“FATCA’s harmful impacts cover the spectrum,” Paul said. “It is a violation of Americans’ constitutional protections, oversteps the limits of Executive power, disregards the mutual respect of sovereignty among nations and drains money from the federal treasury under the guise of replenishing it, and discourages overseas investment in the United States.”
“Tax evasion is a problem that should be addressed, but not in such an egregious way,” Paul added.
Good Jobs First is just hiding the ball a little bit by trying to get rid of reports on business climate. The Good Jobs First report says that the real issue we should be focusing on is “how to build a tax system that is fair, modern and relevant.” Yes, that’s exactly what needs to be done, but I would argue that reports on business climate add to the debate. And while I do think that such reports must be examined with a critical eye, “business climate” matters.
“When economists are not listened to, that often means strong special interests and/or strong voter sentiment stand on the other side of the equation. The numerous special deductions in the tax code, most of which have no efficiency justification, are examples.”
Hence, it appears that this Act would apply to any business (not just Internet Retailers) that makes sales into a state in which it does not have nexus. Therefore, manufacturers or other non-Internet retailers who sell directly to retail customers who do not have sales representatives or any other physical connection with a state may (under this Act) be required to collect sales tax on its remote sales.
It’s not just the e-Bay sellers who would have to deal with this. If you really want to create “market fairness,” there are two ways that are much simpler: either a straight national sales tax collection regime with uniform rules and rate where the proceeds are allocated to the states based on the sales to the state, or a sales tax based on shipping location.
Traditional bricks and mortar retailers squander their immediacy edge with indifferent/uninformed sales help, who look even worse compared to the information now available on the web. But they can do well if they integrate their online and in-store services, carry enough inventory and price competitively.
Legislator insists that thieves get $11 million as price of property tax deal. As Iowans pay their 2012 balances due on today’s state income tax deadline, they may want to take a moment to ponder how careful the legislature is about spending the money they are sending in.
The Des Moines Register reports that Senator Joe Bolkcom demands an increase in the Iowa earned income credit as the price of a property tax bill:
Sen. Joe Bolkcom, D-Iowa City, chairman of the tax-writing Senate Ways and Means Committee, spoke at a Statehouse news conference sponsored by The Coalition for a Better Iowa, which released a booklet with the stories of Iowans who have been helped by the earned income tax credit. About 200,000 Iowa working families receive the tax credit, which assists households with incomes under $45,000.
Senate Democrats want to raise the earned income tax credit from 7 percent now to 20 percent at a cost of about $55 million annually.
Both Sen. Bolkcom and the Register fail to mention the massive fraud rate of the earned income tax credit. The Treasury Inspector General for Tax Administration this month reported:
The IRS estimates that 21 to 25 percent of EITC payments were issued improperly in Fiscal Year 2012. The dollar value of these improper payments was estimated to be between $11.6 billion and $13.6 billion.
Applying that fraud percentage to Sen. Bolkcom’s proposal will result in $11.5 million to $13.75 million in “improper” — mostly fraudulent — Iowa EITC payments. Remember that the EITC is a “refundable” credit, which means that if it exceeds your tax, the state writes you a check. It’s a spending program, a welfare program.
I would say it takes a special kind of legislator to demand $55 million in spending knowing that it’s an appropriation of at least $11 million to thieves, but really it just takes a run-of-the-mill legislator spending your money instead of his own.
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.
Only somebody who doesn’t prepare tax returns would say something this stupid. The TaxProf links to this from a University of Wisconsin academic:
This Article analyzes the ongoing structural transformation by observing and explaining the advantages that accrue from pursuing social and regulatory objectives through the tax code. In particular, this Article identifies a number of legislative and normative advantages that tax-embedded policies offer.
The tax law has one important job: to raise revenue. If this author had ever done business tax returns for a living, she would know what a challenge it is to simply determine taxable income. If she had ever helped a client through an IRS audit, she would know how difficult it is for the agents to simply work through the accounting, let alone run a bunch of social programs on the side. The author should be made to spend three years working at a storefront tax prep business to learn the chaos her views cause outside the faculty lounge.
Baucus’s shift to the right in the last few months (which people had assumed was positioning for the election next year) has antagonized more than just progressives. It seems his Senate colleagues are growing frustrated as well.
And that will severely hamper the chances that a major tax reform bill will make it to the Senate floor.
Few of the commentators I’ve read have asked themselves what happens to the money after the software has collected the money. Do the sales tax fairies simply whisk it off to the nice folks at the state tax department?
Sadly, no. Rather, as an SBA guidebook for small businesses points out, you have to file a tax return with each and every locality for which you have collected tax. The bill streamlines this a bit, but you’ve still got to keep 50 states’ worth of records and file 40-odd states worth of returns.
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For Amazon—the actual target of these laws—this is trivial. Its staff of crack accountants can probably roll these things out before their Monday-morning coffee break. For a small vendor, however, that’s a whole lot of paperwork.
Speaking as a cracked accountant, I am sure that while Amazon can handle its sales tax burden, it is far from trivial. It takes an expensive staff and a good organization with excellent systems in place to do reasonably well — and I expect they still get inexplicable notices from states quibbling over obscure tax issues. Good sales tax compliance functions are expensive, affordable only in a large organization. For some guy selling handmade N-scale boxcars out of his basement, it could be painfully expensive, if not ruinously so. Like any expanded regulation, requiring online sellers to collect Internet sales taxes inherently favors the big.
According to the Streamlined Sales Tax agreement, the definition of candy is a “preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. ‘Candy’ shall not include any preparation containing flour and shall require no refrigeration.”
So pursuant to that definition, a sweet with flour is not candy, while a sweet without flour is. For example, a Hershey’s chocolate bar is candy, while a Twix bar is not. Ditto for Kit Kat bars. Makes sense, right? But what about Twizzlers? Seems a solid bet that licorice is candy, but it isn’t because flour is a top ingredient.
In the past when a client got too big a refund I would scold him/her and say that he/she was making an interest free loan to the government. While this is still true, I do not scold any more, considering the pitiful amount of interest being paid on savings account today.
I’m not a big fan of excess withholding, but it’s a lot easier for a client to deal with a refund that’s too big than a tax bill they can’t pay.
Increasingly, I hear stories of relatively wealthy people contemplating moving to states that do not tax their assets upon death. These are not people with private jets or suites at Yankee Stadium. They are just people who had the good fortune to do better financially than most. Do New Jersey or Maryland or the other states with pretty onerous estate taxes really want their elderly wealthy to move?
While motivations for moving are complicated, taxes are one of them. Why do the same people who want higher cigarette taxes to discourage smoking believe that higher income and estate taxes don’t also affect behavior?
Flickr image courtesy Sean MacEntee under Creative Commons license
April Fools day is a challenge for tax bloggers. No matter how outlandish an idea you have for a joke story, chances are that the legislation has already been proposed. Today’s challenge: Real tax headlines are mixed with fake ones from today’s Tax Policy Blog. Can you pick the real fakes without peeking?
In fact, the research activities credit is noteworthy for its excessive cost — more than $45 million each of the past three years — and the lack of any demonstration of a public benefit. This giveaway is so loosely managed that companies are not even required to disclose how many jobs are related to the taxpayer cost, let alone demonstrate that the jobs would go away without the subsidy.
