Posts Tagged ‘Arnold Kling’

Tax Roundup, 10/31/14: Halloween! And: mortgage interest? Put it on the tab.

Friday, October 31st, 2014 by Joe Kristan

20140325-1The deduction for home mortgage interest is hugely popular among those with huge home mortgages. Taxpayers get to deduct all of the interest paid on loans used to buy a home, up to $1 million in principal; they also get to deduct interest paid on the first $100,000 in home equity debt.

But there is a technicality: the interest needs to be “paid.” That was a problem for a California couple in Tax Court yesterday.

The couple bought a home in 1991 for $300,000. They refinanced it for $600,000 in 2007. Then 2008 happened, and they got a loan modification in 2010. Tax Court Judge Lauber explains:

The modifications included a reduction of the interest rate, a change in the payment terms, and an increase in the loan balance. Immediately before the modifications, the outstanding loan balance was $579,275; after the modifications, the new balance was $623,953. The difference (equal to $44,678) resulted from adding the following amounts to the loan balance: past due interest of $30,273, servicing expense of $180, and charges for taxes and insurance of $14,225.

The taxpayers added the $30,273 to the $9,253 the bank put on their 1098 mortgage interest statement for 2010. The IRS noticed the difference and disallowed the $30,273.

20121031-2The Tax Court sided with the IRS:

Petitioners are cash basis taxpayers. It is well settled that “[a] cash-basis taxpayer ‘pays’ interest only when he pays cash or its equivalent to his lender.”

 Through the loan modification agreement, the $30,273 in past-due interest on petitioners’ mortgage loan was added to the principal. No money changed hands; petitioners simply promised to pay the past-due interest, along with the rest of the principal, at a later date. Because petitioners did not pay this interest during 2010 in cash or its equivalent, they cannot claim a deduction for it for 2010. They will be entitled to a deduction if and when they actually discharge this portion of their loan obligation in a future year. 

In short, you can’t just add interest to the loan balance and get a deduction. That has obvious implications for “reverse mortgages.”

As the taxpayers make the payments, they will have some additional factors to consider. Their original purchase price was $300,000 for the house. Unless the additional borrowing was used for renovation or expansion of the home, it is “home equity indebtedness.” Interest on only the first $100,000 of equity debt will be deductible — and only for regular tax, not AMT.

Cite: Copeland, T.C. Memo 2014-226.

 

mst3k-lanternWilliam Perez, The Tax Audit Success Story and Tips from Audit Experts

Jason Dinesen, Same-sex Marriage and State Taxes: 2014

Kay Bell, 2015 income tax rates, income brackets

TaxGrrrl, IRS Announces 2015 Tax Brackets, Standard Deduction Amounts And More

Robert D. Flach has A SCARY THOUGHT for Halloween. “What if the 114th Congress turns out to be made up of most of the same idiots as the 113th Congress!”  It will be.

 

Leslie Book, AICPA Suit Against IRS Voluntary Education and Testing Regime Thrown Out of Court (Procedurally Taxing)

Tax Trials, Tax Court Preserves Taxpayer Protections against Arbitrary and Capricious Appeals Rulings

 

Arnold Kling  on “middle class” tax credits:

Brooks endorses the reform conservative Room-to-Grow idea of showering middle-class families with tax credits. I see that as political posturing. If I could be in charge of tax reform, we would get rid of credits and deductions, and we also would move away from taxing income and instead toward taxing consumption. Note, however, that tax reform is not one of my top three priorities.

Except for the last sentence, I agree with it all.

 

6fpw32atDon Boudreax on the Arnolds Park IRS cash seizure:

I challenge anyone to justify, or even to excuse, such an abuse of power.  (HT a dear and wise and passionate friend.)

Words normally do not escape me, but I can find none that adequately convey the anger and sense of injustice that course through me when I read of seizures such as this one.  Best to let the matter speak for itself, which it surely does to anyone this side of Frank Underwood in decency and civility.  Fortunately, the great Institute for Justice is on the case.

Oh, I’m sure that things like that could never happen if the IRS had a bigger budget.

 

Andrew Lundeen, Tens of Thousands Protest Internet Tax in Hungary (Tax Policy Blog) Would-be dictators come up with wacky ideas.

20141027-2Matt Gardner, Obscure Law Allows Wealthy Professional Sports Team Owners to Reap Tax Windfalls (Tax Justice Blog) . He doesn’t care for intangibles amortization.

 

TaxProf, The IRS Scandal, Day 540

 

News from the Profession. Grant Thornton to Have Rat Problem for Foreseeable Future (Adrienne Gonzalez, Going Concern)

Tony Nitti, Want To Do Your Part To Help Fight Ebola? Skip Your Next Vacation. OK, I’m skipping my next vacation to Liberia.

Share

Tax Roundup, 9/19/14: Brutal Assault on Reason Season Edition. Arrggh!

Friday, September 19th, 2014 by Joe Kristan

20121006-1Brutal Assault on Reason Season is underway. Elections depress me. Arnold Kling sums up my feelings:

To me, political campaigns are not sacred events, to be eagerly anticipated and avidly followed. They are brutal assaults on reason. I look forward to election season about as much as a gulf coast resident looks forward to hurricane season.

Very few of us are in a position to have more than intuitions on the great issues of the day. Rarely are voters health-care economists, trade experts, military or foreign policy specialists, etc., and most of us have little basis to tell when the politicians are lying about these issues (though that is a good default assumption). Doing taxes for a living, though, I feel competent to identify bogus tax claims by politicians. William McBride does so in a Tax Policy Blog Post,  U.S. Corporate Tax Revenue is Low Because High Taxes Have Shrunk the Corporate Sector.

He quotes the U.S. Senate’s only unabashed socialist, Bernie Sanders:

“Want to better understand why we have a federal deficit? In 1952, the corporate income tax accounted for 33 percent of all federal tax revenue. Today, despite record-breaking profits, corporate taxes bring in less than 9 percent. It’s time for real tax reform.”

There is a truly brutal assault on reason, and Mr. McBride fights back:

The share of U.S. business profits attributable to pass-through businesses has grown dramatically as well, as they now represent more than 60 percent of all U.S. business profits. The second chart below shows that C corporation profits, while extremely volatile, have generally trended downward in recent decades, while the profits of S corporations and partnerships have trended upwards. In the 1960s and 1970s, C corporation profits were about 8 percent of GDP, while partnership profits were about 1 percent and S corporation profits were virtually nil. Now C corporation profits hover around 4 percent of GDP (4.7 percent in 2011), while partnership profits are almost at the same level (3.7 percent in 2011) and S corporation profits are not far behind (2.4 percent in 2011). Partnership and S corporation profits are growing such that they will each exceed C corporation profits in the near future if not already. When commentators claim that “corporate profits are at an all-time high”, they are referring to Bureau of Economic Analysis data that combines C corporations and pass-through businesses, whether they know it or not.

In sum, the Senator’s statement is flat out false. It is completely misleading to claim that corporate profits are up while corporate tax revenues are down, essentially implying there is some mischief going on via “loopholes”, etc. The truth is corporate tax revenue has been falling for decades because the corporate sector has been shrinking, and not just by corporate inversions. The most likely culprit is our extremely uncompetitive corporate tax regime.

In other words, high rates are driving businesses out of the corporate form and to pass-throughs of one sort or another.

20140919-1

As we head into election season, expect the brutal assaults to continue. Here are a few phrases commonly seen in assaults on reason when taxes are involved, enabling you to spot them even if you don’t know a 1040 from a hole in the ground:

“Politician X voted for tax breaks to ship jobs overseas.”

“This tax cut will pay for itself.”

“I believe in free markets, but tax credit X is needed to level the playing field.”

“I don’t want to punish success; I want X to pay his fair share.”

“This tax credit created X jobs”

I know I’m missing many. If you point out more in the comments, I’ll be happy to talk about them.

 

It’s Talk Like a Pirate Day, so Kay Bell comes through with Avast, me hearties! The IRS wants its cut of your illegal income, be it pirated or otherwise criminally obtained.

 

Peter Reilly, Professional C Corp Denied Deduction For Uncashed Salary Check To Owner.  He covers a story I covered earlier this week where a professional corporation deducted a year-end bonus “paid” through an NSF check that was “loaned” back to the corporation.  His take: “I’m not sure that the Tax Court was right to deny any of  deduction, but I really question whether the whole deduction should be denied.”

 

TaxGrrrl, Back To School 2014: Deducting Student Loan Interest (Even If You Don’t Pay It)

20140826-1Robert D. Flach has fresh Friday Buzz, including links on the cost of tax compliance and “7 deadly tax sins.”

William Perez, When are State Refunds Taxed on Your Federal Return?

Jason Dinesen, IRS Says Online Sorority Is Not Tax Exempt. Social media apparently isn’t social enough for them.

Jim Maule, An Epidemic of Tax Ignorance. He covers one of my pet peeves — people who use the term “the IRS code” for the Internal Revenue Code. It’s Congress that came up with that thing, not the IRS.

Russ Fox, Hyatt Decision a Win for FTB as Far as Damages, but Decision Upheld that FTB Committed Fraud. FTB is the California Franchise Tax Board. Tax authorities should get in trouble for fraud to the same extent they hold taxpayers responsible for fraud.

 

A. Levar Taylor, What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 1) and (Part 2).

 

20140801-2Joseph Thorndike, Should We Tax Away Huge Fortunes? (Tax Analysts Blog). “In other words, if you like the estate tax, talk more about revenue and less about dynasties.”

Richard Philips, House GOP Bill Combines Worst Tax Break Ideas of 2014 for Half-a-Trillion Dollar Giveaway. (Tax Justice Blog). When they know that the Senate will ignore whatever they do, it’s easy to accommodate anyone lobbying for a tax break.

Renu Zaretsky, Will Tax Reform See Light at the End of the Next Tunnel? This TaxVox headline roundup covers Tax Reform, Treasury’s plans on inversions, and the continuing resolution passed before the congresscritters left D.C. to assault reason some more.

TaxProf, The IRS Scandal, Day 498

Me, IRS issues Applicable Federal Rates (AFR) for October 2014

News from the Profession. Grant Thornton Has a Fight Song and It’s As Awful As You Might Expect (Adrienne Gonzalez, Going Concern).

 

Share

Tax Roundup, 9/5/14: Obamacare tax credits get a reprieve. And: what’s $14 billion waste for a good cause?

Friday, September 5th, 2014 by Joe Kristan

The U.S. Court of Appeals for the D.C. Circuit will re-hear Halbig.  The full court will re-decide the decision reached by a three-member court panel that limited tax credits under Obamacare to policies purchased through state-established exchanges.  As 36 states have not established exchanges, the decision would have undermined both the employer and employee mandates, which are largely dependent on the tax credits.  Jonathan Adler has more.  Michael Cannon explains the politics behind the decision to re-hear the case.

 

EITC error chartLeslie Book, IRS Issues New Report on EITC Overclaims (Title A).  Leslie covers the recent IRS report on how much of the cost of this welfare program run through tax returns is misspent:

“As a result of the EITC program growth the total overclaims in the study are higher in the 2006-08 Report than in the past 1999 study, with annual overclaim estimates for 2006-08 at $14 billion (lower estimate) or $19.3 billion (higher estimate), compared to 1999 figures of $12.3 billion (lower estimate) and $14 billion (higher estimate).”

The report shows that the errors arise largely from misreporting of income and claiming ineligible dependents.  While some of the errors are attributable to complexity, the skewing of the errors to extra refunds points to widespread cheating.  Complexity errors would tend to be more equally split between overpayments and underpayments, but the vast majority of errors resulted in EITC overpayments.

All of this makes Arnold Kling’s proposal to roll all means-tested welfare programs into a single voucher grant with a uniform phase-out rate look wise.

 

haroldMore on the Iowa Film Credit Settlement with a Rhode Island filmmaker from Maria Koklanaris at Tax Analysts ($link):

The state admits no liability in making the settlement, according to the agreement. An accompanying letter from Adam Humes, a state assistant attorney general, to Joseph Barry of the state Department of Management, says that “the agreement will resolve all claims related to these film projects, and all claims in . . . the civil case in exchange for a cash settlement. After the settlement becomes final, the civil case . . . will be dismissed with prejudice.”

Joe Kristan of Roth & Co. PC of Des Moines said several civil suits arose after the state “slammed the brakes on everything” to do with the film tax credit scandal, which resulted in seven criminal convictions amid revelations that the state had issued $26 million in improper credits.

You gotta like her sources.

 

Sebastian Johnson, Big Oil Wins In Alaska, Hollywood Wins in California.  Because California has plenty of cash to shower on filmmakers…

Russ Fox, $1.25 Billion Attracts Tesla to Nevada

 

Kyle Pomerleau, IRS Aims to Tax Silicon Valley Workers’ Fringe Benefits (Tax Policy Bl0g).

