Posts Tagged ‘Branstad tax policy’

Tax Roundup, 1/13/14: They’re back edition. And: tax fairy doesn’t show up at appeals court.

Monday, January 13th, 2014 by Joe Kristan


20130117-1
The 2014 session of the 85th Iowa General Assembly begins today.
 It doesn’t look like much tax legislation will pass.

The Governor abandoned a plan to allow taxpayers to choose between the current byzantine Iowa income tax and a lower-rate version with fewer deductions and no deduction for federal taxes paid even before the session started.  He instead will focus on lame feel-good initiatives in an election year, reports Omaha.com:

Gov. Terry Branstad is set to unveil his agenda Tuesday during the Condition of the State address. He said his priorities will include expanding broadband Internet access, fighting school bullying and curtailing student loan debt.

The Governor’s opposition will block any tax reform that isn’t sufficiently punitive to the “rich” — which means any reform worthy of the name.  They will try to change some of Iowa’s worst corporate welfare giveaways, reports the Des Moines Register, but the Governor, an inveterate smokestack chaser and ribbon-cutter, can be expected block any restrictions on using your money to lure and subsidize your competitors.

Meanwhile, trial balloons about increasing the gas tax have already deflated.  That means we can expect a quiet session on the tax front, and a continuation of Iowa’s insanely complex and worthless tax system for another year.  But if they change their minds and want to do something useful, it’s always a good time to talk about The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

tax fairyTax Fairy seeker loses appeal.  A South Dakota surgeon who looked across the ocean for the Tax Fairy found only grief — and the grief wasn’t alleviated on appeals.  The Eighth Circuit Court of Appeals last week upheld the conviction that led to a five-year sentence for Dr. Edward Picardi.

The doctor used a scheme where he “leased” his medical services to an offshore company he controlled to artificially reduce his income by stashing earnings in offshore accounts.  The scheme was promoted to him by an attorney-CPA who has been acquitted of criminal charges in another employee leasing case.

Other taxpayers have avoided fraud penalties from employee-leasing to offshore entities (see here), but not taxes and penalties.  When the best you can say about a tax plan is that you avoided fraud penalties, it’s not much of a plan.  There is no tax fairy.

Prior coverage here.

 

Kay Bell has Important January tax dates, deadlines

 

Lyman Stone, Should Nebraska Follow the Example of Illinois or Indiana?  “The case of Illinois is a great example of how higher taxes can contribute to a worsening business climate, which leads to less jobs.”

Annette Nellen, Marijuana and the Tax Law.  Despite appearances, there is no evidence the lawmakers are smoking something when they write tax laws.

TaxGrrrl, Top 10 Most Litigated Tax Issues.  Number one is penalties.

TaxProf, The IRS Scandal, Day 249

Robert D. Flach offers a SPECIAL OFFER FOR ITEMIZERS!

 

TaxTrials, Famous Fridays: Wesley Snipes, A Lesson in Listening to Bad Advice.  Did he ever.

 

The Critical Question: Massages May Feel Nice, But Can You Deduct Them at the Poker Table? (Russ Fox)

News from the Profession: KPMG Upgrades Its Female Interns From Necklaces to Camisoles  (Going Concern)

 

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Tax Roundup, 12/31/2013: So much for Iowa tax reform. And: last-minute charity!

Tuesday, December 31st, 2013 by Joe Kristan

ijlogoThere’s only so much you can do on one day to achieve last-minute tax deductions.  The markets are open, so you can harvest your tax losses.  The post office closes early, so if you want to mail a check for a deductible expense, get down there this morning.  You might want to review all of my 2013 year-end tax tips for some other ideas.

If you are both charitable-minded and deduction-minded, credit-card donations up to midnight tonight work.  Indulge me while I suggest a few good causes that can get you a charitable deduction:

Salvation Army, doing hard work with the homeless and lost and on hand to help at disasters, doing much with little.

Iowa Donor Network, the Iowa organization that gathers and allocates donor organs.

Institute for Justice, the non-profit that helps the little guy fight back against government’s bent on stealing their business or preventing them from making a living.  IJ is the outfit behind the battle against the IRS preparer regulation power-grab — it’s hard to imagine how the IRS would have been stopped without their good work.

The Tax Foundation, fighting the good fight for sound tax policy.

Reason Foundation, supporting liberty against all comers.

Alzheimers Association, fighting an awful disease.

Sertoma, little platoons working to prevent hearing loss through education and awareness.

Cornell College, my undergraduate alma mater.

Southern Illinois University, where I got my accounting degree.

Last but not least, The ISU Center for Agricultural Law and Taxation, sponsor of the Farm and Urban Tax Schools.

That’s it for our 2013 year-end tax tips, but there’s good stuff all year at the Tax Update!

 

Related:

William Perez, Last Day Deduction Ideas

TaxGrrrl, 13 Dramatic Year End Tax Strategies For 2013   

 

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.

So much for the Iowa alternative maximum tax.  Branstad says he’s “realistic” — abandoning idea of pushing for income tax changes in 2014, reports O. Kay Henderson:

Earlier this month Governor Terry Branstad was considering a plan to let Iowans keep filing their personal income taxes under the current system, or opt for a flatter, simpler system with fewer deductions. Branstad’s now abandoning the idea.

“I’ll be real frank to say that with the present make-up of the senate and particularly with the present chairman of the Ways and Means Committee, I doubt that we’re going to see anything significant on the tax front this year,” Branstad said during an interview with Radio Iowa.

The majority Senate Democrats, led by Joe Bolkcom, are obsessed with sticking it to “the rich,” meaning employers, and the Branstad plan fails to do so sufficiently.  As the Senate can block any tax proposal, there was never much hope for the Branstad plan.

As the Governor’s half-baked plan was going nowhere anyway, perhaps now he can start working for the sort of real income tax reform that is so long overdue in Iowa.  The current system is a rat’s nest of special interest breaks, feel-good provisions, complexity and high rates that pleases only lobbyists and string-pullers.  It discourages small businesses with unforgiving complexity while paying the well-lobbied to be our friends.

Let’s get rid of all of the special deductions for special friends of the politicians, and all of the feel-good deductions, and even the deduction for federal taxes.  Oh, and lets get of the Iowa corporation income tax entirely.  Let’s drastically reduce rates to 4% or less and make Iowa taxes easy to understand and pay.  Governor, embrace the Tax Update’s Quick and Dirty Iowa Tax Reform plan for all and see if the soak-the-rich crowd really wants to stand up for insiders, lobbyists, complexity, high rates, and high compliance costs.

 

It’s a dishonor just to be nominated, but Russ Fox can only choose one 2013 Tax Offender of the Year.  The recipient worked very hard to earn the title, and is quite deserving.

 

Tony Nitti, Tax Geek Tuesday: Does The Sale Of Property Generate Ordinary Income Or Capital Gain?  It depends on what you sell, and who you sell it to.

 

Scott Hodge,  Out With the Extenders, In With the New Obamacare Taxes (Tax Policy Blog).  In case you were getting excited about a new year.  It lists all of the Lazarus provisions that expire at midnight, and all of the new taxes that start at 12:01.

Kay Bell,  Expiring commuter tax break will cost public transit users

 

Robert D. Flach brings you his last Buzz of 2013!

Jason Dinesen lists his Most-Popular Blog Posts of 2013

News from the Profession.  Count Your Blessings For Not Being on These Horrible Inventory Counts (Going Concern)

 

I will take the rest of the week off to clear my mind for tax season.  Happy New Year, and see you on Monday!

 

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Tax Roundup, 12/6/2013: Fools Gold Edition. And: corporations can have their identity stolen too!

Friday, December 6th, 2013 by Joe Kristan


20131206-1
We’ve all had narrow misses with bad ideas.  For example, the general manager of the Yankees and Red Sox owner went out drinking and negotiated a trade of Ted Williams for Joe DiMaggio, only to call it off in the light of day.  Think of the time you almost went into business with your brother-in-law.  Fortunately, we usually think better of it in time to avoid disaster.

Not Robert Kahre.  He got this great idea to pay employees in gold and silver coins, which are worth far more than their original face value, while reporting the income and paying taxes at the face value.

Kahre met John Nelson (Nelson), who authored books and taught classes about the IRS and the monetary system, and Nelson’s ideas influenced Kahre to develop the payment system at issue.

According to Kahre, he developed his gold payroll system because the United States government had debauched the national currency and utilized inflation to confiscate the wealth of U.S. citizens. Kahre relied on court cases and the Gold Bullion Coin Act of 1985 that approved gold coins as legal tender. Kahre devised the independent contractor agreements to reflect that the IRS was a foreign agent for the World Bank and the International Monetary Fund (IMF). In Kahre’s view, by collecting taxes for the IRS, employers illegally served as foreign agents for the World Bank and IMF. Kahre relied on several federal statutes, regulations, and “Presidential Documents” in the process of developing his payroll system to avoid the collection of taxes on behalf of foreign agents.

How do you suppose that worked out?  Well, the above description comes from a federal appeals court decision upholding a 190-month prison sentence for Mr. Kahre, if that’s any indication.   More from the decision:

Appellants contend that the district court erred in denying their motions to dismiss the indictments because they did not know that their use of gold and silver coins for payroll payments was illegal under the tax laws. Appellants specifically maintain that the district court’s tax valuation predicated on the fair market value of the gold and silver coins unfairly imputed criminal intent to their unknowing actions.

A footnote helps show why the court wasn’t persuaded (citations omitted, emphasis added.):

Appellants contend that gold and silver coins are statutorily valued at face value. However, this appeal does not really concern the statutory value of gold and silver coins when utilized as legal tender. Instead, this appeal addresses Appellants’ payment of wages in gold and silver coins in a scheme to avoid payroll taxes, as evidenced by the facts that Kahre’s employees were required to immediately return the coins for cash and, that if an employee retained the coins, his wages were reduced by the fair market value of the coins.

Oops.

The moral?  The tax law isn’t required to believe every ridiculous thing you read, and there is no Tax Fairy.

Cite: Kahre, CA-9, NO. 09-10471

 

TIGTAIt’s not just individual identity theft.  TIGTA: IRS Issues $2.3 Billion/Year in Fraudulent Tax Refunds Based on Phony Employer Identification Numbers. (TaxProf). Considering this, and the identity theft epidemic, and their worsening taxpayer service, their wish to devote resources to regulating preparers is hard to take.

