is working its way down the appraisal group’s client list.

 

Principal Park, as seen from my office window.

Principal Park, as seen from my office window.

Baseball-Tax Convergence.  Over at Cubs Fan site Bleacher Nation, Proprietor Brett yesterday posted The Chicago Cubs Financial Story: the Payroll, the Debt, and the Syncing of Baseball and Business Plans.  A lawyer by training, Brett digs deep into the leverage partnership deal where the Ricketts family bought the Cubs in a way structured to defer taxes to the Tribune Company:

In a leveraged partnership, a “seller” partners with a “buyer” to form a new entity, which takes on the assets and distributes cash to the “seller.” In its formation, the partnership takes on a great deal of debt, which is guaranteed by the seller. Doing so allows the “seller” to receive the cash distribution, and defer the taxes associated with the sale of the asset. 

At least that’s the idea. Brett notes that the IRS doesn’t have to agree, and that they didn’t when the Trib tried a similar trick when it sold Newsday.  After tax season, and after I wander down to Principal Park for the noon I-Cubs game on April 16, I’ll try to explain this.

 

Tony Nitti, What Are The Penalties For Failing To File Your Tax Return On Time? .  A lot more than failing to pay.  It’s worth getting that extension in, even if you can’t pay right now.

Kay Bell, Missing your 2010 tax refund? Claim deadline is 4-15-2014

William Perez, Tax Reform Act of 2014, Part 1, Tax Rates

Russ Fox, IRS Releases New Forms W-8BEN and W-8ECI.  Important if you find you are doing business with an offshore payee.

Iowa Public Radio, State Tax Laws ‘A Mess’ For Same-Sex Couples And Employers.  That’s where specialists like Jason Dinesen can really help.

TaxProf, The IRS Scandal, Day 315

Bloomberg, Buffett Cuts Tax Bill, Tells Others Not to Complain.  He’s tired of hearing you complain about subsidizing him, peasant. (Via TaxProf)

Chris Sanchirico, As American as Apple Inc. (TaxVox).  A complaint that Apple doesn’t voluntarily increase its own taxes.

ThinkAdvisor offers 8 Tax Evaders Who Should’ve Known Better — public servants biting the hand that feeds them.

 

Scott Drenkard, Richard Borean, Cigarette Smuggling Across the States (Tax Policy Blog) “Smuggled cigarettes make up substantial portions of cigarette consumption in many states, and greater than 25 percent of consumption in twelve states.”

 

20140320-1

Almost one in five Iowa smokes are smuggled.

 

Cara Griffith, City of Tacoma Considers Contingent-Fee Auditors (Tax Analysts Bl0g) It’s a bad idea, but it’s hard to see where it’s any different from red-light cameras, where the camera companies collect a bounty of their own.

TaxGrrrl, 10 Tips For Making The Most Of March Madness  My strategy is to ignore it.

 

The Critical Question. Can the IRS Tell a Good Story? (Susan Morse, Procedurally Taxing)

 

 

20130419-1You lied to the IRS all these years, but you’re telling me the truth?  Sometimes business owners get away with tax evasion for years.  Then they try to sell their business.

A Henderson, Nevada auto body shop owner decided it was time to cash out.  KTNV reports:

Robert E. D’Errico, 64, was sentenced Wednesday morning to six-months in federal prison for tax evasion.

According to the plea agreement, D’Errico owned Sunset Collision Center in Henderson. In 2009, he began listing the business for sale on small business listing sites and with small business brokers. D’Errico stated in his listings that, “Seller states that his discretionary take-home cash is $150,000 per year and has receipts to prove it.”

When contacted by a potential buyer, D’Errico re-iterated, “Seller’s discretionary cash take home beyond stated net income is approx. $150,000 avg. per year and is verifiable with receipts.”

During a meeting with a potential buyer, D’Errico stated he stopped accepting checks and was taking cash deductibles from customers, as well as selling excess inventory for cash. 

Either the “potential buyer” ratted him out, or he was an IRS secret shopper.  The IRS got a search warrant, found the real ledgers, and things got ugly.  

Tax returns are sometimes the only financial statements a small business has.  Buyers naturally want to see them, and it can be awkward trying to convince a buyer that they aren’t the “real” financial statements.  But it can get a lot more awkward than that.