“The IRS and U.S. Treasury Department last week included taxation of “employer-provided meals” in their annual list of top tax priorities for the fiscal year ending next June. The agencies said they intend to issue new ‘guidance’ on the matter, but gave no specifics about timing or what the guidance would say.”

The IRS believes that the regular free meals provided to employees are a fringe benefit and should be taxed like compensation.

You can make a good theoretical argument that a lavish Silicon Valley cafeteria results in taxable income for the employees. It’s much harder to make a good practical arguemnt for taxing that benefit.  There are serious measurement problems, and the amount of revenue at stake hardly seems worth it.

 

buzz20140905It’s Friday!  That means it’s Buzz day for Robert D. Flach, who buzzes from taxing frequent flyer miles to taxing marijuana.  However you get high, there’s a tax for that.

William Perez, How to Deduct Car and Truck Expenses on Your Taxes.  “To prove you are eligible to deduct your car and truck expenses, you should keep a mileage log.”

Paul Neiffer, Partner Must Have Basis to Deduct Loss. “The bottom line is if you show a loss from a partnership, make sure you have enough “basis” to deduct the loss.”

Kay Bell, New NFL players ready for football, IRS ready for their taxes

Peter Reilly, IRS Shows Serious Meatspace Prejudice.  “You would think with all the pressure that it puts on people to file and pay electronically that the IRS would have a forward looking view and a preference for cyberspace.  It does not seem to be that way  in the tax exempt division, where meatspace seems to be much preferred.”

 

Jack Townsend discusses an Article on Swiss Banks in U.S. DOJ Program.  He quotes from the article:

Caught in the crossfire of these strategies, however, are thousands of bank clients who are either innocent of tax evasion offences or were unaware of their reporting responsibilities.

These include US citizens living and working in Switzerland who cannot open bank accounts or take out mortgage loans. In some cases they have been expelled by their banks as involving too much unwanted paperwork and risk.

Well done, Congress.  Your FATCA makes everyday personal finance a miserable challenge for Americans abroad.

Tax Trials, IRS Updates Internal Revenue Manual for Streamlined Offshore Compliance

 

horse 20140905Annette Nellen, Shakespeare, building your vocabulary … and taxes.  She summons up a “parade of horribles” — well, a judge she quotes does.

TaxProf, The IRS Scandal, Day 484

 

Should I show this to my high school junior?  What Every High School Junior Should Know About Going to College (Bryan Caplan).  “College is a good deal for good students, a mediocre deal for mediocre students, and a poor deal for poor students.”

News from the Profession: EY Is No Longer Blocking Sports Websites Just in Time for Football Season (Adrienne Gonzalez, Going Concern)

 

Share

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)

 

Share

Tax Roundup, 8/15/14: Sell Iowa land, pay Iowa tax. And: more inversion diversion!

Friday, August 15th, 2014 by Joe Kristan

20120920-3

Accounting Today visitors, the ALEC story link you want is here: Tax Roundup, 8/11/14: Don’t you dare agree with me edition.

 

It’s not just Iowa.  If you sell land for a gain, the state where the land is will want to tax you.  A Letter of Findings (Document 14201016issued by the Iowa Department of Revenue this week  gave the bad news to a Wisconsin man.  From the letter:

Your income tax assessment for 2002 was based upon the fact that you sold property in Iowa for that year and the gain from the sale of that property was never reported as taxable income in Iowa.  Your Protest seems largely based on the argument that you are not a citizen or resident of Iowa.

You don’t have to live in a state to be taxed there.  States can tax income from non-residents if it has enough connection to the state.  The letter explains:

 Despite the fact that you are currently a nonresident, you still owe Iowa income tax on the capital gain related to the sale of property in Iowa. 

This is important to a lot of non-Iowans who have inherited farmland here.  Farmland values have spiked in recent years, making it tempting to cash out.  The Department of Revenue will be looking for its cut.

 

Kyle Pomerleau asks How Much Will Corporate Tax Inversions Cost the U.S. Treasury? (Tax Policy Blog):

The Joint Committee on Taxation in May released their estimate of the revenue gained from passing the “Stop Corporate Inversions Act of 2014.” This law alters rules and makes it harder for corporations to invert and move overseas. The JCT estimates that this will raise approximately $19.5 billion over fiscal years 2015 and 2024.

Compare this to the Congressional Budget Office’s fiscal outlook that estimates that the corporate income tax is estimated to raise approximately $4.5 trillion over the same period.

That is a 0.4 percent loss to our corporate tax base due to corporate inversions. Hardly the doom and gloom many in the press and Congress make it out to be.

Or, in handy graphical form:

20140815-1

 

The whole contrived inversion panic is best understood as a diversion, an attempt to create a hate totem to divert attention from the disastrous effects of other policies.

 

20140815-2Jim Maule isn’t taking inversions very well:

Furchtgott-Roth asks, “What is more American than doing what is best for your company?” The answer is, doing what is best for America no matter what it does to the company. That is what America did during World War II. If today’s generation of “capitalists” were the folks around back in the 1940s, we’d be speaking German or Japanese.

The good Professor Maule makes some basic mistakes here.  First, he assumes that people didn’t try to keep their taxes low back in the 1930s and 1940s.  I have boxes of dusty old tax casebooks that say otherwise.

A more fundamental mistake is his assumption that paying more taxes than the tax law requires is “best for America no matter what it does to the company.”  The President and our 535 Congressional supergeniuses have no magical insight on what’s “best for America.”  Reasonable minds may differ on “what’s best” without being traitors.

Professor Maule seems to make the default assumption that whatever gives more revenue to the government is “best for America no matter what it does to the company.”  By that logic, corporations should liquidate and turn their proceeds over to the IRS.  Forget the products those corporations make, the needs they meet, the jobs they provide.  Screw the pensioners with pension plans funded with corporation stock.  Because America!

 

TIGTA reports Some Contractor Personnel Without Background Investigations Had Access to Taxpayer Data and Other Sensitive Information.  Remember how everyone was all up in arms that a private company was hired to call on tax delinquents that the agency couldn’t be bothered with, on privacy and security grounds?  Good thing confidential tax data is secure now.

 

20120620-1TaxGrrrl, TIGTA, IRS Warn Phone Scam Continues As Fraudsters Rake In Millions   

William Perez, How to Make Sure Your Charity Donation Is Tax-Deductible.

Kay Bell, California tax deduction bill aimed at former NBA owner Donald Sterling advances.  California forgets that not every problem is a tax problem, and being a jerk isn’t a taxable event.

Russ Fox, Lawsuits Against FATCA in Canada

It’s Friday, so Robert D Flach has fresh Buzz!

 

Arnold Kling points out this from the Wall Street Journal:

Employers in many countries are reluctant to hire on permanent contracts because of rigid labor rules and sky-high payroll taxes that go to funding the huge pension bill of their parents.

He adds: “Don’t think it couldn’t happen here.”  It’s already starting to.

Because giving money to politicians is more important than your retirement. Amazing Waste: Tax Subsidies To Qualified Retirement Plans, (Calvin Johnson, at Tax Analysts, via the TaxProf): 

Qualified plans are ineffective or counterproductive for their given rationales, which makes them a rich source of revenue when the United States needs money.

Mr. Johnson has a strange hobby of finding ways to give more of your money to the government by making tax rules even worse.  Apparently he is convinced that politicians and bureaucrats have better things to do with your money than you do.  (via the TaxProf)

 

TaxProf, The IRS Scandal, Day 463

Kelly Davis, Hey Missouri, You’re the Show Me State, But Don’t Follow Kansas’s Lead.  (Tax Justice Bl0g).  Shouldn’t that be “so,” no “but?”

 

Share

Tax Roundup, 6/25/14: Check your mailbox edition. And: the Commissioner’s real goal.

Wednesday, June 25th, 2014 by Joe Kristan

20120511-2Ignore them and they will come anyway.  A Chicagoan tried to avoid IRS pursuit by the simple expedient of not picking up his mail.  The Tax Court told him yesterday that doesn’t work:

 On several occasions the U.S. Postal Service (Postal Service) attempted, albeit unsuccessfully, to deliver the 2006-2007 notice of deficiency to petitioner at the address of his Columbus Drive apartment. On at least two occasions the Postal Service left notices of attempted delivery of certified mail at that address. In those notices, the Postal Service informed petitioner that it had certified mail to deliver to him and that he had to sign a receipt for that mail before the Postal Service would deliver it to him.

The taxpayer never got around to doing so. Yet he still wanted to fight the deficiencies in Tax Court:

It is petitioner’s position that he is entitled under section 6330(c)(2)(B) to contest the underlying tax liability for his taxable year 2006. In support of that position, petitioner contends that although respondent mailed to him by certified mail, return receipt requested, the 2006-2007 notice of deficiency that was addressed to his Columbus Drive apartment, he did not receive that notice within the 90-day period during which he could have filed a petition with the Court with respect to that notice. In support of that contention, petitioner relies on his testimony at the partial trial in these cases. 

There’s a 90-day deadline to file with the Tax Court, starting with the receipt of the Notice of Deficiency.  The Tax Court enforces the deadline pretty strictly.  And you can’t extend the deadline just by ignoring your mail:

On the record before us, we hold that petitioner may not decline to retrieve his Postal Service mail, when he was reasonably able and had multiple opportunities to do so, and thereafter successfully contend that he did not receive for purposes of section 6330(c)(2)(B) the 2006-2007 notice of deficiency. On that record, we reject petitioner’s contention that he is entitled under that section to dispute the underlying tax liability for his taxable year 2006.

Nice try.

Cite: Onyango, 142 T.C. No. 24.

 

Paul Neiffer, Is Low Section 179 Causing Low Equipment Sales?

 

Mixed message.   From Tax Analysts ($link): “Taxpayers considering the IRS’s new streamlined filing compliance program need to think carefully about whether their actions were truly non-willful, because a certification that proves untrue could expose them to more charges from the Justice Department, Kathryn Keneally, former assistant attorney general for the DOJ Tax Division, said June 24.”

The Treasury just can’t quite get the hang of this.  What taxpayers need is bright-line guidance that lets them come into compliance, at least below a relatively-generous dollar threshold.  Instead they have to come in with their hands up, while the IRS reserves the right to open fire — to second guess their state of mind.  That’s not necessarily very comforting.

 

 

Rose Mary Woods checks her e-mail in the Nixon administration.

Rose Mary Woods checks her e-mail in the Nixon administration.

Howard GleckmanThe Real IRS Flap Is About Dark Money, Not Emails (TaxVox):

But get past the shouting and two very important issues remain on the table: The first is the IRS has been terribly managed for years and needs to be fixed. It’s easy to forget, but that’s why Koskinen is there.

The second is that the commissioner appears undeterred in his efforts to rewrite the rules for 501(c)(4) non-profits that are engaged in political activities. That seemingly obscure effort will have an enormous impact on future U.S. elections and the balance of political power in the U.S.

This is chilling.  And Mr. Gleckman seems to think it’s just an effort by a disintersted public servant to impose order on chaos:

Koskinen is under great pressure from liberal and conservative groups and from lawmakers on both sides of the aisle to abandon the effort. Don’t for a minute think that the House’s proposed $300 million cut in the IRS budget, its endless requests for IRS documents on multiple subjects, and even the email hearings themselves are not in part an effort to sink—or at least slow–these regulations.

Yet, Koskinen has refused to blink.

If you think Koskinen isn’t a partisan operative at the IRS, you haven’t been paying attention.   All of the pressure to “reform” the (c)(4)s has come from the left.  And it’s clear from the Tea Party targeting that the IRS can’t be trusted to regulate political actors evenhandedly.  If Mr. Gleckman is right, Koskinen’s mission is not to help the IRS to recover from its scandalous practices, but to institutionalize them.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 412.  About 40 links today, primarily on Commissioner Koskinen’s appearance before Congressional investigators and related missing e-mail developments.  It’s hard to imagine how this Commissioner could do a worse job at coming clean and improving IRS relationships with GOP congressional appropriators.

Jonathan Adler, IRS agrees to pay non-profit group $50,000 for unauthorized release of tax return.  But nobody will lose their job, and the $50,000 won’t come out of any individual perpetrator’s pocket.  In fact, the leaker gets to maintain his/her anonymity, and presumably employment too.  And even though it was an illegal, and presumably partisan, disclosure of taxpayer information, the Justice Department isn’t going to investigate.

TaxGrrrl, Lois Lerner And The Case Of The Missing Emails.  “Yes, that’s right: the IRS used the same backup strategy for its important data that I used to record my soap operas in college.”

Russ FoxKoskinen Channels His Inner Nixon. “The IRS continues to look hyper-partisan, and that’s not a good thing for anyone.”

The Hill, Archives official: IRS didn’t follow law on missing emails.   But Commissioner Koskinen says no apologies are in order, so stop bothering him.