 

Now there’s a shocker.  Democrats, liberals pan Gov. Terry Branstad’s flat tax idea (Jason Noble).  If you can’t get the cooperation you need to pass even a half-way plan, you can at least change the terms of the debate by going bold.

 

Jason Dinesen, Stock Losses and Taxes:

Beware of “wash sales.”  A wash sale occurs when you sell stock at a loss and then buy the same stock within 30 days before or after the sale.  (Example:  you sell Stock A at a loss on August 1 and then re-purchase Stock A on August 15.  This is a wash sale and the August 1 loss is not currently deductible but instead adjusts the basis of the stock you purchased on August 15.)

Year-end loss sales are a common tax planning move, but you need to be willing to do without the shares for 30 days.

 

Kay Bell,  Low corporate tax rates don’t guarantee more jobs.  No, but you won’t convince anybody that high corporate taxes help.’

Kyle Pomerleau, New Report on Corporate Income Taxes and Employment Doesn’t Come Close (Tax Policy Blog).  ”Their conclusion is akin to blindly picking two jellybeans from a bag of 1,000, getting two red ones, and then concluding that the rest of the jellybeans in the bag must be red.”

 

Dueling cronyism.  Missouri Lawmakers to Washington: We’ll See Your $8.7 Billion, And… (Tax Justice Blog)

William Perez,  Year End Deduction Strategies for the Self Employed

 Andrew Mitchel,  New Resource Page: Monetary Penalties for Failure to File Common U.S. International Tax Forms.  They’re quite ugly.

 

Elaine Maag,  Analyzing Taxes and Transfers Together (TaxVox)

Keith Fogg,  What is a return – the long slow fight in the bankruptcy courts (Procedurally Taxing)

Jack Townsend,  Economic Substance Uncertainty in Civil Cases

Tax Trials, Supreme Court Adopts IRS Position on Jurisdiction and Application of Partnership Penalties

 

Courtesy Gateway Pundit.

Courtesy Gateway Pundit.

Fiduciary Income Tax Blog,  Valuation of Indirect Ownership Through a Trust

Brian Strahle,  UDITPA REWRITE NECESSARY, BUT WILL STATES LISTEN?

TaxProf, The IRS Scandal, Day 211

 

Robert D. Flach has a meaty Friday Buzz!

TaxGrrrl,  Flushing Out The Toilet Paper Tax Exemption   

News from the Profession.  Former CPA and Procrastinator Ordered By the State to Get Around to Removing “CPA” From All Her Stuff (Going Concern)

 

Happy St. Nicholas Day!

 

 

 

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Tax Roundup, 12/5/2013: Branstad floats optional income tax without federal tax deduction. And: is IRS hiding something?

Thursday, December 5th, 2013 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.

Iowa Alternative Maximum Tax proposal revived?  Governor Branstad may push an optional income tax with lower rates and no deduction for federal taxes.  This plan looks like an attempt to improve Iowa’s byzantine income tax without provoking the wrath of Iowans for Tax Relief, the Muscatine-based advocacy group that strongly opposes efforts to do away with the deduction.  KJAN.com reports:

Iowa’s income tax rates higher when compared to most other states because Iowa offers a deduction that’s offered in only five other states. That deduction allows Iowans to subtract their federal income tax liability from their income before calculating their state income taxes.  “We don’t want to erode federal deductability,” Branstad says, “and that’s why we’re saying: ‘Give ‘em the option.’” By giving taxpayers the option to file their income taxes under the current system with that major deduction or under a new system with lower and flatter rates, Branstad might avoid the firestorm he faced from his fellow Republicans in the late 1980s when he proposed doing away with that deduction.

The Governor appears to plan to add a new twist to the plan, reports Kathie Obradovich:

Branstad indicated that he wouldn’t allow Iowans to “game the system” by changing their form every year. That means taxpayers who give up the federal deduction would have to stick with the choice even if the other option would result in lower taxes in a given year.

That means the new system would be a one-way street.  It no longer would be an “alternative maximum tax,” where taxpayers would always compute their tax both with and without the federal deduction and choose the lower amount.  That makes it even worse than the version passed by the Iowa House of Representatives last year, which would have allowed taxpayers to make the choice annually.  Unless the new system provides significantly better results in the great majority of circumstances, most taxpayers would want to retain the option to use the federal deduction.  That would stall the (presumably) desired transition to a simpler system.  Both the Branstad plan and the House plan significantly add to the complexity of the tax law.

While Iowa’s high stated tax rates — individual and corporate — don’t help, the ridiculous complexity of Iowa tax law is the real problem.  Iowa has a bunch of penny-ante credits and deductions that don’t apply for federal purposes.  These are too small to make a significant difference to taxpayers but also too small for the Department of Revenue to police.  There are also dozens of special-interest tax credits and deductions that take dollars from the rest of us on behalf of people with connections at the Statehouse.

It’s not in his nature, but the Governor ought to go bold and embrace the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  It strips the Iowa tax law to a very few deductions and repeals Iowa’s highest-in-the-nation corporation income tax while drastically lowering personal rates.  The Iowa Senate is unlikely to pass the Governor’s half-baked half-measure anyway; why not change the terms of the debate with a plan that actually makes sense?

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

 

taxanalystslogoChristopher BerginTax Analysts v. IRS: What Are They Hiding? (Tax Analysts Blog):

Back in August, I wrote about the lawsuit Tax Analysts had filed against the IRS seeking documents under the Freedom of Information Act. The documents being sought were training materials used to instruct and guide IRS personnel in the IRS exempt organization determinations office in Cincinnati. The big story then, and now, was generated by former EO director in the IRS Tax-Exempt and Government Entities Division Lois Lerner’s admission that the agency had used inappropriate means to determine which organizations qualified for tax-exempt status as social welfare organizations. The organizations singled out for extra scrutiny were mostly, if not entirely, conservative. Tax Analysts felt compelled to seek relief from the courts because we were getting nowhere with the IRS – other than the big stall – even though it had promised expedited treatment on our original request.

Several months later, the big stall continues — to the point that I have to ask myself whether the IRS just made a stupid mistake in targeting those organizations or whether something much worse is going on. 

They are using the “taxpayer confidentiality” excuse for their standard big stall.  Christopher isn’t buying it:

But I’ll say it again: Training materials, really? Why on earth would the IRS try to keep those secret? You’d think the training manuals would all be in a file cabinet somewhere, which hardly would require a search party of 100 lawyers and a scouring for tax return information.

Could it be that this time something is different? Could there be a smoking gun here? I’m not saying there is. I’m just saying it may be time to start asking that question. Because even for the IRS, this is darned peculiar behavior.

Congress should amend the taxpayer confidentiality rules to keep the IRS from using them as an excuse to hide its own dirty laundry.  It shouldn’t require a federal lawsuit to get the IRS to publicize internal non-taxpayer documents.

 

 

20130121-2Whither the Registered Tax Return Preparer Program?  Robert D. Flach argues that the RTRP designation that was part of the nearly-dead IRS preparer regulation power grab should be administered by the IRS on a voluntary basis.  I disagree.

Robert would like a way to distinguish the better class of “unenrolled” preparers from less-professional seasonal preparers.  I can understand that, but I don’t think that the IRS is the agency that should do this.  It would divert already strained IRS resources to do something the preparer industry could do on its own.  I agree with Jason Dinesen that if preparers want a government designation, they should take the Enrolled Agents exam, which is much more difficult than the RTRP literacy test.  The EA designation is sadly underappreciated in the market, and adding a new IRS-run designation would only make that worse.

 

The IRS reminds us that the “savers credit” can help lower-income taxpayers who contribute to a retirement plan.  This is a non-refundable credit of up to 50% of the amount contributed to IRAs or deferred to a 401(k) plan.  For parents, funding a young adult offspring’s retirement plan contribution is a tax-efficient way to help build a nest egg.

 

Don’t try this with your tax deadlines.   TIGTA: IRS Is Seven Years Past Statutory Deadline for Providing Online Account Access to Taxpayers (TaxProf).  From the TIGTA report:

The RRA 98 required the IRS to develop procedures to allow taxpayers filing returns electronically to review their account online by December 31, 2006. The IRS did not meet this requirement, and we determined that the IRS has not made adequate progress in allowing taxpayers to access tax accounts. Currently, taxpayers cannot review account information electronically.

In fact, the IRS is getting worse, having cut back electronic access for tax professionals.  That makes resolving even a simple IRS notice a tedious multi-week snail-mail slog.

 

Tony Nitti, The Definitive Questions And Answers On The New Net Investment Income Tax [Updated For Final Regulations] 

amazonCara Griffith It’s a Bird, It’s a Plane…It’s Amazon Prime Air? (Tax Analysts Blog).  Sales tax by drone.

Alan Cole, Report: Obamacare Premium Subsidies Will Need Fraud Protection (Tax Policy Blog).  No kidding.

TaxProf, The IRS Scandal, Day 210

 

Kay Bell, Tax e-filing continues to grow, hitting 122 million in 2013

TaxGrrrl, Will Congress Drive Up Gas Taxes In 2014?   

 

Um, because most commuters drive?  Why Does the Tax Code Favor Commuters that Drive? (Tax Justice Blog)

Going Concern, IRS’ Improved e-File System Is a Total Success Except For Two Jerks Who Foiled It

 

Don’t trust tax collectors, if you’re a tax collector:

The former tax collector of Plainville, who is also former treasurer of the Connecticut Tax Collectors Association, was arrested Monday morning and charged with first degree larceny, after being under investigation for possible embezzlement since June.

Debra Guerrette, of Bristol, was placed on administrative leave from Plainville’s Revenue office in June after Bristol police informed the town Guerrette was involved in a criminal investigation.

After an analysis of the financial records for the Connecticut Tax Collectors Association, and also Guerrette’s financial records, police said she had “misappropriated funds in excess of $50,000” between 2008 and 2013, into her personal account.

Will there be a special assessment of the collectors to make up the difference?

 

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Tax Roundup, 12/3/2013: Tax Court says no vesting, no K-1. And: gas tax fever!

Tuesday, December 3rd, 2013 by Joe Kristan

20120511-2Who pays, partner?  A Tax Court decision yesterday held that an executive of a partnership holding a non-vested capital interest should not be considered a “partner” for allocation of taxable income and loss before the interest vests.