Incentives are inequitable. They’re unnecessary — and hence a waste of money. They distort markets. They breed cronyism. If the players involved weren’t establishment politicians, household name corporations, and prestigious law and accounting firms, we’d describe them as grifters.
Why wouldn’t we describe ”establishment politicians, household name corporations, and prestigious law and accounting firms” as grifters? Redundancy?
Here’s a new one. A Pakistani company, the Fatima Group, would like to open a fertilizer plant in Indiana. The company, which for all I know makes the Cadillac of fertilizer, is seeking both federal and state incentives to build its factory. The twist is that the Fatima Group’s fertilizer has been used in 80 percent of roadside bombs in Afghanistan. That’s awkward.
Right now Iowa seems to lead the world in fertilizing fertilizer companies with tax money. No doubt explosive growth is just down the road.
If spending time and effort connecting with tax collectors helpfully “draws our attention to our duties as citizens,” then tax withholding short-circuits that attention. So why not eliminate withholding and oblige each income earner to pay every cent of his or her tax bill by writing personal checks to the IRS? Not only would elimination of withholding make us even more attentive to our “duties as citizens,” we would also – as any behavioral economist would point out – gain a truer and more fully felt sense of the price we pay for Uncle Sam’s splendors.
Reading Don Beaudreax Cafe Hayek blog for one week will make you smarter than all of Iowa’s legislators combined.
Zumba instructor finds way to draw men to her studio. From RegisterCitizen.com:
The dance instructor who used her Zumba fitness studio as a front for prostitution faces jail time after pleading guilty in a case that captivated a quiet seaside town known for its beaches and picturesque homes.
The plea agreement, which calls for a 10-month sentence, spares Alexis Wright from the prospect of a high-profile trial featuring sex videos, exhibitionism and pornography. She’s scheduled to be sentenced on May 31.
Wright quietly answered “guilty” 20 times on Friday when the judge read the counts, which include engaging in prostitution, promotion of prostitution, conspiracy, tax evasion and theft by deception.
Remember, just because they pay in cash doesn’t make it tax-free.
Film tax credit scams are big news in the U.K. right now. An Irish actress, Aoife Madden, yesterday received a 54-month sentence in her role in scamming a U.K. film tax credit scheme. Irish Times reports:
The group successfully claimed £1.5 million in film tax breaks after they said they intended to make a film titled Landscape of Lives with a £19 million budget, funded by Jordanian backers.
Once they were arrested two years ago, the five hurriedly produced a film called, ironically, Landscape of Lies for just £90,000, which went on to win a Silver Ace award from last year’s Las Vegas Film Festival.
The film, which starred former EastEnders actor Marc Bannerman and Andrea McClean, told the story of a former British soldier’s attempts to discover the truth behind his friend’s murder in an apparent mugging.
Before suspicions had been aroused, Madden’s London film company, Evolved Pictures, told revenue and customs that millions had been spent on Hollywood A-list actors and film crew when it lodged a value added tax repayment application for £1.48 million. It received more than £1 million.
Lost in the coverage is Iowa’s pioneering role in film tax credit scams. A little-known film producer from Minnesota came here and showed the Brits just how it’s done:
Take Iowa. A start-up called Polynation Pictures came looking for backing for a sci-fi flick so lame it would have embarrassed Ed Wood. With a financing scheme worthy of Max Bialystock, the con these folks pulled was nearly as inept as the film they made, but Iowa’s film office was too starry eyed to notice.
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The $767,250 production Polynation Pictures proposed eventually came in at $3.7 million. This was achieved in part with preposterous expenses. Producers claimed they paid $1,350 to rent six orange road cones. The use of two 6-foot ladders supposedly cost the company $900 (a bargain, as Polynation claimed to have spent another $900 to rent a single 8-foot ladder). Among production necessities was a new Mercedes. The partners set up an array of separate companies and used them to bill themselves extravagantly for work supposedly done on the picture. These were presented to Iowa as “deferred payments”—to be paid if the movie made money (which the enterprise was sure to do when Iowa handed the tax credits over). The only thing missing was a staged rendition of “Springtime for Hitler.”
Polynation mastermind Wendy Weiner Runge received 10 years for her star turn in the film credit program.
The film credit program was touted as a way to make Iowa a leader in the film world. And, in a way, it did.
You might be interested in this interview with Ms. Madden about her role in the film, knowing what we know now. She said this:
This project has been a crazy but wonderful challenge!! I’ve always wanted to produce a feature, and have a number of projects in development, but this was the one I just wanted to lift off the page. I think the biggest challenge was sourcing finance, which is no surprise for an independent film company. We were extremely lucky to find international investors and lobby them to back the project, but this was a lengthy process and has always been a challenge.
A challenge, yes, but I’m not sure they turned out lucky.
Snatching defeat from the jaws of victory. Now that the courts have saved the IRS from itself by shutting down the misguided preparer regulation system, the Senate rides to the rescue to screw everything up again, Accounting Today reports:
The two leaders of the Senate Finance Committee, Chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, have begun developing proposals for reforming the U.S. Tax Code, including giving the Internal Revenue Service the clear statutory authority to regulate tax preparers in case the IRS loses its appeal of a recent court case invalidating its Registered Tax Return Preparer regime.
The IRS can’t answer its phones. Its pockets are being picked to the tune of billions by semi-literate South Florida grifters. And the Senate thinks that preparers are the problem? Preparer regulation is a market-share enhancement program for the national franchise tax prep outfits; the rules were written by a former H&R Block CEO. If Senators Baucus and Hatch want to re-enact these anti-competitive and useless rules, it just shows who they really represent. (Via Going Concern).
Calendar-year corporation returns are due today! They are easy to extend on Form 7004 if you can’t finish them today. If you don’t extend an S corporation return and you file late, the penalty starts at $195 for each late K-1, and $195 each for every additional month the return is late.
If Iowa’s tax law were a car, it would look like this.
I’ve never filled out an Iowa income tax form but it looks like one of the harder state tax returns. Iowa allows you to deduct what you pay in federal income tax, which is nice but is that much more calculation work (and probably drives up tax rates). There are lines for the lump-sum tax, the minimum tax, the K-12 textbook credit, the school district surtax, the motor fuel tax credit, and the earned income tax credit. I’m sure each one of these has their explanations of necessity but together it sounds like a lot of paperwork, record-keeping, and Tax Filing Day frustration.
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Hence, I’m impressed by a bill passed yesterday (House File 478) by the Iowa House which would offer an alternative to all Iowa taxpayers: a 4.5 percent tax on all income above about $15,000, which no further deductions or exemptions. It’s not perfect: our friend Joe Kristan pointed out that a credit for taxes paid to another state and a deduction for federal interest are probably constitutionally required, and offsetting deductions to certain kinds of income (allowing gambling losses if you tax gambling winnings) is good policy. But as Joe said, the bill “is a welcome step towards improving Iowa’s income tax.”
Far be it from me to let either the Internal Revenue Service or tax prep giant H&R Block off the hook for the current mess which has delayed refunds for more than 600,000 taxpayers claiming college tax credits by up to eight weeks. In addition to their operational missteps, both did a poor job (at least initially) of communicating with taxpayers who desperately need those refunds to pay tuition or other bills.