 

No Walnut STAccounting Today, AICPA Says IRS Voluntary Tax Preparer Certification Program Is Unlawful:

The AICPA’s letter emphasizes the following points:

• First, no statute authorizes the proposed program;

• Second, the program will inevitably be viewed as an end-run around Loving v. IRS, (a federal court ruling rejecting an earlier IRS attempt to regulate tax return preparers);

• Third, the IRS has evidently concluded, in developing the proposed program, that it need not comply with the notice and comment requirements of the Administrative Procedure Act. This is incorrect; and

• Finally, the current proposal is arbitrary and capricious because it fails to address the problems presented by unethical tax return preparers, runs counter to evidence presented to the IRS, and will create market confusion.

Not that being illegal will bother them; see above.

 

Arnold Kling, In Our Hands.  Mr. Kling discusses his idea for replacing all means tested welfare programs like the Earned Income Credit with a universal voucher: “Keep in mind that under current policy, many low-income households face effective marginal tax rates of 100 percent or higher. That is, they are better off with something less than full-time, year-round work.”

 

David Brunori, A Bad Law Addressing a Bad Business Tax (Tax Analysts Blog)

Local option business taxes, whether imposed on income, gross receipts, or personal property, are terrible ways to raise revenue. Only 14 states authorize their use, and they raise a paltry sum compared with the property tax or even local option sales and income taxes. Virtually all the public finance experts who have studied the issue denounce their use.

Of course, Iowa has lots of these.

 

20120606-1Sydni Pierce, Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer (Tax Justice Blog)

Andrew Lundeen, Obamacare Increases Marginal Tax Rate on Labor by Six Percentage Points (Tax Analysts Blog).   “In the case of the Affordable Care act, Mulligan is talking about implicit marginal tax rates, or ‘the extra taxes paid, and subsidies forgone, as the result of working.'”

 

Adrienne Gonzalez, Bernie Madoff’s Former Accountant Pleads Guilty But Clueless (Going Concern).  “Prosecutors say that Konigsberg didn’t intend to help defraud Madoff investors, but knowingly used fraudulently backdated trades provided by Mr. Madoff’s firm as he prepared tax returns for some clients’ investment account.”

 

Share

Tax Roundup, 5/16/14: Iowa Alt Max Tax resurfaces. And: Alimony madness.

Friday, May 16th, 2014 by Joe Kristan
If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

The Iowa Alternative Maximum Tax Trial Balloon rises again.  From O. Kay Henderson, ‘Flat tax’ likely on GOP legislators’ agenda in 2015:

The top Republican in the Iowa House says if Republicans win statehouse majorities in the House and the Senate this November, one item on his wish list for 2015 is a “flat” state income tax. House Speaker Kraig Paulsen, a Republican from Hiawatha, spoke early this morning at a breakfast meeting of central Iowa Republicans.

Paulsen and his fellow House Republicans endorsed a “flat” tax proposal last year, but it was not considered in the Democratically-led Iowa Senate. The proposal would have allowed Iowans to continue filing their income taxes under the current system or choose the alternative of a 4.5 percent flat tax on their income, with no deductions.

I call this an “alternative maximum tax” because taxpayers will compute the tax both ways and pay the smaller number.  That contrasts with the alternative minimum tax, where you compute taxes two ways and pay the higher amount.  It has the obvious drawback of adding a new layer of complexity to the current baroque Iowa income tax.

20120906-1The proposal is likely an attempt to enact a lower rate system in a way that doesn’t upset fans of Iowa’s deduction for federal income taxes — particularly the influential Iowans for Tax Relief.  Because the deduction would rarely provide a better result than the alt max tax, support for the old system would wither away, maybe.

I’m probably too much of a tax geek to read the politics correctly, but I’m not convinced adding a new computation to the Iowa 1040 will fire up the electorate.  I think something like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would be easier to run on.  Eliminate all the crony tax credits and well-intended but futile tax breaks.  Get rid of the job-killing, worst-in-the-nation Iowa corporation income tax.   Drastically lower rates, increase the standard deduction, and limit the role of the income tax to funding the government.   This would get my vote anyway, and it would at least be awkward to argue instead for the current system that sends millions to some of Iowa’s biggest corporations as subsidies on the backs of you, me and small businesses.

Related: The Iowa flat tax proposal: a good deal for middle class and up, but not for lower incomes.

 

I always thought enforcing the tax rules for alimony would be about the easiest job the IRS could have.  When you pay alimony, you get an above-the-line deduction, but only if you list the name and social security number of the recipient ex-spouse.  Just match the deduction with the income and generate notices when they don’t match.

This information systems problem is apparently too much for the IRS.  Peter Reilly reports:

According to the TIGTA report there were 567,887 Forms 1040 for 2010 that had alimony deductions.  The total claimed was $10 Billion.  When they compared the corresponding returns that should have recorded the income, there were discrepancies on 266,190 returns including 122,870 returns that had no alimony income at all reported.  There were nearly 25,000 returns where the income recognized was greater than the deduction claimed which produced a bit of an offset ($75 million).  On net, deductions exceeded income by $2.3 billion.  In her piece “Alimony Tax Gap is $1.7 BillionAshlea Ebeling goes into more details on the report, so I’m going to get a little more into what I see as the big picture here.

While I’ve never been a huge fan of the IRS, over my career I had developed a grudging respect for the organization’s competence and professionalism.  That’s been mostly drawn down over the last few years.

 

taxanalystslogoChristopher Bergin, A Warning About the IRS That We Should Heed (Tax Analysts Blog):

As I wrote almost a year ago, the IRS is in trouble. Punishing it will do no more good than ignoring what has happened over the last year. The former seems to be the plan of House Republicans; the latter appears to be the White House plan. We need to fix it, and that is harder than either of the above two approaches.

This is correct.  Unfortunately, the IRS became a partisan organization in the Tea Party scandal, and it’s proposed 501(c)(4) regulations only make that official.  The impasse won’t be broken until the IRS does something to reassure Republican congresscritters.  Withdrawing the proposed rules is probably a necessary start.

 

Kay Bell, Johnny Football’s Texas residency can cut his NFL income tax.

Lyman Stone, The Facts on Interstate Migration: Part Five (Tax Policy Blog):

On the whole, these high-inward migration states tend to have lower tax burdens. North Carolina and Idaho have periodically had higher than average tax burdens, but most, like Tennessee and Nevada, have consistently low tax burdens. Again, this doesn’t conclusively prove that taxes drive migration, as no doubt other living costs are lower in these states too: but it does suggest that taxes cannot be discounted out of hand.

 

Jason Dinesen, Glossary of Tax Terms: Asset

TaxGrrrl, Tesla Continues To Roll Out Tax Strategies For Consumers .  An auto company with a marketing pitch built around tax credits seems like a bad thing to me.

Stop by Robert D. Flach’s Place for a solid Friday morning Buzz!

 

20140516-1

 

Howard Gleckman, Are Multinationals Getting Tired of Waiting for Corporate Tax Reform? (TaxVox).  They seem to be taking a do-it-yourself approach more and more.

Tax Justice Blog, States Can Make Tax Systems Fairer By Expanding or Enacting EITC.  I think this is wrong, at least the way the earned income tax credit works now.  Arnold Kling has a much-more promising proposal that would replace the EITC and other means-tested welfare programs.

Kyle Pomerleau, Flawed Buffett Rule Reintroduced in Senate (Tax Justice Blog).  Of course, that’s the only kind.

 

Cara Griffith, In Search of a Little Guidance (Tax Analysts Blog). “If informal guidance is the only guidance available to practitioners and taxpayers, can they rely on it?”

TaxProf, The IRS Scandal, Day 372.  Guess what?  It wasn’t just a few rogues in Cincinnati.

 

News from the Profession.  Alleged “Touch It For a Buck” Creeper CPA Got His License Revoked For Felony Creepiness (Going Concern).

 

Share

Tax Roundup, 5/14/14: Earned income credits, still busted. And: extenders advance.

Wednesday, May 14th, 2014 by Joe Kristan
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Nope.  Still busted.  From WashingtonExaminer.com comes an update on what some call America’s most successful anti-poverty program:

The Treasury Department has released its latest report  on the fight against widespread fraud in the Earned Income Tax Credit program. The problem is, fraud is still winning. And there’s not even much of a fight.

“The Internal Revenue Service continues to make little progress in reducing improper payments of Earned Income Tax Credits,” a press release from Treasury’s inspector general for Tax Administration says. “The IRS estimates that 22 to 26 percent of EITC payments were issued improperly in Fiscal Year 2013. The dollar value of these improper payments was estimated to be between $13.3 billion and $15.6 billion.”

Wait.  Didn’t the President sign a bill in 2010 to fix all this?

The new report found that the IRS is simply ignoring the requirements of a law called the Improper Payments Elimination and Recovery Act, signed by President Obama in 2010, which requires the IRS to set fraud-control targets and keep improper payments below ten percent of all Earned Income Tax Credit payouts.

Whatever the EITC does to help the working poor, it is a boon to the Grifter-American community.  Fraudulent EITC claims are a staple of ID theft fraud and low-tech tax cheating in general.

It’s worth noting that the high rate of improper EITC payouts has not gone down in spite of the ever-increasing IRS requirements for preparers who issue returns claiming the credits.  This should give pause to folks who think IRS preparer regulations will stop fraud, though it won’t.

It’s also notable that Iowa recently increased its piggyback EITC to 15% of the federal credit — increasing the annual cost of the credit by an estimated $35 million.  Assuming Iowans are just as honest as other Americans, that means about $8 million of additional stimulus to the Iowa grifter economy.

Finally, the phase-out of the EITC functions as a hidden high marginal tax rate on the program’s intended beneficiaries, the working poor.  The effective marginal rate in Iowa exceeds 50% at some income levels.  Combined with other income-based phase-outs, the EITC becomes a poverty trap.

 

Related: Arnold Kling,  SNEP and the EITC. “My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game.”

 

 

Extenders advance in Senate.  Tax Analysts reports ($link)

Legislation that would extend for two years nearly all the tax provisions that expired at the end of 2013 cleared a procedural hurdle in the Senate May 13.

Senators voted 96 to 3 to invoke cloture on the motion to proceed to H.R. 3474, a bill to exempt from the Affordable Care Act’s employer mandate employees with healthcare coverage through the Veterans Benefits Administration or through the military healthcare program TRICARE.

The bill is the legislative vehicle for the tax extenders. It will be amended to include the text of the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 (S. 2260) and likely that of the Tax Technical Corrections Act of 2014 (S. 2261), both of which the Senate Finance Committee passed April 3 via voice vote.

The bill that passes will probably look much like the Senate bill.  The House has advanced bills to make some of the perpetually-expiring provisions permanent, but the President, pretending that they won’t get passed every year anyway, says permanent extension is fiscally irresponsible.

Among the provisions to be extended yet again, mostly through 2015, are the research credit, new markets credits, wind and biofuel credits, bonus depreciation, and increased Sec. 179 deductions.  The five-year built-in gain tax recognition period is also extended through 2015.

Related: TaxGrrrl, Senate Moves Forward To Extend Tax Breaks For 2014

 

20120906-1O. Kay HendersonKnoxville Raceway ceremony for state tax break of up to $2 million:

Governor Terry Branstad went to Knoxville today to sign a bill into law that gives the Knoxville Raceway a state tax break to help finance improvements at the track.

“This is a great facility,” Branstad told Radio Iowa during a telephone interview right after the event. “Last year, in 2013, they attracted 211,000 visitors, so it’s a big tourism attraction and it’s a good investment and it’s great for the state to partner with the community for a project of this magnitude.”

Here’s how that partnership works: the racetrack will charge sales tax to its customers, and keep the money.  Only two other businesses are special enough to get this sweet deal.  Tough luck for the rest of us who don’t have the good connections and lobbyists.

 

Walnut st flowersJana Luttenegger, Updated E-Filing Requirements for Tax Preparers (Davis Brown Tax Law Blog).  “The handbook is not exactly clear.

Jason Dinesen, Things Tax Preparers Say: S-Corporation Compensation.  “But too many business owners — and their accountants — treat S-corps like a magic wand that can just make taxes disappear completely.”

Kay Bell, IRS fight to regulate tax preparers officially over…for now

Peter Reilly, Can Somebody Explain Tax Shelters To Thomas Piketty?  In the unlikely event that the Piketty recommendations are ever enacted, Peter notes that “there will be a renaissance of shelter activity.”  Peter provides a “Cliff Notes” summary of this year’s big forgettable book I’ll never read, which I appreciate.  Also: Peter uses the tax-law-as-Swiss Army Knife analogy that I am so fond of.

Robert D. Flach, STILL MORE CLIENTS SCREWED BY THE TAX CODE.  “The list of taxpayers screwed by our current Tax Code is not a short one.  Today I add taxpayers with gambling winnings.”