The taxpayer was an executive of Crescent Holdings, LLC, a Georgia real estate partnership.  According to the Tax Court, he received a 2% capital interest in the partnership that was subject to forfeiture if he failed to stay in the job for three years.  He resigned before the interest vested, so he got nothing.  The partnership had allocated income to him on a K-1 for the period up to his resignation — and gave him some cash to pay taxes on the income —  but he argued that because he was non-vested, he shouldn’t receive any K-1 allocation.

Tax Court Judge Ruwe agreed:

Since petitioner forfeited his right to the 2% interest before it substantially vested, he never owned the interest. Petitioner never received any of the economic benefits from the undistributed partnership income allocations to the 2% interest. Requiring petitioner to recognize the partnership allocations in his income is inconsistent with the fact that he received no economic benefit from the allocations.

“His” 2% was allocable instead to other partners.

Non-vested stock or partnership interests subject to “a substantial risk of forfeiture” are not includible in income until the forfeiture risk lapses, unless the taxpayer makes a timely Section 83(b) election to include the value in income on receipt in spite of the risk.

This decision tells partnerships preparing 2012 returns that they shouldn’t allocate taxable income to partners with unvested interests.  I suspect some partners and partnerships may file amended returns for open years as a result.  It’s not entirely clear, but I read the opinion as saying that a timely Section 83(b) election would change this result.

Cite: Crescent Holdings LLC et al. v. Commissioner; 141 T.C. No. 15

 

Because he really, really wants the money.  Branstad declines to issue gas-tax veto threat (Iowa Farmer Today):

“The goal would be over the next couple of months: Does a consensus develop around something or not? And, I guess time will tell whether that happens,” Branstad said. If an agreement emerges, he said he would include a recommendation on how to address a projected annual shortfall of $215 million for critical road and bridge repair needs during his Condition of the State address Jan. 14.

The “shortfall for critical road and bridge repair” has become a mantra at the statehouse, which means they really want to get into your wallets some more.  The $215 million number comes from an Iowa Department of Transportation report.  No politicians seem willing to challenge a self-serving number from the agency that would benefit from more transportation money.  Compared to other states, Iowa isn’t doing so bad.  For example from the most reason Reason Foundation survey of state highway conditions:

Iowa Highways 2009

Many states are getting less gas revenue from gas taxes as cars become more efficient.  There is a case that some adjustment of the tax makes sense.  Still, Iowa is 17th nationally in per-mile spending, and it doesn’t seem like we are doing badly compared to the rest of the country.  And no matter how much they jack up the gas tax, I suspect they’ll continue to tell us we have crumbling infrastructure anyway.

 

Seventh Circuit: Inherited IRA not exempt from creditor claims. That’s a different result that would apply to bankrupt’s own IRA.  Cite: Clarke, CA-7, Nos. 1241 and 12-1255.

 

Tony Nitti, Final Net Investment Income Regulations: Self-Charged Interest, Net Operating Losses, And More

Paul Neiffer,  Bonus Payments Are Ordinary Income – Not Capital Gains. A Tax Court case involving an upfront oil and gas lease bonus payment.

 

nfl logoJeremy Scott, NFL Encourages Localities in Race to the Bottom (Tax Analysts Blog)  So does NASCAR.

William McBride, Baucus Offers Ways to Pay for a Lower Corporate Tax Rate (Tax Policy Blog)

The shopping season that never ends.  Shopping for Tax Extenders (Clint Stretch, Tax Analysts Blog) “Of the 55 tax provisions that will expire at the end of the year, all but a few have expired before. Taxpayers will have to be satisfied with retroactive reinstatement again.”

TaxProf, The IRS Scandal, Day 208

 

 

Robert D. Flach has your Tuesday Buzz!

Kay Bell, States still getting stiffed on sales taxes on Cyber Monday

Celebrate!  Cyber Monday: It’s The Most Wonderful Tax Evasion Day Of The Year!  (TaxGrrrl)

Going Concern: According To This Paper, It Takes Cojones To Commit Fraud

 

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Tax Roundup, 11/19/13: Sub-zero edition! And the dark side of non-recourse debt forgiveness.

Tuesday, November 19th, 2013 by Joe Kristan

20120511-2

Tax Court says you can’t go below zero.  At least not in computing penalties.

A taxpayer filed a return showing no tax, but claiming refundable tax credits that generated a refund of $7,327.  That’s why refundable credits are such a sweet deal — you can get a refund of taxes without ever paying them through withholding or estimated taxes.  They are really a form of welfare.

The IRS issued the refund as claimed, but then thought better of it.  The IRS recomputation was that the taxpayer should have showed a positive tax balance of $144.  That meant the taxpayer was supposed to repay the $7,327 refundable credit plus the $144 tax due, for a total of $7,471.  The IRS assessed the difference, plus a 20% penalty on the $7,471 “underpayment.”  The taxpayer didn’t think refunding the refundable credit counted as an “underpayment, and the case went to Tax Court.

The tax imposes an “accuracy related” penalty on deficiencies, based on how much the taxpayer underpays the “tax required to be shown on the return.”  The IRS said the underpayment was the whole $7,471.  The Tax Court said that refundable credits can’t take the tax below zero for this purpose, so the “underpayment” is only $144 for computing the penalty.

 

This seems wrong.  Refundable credit fraud — especially Earned Income Tax fraud — is a multi-billion-dollar problem.  If there is no monetary penalty for claiming bogus credits, the only deterrent for gaming the system is criminal penalties, and given the limits on the IRS ability to prosecute EITC fraud, it’s an empty threat.

The Tax Court seems to agree:

We note that our conclusion breaks the historical link between the definitions of a deficiency and an underpayment; however, it was Congress that made that break.

If the case holds up on appeal, Congressional action is all that can fix it.

Cite: Rand, 141 T.C. No. 12.

 

Peter Reilly, IRS Letter To Senator Boxer On Short Sales Not Good News For Everybody

I hate to spoil a nice celebration, but I am going to risk it.  The position that the IRS outlined in the ruling is probably good news for most people affected by it.  It may not be good news for everybody, though.  In order to understand why you have to understand the IRS reasoning.  Here is the deal.  When debt is secured by property, it is either recourse or non-recourse…

The effect of that section is to make just about all California home mortgages non-recourse…  There are various exceptions to recognizing debt discharge income, such as the insolvency exception.  These will no longer be available.  

When you give up a house for non-recourse debt, you are considered to sell it for that amount.  That can be a bad thing.   If you don’t qualify for the residential gain exclusion — say, because you haven’t used it as a residence long enough to qualify, or you bought the house to rent — you can have taxable gain, no cash, and no available debt forgiveness exclusion.

 

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.

 

Alan Cole, High Implicit Marginal Tax Rates Make Life Difficult for the Poor (Tax Policy Blog):

The CBO did a great study on this a year ago. It found that the implicit marginal tax rates on some poor folk are frequently above 50%, and sometimes above 80%. That is to say, that when they figure out how to increase their income by a $100, they lose $50 or more in new taxes or lost benefits. 

That’s exactly the sort perverse effect that results from the increase in Iowa’s earned income tax credit, which by itself can put low income taxpayers in a 50%+ bracket.  Take away other benefits and you can see how it could get to 80% or more.

 

Sioux City Journal, Branstad declines to issue a gas tax veto threat.  Probably because he’d like a higher gas tax, even though he likes being re-elected too much to push for one.

 

Ben Harris,  Sorting Through The Property Tax Burden (TaxVox):

Using self-reported American Community Survey data, we find that residential property taxes tend to be close to $1,000 per year, with a small share of households paying substantially more, especially in Connecticut, New Jersey, New York and New Hampshire. In recent years, 48 percent of homeowners paid between $750 and $1,750 in property taxes. About one-third—31 percent—paid less than $750 and 21 percent paid more than $1,750.  Just 3 percent paid more than $4,000, with a miniscule share of homeowners (0.2 percent) paying more than $8,000. 

That seems low, but my clients probably aren’t a representative sample.

 

Jason Dinesen, Missouri Guidance on Same-Sex Marriage

 

Kay Bell, Missouri recognizes same-sex marriages for tax filing only20130121-2TaxGrrrl, Black Market Tax Preparers Continue To Defy IRS :

The solution for tax preparers who didn’t want to register and pay the fee? They simply don’t sign the returns.

And yes, that’s against the rules. But a number of paid tax preparers do it anyway. They are referred to in the business as “black market preparers” or sometimes, “ghost” tax preparers.

And that will happen no matter what regulations the IRS imposes on honest preparers.

 

William Perez, Tax Provisions Expiring at the End of 2013

Tony Nitti, House Republicans Put Tax Reform On Hold To Revel In Obamacare Struggles

I really don’t expect to receive tips from clients–it’s not the norm for tax preparation. I definitely don’t expect to receive $1,458,905 in such gratuities.  

I can’t say I expect that either.  But I would be OK with it!

TaxProf, The IRS Scandal, Day 194

Robert D. Flach brings the Tuesday Buzz!

 

The Critical Question: Are Jamaican Credit Unions The Next Tax Haven?  (Brian Mahany)

AOL? Prodigy? Attorney’s License to Practice Law Is Suspended for Failing to Maintain an Email Account  (TaxProf)

 

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Tax Roundup, 7/24/2013: Iowa corporate tax cuts? And a Carbondale caper.

Wednesday, July 24th, 2013 by Joe Kristan

20130117-1Todd Dorman, Another view on corporate income tax cuts:

I wrote yesterday about Gov. Terry Branstad’s call for corporate income taxes, and how I’d be OK with a deal that cuts rates but also eliminates credits/loopholes.

Mike Owen, executive director of the Iowa Policy Project (congrats on the recent promotion) took some issue with my conclusions in an email…

You might not be surprised that the Iowa Policy Project thinks there’s a perfectly reasonable explanation for Iowa’s highest-in-the-nation corporation tax rate, and that taxes should be higher.  You may also know how I feel about that.

 

Kyle Pomerleau, Another Understatement of the Corporate Tax Rate:

The U.S. News and World Report published an article today titled “The Global Race to the Bottom in Corporate Taxes.” …

It also outlines the vast complexity of the tax system. According to one tax advisory cited in the article, his firm’s clients are “horrified by complexity and cost of filing their taxes in the U.S.”

20130724-1

Welcome to the U.S.

 

Joseph Thorndike, Wealth Taxes to Cure Inequality? How About Tax Reform Instead.  (Tax Analysts Blog).  How about questioning whether inequality is something that needs a “cure,” or even can be cured?  Then ask whether the tax law is safe and effective medicine.  I’d argue no.