But let’s put some of the blame where it rightly belongs: on the Washington politicians. For more than two decades, Congress has been expanding “tax expenditures” with little regard for how complicated such provisions might be for taxpayers to use and for the IRS to administer, let alone for whether they do enough good to justify their cost and the economic distortions they create. A new 1065-page Congressional Research Service compendium lists 250 different tax expenditures. Happy reading.
Every little break like this diverts IRS resources from actually collecting income taxes and makes the income tax a little less effective and useful. Yet Congress still sees the tax law as the Swiss Army Knife of public policy.
No matter how well a student in the basic tax course masters the depreciation deduction to the extent it is studied, that student knows that the total depreciation with respect to a property cannot exceed its cost. All of the students would find themselves bewildered by the proposition that depreciation deductions on a property that cost $34,799 would total $56,000.
Argo pay your taxes. It turns out Iowa isn’t the only government whose film tax credits attract scammers. From London comes this via Boston.com:
In some ways ‘‘A Landscape of Lies’’ was a typical indie film, with a tiny budget, a B-list cast and an award from an American film festival.
What made it special is that it was created solely to cover up a huge tax fraud.
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In fact, officials say, the project was a sham, set up to claim almost 1.5 million pounds in goods and services tax for work that had not been done, as well as 1.3 million pounds under a government program that allows filmmakers to claim back up to 25 percent of their expenditure as tax relief.
No word on whether Leo Bloom prepared the fraudulent returns.
Will there be tax reform? I think there has to be. But I don’t think it will look like theTax Reform Act of 1986 because, in short, it’s not 1986, and we don’t have the same problems or even the same tax system. That doesn’t mean there aren’t a lot of lessons to be learned from the ’86 experience. But I don’t think tax reform will happen soon. And a few of the reasons I think that come right out of “Gucci Gulch.”
I have a copy of Showdown at Gucci Gulch, the book about how the 1986 tax reforms were enacted. I haven’t brought myself to open it; it seems too much like reading about my job.
“Iowa has a solid base of state - level economic development incentives tools upon which to build. However, to become more competitive, Iowa may wish to increase the funding level and flexibility of some of the State’s key incentive programs” states Darin Buelow, a Principal with Deloitte Consulting LLP.
It’s hard to imagine the study coming to a different conclusion considering what they were looking for:
At the request of the Iowa Chamber Alliance (ICA), Deloitte Consulting (Deloitte) benchmarked incentives programs in Iowa and in five alternate states, focusing on a high-level analysis of state-level incentive programs, their value, and overall effectiveness in attracting investors.
In other words, they were to look at whether Iowa has more and better giveaways than its neighbors.
I looked for the study in vain for any analysis of the value of Iowa’s tax credits to the economy vs. alternative uses for the funds — like lowering the tax rates of the rest of us who pay for them. There is no mention of “opportunity cost.” In looking at the “value” of the programs, it makes unsupported conclusions like this one about the “High Quality Jobs Program:”
Considered effective and competitive in providing benefits to mitigate corporate income tax, refunding sales tax for construction and providing a supplemental refundable research credit.
Considered effective by whom? On what basis? It doesn’t say.
The study says Iowa should enrich its data center corporate welfare — where the rest of us subsidize the infrastructure of Microsoft and Apple. They also recomment Iowa “consider allowing sale, refund or transfer” of tax credits.
Transferability of tax credits complicates the projection of revenues and the tracking of credits, creates uncertainty about when credits will be claimed because the purchasing entity may utilize a different fiscal year than the entity awarded the credit, and siphons resources from awarded entities through brokerage fees… Once tax credits are transferred, it creates limited recourse for the State to recover funds claimed in instances where the business awarded the original credit does not fulfill the contracted obligations or if the credit was awarded in error. Additionally, transferability has also resulted in abuses in some tax credit programs.
It would be better Iowa to not “compete” in taxing its current taxpayers to lure and subsidize their competitors. Instead Iowa should enact a tax system good enough that we don’t have to pay people to be our friends. The Quick and Dirty Iowa Tax Reform Plan would be better for Iowa businesses than any number of pocket-picking tax credits.
Former Kirkland & Ellis LP senior partner Theodore Freedman pleaded guilty to fraud in connection with the filing of false tax forms.
Freedman changed his plea yesterday from not guilty to guilty of four counts of tax fraud. U.S. District Judge Deborah Batts in Manhattan accepted the plea and set sentencing for Sept. 17. Freedman’s lawyers reached a plea agreement with U.S. attorneys.
Indicted in July 2011, Freedman misrepresented his income as a partner at the law firm by about $2 million, the U.S. said. He also claimed more than $500,000 in expenses for a sole proprietorship that didn’t exist, the government said.
It’s hard to imagine how he thought this would work. K-1s get matched against tax returns, at least occasionally. The IRS matching system is cumbersome and inefficient, but it works well enough that you can’t habitually ignore K-1s with six-figure income. Furthermore, claiming big bogus Schedule C losses like that is practically an engraved invitation for the IRS to visit your return.
Programming note: This site was pretty much shut down part of yesterday afternoon. Our valiant hosting service says it was a comment spam attack on the pre-2012 archived posts. Sorry about that.
A tailor who counted star athletes including Rickey Henderson and Wilt Chamberlain among his clients has pleaded guilty to skirting about $2 million in sales and income taxes.
Mohanbhai Ramchandani pleaded guilty on Tuesday, state Attorney General Eric Schneiderman said. His company, Mohan’s Custom Tailors Inc., also has had local stars Patrick Ewing and Darryl Strawberry among its clients and made an appearance on Bravo’s “The Real Housewives of New York City.”
The charges say that he failed to pay $1.7 million in sales taxes starting in 2001, and he failed to pay $256,000 of income taxes from 2007 through 2009. I didn’t know tailoring could be so lucrative. But this is unusual:
Authorities said a whistle-blower first raised concerns over Ramchandani’s tax practices. They said one indication of fraud was the use of numbers on his tax forms that added up to multiples of 10, an outgrowth of his belief in numerology.
Once in a while you prepare a return that happens to foot to a round number somewhere. It looks funny, but it will happen occasionally just by chance. But when they are all round, apparently the tax people might notice.
As strange as Mr. Ramchandani’s approach to numbers is, Iowa gives him a run for his money. Iowa’s lead tax credit pusher, Debi Durham, has issued a press release touting the economic wonders of enormous tax credits granted Orascom, an Egyptian company, to build a fertilizer plant in Southeast Iowa. The release bases its conclusions on “ the Regional Economic Modeling Inc. (REMI) analysis for the Iowa Fertilizer Co. project.” From the release:
“The REMI analysis of the Iowa Fertilizer Co. project speaks for itself,” said Debi Durham, director of the Iowa Economic Development Authority (IEDA). “On the front end, Iowa Fertilizer Co. will inject $1.4 billion of capital investment into our state and create at least 165 permanent jobs and thousands of construction-related jobs. Now we know that the benefits of that project will serve Iowans for years to come.”
It speaks for itself and it says nothing. It says nothing about whether the project would have gone ahead without the credits, but Iowa’s claims that Illinois was hot after the plant with its own incentives lack credibility.
The analysis really betrays itself by omitting two key words: “opportunity cost.” It claims every projected benefit from the project without asking whether any benefits would be available if the money were used for something else. It certainly doesn’t say what Iowa loses by having a complex tax system with high rates to pay big subsidies to the well-connected.