 

20130110-2Howard Gleckman, How “Dead Men” Fiscal Policy Is Paralyzing Government (TaxVox).  He reviews a new book, Dead Men Ruling, by Gene Steurle:

“We are left with a budget for a declining nation,” Gene writes, “that invests ever-less in our future…and a broken government that presides over archaic, inefficient, and inequitable spending and tax programs.”

All this has happened due to a confluence of two unhappy trends: The first is what the late conservative writer Jude Wanniski memorably described almost four decades ago as the “Two-Santa Theory.”

The Santas are the two parties, each of whom pick our pockets to fill our stockings.

 

Alan Cole, The Simple Case for Tax Neutrality (Tax Policy Blog).  “When states give preferential rates of sales tax to certain goods, the most visible result is the legal bonanza that follows from trying to re-categorize goods into the preferred groupings. ”

David Brunori, Repealing the Property Tax Is an Asinine Idea (Tax Analysts Blog). “Public finance experts are almost unanimous in their belief that the property tax is the ideal way to fund local government services… Most importantly, the property tax ensures local political control.”

William McBride, What is Investment and How Do We Get More of It? (Tax Policy Blog).  “Full expensing for all investment, according to our analysis, would increase the capital stock by 16 percent and grow GDP by more than 5 percent.”

 

TaxProf, The IRS Scandal, Day 370

News from the Profession.  AICPA Tackling the Important Issue of Male CPAs Wanting It All (Going Concern). 

 

Share

Tax Roundup, 5/7/14: How to keep from beating up the poor with high marginal rates? And: priorities!

Wednesday, May 7th, 2014 by Joe Kristan
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Arnold Kling ponders solutions to the hidden high tax rates on the poor in SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance.  The problem arises because many welfare benefits phase out as income rises.  For example, the phase-out of the Earned Income Tax Credit means Iowans who qualify can face a combined federal and state tax rate of over 50% on additional income.  The problem is finding a way to means-test benefits without turning the inevitable reduction of benefits as income rises into a poverty trap.  Some Kling thoughts:

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

This would give recipients some power over their benefits, and the ability to choose which ones are more important to them — like normal people do with their earnings.  Unused  flexdollars would go into a savings account, which “could be used for medical emergencies, down payments when buying a home, or to save for retirement.”  This would reduce the incentive for “use it or lose it” spending binges.

Implicit marginal ratesImplicit marginal ratesThis seems like a much more promising approach than the current system with its overlapping benefits and multiple phase-outs that sometimes result in effective marginal rates over 100% for the working poor.   Modifying the income tax to provide a standard deduction up to the amount at which the phase-outs end would complement this system, keeping the income tax from adding a layer of explicit marginal tax rates to the rate implicit in the phase out.

Mr. Kling is a brilliant and underappreciated thinker.  I’m re-reading his Unchecked and Unbalanced, which among other things ponders ways to move decision-making on government services to the household and neighborhood level.

 

O. Kay Henderson, About 91 percent of Iowans e-filed their state income taxes:

A dwindling number of Iowa taxpayers submit paper income tax returns to the State of Iowa. Victoria Daniels of the Iowa Department of Revenue has preliminary results for all but the last three days of the tax season, which ended April 30 for Iowa income taxpayers.

“E-filing is up about 4.1 percent and approximately 91 percent of Iowans, to date, have filed electronically,” Daniels says.

I’ve been a fan of e-filing, but the IRS is doing its best to change my mind.

 

 

20140507-1Paul Neiffer, Payments to Veterinarians Require 1099 (Even If Incorporated)!

Peter Reilly, IRS Cannot Levy Tribal Payments

TaxProf, The IRS Scandal, Day 363.  This Washington Post Op-ed linked in today’s scandal roundup gets it right: “The very idea that the administration would protect someone who is hiding behind the fifth when there is not only smoke, but there is actually a clear glow of flames, is insulting.”

Annette Nellen, Taxes and Deficits in the Highway Trust Fund.  “Certainly, if we have more electric cars on the road, which don’t generate anything for the HTF, but still use the roads, a funding mechanism tied only to gasoline purchases is outdated.”

Kay Bell, Home prices, construction outlook up. So are property tax bills

 

Alan Cole, US International Tax System is Fundamentally Unserious (Tax Policy Blog):

The United States is one of the last six remaining countries in the OECD – along with Chile, Ireland, Israel, South Korea, and Mexico – to use a “worldwide” system of corporate taxation. The other twenty-eight countries in the OECD use the much sounder territorial system.

A territorial tax system ends at its country’s borders. In contrast, the United States tries to levy taxes on profits earned in countries other than the United States. The tax system sees an auto assembly plant in Craiova, Romania, built using international funding, staffed by Romanian workers, building a vehicle – the Ford B-Max – that isn’t even sold in the United States – and says “Aha! This is economic activity the United States should be able to tax!”

While it may seem unserious, worldwide taxation is deadly serious to Americans abroad and to U.S. Green Card holders.  Serious, and sometimes catastrophically costly.

 

taxanalystslogoTax Analysts Blog is on an equality kick:

Martin Sullivan, Piketty, Zuckerberg, and a Plan to Tax Wealth That Conservatives Can Support.  “David Miller, a tax attorney at Cadwalader,Wickersham & Taft in New York, has proposed that the federal government tax stock gains of the wealthy whether or not those stocks are sold.”   So they get to deduct losses, too?

David Brunori, Tax Follies in Pursuit of Equality.  “The fact that rich people are rich bugs the heck out of folks on the left.” David points out the folly of a California tax scheme that would try to control CEO compensation by hitting CEOs with punitive California tax rates.  That would make sure no corporate headquarters stay in California.

Joseph Thorndike, Piketty Is Wrong: Americans Don’t Have a ‘Passion for Equality’.  This strikes me as correct.  Patrick Henry said “give me liberty or give me death,” not “Give me liberty or give me equality.”  That contrasts with the “Liberté, égalité, fraternité” of Picketty’s France.

Renu Zaretsky, Retirement, Driving, Greenhouse Gases and Tax Burdens.  The TaxVox tax headline roundup covers a disturbing increase in retirement plan early withdrawal penalties and the Missouri override of its governor’s tax cut veto.

 

Sadly, this may compare favorably with all adults.  According to This FINRA Foundation Quiz, 76% of Millennials Have Absolutely No Clue (Going Concern)

 

Priorities.  From the Milwaukee Journal Sentinel:

George W. Curtis, 77, of Pickett, who practices law in Oshkosh, was charged with willfullly failing to pay taxes he owed for 2007, 2008 and 2009, a period when his law practice generated profits of more than $1 million. Curtis has been designated a “Super Lawyer” several times and has practiced for more than 50 years.

77?  Some people just love the law.  Except maybe not the tax law:

Assistant U.S. Attorney Matthew Jacobs, the prosecutor, said Curtis testified that his income wasn’t steady, that he had to front many expenses, and that he had higher financial priorities at times than paying taxes. In fact, Curtis did file returns that showed his income, but just didn’t pay.

But the government argued Curtis could have paid. During the period he wasn’t, he was paying his wife’s children’s college tuitions and a wedding, a new Lincoln SUV and buying $17,000 on wine.

You need a nice SUV to transport high-class wine.  Have you ever tried to get your wine home in a tax payment?

 

 

Share

Tax Roundup, 4/7/14: Where’s my K-1? And why you should e-file that extension.

Monday, April 7th, 2014 by Joe Kristan

1040 2013The deadline for 2013 1040s is a week from tomorrow, so we may as well start our annual Filing Season Tips feature.  

Many folks arrive here with a search engine query that goes something like “why don’t I have my K-1, should the partnership go to jail?”  A quick reminder of what a K-1 does, and why they often arrive late in the tax season.

K-1s come from partnerships, S corporations and trusts.  Partnerships and S corporation businesses don’t pay the tax on their income.  The income is instead taxed on your 1040.  They have to compute their own taxable income first — as you might imagine, a more complex process than doing the average 1040.  They then have to sort the income into a bunch of different bins so that all the pieces end up on the right spot on the owner 1040s.  The K-1 is best understood as the collection bins for your shares of the various pieces of the business’ income and expense items.

Furthermore, many businesses and trusts that issue K-1s are awaiting K-1s of their own.  Even if they have their own tax information ready, if the business is still waiting on a K-1, it can’t issue yours.

But, but! Aren’t K-1s supposed to be out by January 1?  You’re thinking of 1099s.  K-1s are due with the S corporation returns (March 15) or the partnership returns (April 15), but they can be, and often are, extended to as late as September 15 — legally.

So what to do?  If you don’t have your K-1 yet, try to at least get an idea of what the income will be, and extend your own return accordingly.  It’s always better to extend than to amend.

This is the first 2014 filing season tip — come back for one each day through April 15!

 

Russ Fox, Bozo Tax Tip #6: Just Don’t File

 

e-file logoKristy Maitre, IRS Change in Extension Processing Makes E-Filing That Extension Critical.

The campus could take up to 6 weeks to process a [paper] extension, and it will not show up on the transcript until processed. With that time delay, it is helpful to have the acknowledgement of an e-filed extension.

With the delay in processing of the extensions, remember if you file a return within that 6 week timeframe, it may not show the extension on the module, and your client could get a penalty for filing late if there is a balance due. This will also have an impact on refund returns if they are later picked up for audit, a balance due results, and the extension was not processed properly.

And why, if you do paper file, you shouldn’t bundle extensions for your family or clients to save postage.

TaxGrrrl, Not Ready To File Your Taxes? Don’t Stress Out, File For Extension 

William Perez, Federal Tax Relief for Victims of Washington State Mudslide and Flooding

Jana Luttenegger, DIY Will is a ‘Cautionary Tale’ (Davis Brown Tax Law Blog). “As a result, two of Ann’s nieces received property that it appears clearly from the will and attempted amendment was meant for Ann’s brother instead.”

 

20140321-3Kay Bell, 3 popular refundable tax credits: Are they worth it?  Good question, and no.

Peter Reilly, Easement Valuations Not So Easy Anymore

Keith Fogg, Reliance on Counsel to Avoid Tax Liability.  (Procedurally Taxing).  Not likely to work.

 

TaxProf, The IRS Scandal, Day 333.  Featuring the Washington Post “fact checker” calling shenanigans on IRS Commissioner Koskinen for denying that IRS had “targeted” Tea Party groups.  It’s safe to say Mr. Koskinen has botched his entrance.

Andrew Lundeen, Senate Finance Committee Passes $85 Billion Tax Extenders Bill (Tax Policy Blog)

20121120-2Tax Justice Blog, Five Key Tax Facts About Healthcare Reform.  Ones they like that I despise: “Only two percent of Americans will pay the tax penalty for not having insurance and  “95 percent of the tax increases included to pay for health reform apply solely to businesses or married couples making over $250,000 and single people making over $200,000.”

This attitude is exactly what is awful about the TJB mindset.  No matter how fickle, arbitrary,   unworkable or economically harmful a tax is — and the Obamacare taxes are all of those — we’re supposed to be OK with them as long as they apply only to “the rich.”  Carried to the logical conclusion, it would be just fine to execute the 1-percenters, confiscate their property, and sell their families into slavery — it only affects the rich anyway, and they don’t count.

 

Arnold Kling has a little reminder for folks hung up on inequality, quoting Lawrence Kotlikoff:

The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.

And remember, the rich guy isn’t picking up the tab.

 

O. Kay Henderson, No traction for increasing state gas tax.  Not happening this year, apparently.

 

haroldJennifer Carr at Tax Analysts has a good summary of the research as to the economic effect of state film tax credits:

The film industry and lawmakers doubtless believe that film credits are a great deal for everyone involved — and that would be fantastic if it were true — but the most credible studies don’t reflect that.

Her article (unfortunately available only to State Tax Notes subscribers) discusses the funky analysis that film credit boosters use to justify the subsidies.  The boosters like to overstate the tourism effects of films and assume fantastical “multiplier” effects of film spending.  They also ignore opportunity costs — assuming that if the taxpayer money was not spent on Hollywood, it would just crawl in a hole and die.

 

Career Corner.  Crime May Not Pay But Whistleblowing Certainly Does (Going Concern)

 

Share

Tax Roundup, 2/19/14: Irish Democracy on Independence Day Edition.

Wednesday, February 19th, 2014 by Joe Kristan
Via Wikipedia

Via Wikipedia

My Poli-sci professors didn’t teach “Irish Democracy“:

More regimes have been brought, piecemeal, to their knees by what was once called ‘Irish Democracy,’ the silent, dogged resistance, withdrawal, and truculence of millions of ordinary people, than by revolutionary vanguards or rioting mobs.

One regime with buckling knees is Iowa’s 76-year ban on fireworks.  From the Des Moines Register:

On Monday, a subcommittee passed Senate Study Bill 3182, which would allow Iowans to shoot off firecrackers, bottle rockets, Roman candles and similar devices. The measure, which won approval despite objections from medical groups worried about public safety, now goes to the Iowa Senate State Government Committee.