 

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Tax Roundup, 3/17/14: Celebrate the corporation due date responsibly! And more.

Monday, March 17th, 2014 by Joe Kristan


daydrinkers
Corporate 2013 returns are due today! Or at least the extensions.  It looks like massive celebrations are in store this year, for some reason, but be sure to get your filing in before you hit the bars.  A late S corporation return results in a stiff penalty: $195 per K-1.  That penalty will be repeated for each additional month the filing is late.

C corporations have their own late filing penalty, 5% of any deficiency.  If you owe but can’t pay, you should still file or extend; then the penalty is only 1/2% of the deficiency.

How should I file or extend?  Glad you asked.  Electronic filing is the best and safest way, because you can get electronic confirmation.  No trip to the post office, no holding on to a postmarked receipt, no worrying about the mail truck going up in flames.

If you prefer not to e-file, then take the trouble to get proof of filing.  The cheapest is to go to the post office and mail your return or extension Certified Mail, Return Receipt Requested.  Get a stamped postmark for your package and put it in a safe place.  It also helps to write the certified mail receipt number on top of the return or extension before sealing the envelope for additional proof.

If you lose track of time because of all the festive distractions today, and you find the local post office has closed, you still may be able to get your filing in.  The IRS treats shipping on the due date by a designated private delivery service as a timely filing.  That means your local Fed-Ex office or UPS store might be able to take care of you.  If you do go that route, be sure you use one of the specific services approved by the IRS, and make sure the shipping slip uses today’s date.  You also will need the street address for the IRS service center that your filing is going to, as private delivery services can’t use P.O. Box addresses.

Oh, and apparently green is the official color for corporate return day this year.

Russ Fox, The Other March 17th Deadline: Form 1042s. “The form 1042 series (1042, 1042-S, and 1042-T) is used to report annual withholding for US-source income of foreigners.”

 

20120906-1The revival of the sales tax subsidy for the Iowa Speedway advances in the legislaturereports The Des Moines Register:

The Newton track has received a tax break since it opened in 2006 — a 5 percent rebate of state sales tax collected at the track, totaling about $3.5 million so far. But the law authorizing the tax break required that the facility must be owned at least 25 percent by Iowans.

The purchase by NASCAR, stock-car racing’s sanctioning body, means ownership is 100 percent from outside Iowa. A law change is required to keep the tax-rebate money flowing. Supporters of the tax break say it will help bolster Iowa tourism and spur the state’s economy.

Of course, this favors the track over every other entertainment and tourist venue in Iowa, none of whom get to keep the sales taxes they collect.

 

William Perez, Itemizing Deductions. “If the total of all these itemized deductions is higher than the standard deduction, then a person usually obtains the least amount of tax by itemizing.”

TaxGrrrl, Taxes From A To Z (2014): H Is For Holding Period

Kay Bell, Dealing with a 1099-K for tax-free residential rental income

Jason Dinesen, Glossary of Tax Terms: Refundable Credits  “The term “refundable credit” refers to a tax credit that can produce a tax refund even if your tax liability is $0.”

Peter Reilly, Building Repair Deductions – Thirty Per Cent Of What?  “All the toilets together perform a discrete and critical function in the operation of the plumbing system” is the best line that I could find in the ninety odd pages of Regulation 1.263(a)-3 “Amounts paid to improve tangible property”commonly known as the “repair regs”.    Peter makes a good effort at explaining a brutally boring set of rules that is actually also important.

Keith Fogg, Confusing Lien and Levy (Procedurally Taxing).  May you never need to know the difference.

Tony Nitti, Online Sportsbook Founder Held Liable for $36 Million In Tax And Penalties

 

20130121-2Annette Nellen, Brick wall hit by IRS in its efforts to regulate all return preparers.  Too bad, so sad.

TaxProf, The IRS Scandal, Day 312

Alan Cole, Cadillac Tax Confirms: Employers Respond to Tax Changes (Tax Policy Blog). “According to the report, many companies are already making changes in anticipation of the tax, converting to less generous plans.”