I’ve said it before: using taxpayer money to lure businesses is like a guy taking his wife’s purse to the bar to buy drinks for the girls. It’s not impressive. They might let the guy buy the drinks, but they realize he’ll treat them like he is treating his wife if he gets the chance. And anybody he goes home with isn’t likely to be much of a prize.
Egypt taking a different approach to Orascom. The Orascom executives do better in Iowa than back home, reports SiouxCityJournal.com:
An Egyptian billionaire behind one of the largest and most controversial projects in the state is being investigated for tax evasion and has been barred from leaving his country.
According to an article published Tuesday in Construction Week Online, Orascom Construction CEO Nassef Sawiris and his father, Onsi Sawiris, are barred from travel until a resolution is reached regarding the sale of an Orascom subsidiary and the taxes from that sale.
As hard as it is to deal with Iowa and federal tax authorities, they are probably downright reasonable compared to Egyptian revenuers. I suspect that the “resolution” being sought is much like that sought by a kidnapper.
The TaxProf links to this from the New York Times Dealbook: Why Carried Interest Is a Capital Gain. It is as good an explanation as I’ve seen of why capital gain on private equity isn’t a crime against humanity:
Typically private equity investors are paid a 2% management fee, on which they pay ordinary income tax rates, and a 20% carried interest of the partnership’s profits that is only paid after limited partners receive a preferred return of 8%.
Carried interest, therefore, is the profits share on the sale of a capital asset and not “ordinary income” as some would have it treated. In other words, it is a capital gain within a partnership and is rightfully taxed at the long-term capital gains rate — provided that the asset, or company, is held for more than one year.
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The underlying principle is no different than two friends who partner together to purchase a restaurant. One might bring capital and the other brings expertise. The restaurant could be in disrepair or a great concept that needs additional capital to expand. The chef identifies the restaurant to buy and possesses the skills to manage the restaurant and add value to the enterprise over time. The friend has the capital to invest, but doesn’t possess the operational or investment skills to generate a return.
When they sell the restaurant years later, both partners receive capital gains treatment on their long-term investment. A private equity partnership works in the same way. This is Partnership Law 101.
Exactly. And it’s not like a salary, where somebody writes you a check. The private equity investor is taking a risk, and on any given investment is likely to get nothing. It’s not like, say, a tenured law school faculty paycheck that comes every two weeks.
ProTip: Don’t take your tax advice from rappers. This from Going Concern:
As you might expect, TMZ has the scoop and it quotes a number of artists who are currently considering tips for strippers as a legit deduction and therefore a serious tax strategy. And who doesn’t love creative tax planning? But how might they rationalize this idea?
Well, Bizzy Bone considers these young ladies to be like his family:
Bizzy Bone tells TMZ, “I’m giving charity to females who need their light bills paid. So, of course, that’s a write-off. You write off your kids, don’t you?”
Um, no. Mr. Bone might want to ponder the stories of Ja Rule, Fat Joe, and Beanie Sigel, to name a few, before he gets too smug about his tax deductions.
“Ultimate Swiss Army Knife” image courtesy redjar under Creative Commons license.
The Iowa income tax as Swiss Army Knife. The Iowa Senate Veterans Affairs Committee yesterday sent to the floor a proposal for up to $1,500 in tax credits for hiring an Iowa resident who is “a member of the national guard, reserve, or regular omponent of the armed forces of the United States” for a job of at least 30 hours a week. The bill would also give an additional $500 tax credit for each year the employee is called to active service for at least 30 days.
SSB 1064 cleared the committee unanimously. After all, who would vote against the “Hire a Hero Tax Credit?” But this is a classic example of a feel-good tax provision that clutters the tax law, is very difficult to enforce, and would not accomplish enough to be worth the trouble.
Nobody will hire an employee just to get a $1,500 tax credit. You hire somebody because you have work to do. Because it’s so hard to find and keep good employees, you hire the person you think is most likely to work out; the cost of a hiring mistake can be a lot more than $1,500. It will be hard to enforce — especially the provision saying the credit is unavailable if the new employee replaces another “eligible employee.” Will the state really examine that? Like many credits, it won’t change behavior; it will just be harvested by taxpayers who would have hired the same military people anyway.
Still, why not make a nice gesture to show our voters how much we care? Because every feel-good tax break has a cost. It costs money to comply with and enforce. It also creates a new anti-tax reform interest group; any attempt to clear away expensive and ineffective tax breaks to make a better tax system for everyone will be fought by those few that collect it. It makes a good tax system for everyone just a little bit harder.
The primary purpose of the tax law is to finance government operations. When it become a Swiss Army Knife of public policy, it becomes a little less effective at its real job every time you add a new gadget.
Swiss Bank corpse fined $58 million for tax cheating. The Wegelin Bank, which is closing as a result of its legal troubles, was sentenced yesterday to pay a $58 million tax evasion fine for helping clients evade U.S. taxes. Robert W. Woodhas more.
In January, Sen. Charles Grassley, the 79-year-old Iowa Republican, chastised acting IRS commissioner Steven Miller over his recent proposal to restrict the agency’s whistleblower program, already an object of criticism since its creation in 2006. The proposed curbs, Grassley wrote in a letter to Miller, showed one thing: that the IRS and its boss, the Treasury Department, “view whistleblowers with hostility.”
What exactly is at issue? The current whistleblower rules say a tipster can collect a reward of 15%-30% of proceeds brought in as a direct result of a tip. The dirt has to involve tax evasion of at least $2 million or tax fraud by an individual making at least $200,000 a year.
Miller’s proposed restrictions will likely shrink payouts. Among the curbs: making it nearly impossible for whistleblowers to share in rewards stemming from a company’s inflation of losses, and excluding from rewards any money brought in from so-called Fbar fines.
Apparently the IRS would rather spend its time making experienced preparers take stupid open book tests for permission to continue what they have been doing for years than to actually pursue tax cheats. Only two whistleblower claims have been paid out, but the IRS feels it has plenty of time and resources to appeal the shutdown of its preparer regulation program.
Jeremy Scott, Is the U.S. Tax Gap as Big as Italy’s?(Tax.com). “But numbers from a New York Times article about Italian tax evasion suggest that the United States isn’t doing much better than one of Europe’s most notoriously inefficient tax collectors.”
Meanwhile, somewhere an ID thief is trying to get cash from an ATM with a peanut butter sandwich. TBO.com reports:
A 6-year-old pupil at Symmes Elementary School in Riverview was asked to take her homework out of her backpack, according to Cpl. Bruce Crumpler of the Hillsborough County Sheriff’s Office.
The girl reached into her bag and pulled out a baggie containing 52 debit cards, Crumpler said.
The cards, which can be used as accounts for depositing tax refunds are commonly used by people who use stolen personal identities to file tax returns to obtain fraudulent refunds.
Maybe she’s the little princess of tax fraud. Meanwhile, the same TBO.com has an update on Rashia Wilson, who allegedly proclaimed herself the “Queen of IRS Tax Fraud:”
Wilson may not have been the biggest player in Tampa’s income tax fraud explosion, but she was one of the most brazen — “flashy,” a sheriff’s investigator called her, “in your face about it.”
The affidavits show Wilson even had a picture of herself with a cool smile on her face, wearing an oversized jewel-encrusted pendant spelling out her first name as she held bundles of cash.