Sen. Jeff Danielson, D-Cedar Falls, a professional firefighter who chairs the Senate panel and is sponsoring the legislation, sees the bill as acknowledging reality. Iowa is one of only four states to ban most fireworks but allow sparklers and novelties, including toy snakes and caps used in cap pistols. Selling or firing anything else is a simple misdemeanor that can result in a fine of $250.

Danielson noted that Iowans already have fireworks in their car trunks and in their basements that are purchased in other states, even if they can’t legally explode them.

In other words, Iowans are ignoring the law.  It’s funny that we celebrate U.S. independence via Irish Democracy.  Of course there’s a tax angle:

Collecting tax revenue from legal sales of fireworks has been the crux of the argument in states where laws have recently changed, said Julie Heckman, executive director of the American Pyrotechnics Association. 

Count on legislators to do what constituents want when they finally see that there’s revenue to be had.

 

In other Iowa legislative news:

A bill has been introduced to repeal Iowa’s inheritance tax.  S.F. 2222 is an excellent idea that was consigned to its doom by being assigned to a subcommittee of Bolkcom, Bertrand and Quirmbach.

A state general fund spending limitation, with savings assigned to reserve funds and a “personal income tax rate reduction fund,” would be created by S.F. 2220.  I love the idea, but until Iowa’s long term pension funding problem is addressed, it’s all window dressing.

20120906-1A new form of corporate welfare for developers is contemplated in H.F. 2305.  It would create a “workforce housing tax incentives program” whose requirements imply that some lobbyist has specific projects in mind:

First, the housing project must consist of a certain type and number of dwelling units. The project must include, at a minimum, four or more single-family dwelling units, one or more multiple dwelling unit buildings that each contain three or more individual dwelling units, or two or more dwelling units located in the upper story of an existing multi-use building…

Second, the housing project must involve a certain type of development in a certain geographic location. The project may involve the rehabilitation, repair, or redevelopment of any dwelling unit if it occurs at a brownfield or grayfield site, as those terms are defined in the bill, or in a distressed workforce housing community. The project may involve the rehabilitation, repair, or redevelopment anywhere in the state of a dilapidated dwelling unit or a dwelling unit located in the upper story of an existing multi-use building. The project may involve the new construction of a dwelling unit if it is in a distressed workforce housing community, but shall not include the new construction of a multi-use building…

Third, the average dwelling unit cost of a housing project must not exceed $200,000 per dwelling unit, or $250,000 per dwelling unit if the project involves the rehabilitation, repair, redevelopment, or preservation of “eligible property”, which means the same as defined for purposes of the historic preservation and cultural and entertainment district tax credit in Code chapter 404A…

The median price of a home sold in Iowa was $132,453 in 2013.  This bill would subsidize construction of much more expensive dwellings than we already have for “workforce housing.”   That means builders of unsubsidized units would lose out to whoever is behind this credit.  Owners of houses already built will have their values reduced by the addition of subsidized units to the market.  But the Economic Development bureaucrats will have more money to give to their friends.

 

 

David Henderson, Krugman on Supply-Siders and Incentive Effects of Tax Cuts:

This is an interesting admission on Krugman’s part for two reasons. First, he recognizes, as one must, that the Laffer curve exists. Second, he admits that supply-siders don’t kid themselves that we are in the backward-bending portion, the part where an increase in tax rates reduces government revenues and a decrease in tax rates increases government revenues. I so miss the Paul Krugman of the 1990s.

To be honest, some do kid themselves, just as many of their oppenents deny that taxes have any disincentive effects.

 

Kyle Pomerleau, Andrew Lundeen, Share of U.S. Corporate Income and Taxes by Size (Tax Policy Blog).  “In 2010, U.S. corporations paid about $223 billion in income taxes on slightly more than $1 trillion in taxable income. However, the vast majority of this income and taxes is attributable to the roughly 2,700 corporations with assets above $2.5 billion.”

 

Jason Dinesen, The Iowa Taxpayers Trust Fund Tax Credit   

Joseph Thorndike, Harry Truman Knew the Truth: IRS Budget Cuts Are Very Expensive (Tax Analysts Blog).

TaxProf, The IRS Scandal, Day 286

David Brunori, Blaming Big Corporations Is Not the Answer (Tax Analysts Blog) “Following the law is hardly a corrupt activity.”

 

Tax Justice Blog, Tax Preparers Should Be Regulated.  Nonsense based on the unwarranted assumption that the regulations will actually solve anything.

Kay Bell, Guns & taxes converge again, this time in Connecticut, Florida

 

News from the Profession.  The CPA Exam is Broken Into Parts But These Sentences Not So Much (Going Concern)

 

20130316-1Maybe Irish Democracy is better than voting democracy.  From Arnold Kling:

James Lindgren reports,

in 2012 a majority of Democrats (51.6%) cannot correctly answer both that the earth revolves around the Sun and that this takes a year. Republicans fare a bit better, with only 38.9% failing to get both correct.

I file this under “libertarian thought,” because to me it speaks to the issue of how romantic one should be about democratic voting.

Science!

 

Programming Note: I am airborne much of today.  I am improvising the back end of my travel plans to avoid the blizzard of doom slated for Iowa.  In short, no posting is likely tomorrow.  See you Friday!

 

Share

Tax Roundup, 2/5/14: Tax Credits do it all! And: advice from a champion.

Wednesday, February 5th, 2014 by Joe Kristan
The income tax, the Ultimate Swiss Army Knife of public policy.  Flickr Image courtesy redjar under Creative Commons license.

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Tax Credits! Is there nothing they can’t do?  Bill offering tax credits to rehab abandoned public buildings advances (Jason Noble, Des Moines Register):

House Study Bill 540 adds abandoned public buildings to the list of properties eligible for tax breaks under the state’s Redevelopment Tax Credits program, meaning businesses or nonprofits could obtain state aid for such projects as they currently can on renovations of industrial or commercial properties.

It’s an idea that Gov. Terry Branstad highlighted in his Condition of the State Address last month, and appears to have bipartisan support.

This is a back-door appropriation to help out school districts and local governments, but running it through tax return hides it from those pesky taxpayers who foot the bill.  As with Congress, the Iowa General Assembly sees the tax law as the Swiss Army Knife of public policy.

 

20121120-2Arnold Kling exposes the vastness of the Right Wing Conspiracy:

The Congressional Budget Office, a Koch-funded organization known to be affiliated with the Tea Party, writes,

CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

A conspiracy so vast…

 

James Schneider, guest-posting at Econlog, discusses why we pay our taxes in  The Sucker Tax:

Imagine a state of anarchy (a lack of government not a house full of boys). An evil genius announces that he will impose a sucker tax. Everyone will be taxed ten dollars, and the proceeds will be redistributed back to all the citizens in equal shares without reference to who paid the tax. In a certain sense, this tax maximizes unfairness. It serves no other purpose than to punish people in direct proportion to how much of the tax they paid. To make tax compliers feel even more ridiculous, the evil genius announces that he will make no effort to punish “tax cheats.” A fair outcome of the game requires that there be no suckers. This will occur if everyone evades the tax. However, it will also occur if everyone pays the tax. Under this scenario, you probably wouldn’t pay the tax (even if you believed in fairness) because you would assume that no one else was going to pay the tax.

Now imagine that the evil genius announces that unless everyone pays the tax one person will be punished.

Read the whole thing.  I especially like this: “Compliance does not mean consent.”

 

20121220-3TaxGrrrl, Baby, It’s Cold Outside: Surviving The Winter With Some Tax Help From Uncle Sam

Paul Neiffer considers One Possible Section 179 Strategy. A reader asks Paul, “Should I wait to buy section 179 property until the date 179 property is raised from $25,000 to whatever?”  He has a way for farmers to plan around the uncertainty.

William Perez, Filing Form 1040A May Help Parents Qualify for the Simplified Needs Test.  For college financial aid.

Jason Dinesen asks, Why Doesn’t the IRS Push the EA Designation?:

The IRS already oversees the EA program. There’s no new infrastructure to put in place. No new exams to create. The infrastructure and exams already exist.

Yet throughout the IRS’s ill-fated attempts at creating the “Registered Tax Return Preparer” designation, the IRS rarely mentioned the EA program, except as a side note of “CPAs, EAs and attorneys are exempt from the RTRP testing.”

I think it’s because it would be inconvenient to their efforts to regulate all preparers.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Peter ReillyThe Dog That Did Not Bark – IRS Issues Adverse 501(c)(4) Rulings To Deafening Silence:

An interesting question about the whole scandal narrative is how it would look if it turned out that many of the groups that the IRS “targeted”  were in fact inappropriately claiming 501(c)(4) status.  Tea Party Patriots Inc, for example, spends a lot of energy talking about how all those intrusive questions were harassment, but what if it turns that, in fact, all those phone calls that TPP Inc made telling people that November 2012 was the last chance to stop Obamacare from turning the country into a cradle to grave welfare state could be viewed as political? 

I think Peter is missing the point.  The issue isn’t whether every right-wing group qualified under the standards historically used for 501(c)(4) outfits.  It’s whether the rules were selectively enforced against right-side applicants —  as seems to be the case.   After all, it wouldn’t be OK to examine 1040s of only Republicans even if it turned out some of them were tax cheats.

 

TaxProf, The IRS Scandal, Day 272

 

David Brunori, Casino Taxes for Horses or Children? (Tax Analysts Blog):

Horse racing has been a dying sport since Nathan Detroit bet on a horse named Paul Revere in Guys and Dolls. In Pennsylvania, the schools are broke. So naturally, when governments need money, they turn to a moribund pastime to pay the bills. 

For the children!

 

William McBride, New CBO Projections Understate the Average Corporate Tax Rate. “Particularly, the CBO is using as their corporate tax base measure domestic economic profits from the BEA, which includes both C and S corporations, even though S corporations are pass-through entities not subject to the corporate tax.”  Well, that’s just nuts.

Tax Justice Blog, Gas Tax Remains High on Many States’ Agendas for 2014

 

Joseph Thorndike, Debt Limit Debates Are Good for Theater, Not For Policy Reform. (Tax Analysts Blog)

Jack Townsesnd, TRAC Posts Statistics on Criminal Tax Enforcement Related to IRS Referrals   “[A] surge in IRS criminal investigations referred under Obama has fueled an increase in the number of cases prosecuted.”

 

Answering the Critical Question: What Kids Peeing in the Pool Can Teach Us About Tax Compliance (Leslie Book, Procedurally Taxing)

News from the Profession: McGladrey Interns Are Busy Learning Their Colleagues Are Boring, How to Use an Ice Cream Truck (Going Concern)

 

Nice Work, Champ.  It’s funny how hard it can be for some people to heed their own good advice.  Take this North Carolina man:

Prosecutors said Larry Hill, who coined himself “the people’s champ” for his efforts to keep local children out of trouble, didn’t live by his own message and that his case represented “disturbing hypocrisy.”

In a YouTube clip posted in November 2012, Hill says, “I want all my young people to think before you act. Trouble is too easy to get into, and once you get into trouble, you’ll be all by yourself.”

Federal Judge Earl Britt sentenced Hill to 100 months in prison for conspiracy to defraud the U.S. government and 18 months for filing false tax returns.

If it’s any comfort, Mr. Hill will have plenty of company where he’s going.  But he will have to get used to a more spartan existence:

The judge agreed to the lower sentence of 100 months but said Hill deserved the “most severe punishment to reflect the seriousness of the offense,” pointing out that Hill used much of the money to buy himself expensive jewelry and cars, including a Maserati. The judge also noted that Hill was on supervised release from an insurance fraud prison term when he committed the tax fraud.

That doesn’t make his advice any less sound:

He should follow it sometime.  Russ Fox has more on Mr. Hill.

 

Share

Tax Roundup, 1/17/14: Envy as a principle of tax policy. And: my maybe webinar!

Friday, January 17th, 2014 by Joe Kristan

taxanalystslogoJoseph Thorndike, the tax historian at Tax Analysts, asks: What if the Income Tax Is All About Envy? Would That Be So Bad?.

The short answer: yes, it would.  The primary purpose of a tax is to fund the operations of the government.  Asking the tax to do anything else makes it worse at its main job, while imposing wealth-destroying distortions on the economy.  Also, as we noted the other day, increasing taxes on “the rich” has coincided with an increase in inequality.  It’s not clear at all that taxes at any non-catastrophic level can “help” inequality.

But its a slow news day, so let’s spend a little time on a longer answer.  Joseph thinks that inequality on its own is bad, even when “the poor” are well-off in real, but not relative, terms:

In other words, even if a rising tide lifts all boats, the relative size of everybody’s boat still matters. If some boats are much bigger than others, then a society is vulnerable to political instability.