TaxProf,  The IRS Scandal, Day 76

David Brunori, Don’t Cheat the Tax Man (wink, wink) ITax Analysts Blog):

What the nanny staters in Washington don’t understand is that prohibition, whether direct or indirect through the tax laws, doesn’t work. It did not work for alcohol. It did not work for marijuana. It will not work for cigarettes. Prohibition does not work because free men and women want to make their own decision about what they drink, smoke, eat, etc.  And they act rationally.

If only legislation did so.

 

Jason Dinesen, When Do Dependents Have to File a Tax Return?

Robert D. Flach, THE BIGGEST LOSER, on the tax laws mistreatment of gambling income.

The new Cavalcade of Risk is up!  For your insurance and risk-management reading pleasure.  Don’t miss Hank Stern’s Scamster Tricks.

Jack Townsend, Taxpayer’s Counsel Attending IRS CI Interviews of Third Party Witness

Howard Gleckman, The OECD’s International Tax Plan: The First Step on a Long Road (TaxVox)

Tax Justice Blog, New CTJ Report: Reforming Individual Income Tax Expenditures

TaxGrrrl, Remembering The ‘Hot Dog Tax’ On National Hot Dog Day

Me, Man who supported someone else’s kid gets attaboy, but no tax credit.

 

They really don’t want this guy to set up shop again.  A July 23 press release from the Department of Justice says:

The Justice Department announced today that it has asked a federal court to bar Ronald Manis of Carbondale, Ill., from preparing tax returns for others.  The civil injunction suit, filed in the U.S. District Court for the Southern District of Illinois, alleges that Manis routinely prepares federal tax returns for individuals and corporations improperly claiming deductions that result in his customers understating their federal tax liabilities.

Nothing extraordinary there, other than that there would be anything untowards happening in Carbondale.  But further down in the press release there’s this (my emphasis):

In September 2011, Manis pleaded guilty to willfully failing to file his own federal income tax returns for 2003, 2004, 2005 and 2006, and was sentenced to three months in prison. According to the government complaint, Manis was released from federal prison on July 20, 2013.

They don’t seem to want to let him participate in the upcoming tax season at all.

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Tax Roundup, 5/23/2013: Iowa property taxes improve, income tax gets worse. Plus: more Apple bites.

Thursday, May 23rd, 2013 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 General Assembly nears the end of its annual rampage.  While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.

The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses.  Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.

As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million  (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out.  They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.

Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.

While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting.  Yes, lower rates for commercial property are needed.  But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.

Related:

David Brunori, Soviets Run Mississippi, Planned Economies and All (Tax Analysts Bl0g)

The Quick and Dirty Iowa Tax Reform Plan.

 

TaxProf, The IRS Scandal, Day 14

Going Concern, Lois Lerner Knows What You People Are Thinking

 

Andrew Lundeen, Apple’s Appearance before the Senate Clarifies the Need for Comprehensive Tax Reform (Tax Policy Blog):

Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.

Kyle Pomerleau, Another Perspective on the Apple Hearing (Tax Policy Blog):

Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.

Indeed.

 

Linda Beale, Citizen for Tax Justice’s Bob McIntyre on Apple’s offshore profit-hoarding.

 

Robert D. Flach, A KIND OF CATCH-22  On the compliance burden of the fraud-ridden Earned Income Tax Credit.

Tax Trials, See You on Tuesday: IRS Furloughs Impact Certain Filing Deadlines & Services

Kay Bell, IRS offices will be closed Friday, May 24. Plan accordingly

Jack Townsend, Tax Perjury and FBAR Charges Related to Illegal Income Fake Art Case

 

Cara Griffith, A Missed Opportunity in Texas (Tax Analysts Blog)  An attempt to enact an independent tax court in Texas fails:

“The importance of an independent tax tribunal is well documented in the pages of tax journals and even mainstream media outlets.” 

Iowa has nothing like an independent tax appeals process.

Me, Playing with fire: Using an IRA to finance your business.  My new post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

 

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Tax Roundup, 5/21/2013: thief subsidy edition. And why the IRS scandal is so depressing.

Tuesday, May 21st, 2013 by Joe Kristan

20130117-1Iowa’s elected leadership has come up with a deal to bring down Iowa’s high commercial property taxes in exchange for an increase in Iowa’s earned income tax credit.  The Democrats who control the Senate have long been pushing for an increase in the EITC, and this seemed like an obvious compromise from early in the session.  There will be much rejoicing if the deal gets completed, as appears likely; property tax reform has been the Governor’s highest legislative priority.

It’s too bad that the cost of a sensible property tax is a big increase in a program that is a poverty trap for honest taxpayers and a pinata for thieves.  The phase-outs of the EITC result in shockingly-high marginal tax rates on each additional dollar earned by relatively low-income taxpayers.

The EITC  is refundable, which means it is really a welfare program run through tax returns.  About 25% of the EITC is claimed “improperly,” which is a nice way to say it’s stolen.  The annual cost of the Iowa EITC boost is estimated at $35 million, so the price of fixing a broken commercial property tax regime is an $8 million annual thief subsidy.  So while the politicians celebrate their great compromise, Iowa’s petty thieves also have occasion to raise a glass, filled by you.

 

TaxProf,  Supreme Court Unanimously Reverses Third Circuit, Says PPL Can Claim Foreign Tax Credit for U.K. Windfall Tax and Avi-Yonah and Christians on Yesterday’s PPL Decision.

 

Jeremy Scott, Rand Paul’s Claim of “Written Policy” Seems Like GOP Overreach

It is unlikely that Republicans will find Paul’s smoking gun, but the IRS scandal is almost certainly the result of political bias on some level.  It is hard to believe that a group of officials would innocently pick terms like “Tea Party,” “patriot,” and “9/12” to single out organizations for additional scrutiny.  It would be incredible to find such disinterested tone-deafness even in the most politically insulated of civil servants (and the IRS is far from insulated).

I doubt the White House left fingerprints on IRS efforts to harass political opponents (though it didn’t lift a finger to stop it).   That leads to an even more depressing possibility: that the IRS went out its way to beat up on the President’s opponents on its own.  Nobody blew the whistle.  That means IRS management is so corrupt and political that it would go after the administration’s political opponents with only a wink and a nudge.  And anybody who doesn’t think this was politically-motivated is kidding themselves.

James Taranto puts it well:

And the IRS scandal was a subversion of democracy on a massive scale. The most fearsome and coercive arm of the administrative state embarked on a systematic effort to suppress citizen dissent against the party in power. Thomas Friedman is famous for musing that he wishes America could  be China for a day. It turns out we’ve been China for a while.

 

No-longer-Acting IRS Commissioner Steven Miller

No-longer-Acting IRS Commissioner Steven Miller

Megan McArdle, Yes, What Happened at the IRS is a Scandal

Russ Fox, The IRS Scandal Reaches the White House

TaxGrrrl, IRS Hearing Marks End Of Their Worst.Week.Ever But Congress Signals More Hearings Are On The Way

Kay Bell, House and Senate committee hearings on IRS screening of Tea Party tax-exempt applications set for May 21 & 22

ViralRead, Report: Head of IRS Employees Union Met With President Obama the Day Before Tea Party Targeting Began

The Other McCain, Portrait of a Thug: IRS Union Boss

 

Peter Reilly, Bank Cannot Issue 1099-C And Subsequently Try To Collect

Jason Dinesen, Same-Sex Marriage, Community Property, And Multi-State Income — Part 3

Fiduciary Income Tax Blog, Passive Income: Good or Bad?

 

Paul Neiffer,  A Farmland REIT is Now Publicly Traded

Stephanie Fitch, 5 Questions Congress Should Ask Obama Commerce Nominee Penny Pritzker

William Perez,  IRS Offices to be Closed on May 24

Linda Beale, How Apple avoids US taxes with shell games

 

Going Concern,  Last Year Was a Very Unfortunate One to Be Wealthy and French, Even By French Standards.  When marginal rates exceed 100%, you know a country is off the rails.

Robert D. Flach has a new Tuesday Buzz up!

The Critical Question: NFL Linebacker James Harrison Spends More On Massage Than You Did On Your House. But Can He Deduct It?  (Tony Nitti)

 

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Legislature carves new special favors, does nothing for the rest of us.

Wednesday, May 8th, 2013 by Joe Kristan
If Iowa's tax law were a car, it would look like this.

Iowa House approves two new bumper stickers for this car.

The Iowa House of Representatives advanced two corporate welfare provisions  yesterday.

SF 433 makes it easier for businesses with “pilot projects” to keep employee withholding under a “target jobs withholding tax credit” program.  It never says what exactly the “pilot projects” are supposed to prove — maybe if you divert employee withholding to the employer, they like that?  This additional clutter to Iowa’s already byzantine tax law passed 97-2, opposed only by Bruce Hunter (D., Des Moines), and Charles Isenhart (D., Dubuque).

Gazette.com reports on the vote:

Legislation aimed at helping some Iowa border communities compete with neighboring states is on its way to the governor.

The targeted jobs program allows qualifying businesses to apply for state withholding tax credits if they plan to relocate or expand in Iowa, provided they are creating or retaining jobs.

“Creating or retaining” jobs?  Doesn’t that happen whenever you hire someone?  If you want Iowa to “compete” with neighboring states, make the whole tax law competitive.  It’s not just border cities who suffer from a bottom-tier business tax climate.

 

SF 436 expands the amount of Historic Rehab Credits available, increasing the distortion of property markets by subsidy, generally for the benefit of the well-connected developers who know how to play the game.  This one passed 97-2, with only Rep. Hunter and Rick Olson (D., Polk) voting no.

As for actual good policy — simplifying the law, lowering rates, and doing something for people without lobbyists — nothing.  The closest thing to it this session, the flat Alternative Maximum Tax (HF 478), is dying in the Senate.  So once again it looks like the legislature will go home having only added more barnacles to the Iowa income tax.

 

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State gives Facebook $18 million for 31 jobs.

Wednesday, April 24th, 2013 by Joe Kristan
Wikipedia image

Wikipedia image

The politicians are tripping all over themselves to claim credit for Facebook’s new server farm in Altoona.  From The Des Moines Register:

The Iowa Economic Development Authority board today approved $18 million in tax credits for Facebook’s $300 million data center in Altoona.