“YES I’M RASHIA THE QUEEN OF IRS TAX FRAUD,” reads a May posting on her Facebook page described in the affidavits. “IM’ A MILLIONAIRE FOR THE RECORD SO IF U THINK INDICTING ME WILL BE EASY IT WONT I PROMISE U!”
Easier than she thought, apparently. She has been indicted on 57 federal tax fraud charges for collecting $1.3 million through fake tax returns, apparently claiming earned income credits and refundable education credits. That should make the politicians think twice before they expand these fraud-ridden credits, but it won’t.
How many lawyers does it take to lose a tax case? 15. At least that’s how many lawyers were listed on the losing side yesterday in Bank of New York Mellon Corp., a Tax Court case disallowing foreign tax credits in a tax shelter case. Six lawyers are listed on the IRS side, for a total of 21. The losing side was led by former IRS Chief Counsel B. John Williams. If nothing else, the legal expense deductions should take a bite out of the losing side’s tax bill. The TaxProfhas more.
Iowa’s push for a 4.5% optional flat tax — which I call an “alternative maximum tax” – puzzles David Brunori ($link)
Many liberals in Iowa are complaining that a flat tax wouldn’t require the rich to pay their fair share, whatever that means. But a lot of those people seem more interested in soaking the rich than in helping the poor. Personally, I am much more in favor of reducing the tax burdens on the poor and dispossessed than I am in making rich people suffer.
I think a flat income tax with few deductions (and a sizable exemption for low-income people) is the way to go. I’m unsure why the state would continue its horribly complicated personal income tax system that benefits return preparers, tax lawyers, and tax accountants.
It’s because of a peculiarity of Iowa politics. The powerful lobbying group Iowans for Tax Relief opposes a repeal of the Iowa deduction for federal taxes paid. ITR has shown that it can provoke successful primary challenges of Republican legislators who displease the Muscatine-based lobby. Yet significant rate reduction is impossible if the deduction is retained. Making the lower rate an “alternative” rather than a replacement appeases Muscatine, though at a cost in incoherence.
Will we see a revival in enforcement of the accumulated earnings tax? The obscure depression-era tax on C corporations that retain cash in excess of their “needs,” as second-guessed by the IRS, is rarely asserted. With left-side economists like Paul Krugman asserting that corporate cash-hoarding is one reason why the economy remains weak, don’t be surprised if his friends in the Obama administration try to revive enforcement of this archaic and foolish penalty tax. (Via Tyler Cowen).
As the chart below shows, mandatory spending represents the majority of the federal budget, and the part that has grown most dramatically in recent years. Mandatory spending was about 10 percent of GDP for most of the 30 years prior to 2008. It leapt to 15 percent of GDP in 2009 and now remains at 13.1 percent. It is projected to increase to 14.1 percent of GDP by 2023. Meanwhile, discretionary spending, on programs like defense, roads, and other infrastructure, is on a steady decline. Discretionary spending is now 8.3 percent of GDP and set to go to a 50 year low of 5.5 percent of GDP by 2023.
No spending is really “mandatory.” Congress and the President can always change the “mandatory” programs. And they will, or we will face fiscal disaster and crushing taxes.
The Iowa Senate approved the Iowa tax code conformity bill, SF 106, yesterday. The bill was approved 48-0, which is a good sign that it will pass quickly — enabling Iowans to get on with filing their 2012 business returns.
The bill updates Iowa’s income tax for the Fiscal Cliff tax bill changes passed last month by Congress. Key items updated to match federal rules include:
- Conforming with the $500,000 federal Section 179 deduction limit for 2012 and 2013.
- Allowing the optional deduction for state and local sales taxes for 2012 and 2013.
- Conforming to federal research credit rule changes
- Continuing the IRA charitable distribution exclusion
- Adopting the federal “above the line” deductions for college tuition and for out-of-pocket expenses of educators.
The bill does not adopt federal bonus depreciation for 2012 and 2013. The bill does not show up yet on the calendars for the House Ways and Means Committee or for House floor debate, so it may not get to the Governor this week. Update, 9:00 am: An e-mail from the House floor manager for the bill says the House may take it up as soon as tomorrow.
More boffo reviews for the shutdown of the IRS preparer regulation program!
It’s hard to choose just one IRS knee-slapper, but here goes. The agency insists IJ’s “suggestion that the return preparer program is the product of a tainted lobbying effort is belied by support for the program from the Taxpayer Advocate, the Electronic Tax Administration Advisory Committee, numerous consumer advocacy groups, and comments from individual practitioners.” The ETAAC is an IRS-administered panel whose members include lawyers and CPAs—who weren’t subject to the regulations—and people with connections to H&R Block and Jackson Hewitt, big businesses happy to help the government force the little guys out of the industry.
Protecting the taxpayers has never been the point.
Rather than continuing to fight in court, the agency would do better to cashier the rules on legal and economic grounds. They are a classic example of big business harnessing government power to aid the powerful at the expense of small-business competitors. Meantime, won’t someone in Congress tell the IRS to stop exceeding its legal authority?
Regina Jimenez, 60, of Clinton pleaded guilty to two counts of filing false tax returns. She faces up to three years of prison, a fine of up to $1 million and costs of prosecution on each count.
According to court documents, Jimenez operated AA Accounting & Tax Services, Inc. in Clinton from approximately 2007 through 2011. Jimenez used the business to facilitate the theft of more than $200,000 from a client who believed that Jimenez would use the money to pay the client’s taxes.
There’s never a good reason to have your tax preparer pay your income taxes for you. If your preparer tries to get cash from you “to give to the IRS,” ask many questions.
Remember, if the farmer purchases a corn call option as part of this hedging strategy, this no longer qualifies as a hedge (even though is a normal strategy of selling actuals and buying the “board”, for tax purposes, it is not a hedge) and is considered speculation. In many cases, the tax treatment can be harsh since if the option produces income, the IRS will treat it as ordinary and if it produces a loss, it will be considered a capital loss (the worst of both).
Why you should spring for a good GPS unit. You might get lost otherwise, like a star-crossed couple in my home town of West Des Moines. The Des Moines Register reports:
The incident occurred at about 2:12 a.m. Friday, when a car pulled into a police station driveway at 250 Mills Civic Parkway marked for “Authorized Personnel,” according to a police report.
Police said the car passed two patrol cars and drove up a private drive before turning around when it reached a garage. An officer in one of the patrol cars then turned on his top lights and stopped the car.
The driver told officers they were trying get to Beach Girls, an adult entertainment venue at 6220 Raccoon River Dr., West Des Moines, according to the report.
The two officers reported that both the driver and passenger had bloodshot, watery eyes and that the vehicle smelled of marijuana.
If they mistook the West Des Moines cop shop for a strip club, either they already had enough fun for the night, or strip joints have changed a lot since my bachelor days.
What is his real rate? He will be paying a real federal rate, considering the itemized deduction phase-out, of 40.788%. His California rate will be an insane 13.3%. That will be deductible on his federal return, so the net combined income tax rate is about 48.662%,
But there’s more! Golfers are independent contractors, so they have to pay self-employment taxes. That rate is 3.8% in 2013, but 1.45% can be deducted on the federal return, so the net is about 3.19%. That gets his rate up to about 51.856%, or so.