Now, you can object that all the people with little boats are just feeling envious. But that doesn’t make the envy disappear; moral indignation may be satisfying, but it’s not a particularly effective means of keeping the peace. What’s needed, if you’re trying to fend off revolution, is some sort of actual policy response to feelings of relative deprivation.

I think Joseph greatly overstates the risk of well-fed people rising up against their neighbors just because they have nicer cars and houses.  People with something to lose tend to be risk-averse, and few things are riskier than revolution.   Still, that’s not something I can empirically demonstrate.

Equality in action in the Soviet Union on the Belomor Canal

Equality in action in the Soviet Union on the Belomor Canal

One thing that is indisputable is that catastrophe happens when a government makes “equality” its driving principle.  It was tried extensively in the 20th century, and tens of millions became equally dead as a result.  Given that history, equality as an end in itself has no moral force.

In our current politics, inequality is the cynical rallying cry of a President who lives in a mansion and plays golf at exclusive resorts pretty much every week.  He presides over a listless economy, enormous deficits,  and a health reform plan that is a debacle.  He’s out of ideas, so he’s reduced to saying it’s the rich guy’s fault.  Given the approval ratings he’s getting out of it, revolution seems a long way off.

 

Scott Hodge and Andrew Lundeen, High Income Taxpayers Earn the Majority of All Pass-Through Business Income (Tax Policy Blog).  They make a point that can’t be repeated too often:

It is often said that raising top tax rates will have little effect on business activity because only 2 percent of taxpayers with business income will be impacted. However, the more economically meaningful statistic is how much overall business income will be taxed at the highest rates. In 2011, the vast majority (70 percent) of pass-through business income was reported by taxpayers earning more than $200,000. Millionaire tax returns earned 34 percent of all private business income while taxpayers with incomes below $100,000 earned just 14 percent.

20140117-3

Indulging in envy-driven rate increases on “the rich” means weakening businesses and their ability to hire and grow — reducing opportunities for their would-be employees in the name of “equality.”

 

Perspective.  The brilliant Arnold Kling quotes Laurence Kotlicoff on the U.S. Budget:

In a podcast with Russ Roberts, he says,

I think we are probably in worse fiscal shape and any developed country. The reason, Russ, is we’ve been piling up debts for over 6 decades; and when I say ‘we’ I’m referring to Republican and Democratic administrations and Congresses. And we’ve been hiding them. We’ve been keeping them off the books and using economic labels, words, to pretend that they are not real liabilities of the government…we have all these obligations to something like 30-40 million current retirees and close to 80 million baby boomers who are about to start collecting Social Security benefits if they haven’t already. All those obligations are not reported as part of the government’s debt, so we are missing those off-the-book obligations.

But the real economic emergency is inequality. Or austerity. Or something.

Of course, that “something” is probably those  Tea Party extremists who actually want the government to live within its means.  How dare they.

 

Kay Bell, Filing patience can prevent a big tax mistake.  Hurrying your refund by taking out a refund anticipation loan can be an expensive mistake.

Russ Fox, We Will Soon be Able to Efile Past Due Individual Tax Returns.  Good news.  While everybody should file on time, not everybody does, and anything that helps non-filers come in from the cold is a good thing.

 

20130114-1Programming Note:  I am scheduled to participate in a Tax Update Webinar Monday sponsored by the Iowa Bar Association from noon to 1:45 pm.  Registration information is here — $40 to get a great start on your 2014 CPE/CLE.  Other speakers are Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation, and Kristy Maitre, Iowa’s IRS Stakeholder Liason.

While I hope to be there, I can’t guarantee it.  I am on federal jury standby this month, and I won’t know until after 5 p.m. tonight whether I will be hanging out in the jury room at the Des Moines Federal Courthouse instead of at the webinar.  They haven’t needed me these first two weeks, but I suppose past performance is no guarantee of future results here.  If I am on jury duty, the Tax Update may go quiet for awhile.

Update, 1/18: not called for a jury next week, so I will be on!

 

TaxGrrrl, IRS Free File To Open January 17, Two Weeks Before Tax Season Officially Opens 

TaxProf, The IRS Scandal, Day 253.  He quotes an op-ed by an attorney for the Tea Party outfits, who says: “Let’s all be very clear: The FBI did not conduct an “investigation” into the IRS scandal.”  Of course.  Lookouts don’t investigate.

Robert D. Flach brings the Friday Buzz!

 

News from the Profession.  Life at Deloitte May or May Not Involve Time Spent on Your Knees (Going Concern)

 

Share

Tax Roundup, 12/27/2013: Should you prepay your taxes for the deduction?

Friday, December 27th, 2013 by Joe Kristan

20111040logoIs it worth paying taxes early to get a deduction early?   Many more taxpayers will have to ask that question this year for the unfortunate reason that the increase in the top regular rate to 39.6% makes their regular tax higher than the alternative minimum tax.  While it’s cold consolation, you can use your deduction for state tax payments when you aren’t subject to AMT.

First you have to make sure you can use the deduction at all.  You can’t use a deduction for taxes paid on your federal return if you don’t itemize, or if you are subject to AMT.  If you pass these tests, then you should ponder if you are going to be in a much higher bracket next year.  Assuming that you are in the same bracket for both years, and that no change in the tax law will affect your deduction, it’s a time-value-of-money question.

The charts below show the tax benefit of prepaying $1,000 of state and local taxes at the federal tax brackets. The first bracket shown is the top Iowa rate, to enable Iowans to determine the value of prepaying federal taxes.  It shows the present value at several key payment dates:

 

January 15: Federal fourth quarter 2013 payments are due

January 31: due date of Iowa fourth quarter estimated taxes.

March 1: due date of first Iowa property tax installment.

April 15: due date of most state individual tax returns.

April 30: due date of Iowa individual tax returns.

September 1: due date of second Iowa property tax installment.

pv tax prepayment3

If the benefit is in green, prepayment makes sense.  If it is red, the time value lost by paying early exceeds the benefit of accelerating the deduction by a year, assuming that the benefit will arrive on April 15.

This chart is only accurate assuming all of its underlying assumptions are met, so use it with caution.   It does illustrate that prepaying January taxes usually makes sense, but prepaying September taxes seldom does.

Come back tomorrow for another installment of our 2013 year-end tax tips series!

 

Howard Gleckman, Finance Chairman In-Waiting Ron Wyden Is A Tax Reformer (TaxVox):

The 64-year-old Wyden, who has a history of proposing creative, ambitious, and sometimes controversial ideas, initially sponsored a tax code overhaul in 2010 with former GOP senator Judd Gregg of New Hampshire. After Gregg retired, Wyden found another GOP cosponsor in Dan Coates of Indiana. Wyden-Coates follows the broad outline of the original Wyden-Gregg plan.

For individuals, it would set three rates—15-25-35. The top bracket would kick in at $140,000 for couples filing jointly. It would repeal the Alternative Minimum Tax, nearly triple the standard deduction, and create a 35 percent exclusion for long-term capital gains and dividends (equal to a rate of 22.75 percent for top-bracket taxpayers). It would eliminate the tax advantages of many employee benefits–but not employer-sponsored health insurance–and simplify tax-preferred savings.

While the plan would preserve most other individual tax preferences, the very large standard deduction would sharply limit the number of taxpayers who take them (even today, fewer than one-third itemize).

Wyden-Coates would cut the corporate rate to 24 percent from 35 percent.

I can think of a better tax reform, but Wyden-Coates would be a huge improvement over what we have.

 

taxanalystslogoCara Griffith, Enabling an Informed Debate (Tax Analysts Blog):

A transparent tax system, in which there are no “secret tax laws,” is a better tax system in that taxpayers more clearly understand the laws they are required to comply with, tax officials can more easily administer the law, and both sides can engage in a more informed debate about tax policy.

I would add that the transparency should extend to subsidies, like Economic development tax credits, that are run through state tax returns.

 

Jason Dinesen, Capital Losses and Tax Planning 

Kay Bell,  Valuing your tax-deductible donations of household goods

Jim Maule, How to Lose a Charitable Contribution Deduction.  If you leave an anonymous gold coin or jewelry piece in a Salvation Army kettle, it does no good on your 1040.

TaxGrrrl, 12 Days Of Charitable Giving: Ride For Reading   “Our featured charity, Ride for Reading, delivers books to children in underserved communities… by bicycle!”

 

 

TaxProf, Court: Home Depot Cannot Use Out-of-State IP Affiliate to Shift Income From Arizona,  Don’t expect state courts to uphold tricks that reduce state revenue.

Arnold Kling describes Two Views of Obamacare, and explains how it is far from a “market approach.”

 

20120514-1The flip side of the “Facebook stock option loophole”: Mark Zuckerberg’s $2 Billion Tax Bill (TaxProf).  People who complain about the deduction for stock option compensation never mention that the same amount is income to the option holders, usually at higher rates.

 

 

Memory Lane beckons at Robert D. Flach’s place with 2013: THE YEAR IN TAXES – PART ONE:

Perhaps tied for the top tax story of the year (with the death of DOMA, which I will discuss later) is the David-versus-Goliath victory of three independent tax return preparers who felt the cost of the IRS mandatory RTRP tax preparer regulation regime, especially the annual CPE requirement, was “prohibitive” for their small practices and joined with the Institute for Justice to challenge the licensing program in federal court in Loving v IRS.

Go, David!

 

The Critical Question: Did Tenth Circuit Help KPMG Weasel Out Of Liability To Buy.com Founder?  (Peter Reilly)

 

Share

Tax Roundup, 12/23/2013: The joys of being at-risk. And: commence self-destruction sequence!

Monday, December 23rd, 2013 by Joe Kristan

S imageS image20091210-1.JPG‘Tis the season to be at-risk.  We mentioned yesterday how you can get basis for deducting S corporation losses by making a loan to the corporation.  But not just any loan.  If you borrow from another S corporation shareholder to make your loan, your basis won’t be “at-risk.”

A Monroe, Iowa farmer learned that the hard way with his 1991 loan, as we discussed long, long ago:

Larry Van Wyk, a farmer from Monroe, Iowa, got a taste of the dangers of the at-risk related-party loan rules back when farmers were their primary target. He owned an S corporation farm 50-50 with his brother-in-law, Keith Roorda. On December 24, 1991, Larry borrowed $700,000 from Keith. The loan was fully-recourse, so the brother-in-law could proceed ruthlessly against Larry in the event of non-payment. Larry used about $250,000 to repay money he owned the S corporation and loaned the remainder to increase his basis to enable him to deduct losses.

 Unfortunately, Larry’s brother-in-law had “an interest in the activity” – he owned half of it. This made the deduction not “at-risk,” even though no loan from a brother-in-law is without risk in a very real sense. The efforts of some of the finest tax attorneys west of the Mississippi were unavailing; the Tax Court agreed with the IRS, and Larry lost his losses.

It’s not enough to avoid borrowing from another shareholder; you don’t want to borrow from somebody related to another shareholder.  And as “interest in the activity” isn’t necessarily the same as “shareholder,” you should watch out for borrowing from anybody else involved in the business.  The safe thing is to visit your friendly community banker for your loan.

This is another of our daily year-end 2013 tax tips — one a day through December 31!

 

Weekend update!  In case you missed it over the weekend:

2013 Winter Solstice Tax Tip: S corporation basis and

Winter Sunday tax tip: loans for S corporation basis.

 

William Perez, Roth Conversions as a Year-End Tax Strategy

Jason Dinesen,  Six Things I’m Talking to My Small Business Clients About at Year-End (Part 2) 

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

We have a Commissioner.  Senate Votes 59-36 to Confirm John Koskinen as IRS Commissioner (TaxProf).  A lot of folks have noted that once again we have a Commissioner who hasn’t done taxes for a living.  That doesn’t have to be fatal.  Anybody who has hung around CPA firms can tell you that somebody who is good at taxes can be pretty terrible at running an organization.

Still, it’s not a great sign.  The new guy, John Koskinen, will be 79 years-old when his five-year term runs out.  He got his reputation as a “turnaround guy” at Freddie Mac in the wake of the financial crisis, preserving the bureaucracy as responsible as any for the financial meltdown.  I suspect he was hired to protect the agency, not the taxpayer.

By the way, there is another Koskinen.

 

The crumbling mandate.  Tax Analysts reports ($link):

Individuals whose health insurance plans were canceled by insurers because they did not meet the requirements of the Affordable Care Act will be eligible for an exemption from the individual mandate penalty that takes effect in 2014, the Department of Health and Human Services said late December 19.

20121120-2Megan McArdle says this means Obamacare Initiates Self-Destruction Sequence:

As Ezra Klein points out, this seriously undermines the political viability of the individual mandate: “But this puts the administration on some very difficult-to-defend ground. Normally, the individual mandate applies to anyone who can purchase qualifying insurance for less than 8 percent of their income. Either that threshold is right or it’s wrong. But it’s hard to argue that it’s right for the currently uninsured but wrong for people whose plans were canceled … Put more simply, Republicans will immediately begin calling for the uninsured to get this same exemption. What will the Obama administration say in response? Why are people whose plans were canceled more deserving of help than people who couldn’t afford a plan in the first place?”