Bill Gale, Howard Gleckman, Dave Camp’s Most Valuable Contribution to Tax Reform (TaxVox):

 Still, the 1000-page bill puts his plan out there in all its gory detail. It shows just how tough it is to pull together a reform that cuts rates and trims tax preferences while maintaining today’s revenue and the distribution of burdens.

It will be easier if you worry less about “maintaining today’s distribution of burdens.”  As far as I know, we haven’t achieved some perfect distributional model that should never be messed with.

 

From the Wall Street Journal comes Audit Bait: The Dirty Dozen — Moves That Could Trigger IRS Scrutiny:

  1. Forget to claim reported income.
  2. Take outsize deductions, especially for charitable gifts or travel and entertainment.
  3. Hide offshore accounts.
  4. Claim certain items on small-businesses returns.
  5. Pretend a money-losing pastime is a business.
  6. Use suspiciously round numbers.
  7. File an amended return.
  8. Use a dubious tax preparer.
  9. Be a tax protester.
  10. Provoke a whistleblower.
  11. Fail to claim canceled debt as income.
  12. Fail to file.

Yes, all those things are true.  But if you really want to get examined, you might consider putting your returns claiming refunds on absurd grounds on a website that purports to “crack the code.”  Just a thought, in case you don’t find your life exciting enough. (Hat tip: TaxProf.)

 

News from the Profession. Deloitte Exec Gets Six-Week Vacation Thanks to Wife’s Heavy Foot, Russian Frivolity (Going Concern)

I hear his parents are upset.  32-yr-old Playboy ‘playmate of the year’ in trouble over 90-YEAR-OLD BOYFRIEND (Malaysia Times)

 

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Tax Roundup, 3/14/14: Unhappy with your state revenue exam? Iowans can appeal to the examiner’s boss! And: stealing the wrong identity.

Friday, March 14th, 2014 by Joe Kristan

 

Via Wikipedia

Via Wikipedia

How would you feel about going to court and finding out that if you win, the appeal will be heard by your opponent?  That’s pretty much how the Iowa internal tax appeals process works.  And while a reform bill is getting attention in the legislature, that feature isn’t going to change just yet, reports Maria Koklanaris in a State Tax Analysts article

In a letter to legislators, DOR Director Courtney Kay-Decker said the department was able to successfully draft legislation for some of the priorities outlined in the report, including implementing a small claims process and eliminating the State Board of Tax Review for all matters except property tax protests. But she said it could not come up with language this year for what she called her highest priority, which is also the top priority of taxpayers in the eyes of many.
“Most importantly, we were unable to cohesively and comprehensively incorporate the recommendation to remove the Director from the appeals process,” Kay-Decker said in her letter. “This is disappointing as it was perhaps my highest priority.”

The Council on State Taxation gives the current Iowa system failing marks.  From Tax Analysts:

Ferdinand Hogroian, tax and legislative counsel at the Council On State Taxation, said Iowa’s tax appeals process is the only area in which the state earns poor marks in COST’s most recent report on tax administration.  The report specifies the director’s involvement in tax appeals as a major problem.
“Although an Administrative Law Judge of the Department of Inspections and Appeals conducts evidentiary hearings, IA DOR can retain jurisdiction and override,” the report says.

Attorney Bruce Baker, who frequently does battle against the Department of Revenue, points out the obvious problem with the current system: “I’ve often joked that my clients would like to be able to appeal to the chairman of the board.”  But the Department of Revenue will retain that option, at least for now.

While the legislation they are working on (SSB 3203) is an improvement, I still think Iowa needs an independent tax court — perhaps three judges from around the state who will agree to serve as tax judges as part of their caseloads to develop expertise.  It could be modeled on the specialty business litigation court that Iowa is experimenting with.  Now if you leave the current internal Department of Revenue Process — appealable by the Department to the Director of the Department — you litigate before generalists judges who may have never heard a tax case before.  They tend to defer to the Department, even when it seems clear the department is wrong.

 

Paul Neiffer, A Bad Day in Court.  A bookie who tried to hide funds overseas does poorly.

Tony Nitti, Professional Gambler Bets Wrong In Tax Court – Takeout Expenses Are Gambling Losses, Not Business Expenses   

TaxGrrrl, Taxes From A To Z (2014): G Is For Garnished Wages .  I hope not yours or mine!