In 2011, Lefty’s combined rate worked out to about 42.589%. That means his effective rate increased by about 9.266%. But that understates it. Think of Phil Mickelson as a business. His after-tax profit on a given income level has taken a real hit. Where after-tax income was about 57.411 cents out of every dollar in 2011, now its about 48.144%. That means his after-tax income has fallen by about 16% – nearly 1/6. Don’t think it matters? Try it sometime with your own after-tax income.
A 16% cut in margins would be a worry in any business. Mr. Mickelson is in a business where he can boost his margins by nearly 8% with a moving van. He’d be an odd businessman indeed if he didn’t give the idea serious consideration. And he will have plenty of company.
My concern is more for the EA [Enrolled Agent] name itself. I really fear that EAs are getting pushed further and further to the margins. We’ve always been on the margins, so how much further can we be pushed?
The problem is, there’s no good solution for how to enhance and protect the EA name, because there’s so few of us.
So again, where do EAs fit in? There’s just not a good answer or good solution.
I thought the RTRP designation was a mortal threat to the EA brand. Enrolled Agents have to pass a much harder IRS-administered test and more rigorous CPE than the RTRPs would face. Yet few people know what an enrolled agent is. If IRS wants to improve the caliber of tax preparers, they should give more publicity to the existing EA designation and make it more desirable. But that doesn’t help them expand their power over all preparers.
Robert D. Flach proposes a voluntary Registered Tax Return Preparer designation. I have no problem with a voluntary branding, and if Robert and other unenrolled preparers can make a brand of it, more power to them. I don’t see it happening, though, as it would do nothing for the big franchise preparation companies, who already have their own brands.
Republicans want to use revenues from base-broadening solely to reduce rates. Democrats want to use revenues from base-broadening solely to raise revenue. (The quote in the title of this post is from senior Obama advisor David Plouffe.)
We will never be able to begin the tax reform process in earnest until Republicans and Democrats settle their differences on the total amount of revenue the federal government can collect. It was actually Bowles and Simpson who outlined the process: First, you settle on a number for the amount of revenue you want to raise (if any). In their case the amount of revenue was $800 billion over 10 years (using a different baseline). Second, you broaden the base as much as possible. The money from base-broadening is first devoted to deficit reduction and whatever is left over is used for rate reduction.
That requires agreement on how much we can afford to spend. Until that answer changes from “MOAR!” it won’t be enough.
After most of us stopped paying attention Friday afternoon, a federal judge in Washington D.C. stunned the tax world by striking down the IRS effort to regulate tax preparers. U.S. District Court Judge James Boasburgruled that the IRS lacks the legal authority to impose the RTRP program.
So now what?
I expect the IRS to appeal the ruling to the D.C. Circuit Court of Appeals, but that would take months. It seems unlikely that Judge Boasburg would stay his own ruling in the meantime, and I doubt that an appeals court will either.
Dan Alban of the Institute for Justice, the legal team behind the suit, told Accounting Today:
“Anything that’s part of the RTRP regulations is struck down by this decision today,” Alban explained. “The PTIN is a separate regulation and it’s done under separate statutory authority. It’s a ‘shall issue’ type of permit. If you pay the fee, if you pay that amount of about $65, you’ll get a PTIN. The IRS was going to make the PTINs conditional on having the RTRP credentials, but now they’re not allowed to do that. It will go back to how it was last year, when you had to get a PTIN, but anyone could get one and you didn’t have to pass an exam or complete any continuing education.”
So no PTIN refunds, but no testing or CPE requirements, and, presumably, no more RTRP designation. This would seem to end the need to get IRS approval for CPE programs, a requirement that has shut down many local CPE programs, like those offered by the organization of Iowa Enrolled Agents.
As of this writing, the IRS has yet to comment.
So who wins? Small unenrolled preparers are big winners. They are now free of the brain-dead RTRP bureaucracy. Enrolled Agents are also big winners. The RTRP designation threatened to kill the EA brand by confusing taxpayers about the difference between enrolled agents, with their much stricter testing and CPE requirements, and Registered Tax Return Preparers. But the biggest winners are taxpayers, who will not have their costs increased by an IRS-imposed guild system that would reduce the availability of tax preparers while doing nothing to increase their quality.
The losers? The IRS, which loses its ability to bully preparers with the extrajudicial discipline system of the new regulations. The big national preparers, who were instrumental in drafting the rules because they promised to weaken their competitors. And, retrospectively, Doug Shulman, the former IRS commissioner who masterminded the requirements.
When at first you get enjoined, try, try again. In 2010 a Kansas City-area man was enjoined from setting up a bunch of tax shelter plans, finding that the man “Deliberately Advised His Clients to Break the Law, and Helped Them Go About Doing so.” Apparently he dusted himself off and went right back to work. From a Department of Justice Press release:
The Justice Department announced today that a federal court has permanently barred Cash Management Systems, a Virginia corporation, from promoting two tax schemes that allegedly involve disguising wages as tool-reimbursement or tool-rental payments. Also subject to the civil injunction order were Cash Mangement’s marketing arm, Xell Enterprises, incorporated in Kansas; its principals, Bruce Lemay and Richard Herson Mills; and Allen Davison, of Overland Park, Kan. According to the government complaint, Davison provided legal opinion letters regarding the schemes and served on Cash Management’s board of directors.
Judge Eric F. Melgren of the U.S. District Court for the District of Kansas entered the permanent injunction, which the defendants consented to without admitting to the allegations against them. Davison was enjoined from promoting other tax schemes in 2010.
No, you can’t give a tax free “tool allowance” to employees. And just because somebody was enjoined from promoting other tax schemes doesn’t mean this one works.
Companies that make medical devices are paying a 2.3% excise tax to help fund the Federal health-care program. A lot of people undoubtedly think that means the 2.3% will come straight out of the company’s profits (and this in turn can lead to strongly populist instincts about sticking it to the people making a profit in health care). But the people who pay for a tax aren’t always the ones who cut the checks to the IRS.
Roberton Williams, How the New Tax Act Affects the Alternative Minimum Tax (TaxVox): “One curiosity that won’t please high-income taxpayers: the new Obamacare taxes on investment income don’t count in determining whether you owe AMT.”
So preparer regulation wasn’t really the solution? Taxpayer Advocate Nina Olson says tax complexity is the biggest problem for taxpayers in her annual report:
The most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code (the “tax code”). Among other things, the tax code:
-Makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns;
- Requires the significant majority of taxpayers to bear monetary costs to comply, as most taxpayers hire preparers and many other taxpayers purchase tax preparation software;
- Obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay;
- Facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and by providing criminals with opportunities to commit tax fraud;
- Undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply; and
- Generates tens of millions of telephone calls to the IRS each year, overburdening the agency and compromising its ability to provide high-quality taxpayer service.
What do you suppose clued her in?
The byzantine complexity of the tax law is indeed the biggest problem facing the taxpayer. She also prominently mentions the identity theft epidemic, preparer fraud and IRS funding. One item not identified as a serious problem? Unregistered tax preparers.
I have recommended the regulation of unenrolled return preparers since my 2002 Annual Report to Congress, and reiterated and supplemented that recommendation in successive reports. My office was very much involved in the analysis and discussions resulting in the IRS report, and I applaud Commissioner Shulman’s leadership in undertaking this significant review.
So what has that accomplished? The IRS has tacitly admitted the program isn’t working by waiving the continuing education requirement. The population of preparers is poised to crash. That will raise the cost of tax preparation, forcing many to self-prepare and driving others out of the system entirely. Meanwhile, one reason IRS resources are unavailable for taxpayer service is that they are directed to mismanaging preparer regulation.