Arnold Kling put it more pithily: “Obama Repeals Obamacare.”

They’re desperately improvising as they go.  Not a good situation, considering the mandate tax is supposed to take effect in less than two weeks.   I’m starting to doubt that it ever gets enforced.

Related: Paul Neiffer, Cancelled Health Insurance Policies

 

20121220-3Kay Bell, Singing the praises of tax-favored retirement savings

Brian Mahany, IRS Ordered To Pay Taxpayer’s Legal Fees 

Russ Fox, The Death of the Death Master File (Sort of)

Peter Reilly,  Woody Allen’s Blue Jasmine Has A Tax Lesson.  If you don’t wan’t to stay married to a spouse, you might not want to file a joint return either.

TaxGrrrl,  12 Days Of Charitable Giving 2013: Esophageal Cancer Action Network

Robert D. Flach has a special Monday Buzz!

 

Tax Justice BlogUltra-Wealthy Dodge Billions in Taxes Using “GRAT” Loophole

Michael Schuyler, Why A Death Tax “Loophole” May Make Economic Sense (Tax Policy Blog).

Jack Townsend, Swiss Bank Hype and Over-Hype.  ” Merely having U.S. clients with undeclared accounts is not the problem for those banks; it is those banks actions to become complicit in the U.S. clients’ failure to report the accounts.”

Jim Maule finds his inner libertarian, embracing a Reason Foundation report calling for elimination of the home mortgage deduction in exchange for lower rates.

 

News from the Professon.  PwC Won’t Stop Beliebin’ In Ugly Christmas Sweaters (Going Concern)

Share

Tax Roundup, 11/15/2013: Trains, Zeppelins and Fertilizer edition.

Friday, November 15th, 2013 by Joe Kristan

 

20121226-1What, no zeppelin port?   A candidate for Iowa governor proposes a gas tax increase for, well, a bunch of stuff, reports QCTimes.com:

Democratic gubernatorial hopeful state Sen. Jack Hatch is proposing to phase in a 10-cent gas tax increase to pay for overdue road and bridge improvements, build passenger rail links, construct flood protection, reduce the backlog of school construction projects and expand broadband service in rural Iowa.

The increase would amount to less than $50 a year for most Iowans, he said.

Infrastructure, in all of its forms, is one of the most basic parts of state and local government, Hatch said Thursday in announcing his Building a Better Iowa infrastructure plan.

The idea of a continuing “infrastructure crisis” is a standard political assertion, even though it isn’t true.   If it were, though, you’d stop the list of crisis projects after “bridge and road improvements.”   The idea that blowing millions to construct an unneeded and money-losing passenger rail system is an infrastructure priority is laughable.  Local school districts can finance improvements whenever their voters think they’re worth a bond issue.  And rural broadband, supplied by the government?  Because satellites don’t cover rural Iowa?

 

20120906-1

Using your wife’s money to buy drinks for your new girlfriends.  Sen. Hatch wants to run against Governor Branstad next November, who has some economic issues of his own.  These are spotlighted by the Governor’s selection as “Politician of the Year” by Site Selection Magazine.

Based on its website, Site Selection Magazine seems to be the trade journal of the little industry of fixers and middlemen who harvest taxpayer money for clients choosing to relocate or expand. Governor Branstad was “honored” for giving over $80 million of tax credits to the Orascom fertilizer plant in Southeast Iowa to build a plant they were probably going to put there anyway.  The credits add up to around $500,000 per “permanent” job.

These sorts of giveaways are great for the companies that can play the system to milk the fisc, but they aren’t so great for the rest of us who pay for them.  They are the government equivalent of the guy who takes his wife’s bar to the bar to buy drinks for the girls.  He may think he’s doing great things, but it’s neither impressive to the girls nor helpful to the wife.

Somebody out there is saying, “but what about the jobs?”  Even if you assume that the spending is responsible for the jobs — a stretch — that money wasn’t just conjured up.  It comes from the rest of us, who would have used it to create jobs through spending or investing.  If you think the state can wisely allocate investment capital, I have a nice film credit program to discuss with you.  You shouldn’t talk about the jobs you attract by giving away money without talking about the jobs that you lost.

 

Arnold Kling, It’s Implementation, Stupid:

The problems with implementation are under-rated and always have been. The Obama Administration has spent 3 years bulldozing the individual market in health insurance. Now, they expect the health insurance companies to rebuild it in 30 days.

This will not end well.  But while I expect enormous changes in the ACA law, given its evident failure, I don’t expect repeal of the new 3.8% net investment income tax or .9% additional medicare tax to happen.  Clearing the wreckage will be expensive.

Des Moines Register,  136 Iowans buy private health plans through online marketplace.  Not looking good.

Why not just kill me now?  Why Not Use Tax Preparers as a Portal to Health Exchanges?  (Howard Gleckman, TaxVox)

 

TaxProf, Number of Taxpayers Who Renounced U.S. Citizenship Skyrockets to All-Time Record High.  This doesn’t strike me as a good thing.

 

Kay Bell,  EITC claim issues prompt IRS letters, visits to tax pros.  If you prepare a lot of EITC claims, your documentation needs to be meticulous.

Jack Townsend, IRS Indian Initiative for Persons Outside OVDP; Also on Quiet Disclosures

Linda Beale, IRS will issue summonses for offshore bank account info

William Perez,  How Much Government Do People Get Compared to How Much Taxes They Pay?

 

TaxGrrrl, Braves New World? Taxpayer Funding Remains A Concern As Atlanta Rushes Towards New Stadium.  If I were an Atlanta taxpayer, I’d be concerned.

Tony Nitti, Did The Sale Of Stan Musial’s Memorabilia Give Rise To A Hefty Tax Bill?   

 

Kyle Pomerleau, Don’t Forget the Facts If You Want to Raise Taxes on the Rich (Tax Policy Blog)

20131030-2

Christopher Bergin, The IRS: A Greek Tragedy (Tax Analysts Blog)  “I mostly also agree with Olson that much of the impairment at the IRS is caused by Congress continuing to force the agency to do more with less.”

TaxProf, The IRS Scandal, Day 190

Robert D. Flach has your Friday Buzz!

News from the Profession:  Perhaps Comparing the CPA Exam to Actual War Isn’t The Best Idea (Going Concern)

 

Share

Tax Roundup, 10/30/2013: Beggars night day edition! And why IRAs are scary as start-up investors.

Wednesday, October 30th, 2013 by Joe Kristan
MST3K-2 lantern

Stop by for treats tonight. You can find us by Son’s MST3K-themed pumpkin.

The Des Moines area has an unusual tradition for trick-or-treating on October 30, rather than October 31.   On our “Beggars Night,” it’s customary for the little monsters to tell a joke.  A perennial favorite:

What’s a pirate’s favorite restaurant?

Aaaarghh-bys!

So drive carefully tonight!

 

Speaking of scary, think of having your IRA disqualified and taxed currently, with penalties, for engaging in a prohibited transaction.  That’s what happened to a Missouri man in Tax Court yesterday.

The taxpayer, a Mr. Ellis, rolled $320,000 out of his 401(k) and put it into a self-directed IRA.  The IRA than bought 98% of a corporation (an LLC that elected to be taxed as a corporation) to open a used-car lot, where he began working as the general manager.  It went badly.  From the Tax Court opinion:

In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business. Mr. Ellis would operate this business and use it as his primary source of income by paying himself compensation for his role in its day-to-day operation. Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that section 4975 was enacted to prevent.

The result? $163,000 of taxes and penalties on the $320,000 invested in the used car lot — which, of course, may well not be very liquid, seeing that it’s all invested in a closely-held corporation.

This case has an interesting twist to those of us who follow tax cases too closely.  The IRA plan was apparently the work of  a Kansas City law firm whose attempt to make their practice income largely tax-exempt by funneling it through an ESOP-owned S corporation was shot down in Tax Court in 2011.  I’m just guessing here, but the IRS may have taken a look at that firm’s clients after seeing how aggressive the firm was in using retirement plans to shelter business income.

It’s tempting to have your IRA invest directly to avoid the current tax and 10% penalty that can apply to an early withdrawal.  The results, though, can be a lot scarier than any trick-or-treater.

Cite: Ellis, T.C. Memo 2013-245.

 

59pdhyefMore scary.  Econoblogger Arnold Kling has thoughts on whether Healthcare.gov might be saved:

My opinion of the distribution of likely outcomes is that it is bimodal. There is a high probability that the exchanges will be working at the end of November. I think that there is an even higher probability that they will be working never.

The public pledge where the new savior of the site impresses Mr. Kling, but he thinks the design issues might be intractable.

Andrew Lundeen, Scott Hodge,  The Income Tax Burden Is Very Progressive (Tax Policy Blog):

About half of the nation’s income is reported by taxpayers who make less than $100,000, and half is reported by taxpayers who make more. However, taxpayers who make less than $100,000 collectively pay just 18 percent of all income taxes while those who make more pay over 80 percent of all income taxes.

They have a chart, of course:

20131030-2

 

Howard Gleckman, Who Benefits from Muni Bonds? It’s More Complicated Than You Think (TaxVox) “…while most of the benefit of the tax-exemption goes to high-income investors, lower-income households who hold taxable bonds in their 401(k)s also receive some advantage.”

 

But they’re ready to regulate preparers! TIGTA: IRS Cannot Account for 23% of its IT Assets (TaxProf).

 

Jason Dinesen asks Is There a Way to Protect Yourself from Tax Return Identity Theft?   Use common sense — but if someone in your family dies, ID thieves may be able to get government-published information enabling them to steal the deceased’s identity no matter what you do.

TaxGrrrl, Somebody’s Watching Me: IRS Criminal Investigations Ramp Up Efforts To Thwart Tax ID Thefts   

 

David Brunori offers Tax Advice for State Legislators of All Parties (Tax Analysts Blog).  There’s a lot there, including this:

Both parties should also give serious thought to greater reliance on the property tax. Yes, I know people hate that tax. I also know that politicians find it advantageous to attack it. But the property tax revolts of the late 1970s and the 1980s have badly damaged the fiscal structure of state and local governments.

Don’t expect either party to heed the advice.

 

William Perez,  47% of Individual Taxpayers Earn Under $30,000

TaxProf, The IRS Scandal, Day 174

High-fiber diet.  Tax identity thief who ate debit card evidence is convicted (Kay Bell)

From Phil Hodgen’s series on expat taxes: Chapter 2 – Are You An Expatriate?

Carlton Smith, Byers v Comm’r – CDP Venue In Courts Of Appeals May Be Upended (Procedurally Taxing)

 

Joseph Thorndike, It’s Time to Give Up on Tax Reform (Tax Analysts Blog):

Tax reform? Don’t bet on it. Not this year, and probably not next year either. Tax reform, like everything else in Washington, is on hold pending the resolution of a broader, highly polarized debate about the role of government in American society.

 

Robert D. Flach has his Tuesday Buzz on Wednesday this week.

 

 

20131025-237-yard month penalty for former Eagle Mitchell.  The sentence was handed down yesterday in a Florida federal courtroom, reports the Orlando Sentinel.

The former NFL wide-receiver blamed brain injuries suffered on the field after pleading guilty to a plot where he helped convince Milwaukee Bucks player to use a Florida preparer to file a refund claim, which would be split between the NBA player, Mr. Mitchell, and the preparer.  The claim was fraudulent, and the NBA player wasn’t charged.  Mr. Mitchell also allegedly used an LLC to conceal other fraudulent tax claims.  Brain injuries are funny things.

 

News from the Profession: Dancing Accountant Nearly Thrown Out of a Bank For Dancing To “Money, Money, Money”  (Going Concern)

 

 

Share

Tax Roundup, 10/24/13: Payroll tax grief in Cedar Rapids. Also: suits, geeks, and Obamacare.

Thursday, October 24th, 2013 by Joe Kristan

bureauofprisonsNever borrow withheld taxes. A little story out of Cedar Rapids this morning has a big lesson for business owners: Former owner of Cedar Rapids security firm sentenced on tax charge (Dar Danielson, Radio Iowa).  In its entirety:

A former eastern Iowa business owner will spend over two years in prison on a tax violation. Forty-six-year-old Eric Holub of Clarence pled guilty to failing to forward withholding taxes he took out of his employee’s checks to the IRS.

Holub admitted to failing to send $460,000 in withholding taxes from January 2008 to December of 2009 for Premier Security, a private business he owned in Cedar Rapids. Holub was sentenced to 30 months in prison and three years supervised release.