Kay Bell, Sorry tax pros, more taxpayers filing on their own.  Taxpayers always have that option, and preparer regulation would drive more taxpayers to do so by increasing the cost of preparers.  Whether that will improve compliance is left as an exercise for the reader.

 

taxanalystslogoChristopher Bergin, It’s Not Just About Lois Lerner (Tax Analysts Blog):

But we need to remind ourselves that there is a lot more potential abuse going on at the IRS than what’s been associated with Lois Lerner. Here are a few examples. I talk to many practitioners who (a) don’t want to be identified, probably for fear of retaliation, and (b) question the independence of the IRS Appeals Office. That is a big problem.

In 2012 a high-ranking IRS executive said in a speech that she believes the government has a higher duty than that of a private litigant. “The government,” the executive said, “represented by the tax administrator, should not pursue a particular outcome and then look for interpretations in the law that support it. The tax administrator should do nothing more or less than find the law and follow it, regardless of outcome. The separation of powers, a bedrock principle of our Constitution, demands it.”

I have a few questions. How many private tax litigators believe that’s actually how the IRS operates? If this noble statement is taken seriously by others in the IRS, why did Tax Analysts have to go to court to get training materials? And why is the IRS being questioned so strongly by Congress on its belief – or, more accurately, the lack thereof – in the bedrock principle of the separation of powers?

The results-driven IRS approach to non-political issues doesn’t lead you to think Lois Lerner was acting with Olympian detachment in the Tea Party scandal.

TaxProf, The IRS Scandal, Day 309

Len Burman, How the Tax System Could Help the Middle Class (TaxVox)

My most “innovative”—some would say “radical”—policy option would replace across-the-board price indexing, which exists under current law, with indexation that reflects changes in economic inequality.

An awful idea.  The tax code will never “solve” the problem of inequality.  This is a clever-sounding idea that will do nothing but create complexity.

 

Sauce for the gander, indeed.  Identity Thief Sentenced for Filing Tax Returns in the Names of the Attorney General and Others:

A federal judge sentenced Yafait Tadesse to one year and one day in prison for using the identities of over ten individuals, including the Attorney General of the United States, to file false and fraudulent tax returns.

I don’t wish identity theft on anybody, not even a politician.  It can lead to all kinds of expensive and time-consuming inconveniences and embarrassments.  But if it had to happen to someone, why couldn’t it have been Doug Shulman, who let identity theft spin out of control while he pursued his futile and misguided preparer regulation crusade?

 

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Tax Roundup, 3/12/14: Hundreds of Panthers fear ID-theft. And: more smidgens!

Wednesday, March 12th, 2014 by Joe Kristan

uni-logoID Theft may affect 200 University of Northern Iowa employees.  KWWL.com reports:

In February, when the issue was first discovered, about 50 people had reported issues filing their federal income taxes. Now, University officials say 200 employees have come forward, and but not all of those are fraud. Still, that has psychology department secretary Jan Cornelius concerned. She said her social security number was stolen.

The problem was identified by taxpayers whose returns were rejected because somebody else had already filed under their numbers.  You need to be careful with your Social Security Number, and you should never transmit tax documents as unencrypted email attachments.  Use a secure file transfer portal, like Roth & Company’s Filedrop, to send tax files electronically.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

More Smidgens.  The House Oversight Committee investigating the Tea Party Scandal issued a report yesterday blasting the idea that the IRS stall on right-side 501(c)(4) groups was just a non-political coincidence involving bumblers in Cincinnati.  Using IRS documents and e-mails, the report paints a picture of an effort driven by a highly-political bureaucrat to “do something” through IRS regulation to administratively reverse the Supreme Court’s Citizens United decision.  From the report’s conclusion:

Evidence indicates Lerner and her Exempt Organizations unit took a three pronged approach to “do something about it” to “fix the problem”of nonprofit political speech:

1) Scrutiny of new applicants for tax – exempt status (which began as Tea Party targeting);

2) Plans to scrutinize organizations, like those supported by the “Koch Brothers,” that were already acting as 501(c)(4) organizations; and

3)“[O]ff plan” efforts to write new rules cracking down on political activity to replace those that had been in place since 1959. Even without her full testimony, and despite the fact that the IRS has still not turned over many of her e-mails, a political agenda to crack down on tax-exempt organizations comes into focus. Lerner believed the political participation of tax-exempt organizations harmed Democratic candidates, she believed something needed to be done, and she directed action from her unit at the IRS. Compounding the egregiousness of the inappropriate actions, Lerner’s own e-mails showed recognition that she would need to be “cautious” so it would not be a “per se political project.”