The problem has always been tax complexity, and it continues to get worse. No preparer regulation will change that. The Taxpayer Advocate’s previous preparer regulation efforts only served to enrich the national tax prep franchises and distract from the real problem of complexity while damaging the ability of the IRS to serve taxpayers.
Buchanan’s model of government action was based on a theory of “politics without romance,” which contended that policymakers act in their own self-interest the same way that market actors do. This means that politicians are not enlightened, selfless despots, and respond to the incentives of the political sphere, making policy that will help get them re-elected. Often the best way to do that is by catering to special interests. The longer I work in this city, the more I see this observation as true to life.
This is (to me) the essence of the “Public Choice” analysis of government, created by Mr. Buchanan and Gordon Tullock. It explains why passing a law or creating a regulation rarely solves the problem, and instead enables the well-connected to use the government as a club against their rivals. The tax preparer regulations, literally authored by a former H&R Block CEO, are a classic example. James Buchanan’s legacy is a valuable and too-little-heeded caution against increasing the role of government.
A Midwestern economist says Iowa policymakers should focus on cutting income taxes rather than property taxes. Ernie Goss, an economist at Creighton University in Omaha, says Iowa’s income tax rates are fifth highest in the country.
“In terms of what Iowa needs to look at, in my judgement, given what’s going on in Kansas, what’s about to go on in Nebraska — Iowa’s neighbors — you need to look at income taxes, in terms of being more competitive,” Goss says.
Iowa property taxes are too high, but income taxes matter more for many taxpayers. While property taxes are a big deal to companies that own real estate, like a manufacturer or a big insurance company, income taxes can mean a lot more to a start-up or a tech company. Fortunately the Tax Update’s Quick and Dirty Iowa Tax Reform Plan is ready to go!
Making a dent in the deficit! A chart shows how much the tax increases on “The Rich” will reduce the $1.2 trillion federal deficit (new taxes in green, deficit in red)
Either the government spends a lot less, or taxes go up a lot for everyone. The rich guy isn’t buying
It’s Monday. Do you know if your payroll taxes have been remitted? Another sad story of a payroll service provider who decided he needed taxes withheld from his clients more than the IRS did. Digtriad.com reports that Arthur Weiss of Winston-Salem, North Carolina is going away for 15 years:
Case documents show Weiss operated professional employer organizations (PEOs), which provided payroll-related services to client companies. For his client companies, Weiss agreed to pay the employees, withhold and remit federal and state taxes, prepare and file the federal and state employment tax returns and provide workers compensation insurance (WCI).
Weiss did pay the employees and withhold the employment taxes, but he failed to remit the employment taxes, keeping them for his personal use.
PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS). Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number. This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services. If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect. Not many employers can afford to pay payroll taxes twice.
Few thieves report their income honestly. From WHOTV.com:
Disgraced former Peregrine Financial CEO Russell Wasendorf Sr. is in jail awaiting sentencing for embezzling over $200-million in customer funds, fraud, and lying to federal regulators.
Now the state says he may have also cheated on his taxes.
…
Records show the [Iowa Department of Revenue] filed an assessment in November against Russ and Connie seeking $14.1-million in unpaid taxes and penalties to Iowa.
Tax breaks for Hollywood, NASCAR, windmills, algae and multinational corporations ended up in the “fiscal cliff” bill thanks to President Obama, according to Senate Republican sources. But they were spawned by a web of lobbyists, donors and staffers surrounding Democratic Sen. Max Baucus of Montana.
Baucus’ Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama’s insistence, the Baucus bill was cut and pasted word for word into the cliff legislation.
Spending, by the numbers. Local radio guy Brian Gongol asks, Why do we baffle ourselves with huge numbers instead of talking about budgets in per-person terms? Why, indeed? You could ask 100 people on the street how much money the government spends and how big the deficit is, and you would be lucky to get the size of the budget within a trillion dollars. The numbers are hard to comprehend.
The ability of the politicians to get away with talk about “millionaires and billionaires” proves this — a billion is 1,000 million, and while there are likely people on your street with a net worth of $1 million, you probably haven’t met anybody worth $1 billion. They aren’t remotely the same thing.
In doing year-end tax projections for a client with a once-in-a-lifetime gain from a business sale and a huge resulting tax liability, I wondered how long his enormous (to me) liability would keep the government running. Dividing the 2012 fiscal year spending of $3.796 trillion by the 31,536,000 seconds in a 365-day year, I figure that the federal blob spends $120,370.37 per second. The biggest tax liability I’ve ever seen comes well short of funding 2 minutes of government operations. I probably will never cover a second. Where do you fit?
Fiscal Cliff Webinar! I will be appearing with Roger McEowen on the “Tax Notes From the Fiscal Cliff” webinar at Noon January 14. We will be covering the new legislation and the proposed 3.8% “Net Investment Income Tax” regulations. Register today!
So here’s the big news: the anti-tax side won. Sure, Obama would love to raise taxes even more, especially on people making between $200K and $450K. But now he has almost zero leverage to do that.
I think that’s about right. And now the President has lost his ability to distract attention from the ongoing fiscal calamity with arm-waving about “millionaires and billionaires.”
The expectant crowd gathers in Ames, Iowa for the final 2012 session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School.
350 practitioners are signed up, and the coffee’s on!
Fiscal Cliff Notes
Because writing big checks in April is always popular. A few commenters have said that the Treasury Secretary can prevent Fiscal Cliff disaster by just setting the withholding tables to pretend that the tax law isn’t changing January 1. Marie Sapirie of Tax Notes says it’s not that simple ($link)
Commentators have suggested that Geithner may even be able to prospectively implement the administration’s policy of raising taxes on taxpayers making more than $250,000 per year by increasing withholding only on income above that level. That is almost certainly wishful thinking. Whatever the “most appropriate” amount of withholding to reflect the tax rates in section 1 may be, section 3402(a) does not give the Treasury secretary the power to create withholding tables that have no basis in current or recently expired law.
Of course Secretary Geither hasn’t always been big on following the tax law.
Big news in pensions today: Silverdex, a major US-based conglomerate with fingers in just about every economic pie, from mining to solar cells, turns out to have been stuffing its main pension fund full of… it’s own corporate bonds
Just kidding.
I don’t really know how to say this, but sorry, I lied a little bit. I’m not talking about a private company at all, because of course, if a private company did this, it would be completely and totally illegal. Regulators would have shut this down decades ago and probably at least a few lower-level executives would have spent a little time in the pokey. Instead this is, of course, a description of how the United States Social Security “trust fund” works.
Like so many things: private sector does it, it’s scandal and ruin. Government does it, it’s Tuesday.
Martin Sullivan, Capital Gains Frustration for Tax Reformers (Tax.com). His “reformers” want to increase the problems inherent in capital gains taxes by increasing them. May their frustrations endure.
Anything missing? Not a word here about income tax reform. The governor had been talking about income tax reform in the runup to the elections, but hasn’t said much about it since. I’m getting the feeling that Iowa’s chilly business tax climate isn’t warming up anytime soon.
What the current model of the Iowa tax law would look like if it were a car.