Two paragraphs – just enough to tell an alert reader a story of financial catastrophe.    Court documents tell a bit more of the defendant’s story.  He had to use a public defender, so he’s broke.  He’s married with six kids, three under 10.  Even though he’s going away for 2 1/2 years, he still has to pay the IRS $438,426.17 somehow.  Small wonder he’s being treated for depression.

What we don’t learn is why he didn’t pay over his payroll taxes.  I handled payroll in the early days of our firm, and there were times when it sure would have been handy to not remit the payroll taxes right away, given other pressing cash needs.  Maybe cash was tight, and it seemed like a good way to pay vendors.  Maybe he figured he’d get caught up someday, but when the IRS didn’t react immediately, catching up seemed like it wasn’t so important.

In any case, it’s a huge mistake to not remit payroll taxes on time.  Penalties start running up immediately, and bankruptcy or using a corporation will not make the liability go away.  And more and more, the government isn’t satisfied the with getting the cash; they want jail time too.  30 months plus principal, interest and penalties for “borrowing” payroll taxes makes car title loans look like a bargain.

Links:

Indictment

Judgement

 

20130320-1Iowa R.V. Owners come in from the cold.  Iowa’s amnesty for R.V. owners who had skipped Iowa registration fees by registering their vehicles in Montana ended yesterday with “dozens” of settlements and “just over $100,000″ in fees collected, reports the Des Moines Register.  The idea that you could use a Montana LLC to skip registration fees in Iowa never seemed remotely plausible to me, but people will believe just about anything if it might save them a few bucks.

 

 

Arnold Kling, The Obamacare Suits/Geeks Divide:

In response to the WaPo story, I wrote a letter to the editor, which they published (mine is the third letter on this page). This is not a technical screw-up, and it will not be fixed by technical people. It is an organizational screw-up. And until that is recognized, it probably will get worse. I write,

In my experience, communication failures between technical staff and management reflect an atmosphere of fear and lack of mutual respect.

I call this the suits-geeks divide. I saw it during the financial crisis, when it was evident that many mortgage credit-risk geeks warned of problems at their firms but management went out of the way not to listen. Merrill Lynch and Freddie Mac were particularly well-documented cases.  

It’s starting to look like a delay of the individual mandate — the key tax provision that holds Obamacare together — is inevitable.   It may take some time yet for the administration to swallow this bitter pill, just after they shut down the government rather than accept a GOP-sponsored delay.

 

Megan McArdle,  Why Obamacare Is Like Three Mile Island. “All the pieces are interdependent, so a failure in one part is apt to cascade throughout the market. This is not a system where you want to start pulling out one piece to see how well the rest can get along without it.”

 

Des Moines Register, Lawmakers are warned of unfunded liabilities in pensions:

Iowa’s public employee pension funds face billions of dollars in unfunded liabilities, and tough scrutiny is needed to ensure taxpayers and public employees are protected, state lawmakers were told Wednesday.

Public defined benefit plans are lies.  The only question is whether the beneficiaries are being lied to with promises that won’t be kept, or the taxpayers are being lied to by politicians hiding the real cost of government payroll.  Probably both.

20130419-1TaxGrrrl,  IRS Issues More Guidance On Post-Shutdown Operations 

Kay Bell, IRS seeks volunteers for tax-exempt advisory panel.  I bet they get some Tea Party applicants.

 

William Gale,  The Illogic of the McConnell Debt Limit Rule (TaxVox)

TaxProf, TIGTA: Hundreds of Employees of IRS Contractors Owe Millions in Taxes

Dan Mitchell, Welfare Fraud Is another Reason to Replace the IRS with a Flat Tax.  More on the TIGTA EITC report we mentioned yesterday.

William McBride,  Ripe for Reform: Improper EITC Payments Exceed $11 Billion per Year (Tax Policy Blog)

Tax Justice Blog,  Illinois Ruling Strengthens Case for a Federal Solution to Online Tax Collection

Cara Griffith, In Defense of State Treasurers (Tax Analysts Blog)

 

Share

Tax Roundup, 10/23/2013: The Earned income tax credit thief subsidy feature. And: tax season delayed!

Wednesday, October 23rd, 2013 by Joe Kristan

Some smart people are big fans of the Earned Income Tax Credit. Some see it as a way to help the working poor, and some see it as a less destructive way to achieve the goals of minimum wages.

Yesterday the Treasury Inspector General for Tax Administration reported that from 21% to 25% of the earned income credit was paid improperly for the most recent fiscal year, and that $110 to $130 billion has been “paid improperly” over the past decade. That’s a nice way of saying “stolen.”

 

EITC error chart

Just because there is a lot of theft doesn’t by itself make a program bad — though that kind of loss rate would bankrupt anybody in the private sector.   Most people would send food to starving people in a war zone knowing that local warlords will be plundering some of it. But a program that comes at the cost of sending $11 billion annually to thieves needs to otherwise be a very good thing.   That’s not so clear with the EITC.

The credit does help the working poor — as long as they stay poor. As they work their way out of poverty, it becomes a trap. The phase-out of the credit imposes a punishing unstated, but very real, marginal tax rate.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC is only one program that does this; all “means-tested” welfare programs do this to some degree. It’s not uncommon for this implicit tax rate to exceed 100% at some income levels.

I don’t know what the right answer is (Arnold Kling has some ideas), but increasing the EITC, like Iowa did this year, isn’t it.

 

Oh, Goody. 2014 Tax Season to Start Later Following Government Closure; IRS Sees Heavy Demand As Operations Resume (IRS Press Release)

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4. 

20131023-1It’s funny how programming IRS computers isn’t “essential,” but barricading open-air monuments is.

Other coverage:

William Perez, IRS Expects to Delay the Start of the 2014 Filing Season

Kay Bell, IRS won’t accept 2013 tax returns until Jan. 28, 2014

Russ Fox, Sigh: 2014 Tax Season to be Delayed up to Two Weeks

TaxGrrrl, IRS Announces Delayed Start To 2014 Tax Season   

 

Robert D. Flach, HOW TO DEAL WITH THE IRS AND LIVE TO FIGHT ANOTHER DAY

Paul Neiffer,  Taxpayers Want Their Cake, Frosting and Candles! Live by the low estate-tax value, die by the low estate-tax value.

Jack Townsend, Has the U.S. Aided International Tax Evasion?

Russ Fox,  Coming Attractions: When the IRS Writes New Law When They’re Not Allowed To.  A federal judge has allowed a suit challenging the IRS unilaterally extending the tax credit for insurance purchased on state-sponsored exchanges to policies sold on federally-run exchanges.

TaxProf, The IRS Scandal, Day 167

 

President Reagan signs PL 99-514, the Tax Reform Act of 1986.The Tax Policy Blog takes us on a nostalgia tour in  8 Technological Changes Since the 1986 Tax Reform.  Take a trip back to the days of “car phones.”

 

Clint Stretch, Whom Do Tax Reformers Want to Help? (Tax Analysts Blog):

When congressional leaders start talking about tax reform as if it will benefit everyone, someone should be asking: Whom are you trying to help? The answer may be Americans earning more than around $75,000 who have fewer itemized deductions, fewer kids, fewer healthcare benefits, and lower retirement savings than most.

I’m not convinced that’s the right way to look at it.  Getting rid of complexity and lowering rates helps everybody by eliminating dead weight loss and redirecting resources from tax planning and compliance to more useful pursuits.

Andrew Lundeen, A Lot Has Changed in the 27 Years Since the Last Major Tax Reform (Tax Policy Blog).  “The amount of credits, loopholes, and deductions has increase by 44 percent, from $844 billion (2013 dollars), to over $1.2 trillion (2013 dollars), with much of that growth coming from the expansion of refundable tax credits.”

 

Howard Gleckman, Congress Shouldn’t Forget About Tax Entitlements In Its Search for Deficit Reduction (TaxVox)

 

Tax Justice Blog,  Governor Scott Walker Appropriates State Budget Surplus for Campaign Season Tax Cut.  In Tax Justice World, returning money taken by force of law to the taxpayers is “appropriating” it.

 

David Brunori, Eliminating the Sales Tax Is a Very Good Idea (Tax Analysts Blog) “But ending a tax that preys on the poor and is increasingly difficult to collect may provide the economic boost Rhode Island needs.”

Brian Strahle, BLAMING THE PLAYERS FOR THE RULES.  “Regardless, most taxpayers are simply trying to comply with the maze and complexity of non-uniform multistate tax laws”

Joseph Thorndike, The Gas Tax Doesn’t Work Because Politicians Broke It (Tax Analysts Blog).  By not raising it, apparently.

 

The Critical Question:  JD Salinger – Was January 27 2010 A Good Day To Die ?  (Peter Reilly)

Career Corner.  First Round Interview Tips for This Fall’s Accounting Recruits (Going Concern)

 

Share

Tax Roundup, 10/16/2013: Extension season is over, now what? And the joy of infinite marginal tax rates.

Wednesday, October 16th, 2013 by Joe Kristan

20111040logoI hope you don’t have to.  Filing Tax Returns after the October 15th Deadline (William Perez):

You’ll need to mail in your return to the IRS, whether you prepare the return yourself or hire an accountant. That’s because the IRS’s electronic filing servers start going offline after October 15th to prepare for the next filing season.

If you are filing after October 15 this year, my first advice is to file quickly, as you are likely to never file if you don’t get it done now.  My next advice is to make sure it doesn’t happen next year.

Most people who file late make it harder than it needs to be.  90% of the stuff that could possibly go on their returns comes from third parties — things like W-2s, 1099s, mortgage interest and property tax statements, and thank-you notes from charities.  People who can’t seem to file on time should get a big envelope.  They should put these items in the envelope as they come in starting in early January.  They should seal the envelope on February 28 and give it to their preparer.  For most taxpayers, that is all you need to get a reasonably accurate return.

The procrastinators want to go through their checkbooks and find every last $10 charitable gift, and then they never get around to it.  When they finally do, it’s almost certainly a poor use of their time, and when it causes them to file late, it costs them a lot more than that last $10 deduction will save.

Related:  2012 Tax Season Officially Bites the Dust (Paul Neiffer)

 

 

Implicit marginal ratesAlan Cole, Obamacare Puts Infinite Marginal Tax Rates in Action (Tax Policy Blog):

The moment your modified AGI reaches 400% of the poverty line, you instantly lose a subsidy that could easily be worth $15,000. This is a discontinuity in public policy with respect to income. It is a place where an infinitesimal change can result in disastrous consequence for a taxpayer. At 400% of the poverty line, the marginal tax rate is infinite.

It’s an extreme example of the way means-tested welfare benefits can impose high hidden tax rates on poor and middle class taxpayers — punishment ignored by advocates of higher benefits in the name of “compassion.”  More from Arnold Kling.

 

Tony Nitti,  A Quick Look At Expiring 2013 Tax Provisions: What To Do Before Year-End

TaxProf, The IRS Scandal, Day 160

 

Kyle Pomerleau, What is the Debt Ceiling and Why Does it Matter? (Tax Policy Blog) ‘

Howard Gleckman, The U.S.May Not Default on Friday But Washington Is Still Playing A Dangerous Game

Joseph Thorndike, Debt Limit Fights Are All the Same – Except for This One (Tax Analysts Blog)

But in fact, the nation’s fiscal shortfall can’t be permanently finessed with any sort of measures, be they ordinary, extraordinary, or even superhuman. Default will happen — the only question is when.

Have a nice day.

 

 Jason Dinesen,  If EAs are Liechtenstein and CPAs are the U.S., What are the Unenrolled?   That’s not fair to CPAs; I don’t know any who’ve been shut down for the last two weeks.

 

Leslie Book, Potential Storm Over Removal Power of Tax Court Judges (Procedurally Taxing):

Kuretski is like one of the many thousands of CDP cases where the parties disagree on some aspect of a collection determination, but also has one very big wrinkle: the taxpayers are using the case as a vehicle challenging the constitutionality of the President’s powers to remove Tax Court judges under Section 7443(f).

I didn’t know the President could do that.

 

2014 State Business Tax Climate IndexTax Justice Blog, State News Quick Hits: Criticism of “Business Climate” Rankings Grows, and More.  Most of the criticism comes from politicians in states with poor business tax climates, and their allies, for some reason.

 

Brian Mahany, High Intrigue in Florida FBAR Trial!

Lush Caribbean islands, secret unreported Swiss accounts, tens of millions of dollars and a husband who disappears into the night. Is this the plot of a new best seller suspense novel? No! It’s some of the events unfolding in a Ft. Myers federal court room where prosecutors say that Patricia Hough conspired to defraud the IRS and filed false tax returns.

I prefer a boring life, at least compared to something like this.

 

Kay Bell, Supreme Court says ‘no’ to NY strip club’s tax relief plea.

The Critical Question: Do Women in Accounting Really Have More Opportunities Than They Did Ten Years Ago? (Going Concern)

 

Share