“Welcome, Facebook,” said board member Pete Brownell. The data center project has been referred to as Siculus Inc. in state documents.

Debi Durham, the state’s economic development director, said she expected that Facebook’s investment would grow to a billion dollars within five or six years.

“It’s good to be friends with Facebook,” she said. Gov. Terry Branstad said Facebook is “about as high-profile a company as it gets.”

The “high profile” bit tells you why politicians love “targeted” tax credits.  It gives them an excuse to call a press conference and cut a ribbon, claiming credit for the project like a rooster taking credit for the sunrise.  It’s more fun than facing the fact that real economic growth doesn’t come from photo ops.  It doesn’t come from paying $580,000 to a wealthy company for each “job” it brings.

Ultimately economic growth comes from making Iowa an attractive place for low-glamor businesses to set up and expand without having to hire lobbyists and tax consultants to tap the corporate welfare keg.  It comes from incremental hiring and location decisions that involve no politicians.  It calls for discarding high-profile corporate welfare in favor of a simple low-rate system that’s friendly even for obscure businesses — like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

To put things into perspective: our firm, Roth & Company, has “created” more jobs, at higher pay rates, than Facebook’s 31 promised jobs.   Where’s our $18 million?

Related:  LOCAL CPA FIRM VOWS TO SWALLOW PRIDE, ACCEPT $28 MILLION

 

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Tax Roundup, 4/11/2013: A new Iowa income tax reform proposal. And: new Obama budget, same as the old one.

Thursday, April 11th, 2013 by Joe Kristan

20130117-1Iowa Senate Republicans advance income tax plan.  TheGazette.com reports:

Sen. Randy Feenstra, R-Hull, said all 24 minority Senate Republicans have signed onto a proposal to significantly lower state personal income tax rates and simplify the Iowa tax code by offering a two-pronged approach that would eliminate federal deductibility and benefit most Iowans.

The Hull Republican said the proposed new tax structure would flatten the current nine income tax brackets into three, elimination of federal deductibility as a competitive impediment, enhance the current standard deduction for all taxpayers and provide an  extra boost for blind, elderly and dependent Iowans, eliminate itemized deduction, increase personal exemption credits, and raise filing thresholds.

So far I have been unable to find the bill (though it being April 11, I’m not going to spend a lot of time looking for it today).  As Senate Republicans have no chance of advancing a bill in the face of majority Democratic opposition, it’s really a gesture.  Still, it’s nice to see that income tax reform remains alive, in spite of the Governor’s indifference this year.  It’s also nice to see that the insistence on keeping the deduction for federal taxes is eroding.  Much better to build it into a lower rate.

If they keep talking taxes, they may finally see that The Quick and Dirty Iowa Tax Reform Plan is the way to go!

Radio Iowa has more.

 

Megan McArdle,  “Tax Breaks for Corporate Jets”: The Non-Issue at the Heart of the Presidential Agenda:

This is a bit weird given that President Obama rides on what is essentially the nicest corporate jet in the world.  To be fair, the President is quite right that companies do not need a tax break to buy corporate jets.  But since they don’t really get a tax break for buying corporate jets, we probably don’t need to spend this much valuable presidential time worrying about this non-problem.  

Anything to make life difficult for a high-tech U.S. manufacturer.   As long as the President continues to beat dead horses like this and the “Buffett Rule,” we know he is not at all serious.

Tony Nitti, Tax Aspects Of The President’s FY 2014 Budget

Howard Gleckman,  The Real 2014 Budget Battle May Be Over Spending, Not Taxes

William McBride,  President Obama’s 2014 Budget Takes another Whack at Savers (Tax Policy Blog)

Paul Neiffer,  Here We Go Again!

 

Cara Griffith, Crafting a Better Mainstreet Fairness Act? (Tax.com)

By enacting it?  How Democrats Will Destroy Progressive Government (Joseph Thorndike, Tax.com):

Sure, Democrats pay lip-service to infrastructure, education, and the like. But for the most part, they are profoundly unwilling  to make a wholistic case for activist, progressive government.

Actually, they probably wouldn’t get very far making the case honestly.

 

TaxProf,  Is the IRS Stalking You on Facebook, Twitter?  Is that how they caught “The Queen of IRS Tax Fraud?

Jason Dinesen,  Same-Sex Marriage, Divorce and Taxes

Me:  How much K-1 loss can I deduct?  Start with your basis.  Part of my 2013 filing season tips series.  My exciting installment on partnership debt basis goes up later this morning.

 

Oh, but it’s for our own good.  IRS Claims It Can Read People’s E-Mails Without Needing a Warrant (Joseph Henchman, Tax Policy Blog).

Jack Townsend,  KPMG Publication on FBAR Filing Requirements for Corporations and Executives

Russ Fox,  Bozo Tax Tip #2: Nevada Corporations

Kay Bell,  Top 10 things you don’t want to hear from your accountant.  How about “I’m calling from Brazil, thanks for the cash!”

He’d have had trouble during tax season.  FYI: The Guy Who Stabbed 14 People At a Texas College Wanted To Be an Accountant When He Grew Up (Going Concern)

Christopher Bergin, Why Transparency Is Like Porn (Tax.com)  No, it’s not about Lululemon.

 

News you can use.  Make Your Own Bubble in 10 Easy Steps (Bryan Caplan)

 

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Tax Roundup, 3/13/2013: Governor, legislators battle over who to give your money to. Plus: Education credit returns bog down.

Wednesday, March 13th, 2013 by Joe Kristan

GovBranstadI will fight for the right to tax you to subsidize other people.  Governor Branstad is touchy about criticism of the massive tax breaks for the Southeast Iowa Orascom fertilizer plant.  Radio Iowa reports:

“I’m here to make it clear that the chief executive of this state is on your side and we will fight for these jobs and I want to make it clear that when we make a promise to Lee County — or to any county in Iowa for that matter — it’s a promise we’re going to keep, no matter what they might say in Des Moines in any committee meeting,”

Never mind the high possibility that the plant would have been built without our tax money.  Never mind the moral problem of taxing existing businesses and taxpayers to lure and subsidize outsiders.  Never mind that political allocations of investment capital are always and everywhere unwise.  Forget the lost opportunities for taxpayers to spend the money on their own projects.  Jobs!

The Governor also hinted at darker forces opposing the tax credits, reports KCCI.com:

And he said he believed the Koch brothers were behind some opposition to the plant because it would hurt their fertilizer business.

So Iowa Democrats opposing the subsidies are tools of the libertarian Koch brothers.  Who knew?

Prior coverage here.




In other bad state tax policy news, the Senate Ways and Means Committee Democrats advanced an increase in the Iowa earned income credit from 7% of the federal amount to 20%.  Unfortunately, it would also be a huge increase in the marginal Iowa tax rate of families working their way out of poverty.  The phase-outs of the credit create a hidden high marginal tax rate that punishes families emerging from poverty.

 

The EITC is a refundable credit, which means the tax man writes checks to folks with no taxes.  Naturally EITC fraud is rampant.

 

 

TaxGrrrl, Hundreds Of Thousands Of Taxpayers Thought To Be Impacted By Education Credit Snafu

IRS agent pleads guilty to charges resulting form selling out a whistleblower.  Jack Townsend has the scoop.

Kay Bell,  2013 tax filing season gets crazier for some H&R Block, TurboTax customers

Jason Dinesen,  Small Business Health Insurance Credit, Part 2

Elizabeth Malm,  Texas Considering Drastic Modifications to Margin Tax (Tax Policy Blog).  Good.

Patrick Temple-West,  Yankees embrace frugality to dodge tax, and more.  Who says taxes don’t influence behavior?

Jeremy Scott, Carl Levin Changed the Face of Tax Enforcement (Tax.com)

Howard Gleckman,  Taxes and Paul Ryan’s Budget (TaxVox)

William Gale, A Carbon Tax is a Win-Win for the Economy and the Environment (TaxVox)

 

David Brunori, Things to Read, Sites to Visit(Tax.com).  He shares some online resources, but tragically fails to mention the Tax Update.

Peter Reilly,  No Fans Of Sister Wives At The IRS ?   As far as I’m concerned, the possibility of consolidated individual returns should be all the argument needed against polygamy.

The Critical Question:  Why Is My Refund Short? (Trish McIntire)

 

News you can use.  Note to Drivers: All Wheel Drive Does Not Give You Superpowers, Just a Dangerous Overconfidence (Megan McArdle). 

So you think you’re having a bad busy season?  It could be worse: Upstanding San Leandro Accountant Finds Himself on Oakland’s Most Wanted ListGoing Concern has the news of law enforcement gone awry.

 

 

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Tax Roundup, 2/22/2013: Why California refugees might not choose Iowa. And: to C or not to C?

Friday, February 22nd, 2013 by Joe Kristan

 

Enjoying a short Des Moines winter commute.

Enjoying a short winter commute in bicycle-friendly Des Moines.

We aren’t scaring them.  Governor Branstad is making a trip to California to poach some businesses from the failing Golden State.  He’s not scaring one Californian:

Iowa’s top state personal income tax rate is 8.98 percent, compared to 13.3 percent in California. Probably not enough of an improvement to lure millionaires from Pacific Palisades to Dubuque. By contrast, Texas offers zero percent.

The top state corporate income tax rate is 12.5 percent in Iowa, 8.84 percent in California and zero percent in Texas.

Earlier this year, Branstad said he would no longer pursue getting rid of Iowa’s corporate and personal income taxes. Instead, he’s going to focus on cutting property taxes.

Well, California’s property taxes already are fairly low thanks to Proposition 13. Although property prices here are triple those in Iowa and most other states because of our severe restrictions on building.

Bottom line: Iowa doesn’t offer enough incentives to attract many businesses and people to leave California. The Hawkeye State is the Golden State with bad weather.

Ouch.  Well, Iowa’s solvent, too, unlike California, which is a fiscal disaster.  We also have short commutes.  Still, he makes a valid point: it’s not enough to compete with a basket case like California.  Golden State refugees have plenty of places to choose from, many of which have better taxes, better weather, or both.  I have no thoughts on fixing the weather, but The Quick and Dirty Iowa Tax Reform Plan would take care of the tax problems.  With no corporate tax and a 4% individual rate, combined with good employees, education and quality of life, we’d see some Californians.