Committee Democrats continue to insist that there is no “political motivation,” and no evidence of White House involvement.  To deny that targeting “Tea Party” and “Koch-funded” organizations is political is to insult our intelligence.  As far as White House involvement, the Chicago Way isn’t for the Boss to pick up the phone and call the Cincinnati service center.  The President’s public in-your-face criticism of the Supreme Court for Citizens United at a State-of-the-Union address gave his supporters in the bureaucracy all the guidance they needed.

The TaxProf has a roundup.

 

roses in the snowWilliam Perez, Deductions for Self-Employed Persons.  “Deductions that go on Schedule C reduce both the self-employment tax and the federal income tax.”

TaxGrrrl, Taxes From A To Z (2014): E Is For EE Bonds   

Russ Fox, The Moral Climate may have Changed but the Law Hasn’t. “Thus, until Congress changes the law a professional gambler cannot deduct gambling losses in excess of wins.”

Kay Bell, Beware tax break bait and switch.  “Yes, gifts to your favorite charity can be deducted, but only if you itemize on Schedule A.”

Paul Neiffer, Permanent Means Permanent:

North Dakota law regarding easements is unique.  It appears to be the only state in the country that limits easements to 99 years by law.  Since the Tax Code requires that the conservation easement be of a permanent nature, the Tax Court ruled in favor of the IRS and disallowed all of the easement charitable donations.

Oops.  Still, I think anything “permanent” should be looked at skeptically.  Nobody knows whether it will seem wise to lock up a parcel 100 years from now.

Tony Nitti, Tax Geek Tuesday: Tackling The Dreaded Section 754 Adjustment   

 

20120906-1David Brunori, Where Is the Outrage? (Tax Analysts Blog):

According to Good Jobs First, there are 514 economic development programs in the 50 states and the District of Columbia. More than 245,000 awards have been granted under those programs. I ask again, where is the outrage? The system is antithetical to the idea of free markets. A quarter of a million times, state governments decided what is best for producers and consumers. That should make us cringe. First, the government is inefficient at providing public goods, and it is terrible at manipulating the markets for private goods. But more importantly, those 514 economic development programs are almost all the result of insidious cronyism. Narrow business interests manipulate government policymakers, and those interests prosper to the detriment of everyone else. Free markets be damned.

And while I’m looking for outrage, where are the liberals? The 965 companies in the report received over $110 billion of public money. Berkshire Hathaway, a company with $485 billion in assets and $20 billion in profits, received over $1 billion of that money. Its chair, William Buffett, is worth about $58 billion. Buffet, by the way, is still a darling of the left. He has some nerve to call for higher taxes. The billion dollars his companies took would pay for a lot of teachers, healthcare, and other public goods. 

They take just a little bit at a time from all of us so we don’t notice, and they give it in big chunks to their well-connected friends, who certainly do notice.   The report David refers to is here.

 

Joseph Henchman, State Sales Tax Jurisdictions Approach 10,000 (Tax Policy Blog).  Small wonder online sellers don’t want to collect everyone’s sales tax.

Elaine Maag, The Many Moving Parts of Camp’s Tax Reform for Low-Income Families (TaxVox)

 

Joseph Thorndike, The Last Time Everyone Gave Up on Tax Reform, It Actually Happened (Tax Analysts Blog).  But not this time:

Ultimately, Reagan agreed to make tax reform a priority. And his support was crucial. No lawmaker, no matter how exalted, well intentioned, or energetic, can move the ball like a president.

Which is one very important reason why 2014 is different from 1984. President Obama has no discernible interest in fundamental tax reform. So conventional wisdom is right: The Camp tax plan is going nowhere fast.

I think that’s right.

 

All it needs is a little pasta and fresh lemon.  Argentina: Authorities investigate tax evasion via garlic exports through shell companies

Career Corner.  It Is Almost Certain You Will One Day Be Replaced by Machines (Going Concern).  

 

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