 

To C or not to C?  The Wall Street Journal reports that taxpayers are revisiting whether to operate businesses as C corporations or pass-through entities.  C corporations face a top rate of 35%, where individuals have top rates over 42% as a result of the ill-concieved fiscal cliff and Obamacare tax increases.  From the article:

“Even though on the surface you’re looking at 35% versus 39.6%, it’s a deceptive comparison,” says Robert W. Wood, a tax lawyer with Wood LLP in San Francisco. “There may be a slight short-term advantage in C-Corporations, but there are a number of negative long-term implications that would outweigh short-term benefit.”

For example, C-Corporation profits can be double-taxed. In addition to the corporate tax on profits, owners also would owe personal taxes on any money they take out of the company as dividends. The double tax kicks in when a business is sold, too.

Another potential problem is that a firm that switches from an S-Corporation generally has to remain a C-Corporation for at least five years. 

At current rates, a switch to C corporation format is probably still unwise, if tempting, because of the double tax issue.  You might have lower tax up front, but getting the money out involves either paying a second tax on the dividends or expensive tax gymnastics, often involving renting to a corporation or potentially “excessive” compensation.  C corporations are the Roach Motels of the tax world: they’re a lot easier to check into than check out of.  But if there is a significant reduction in corporation rates, the current tax savings will be enough to tip the balance for many taxpayers to C corporation status, double tax or no.

Hat tip: TaxProf Blog.

 

When Will Tax Complexity Cause a Collapse? (Jason Dinesen). 

The tax code, as most everyone knows and acknowledges, is ridiculously complex and getting more complex all the time.

When will the complexity cause the system to collapse? And what, exactly, will collapse?

I think it would require a combination of things to “collapse” the tax law.  If the perception becomes widespread that it is impossible to comply with the tax law without unreasonable effort, or the rates get intolerably high, and technical advances allow for cash transfers and banking that the government can’t trace, then the game is over.

Tax Analysts is having a conference today on whether, after 100 years, the income tax has run its race.

Elizabeth Malm, Holy Smokes! Washington Loses $376 Million to Cigarette Tax Evasion in 2012.  Many states have raised tobacco taxes to a point where smuggling becomes attractive.

 

Howard Gleckman, Congress May Not Rewrite the Tax Code in 2013, But It Could Make It Simpler (TaxVox).  If you can’t do everything, you might still do something.

Kay Bell, Education tax credit form, already pushed into February, now causing filer confusion and more delays in processing

Peter Reilly,  Bill Romanowski’s Tax Court Loss Not A Typical Horse Case.  We covered it here yesterday.

TaxGrrrl, About Those Leaked Wal-Mart Emails… Is IRS To Blame For Sluggish Sales?  Are tax refund delays stopping consumer spending?

Teaching by bad example, Nebraska-style.  I examine the tax troubles of a prairie-town lawyer.

 

Jim Maule, How Tax Falsehoods Get Fertilized.  That “70,000-page tax code” really bugs him.

Want to raise the minimum wage?  Then apply it to your interns, Congresscritters. (Donald Boudreaux).

Don’t bug Robert D. Flach with requests for free tax help.

 

It’s probably how he meets girls too.  Berlusconi & The Lure of Tax Refunds (Robert Goulder, Tax.com).

CPA exam tip: Calm Down, This CPA Exam Practice Question Isn’t as Dirty as You Think (Going Concern)

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Tax Roundup, 2/18/2013: Your tax dollars at work for somebody else.

Monday, February 18th, 2013 by Joe Kristan

 Why don’t some big companies complain about Iowa’s highest-in-the-nation corporation tax rate?  Because they are on the receiving end.

20130218-1The Department of Revenue last week issued the 2012 list of recipients of of the Iowa Research Activities Tax Credit over $500,000.  Like the Earned Income Tax Credit for the working poor, the Research credit is “refundable.”  If a recipient doesn’t actually owe tax, the state will send a check for the amount of the credit anyway.

For the working poor, the EITC is unabashedly a welfare program.  For the corporate recipients, the credit is touted as “economic development.”  I’m sure EITC recipients feel the same way about their government checks.

The report shows that about $34.2 million of the $50.5 million claimed in research credits was refunded — about 2/3.  The biggest recipient of the credit was Rockwell Collins, which received $13.8 million in credits.    The report doesn’t say how much credit was refunded for each large recipient; If 2/3 of the Rockwell Collins credits were refunded, that means Iowa taxpayers gave the company $9.2 million

I don’t believe Rockwell Collins, or anyone else, should pay Iowa corporation income tax.  It is a bad tax whose repeal would make life better for Iowans.  But that’s a long way from saying that taxpayers should actually cut annual welfare checks to corporations doing business in Iowa.   While I don’t blame them for taking the checks — who turns down free money? – don’t try to tell me that it’s good for me.

Repeal of giveaways like the refundable research credit and the “economic development” credits given to the big fertilizer companies would go a long way towards paying for repeal of the corporation income tax for businesses lacking the lobbyists and wire-pullers needed to hit the corporate welfare jackpot.  Maybe some day we’ll demand the legislature replace the tax-some, pay-others Iowa tax system with something better, like The Quick and Dirty Iowa Tax Reform Plan.

Speaking of Iowa Tax Reform, I have posted my analysis of the proposed Iowa 4.5% optional flat tax.

 

Dislike.  The left-wing high-tax advocacy group Citizens for Tax Justice is scandalized that Facebook isn’t paying income taxes on its 2012 income (via the TaxProf):

Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.

Instead, Facebook says it will receive net tax refunds totaling $429 million. Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.

So why are “executive stock options” deductible?  Because they are taxable to the recipients as W-2 income.  They are reported as taxable income on the executives 1040s at the same 35% top rate that the corporation pays.  In other words, CTJ is upset because the executives, rather than the corporation, write the checks to the IRS.

There is no actual tax reduction.  In fact, the government actually gets more income from the options than if Facebook had not issued the options and just paid 35% tax. Because they are also subject to the 2.9% medicare tax (3.8% starting in 2013), the option exercises actually generate additional revenue for the IRS.  Presumably CTJ would want the executives to pay tax with no deduction on the other side.  That seems unjust.

 

Another victory for Citizens for Tax Justice!  After Illinois Tax Increase, State Farm Reportedly Moving Operations to Texas (Joseph Henchman, Tax Policy Blog).

 

Peter Reilly, Married Same Sex Couples – Windsor Decision Requires Action This Tax Season

Kay Bell,  Sign up now to pay your federal tax bill via EFTPS.  With the ongoing disintegration of the postal service, it’s good to have a secure and sure way to get your taxes paid on time.  I’m signed up.

Tony Nitti,  Former San Diego Mayor Gambles Away $1 Billion; What Are The Tax Implications?

Martin Sullivan, Taxation of Intangibles: Still Hazy After All These Years (Tax.com)

Roberton Williams, A New Marriage Penalty for High Earning Couples—and a Bonus for Some (TaxVox):

Our new Marriage Bonus and Penalty calculator, despite all its  Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.

Just another example of the whimsical and poorly-conceived nature of the Obamacare Net Investment Income tax.

 

Brian Mahany, IRS Wins Tax Shelter Case – Will Claims Of Accounting Malpractice Follow?

Jack Townsend,  New Plea Agreement Involving Israeli Banks

Robert Goulder, Jack Lew, the Cayman Islands & FATCA (Tax.com)

Ben Harris, Five reasons Why the Sequester’s Automatic Spending Cuts are Bad Policy (TaxVox).

Yeah, that’ll work.  Newtown Lawmaker Proposes ‘Sin Tax’ On Violent Video Games (TaxGrrrl).

 

Traverse City!  I will be speaking at a Farm Income Tax, Estate and Business Planning Seminar in Traverse City, Michigan June 13-14.  The seminar is co-sponsored by the Iowa State University Center for Agricultural Law and Taxation.  Other speakers include Roger McEowen and Paul NeifferRegister now!

 

Chicago! Jackson’s Fall Includes Tax Charge (Russ Fox):

The last three governors of Illinois all went to prison (and it’s equal opportunity corruption: both Republicans and Democrats).  Joining them will be former Congressman Jesse Jackson, Jr. and his wife, Sandi (a former Alderman in Chicago).

Mr. Jackson resigned last November from Congress; Ms. Jackson resigned in January from the Chicago City Council.  Both are pleading guilty: Mr. Jackson to conspiracy and Ms. Jackson to filing a false tax return.  They pleaded guilty on Friday.

The scheme apparently had them using “business” credit cards (here, business is their re-election campaign) for personal expenses.  As this blog has highlighted numerous times in the past (and will likely do numerous times in the future), you can’t put personal expenses on a business return.  And we’re not talking nickel and dime purchases; the total is $582,772.58.  Add in filing false campaign reports and you have problems.

When people complain about the need to turn power over to government instead of ”greedy corporations,” there is an implied assertion that the government and its operatives are somehow less vulnerable to avarice and self-dealing.  Against all evidence.

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Tax Roundup, 2/15/2013: Governor couples Iowa taxes to fiscal cliff bill. Also: 19 years for municipal thief.

Friday, February 15th, 2013 by Joe Kristan

20130117-1Governor Branstad has signed the bill conforming Iowa’s tax law to federal changes enacted last month.  The Governor signed SF 106 yesterday afternoon.

The bill allows taxpayers to use several federal provisions in computing their 2012 Iowa taxes, including:

- The federal Section 179 deduction of up to $500,000.

- The federal above-the-line deductions for tuition and educator expenses.

- The exclusion for IRA distributions to charity for taxpayers who have reached age 70 1/2, and the transitional rules for January 2013 charitable rollovers of IRA distributions.

- The optional deduction for state and local sales taxes.

The bill does not conform Iowa to federal bonus depreciation; Iowa filers will normally use federal standard MACRS depreciation instead.

 

Tony Nitti,  Senate Proposal for Tax Reform Part II: Democrats Seek To End S Corporation Payroll Tax Loophole.  It’s similar to nonsensical proposals put forward in prior years to tax S corporation K-1 income when 75% or more of revenues are “attributable” to three or fewer shareholders — an impossible standard to evaluate in many cases, and one that discriminates against the smallest S corporations.  It shows they are lazy — the problems with the approach are well known, yet the won’t make the effort to correct, instead trotting out the same old bill.  It just shows they aren’t serious.

David Cay Johnston finds the cuts to IRS funding that would result from the impending sequester “Particularly Devastating” (Tax.com)

 

Going Concern,  Former Dixon Comptroller Rita Crundwell Gets Nearly 20 Years.  She stole over $50 million from an Illinois municipality of 15,000 people going back to 1990.  And nobody noticed for over 20 years.

Kay Bell,  IRS’ Where’s My Refund? site swamped by impatient refund tracking taxpayers.

Taxpayers overwhelmed with compliance demands, asks government to slow down.  IRS Overwhelmed With Refund Requests, Asks Taxpayers To Slow Down(TaxGrrrl)

Paul Neiffer, Another Bill to Reduce Farm Payments is Introduced!

Jack Townsend, Swiss and US Sign IGA.  An agreement under the “FATCA” foreign bank reporting rules.

Patrick Temple-West, Married couples face tough taxes, and more (Tax Break)

Russ Fox, Nevada Looks to Tax Online Poker Tournaments

Donald Marron,  The Balanced Budget Amendment’s $300 Billion Error

News you can use.  Retire Rich: The Forbes 2013 Antiretirement Guide (Janet Novack)

Nick Kasprak,  Happy Valentine’s Day! Will You Marry Me (For Tax Reasons?) (Tax Policy Blog).

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Some people are just incurable romantics!

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Tax Roundup, 2/8/2013: IRS “cracks down” on ID theft. And… bacon!

Friday, February 8th, 2013 by Joe Kristan
Flickr image courtesy Dinner Series under Creative Commons license

Flickr image courtesy Dinner Series

About time. IRS Cracking Down on ID Theft, Tax Fraud (AP): 

In 2012, the IRS says its investigations and in-house filtering systems prevented $20 billion in would-be fraudulent refunds, up from $14 billion the year before. But [Acting IRS Commissioner] Miller acknowledged that thieves still get away with stealing numerous tax refunds, although the IRS could not provide exact loss figures.

“In terms of how much got past us, we’re quite sure some did,” Miller told reporters in a conference call. “I know it doesn’t approach the number that we stopped.”

How much might that be?  Maybe $5 billion a year, maybe more.  That’s means about 20% of the fraud gets through.  If your “in-house filter” let 1/5 of the grounds of your coffee into the pot, you’d change filters.

This is the first highly-publicized nationwide IRS crackdown on identity theft, years after the problem began to spiral out of control.  It’s surely coincidence, but it almost is as if the IRS, now that it has been barred from it’s preparer regulation power grab, has decided that maybe it really should do something about ID theft after all.

Other Coverage: TaxGrrrl, IRS Makes Arrests, Targets Businesses In Massive Identity Theft Crackdown

 

Governor “likely” to sign Iowa coupling bill.  GlobeGazette.com reports:

DES MOINES – The first bill the Iowa Legislature will send to the governor this year will align the Iowa and federal tax codes, a move that will reduce the amount of taxes Iowans pay to the state.

Although Republican Gov. Terry Branstad will thoroughly review the legislation, his spokesman said the governor supports the intent of Senate File 106 “and will likely support it.”

That’s good news.  The sooner he signs it, the sooner the state can begin processing 2012 returns with Section 179 deductions, educator expenses, and a number of other provisions affected by the Fiscal Cliff legislation.

 

Christopher Bergin, More Than an Obstacle to Tax Reform (Tax.com):

Up until now, I’ve given the President the benefit of the doubt about reforming our broken tax system. I just didn’t think tax reform was a big issue for his administraiton. But now I’m beginning to think he doesn’t care about tax policy at all.

What was the tip-off?

No matter the fiscal crisis, the President never misses an opportunity to propose tax increases on “the fat cats.” To the President, the fat cats are the people and the businesses he thinks can pay a “little more” to support their government. I’m not sure I buy his definition of fat cat. But I certainly don’t buy his definition of tax reform. Tax reform is about building a tax system that is fairer, simpler, and more economically efficient. If in the process it raises revenue, I’m fine with that, but I don’t think the primary goal of tax reform is to wring more money from the well-to-do simply because they are doing better than you are.

It’s been blindingly obvious from the beginning that the President has no interest in tax policy.  Look at his record:

- Increases in top marginal rates, which creates incentives for more loophole-carving.

- A baffling new tax on “net investment income” just to pretend that “the rich” will be paying for Obamacare.

- New “targeted” tax credits, which are pretty much the opposite of tax reform.

And his big current proposals are to limit deductions for corporate jets and screwing around with how private equity is taxed — symbolic and political gestures that would make the tax law even more complex.  Any belief that the Obama administration cares a fig about tax reform requires more unfounded faith than a fourth marriage.

 

Tax Trials, Conservation Easement Deduction Denied as Quid Pro Quo for Subdivision Approval.  Interesting case for developers.

Paul Neiffer, Capital Gains Tax On Inherited Property

Roberton Williams, Finally, a Permanent Estate Tax, Though Just for the Wealthy Few

I’ll bet he does. Stop the Indictment; My Client Wants Off (Jack Townsend).

Dan Meyers, The Second Hundred Years of The Federal Individual Income Tax

Patrick Temple-West,  Pharmaceutical makers lower their taxes, and more (Tax Break)

Jim Maule ponders the imponderable: When Is a Tax Increase Not a Tax Increase?

Peter Reilly,  Maryland Exempts Residence For Mormon Temple Workers As “Convent”

 

Kay Bell,  ‘Devil’s’ tax form prompts man to quit job.  Maybe there should be a Super Bowl ad, “Satan Made a Tax Accountant.”

 

I don’t condone this behavior, but I understand: Police say people smoking pot, doing taxes at Clay H&R Block (Charleston Daily Mail).

 

20120208-2Central Iowa Culture Watch.  The State Fairgrounds in Des Moines hosts the cultural event of the season this weekend: the Blue Ribbon Bacon Festival.  Tickets routinely sell out in minutes, so if you have to ask, you can’t go.  What will you miss?  KCCI.com reports:

Start with the dress. It is made of real bacon, created by an East Des Moines dressmaker – and it is actually worn by the Bacon Queen…

“It wildly surpassed anything I thought was achievable. I mean, look at it, it sparkles,” said Porter.

Yes, the Bacon Fest sells out in no time.  Meanwhile, plenty of tickets remain to see Nadja Salerno-Sonnenberg later this month.
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Tax Roundup, 1/28/2013: Should Iowa rebate its budget surplus? And PTIN limbo.

Monday, January 28th, 2013 by Joe Kristan

20130117-1Iowa is collecting more tax money than it is spending.  Iowa House Republicans propose to give the money back as a one-time tax credit.  The Des Moines Register reports:

The proposal would capture the state’s estimated $800 million budget surplus, divide it equally among the state’s income tax payers and issue an income tax credit to every taxpayer for his or her share. Senate Republicans said last week the credit amounts to $375 for individuals or $750 for couples who file jointly.

That means, for example, if a married couple’s state income tax liability was $1,000, they would receive a $750 tax credit, reducing the amount they were actually required to pay to $250. If a payer’s burden was less than $375, he would receive a credit equal only to his actual bill.

It’s a simple plan that treats the surplus as a non-recurring event.  Unfortunately, there is nothing simple about Iowa’s tax law otherwise.  I’d prefer to see it returned as part of a tax reform plan.

House Democrats prefer to spend the money, and the Governor wants some of it to fund his education reform plan.  ISU economist David Swenson says the money should be run through the government:

Drawing on a statistical model that predicts economic impacts, he said  $780 million in government spending could support roughly 2,000 more jobs than the same amount of spending by households.

Yes, the magical power of the government to transform your money into jobs.  If we just gave the government infinite money, we’d get infinite jobs.   If that worked, you’d think we’d have more jobs than ever, considering that Federal and state governments are spending more money than ever.

20130128-1

Link: Text of HF 1.

 

Tax Notes, Preparers in Limbo as IRS Shutters PTIN System After Loving Decision ($link):

     Tax return preparers who just recently were rushing to get their preparer tax identification numbers from the IRS before it starts accepting 2012 tax returns on January 30 are in limbo after a federal district court enjoined the Service from enforcing requirements under the registered tax return preparer (RTRP) designation.

     The IRS’s online PTIN system appears to be unavailable. People familiar with the system are uncertain why the IRS took it offline and what its unavailability means for the hundreds of thousands of potential PTIN registrants.

     “From a practical point of view, [the IRS] has already shut the [PTIN] system down,” said Dan Alban of the Institute for Justice and the lead attorney for the plaintiffs in Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013)  “Whether they are legally required to do so is the question.”

Well done, IRS!  Preparers are required to have a PTIN.  The IRS apparently tied it’s PTIN software to the preparer regulation system overturned earlier this month.  Another triumph for tax administration.

TaxProf,  What’s FATCA Got To Do With It? Tina Turner Renounces U.S. Citizenship.  It’s always easier for the wealthy to avoid the ridiculous paperwork the tax law imposes on Americans abroad.  It’s the little jaywalkers that get shot to ensure the serious money-launderers get slapped on the wrist.

Andrew Mitchel has posted two videos explaining Form 5471.  Think that sounds dull?  If you fail to report your interest in a foreign corporation, the $10,000 fine will make it interesting.

Martin Sullivan, UK Conservative Policies in Trouble (Tax.com)

Brian Mahany, Tiger Woods and Tax Migration – The Wealthy Flee High Tax States (tax planning post)

Patrick Temple-West,  Republican governors open new front in tax debate, and more

Paul Neiffer,  AMT Causes a Few More Capital Gains Tax Rates!

Robert Goulder, The Pepperdine Papers: Advice for Obama’s Second Term (Tax.com)

Kay Bell, Deducting sales tax on your new car … or boat or airplane or home

Jim Maule,  Tax Planning: A Chore That Never Sleeps.  I think it works better if it does.

Trish McIntire,  Who Do You Believe?.  If your tax advisor contradicts your bar buddy on a tax issue, go with the tax advisor.

Dan Meyer, Will Tax Benefits Later Cost You Now?

Robert D. Flach,  THE RESIDENTIAL ENERGY CREDIT IS BACK FOR 2012 (AND 2013)!

Joseph Henchman,  Municipal Bankruptcies Since 1988. (Tax Policy Blog).  He lists about 43.

Russ Fox,  Cash and Carry Doesn’t Work for Strip Club Owner.  I don’t think it’s allowed for the patrons either.

Worth a try.  Shop Till Your Taxes Drop  (TaxGrrrl)

 

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Tax Roundup, 1/17/2013: Iowa alternative maximum tax introduced. Also: cash for clunkers, firearms edition!

Thursday, January 17th, 2013 by Joe Kristan

20130117-1Alternative Maximum Tax introduced in Iowa House.  The Republican leadership of the Iowa House of Representatives has introduced a new way to compute Iowa personal income tax.  HF 3 would create an optional ”alternative base income tax”at a 4.5% flat rate.   The bill would allow taxpayers to elect to be taxed on their federal Adjusted Gross Income before net operating losses, less a $6,200 standard deduction ($12,400 for joint filers and heads of households).  The only credits allowed would be for estimated taxes and withholding.  Taxpayers could instead continue to follow the existing tax law.

There is an obvious flaw in the statute as drafted: federal AGI includes interest on federal debt, which states aren’t allowed to tax.  Maybe that’s just assumed, but the existing Iowa income tax law specifically excludes U.S. interest.  This tax is different from that proposed by Iowans for Discounted Taxes, which would exempt all investment income from the tax base.

The bill would be a huge step forward for Iowa tax policy if it were enacted as a replacement for Iowa’s current tax, rather than an option.  Eliminating all of the tax credits and special state deductions would greatly simplify everyone’s tax life, and lowering the rate would make Iowa much more attractive to businesses and newcomers.  In this form, though, it’s just another computation, an alternative maximum tax.  It’s like the alternative minimum tax, except you pay the lower tax computed, rather than the higher one.   It was probably drafted this way to avoid a fight over eliminating the current deduction for federal income taxes on Iowa returns.

I will run some numbers to see how the HF 3 tax would compare with taxes computed the current way.  The bill is co-sponsored by 54 representatives, including House Speaker Paulsen, so it’s a given that it will pass the House in some form.  It will be interesting to see whether the Senate, controlled by Democrats, will bring this to a vote.  The Governor has made clear income tax reform isn’t his priority this year.

 

This plan might be half-cocked.  From William McBride at the Tax Policy Blog:

This week Rep. Rosa DeLauro (D-CT) proposed an assault weapon buy-back program that would operate through the tax code:

“The SAFER Streets Act creates a $2,000 refundable tax credit ($1,000 for two consecutive years) for an assault weapon owner who turns in their firearm to the state police.”

This assumes the gun manufacturers cannot produce additional guns as
fast as the old ones are destroyed, and that they cannot be produced, at
this rate of production, cheaper than the buy-back price. 

Cash for Clunkers, firearms edition.

Kay Bell,  Guns, ammo, violence and taxes

 

TaxProf, TIGTA: IRS Has 60% Error Rate in Policing Noncash Charitable Contribution Deduction.  I’m sure they’ll do lots better implementing the Affordable Care Act.

Patrick Temple-West,  New Yorkers face higher real estate taxes, and more

Peter Reilly,  Are Tax Protesters Actually Winning ?:

Ms. Curtis lost as badly as it is possible to lose in Tax Court.  There is the 75% fraud penalty and the maximum sanction, $25,000, for frivolous arguments. She still might appeal, though.  Presumably the Circuit will make relatively quick work of that and maybe pile on some more sanctions.  Fine.  Now the IRS has to start trying to collect from her. 

Tax protester arguments can slow down the tax collector, but the tax man wins in the end.

 

Robert D. Flach, THE RETURN OF A HOME OFFICE STANDARD DEDUCTION

Kerry Kerstetter,  New option for Home Office deduction

Jason Dinesen,  How the Fiscal Cliff Deal Affects Teachers

Trish McIntire,  Red Forms

Cara Griffith, Should States Just Enforce Use Tax Collection? (Tax.com)

Russ Fox,  California Supreme Court Takes Gillette Case

Joseph Henchman,  The Al Bundy Tax Rule: New Hampshire Governor Pledges to Veto Beer Tax (Tax.com)

If it’s your identity, pretty bad.  IDENTITY THEFT AND TAX FRAUD – HOW BAD IS IT? (TaxTV.com)

Brian Mahany,  Steelers’ Plaxico Burress Pays Off $98,000 IRS Tax Lien

Christopher Bergin, Everybody’s Gone Surfing (Tax.com)

News you can use: Going Concern’s Guide to a Healthy Busy Season: Because No One Should Die at Work

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Tax Roundup, 1/16/2013: Iowa legislators to push Alternative Maximum Tax? Also: new home office deduction option.

Wednesday, January 16th, 2013 by Joe Kristan
20130116-1

Kraig Paulsen

It looks like the Republican leadership in the Iowa House of Representatives will be pushing income tax changes this year.  Unfortunately, it looks like they are pushing the plan I call an “alternative maximum tax” like the one floated by Governor Branstad last year and quietly dropped after the election.  O. Kay Henderson reports:

House Republicans are calling for a “flat” state income tax. If their idea becomes law, Iowans would have the option of filing their personal income taxes under the current system — which has a top rate of nearly nine percent — or opting to pay a four-and-a-half percent rate, with no deductions.

 The governor has made it clear property tax reform is his top priority,
but House Speaker Kraig Paulsen of Hiawatha, the top Republican in the
legislature, says Branstad hasn’t said no to cutting income taxes.

20130116-2Any tax practitioner will point out that this will in practice just be one more complication in computing Iowa taxes.  Taxpayers will compute their taxes under both the current system and the flat system and choose the one that results in the lower tax.  I assume the legislative leaders are resorting to this awkward plan to get around the implacable opposition of the powerful Muscatine-based Iowans for Tax Relief to any tax reform that would repeal the deduction for federal taxes on Iowa returns.  Their plan is likely based on that proposed by Iowans for Discounted Taxes.

Far better to just clean up Iowa’s tax law.  Repeal the special interest loopholes and corporate welfare tax credits, get rid of all non-federal deductions, get rid of the deduction for federal taxes, tie the tax law to the federal code, drastically lower the rates, and eliminate the corporation income tax entirely.  In short, enact The Quick and Dirty Iowa Tax Reform Plan.

 

Flickr image courtesy e53 under Creative Commons license

Flickr image courtesy e53 under Creative Commons license

Whether or not Governor Branstad wants to deal with income taxes, he may have to.  His neighbor in Nebraska may be forcing his hand.  1011Now.com reports:

Gov. Dave Heineman is calling for an overhaul of Nebraska’s tax system, saying the state needs to get rid of its individual and corporate income taxes and make up the lost revenue by shutting off as much as $2.4 billion in tax breaks for businesses.

The Republican governor unveiled his tax plan Tuesday during his annual State of the State address to lawmakers.

Heineman says his plan would keep the state competitive with two neighboring states, Wyoming and South Dakota. Both have no individual income tax.

It sounds much like the plan proposed by Louisiana Governor Jindal this week.   If the other states massively improve their income tax systems and Iowa doesn’t, all of the fertilizer tax credits in the world won’t help Iowa’s business climate.

 

 

IRS unveils simplified home office deduction for 2013.  The IRS yesterday unveiled a new optional way to compute home office deductions.  From IR-2013-5:

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

This will be handy.  When you depreciate part of your home for a home office deduction, you lose the ability to exclude that much gain on a later home sale.  Home office deductions are also complicated and a magnet for IRS examiners.  This looks like it will be useful for the growing ranks of people who run businesses out of their home.  Taxpayers will still be allowed to opt out of this new method and compute their home office deductions the old way.  Full details are found in Revenue Procedure 2013-13.

Other coverage:

TaxProf,  IRS Announces Optional $1,500 Home Office Deduction in Lieu of Depreciation

Russ Fox, Is A Simplified Home Office Deduction Better?  “The reality is that $5 per square foot understates the cost of most home offices, especially when factoring in depreciation.”

 

Paul Neiffer,  Senator Grassley Wants Extension of March 1 Filing Deadline:

Due to the passage of the new tax law, the ability of the IRS to accept most farmers tax returns by March 1 is very uncertain.  Senator Grassley’s letter indicates that the IRS has granted an extension in the  past, most recently last year when the MF Global mess occurred.  In that case, the IRS did not actually extend the filing date, but granted  waivers of the penalty for any estimated tax penalty caused by MF Global  untimely mailing of form 1099.

Farmers don’t have to make estimated tax payments if they file by March 1.  If they can’t do that, the IRS can impose estimated tax penalties on the whole balance due.  The late enactment of new tax laws for 2012 may make it impossible for the IRS to process returns by then.

 

January: the month to start your 2013 year-end tax planning!  My new post at IowaBiz.com, the Des Moines Business Record’s blog for entrepreneurs.

Jason Dinesen, Rental Properties and Basis Allocation

TaxGrrrl,  IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More

Mary Ellen Goode,  A Stark Reminder of the Excessive Cost of Complying with the Tax Code

Rush Nigut,  Iowa Business Specialty Court Pilot Project.  I hope it leads to a specialized Iowa Court for tax cases.  Taxpayers are at a huge disadvantage arguing before District Court judges with no tax expertise.

Kay Bell, The 1040 is ready! The 1040 is ready!

Anthony Nitti,  Dear America: Your Higher Payroll Taxes Are Not The Result Of A Tax Increase.  Only if the multi-year payroll tax break didn’t count as a tax cut.

Janet Novack,  11 Ways To Tap Retirement Cash Early, Without A 10% Penalty

David Brunori, Virginia’s Gas Tax Reform (Tax.com)

Howard Gleckman,  A Budget Deal is Staring Them in the Face, But Here’s Why Lawmakers Won’t Compromise in 2013 (TaxVox)

Robert D. Flach has a new Buzz!  He responds to my take on his take on CPAs.

Jim Maule,  Still More Joys of IRC Section 86.

 

Kyle Pomerleau, New Paper on Estate Tax Misses the Mark.  (Tax Policy Bl0g). It’s about…

Caron & Repetti: Occupy the Tax Code: Using the Estate Tax to Reduce Inequality (TaxProf)

My experience in tax practice convinces me that the estate tax is unnecessary to break up and dissipate large estates.  Beneficiaries take care of that just fine.

 

Hey!  I said I was sorry!  Defendant Screws Up His Acceptance of Responsibility (Jack Townsend):

Although the defendant claimed remorse, his actions after the time of the guilty plea continued the obstructive conduct.  Hence, this defendant got no benefit from pleading guilty, and saving the Government and the court the time and expense of trial.  Not only that, his obstructive conduct convinced the judge to sentence him at the top of the unreduced Guideline range.

If you want the judge on your side, it might be a good idea to stop committing the crime for awhile.

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