They could have thought about that before they voted for it. From Byron York:
Sixteen Democratic senators who voted for the Affordable Care Act are asking that one of its fundraising mechanisms, a 2.3 percent tax on medical devices scheduled to take effect January 1, be delayed. Echoing arguments made by Republicans against Obamacare, the Democratic senators say the levy will cost jobs — in a statement Monday, Sen. Al Franken called it a “job-killing tax” — and also impair American competitiveness in the medical device field.
You mean taxes matter? Who knew? (via Instapundit)
Warren Buffett calls for another tax increase on people who aren’t Warren Buffett. From CNBC:
Warren Buffett isn’t limiting his call for higher taxes to a minimum rate for very rich Americans who get a large chunk of their income from investments.
He’s also one of several dozen wealthy people who have signed a statement calling for a “strong tax on the largest estates.” It’s been released by a group called “United For a Fair Economy.”
Like the income tax hikes he supports, this increase wouldn’t affect him, because he plans to leave his pile to the Bill and Melinda Gates Foundation, where it will escape estate tax. I’ll take him seriously if he calls for reducing or eliminating the estate tax charitable deduction. Going Concern has more.
In Iowa he’d have to collect sales tax too. The Tax Court yesterday told a Houston patrolman learned that he was in independent contractor when performing security services off-duty. From the decision (citations omitted):
An employment relationship is indicated when the service recipient has the right to control the details and means by which the worker performs the services. In contrast, independent contractor status is indicated where the opposite is true. This factor is generally critical in determining the nature of a working relationship. Petitioners did not demonstrate that the third parties maintained the requisite right to control Mr. Specks in the performance of the security services.
Jack Townsend links to a study of plea agreements in federal criminal cases. While much of his post is of interest only to attorneys, this quote from the study should be read by anybody tempted to file a return (or not file) based on the idea that the income tax is unconstitutional (my emphasis):
These constitutional challenges do not work out well for defendants. Almost twenty years ago, the United States Supreme Court held that a considered, fundamental disagreement with the constitutionality of the tax laws does not represent a valid defense to a charge of tax evasion. Yet even with this guidance, many tax resisters remain unwilling to concede the point, and demand to take their cases to trial. One exasperated federal judge catalogued some of the “tired arguments” advanced by these defendants:
That defendants continue to press these arguments in court despite their nonexistent odds of success underscores how many parties simply do not behave as extrapolation from likely trial outcomes might predict.
There’s no point trying to convince tax protesters that they are wrong in theory. All you can point out is that their arguments never work when it matters.
David Brunori, Time To Get Rid of the Deduction for State And Local Taxes. (Tax.com) When the taxes arise from business income, like from S corporations and partnerships, I disagree. It any case, it should only come with rate reductions.
When your identity is stolen, the IRS will be happy to bounce you around the bureacracy. The Taxpayer Advocate testified yesterday at a House hearing on identity theft. The IRS, which does a bang-up job of rapidly mailing fraudulent refunds, is less streamlined when it comes to helping taxpayers whose identities are stolen:
“Yet today the IRS is moving backward toward a decentralized approach, creating specialized identity theft units within 21 separate functional areas,” Olson told the House Oversight and Government Reform Subcommittee on Government Organization, Efficiency and Financial Management. “If, as seems likely, the IRS reduces the role of the IPSU and directs taxpayers to deal directly with the 21 specialized units, I am deeply concerned that we will revert to back where we were in 2008, with large numbers of taxpayers that have cross-functional issues unable to get their problems resolved without multiple contacts with multiple functions, and that would in my opinion be a disaster for the victims.”
She says that the IRS will have to choose between fast refunds and stopping fraud:
Specifically, we may need to ask all taxpayers to wait longer to receive their tax refunds, or we may need to increase IRS staffing significantly. Under current circumstances, I have come to the conclusion that it is simply not possible for the IRS both to process legitimate returns rapidly and to combat refund fraud effectively at the same time.
So it’s too much to ask for the IRS to make better use of existing resources by not wasting them on the futile and expensive return preparer registration program — a program unwisely supported by the Taxpayer Advocate.
IRS makes doing business in the U.S. even more of a hassle for foreigners. The IRS and Congress are doing their best to make it impossible for Americans to do business abroad with FATCA and the offshore compliance jihad. Now they are doing a bit of the same for foreigners trying to do business here with new rules for International Tax Identifiction Numbers (ITINs).
ITINs are needed when foreigners invest in US real property or other assets where a US tax identification number is needed. U.S. taxpayers just use their Social Security numbers. The process is a hassle, with exacting documentation requirements that often require applicants to send passports to the IRS for extended periods while the IRS processes the paperwork.
While the new rules provide more options for applying for the paperwork, they now make the ITINs expire after five years, requiring taxpayers to repeat the whole process to stay in tax compliance. This hassle isn’t just an issue for offshore taxpayers; it also makes compliance more difficult for U.S. taxpayers with offshore investors. Just another little effort by the IRS does to make staying legal as difficult as possible.
The injunction didn’t go through, so on to the indictment. A few years ago the IRS tried to close down the practice of a St. Louis-area tax preparer after making spectacular allegations of malfeasance. The effort ended in a settlement that looked much like a victory for the preparer. The IRS apparently didn’t take that well. Stltoday.com reports:
Frank L. “Tiger” Zerjav, Jr., 39, of Wildwood, has been indicted for allegedly submitting four years of false tax returns and trying to dodge $182,000 in taxes, the U.S. Attorney’s office said Thursday.
Zerjav was indicted on four charges of federal income tax evasion for the returns covering 2001-2004. He also faces an obstruction of justice charge for allegedly producing altered computerized accounting records after receiving a grand jury subpoena.
They couldn’t put Mr. Zerjav out of business through civil procedures. A tax fraud conviction would do the trick. They’ll need to make a much more convincing showing than they apparently were able to do on the injuction effort. This does remind us that if you get on the bad side of the IRS, your own filings had better be squeaky clean.
Unless something changes, we’re headed toward one of two uncomfortable places. Either we veer over the fiscal cliff and the economy crashes—or we keep going down the road we’ve been taking for more than a decade, delaying hard choices while assuring voters that no really hard choices need to be made. That road probably ends in an even nastier smashup.
I just posted about the fact “that the IRS is getting more out of hand with its ‘due diligence’ requirements for tax preparers who are claiming the Earned Income Tax Credit for clients” here in “WE ARE NOW NOT ONLY TAX PREPARERS, BUT SOCIAL WORKERS AS WELL!”, which was a response to Trish McIntire’s post “EITC Checklist Expanded” at OUR TAXING TIMES.
At the seminar we reviewed in detail the new Part IV “Due Dilligence Requirements” on Pages 3 and 4 of the form. In my opinion the new hoops that we are required to jump through are TOTALLY RIDICULOUS!
Like with the preparer regulations, honest preparers are saddled with rules they don’t need in response to tax cheaters who will ignore the rules anyway.
The Tax Roundup is reporting from Muscatine, Iowa, home of the 900-lb gorilla of Iowa tax policy, Iowans for Tax Relief. Also a 24/7 WalMart, for business travelers who forget to pack socks.
Roger McEowen and IRS Taxpayer Liason Christy Maitre give the latest scoop on the Fiscal Cliff at the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School, Muscatine session.
Department of We’re Doomed: The leaders of the House Ways and Means Committee say that they don’t plan to do an “AMT patch” separately from the “fiscal cliff” negotiations for next year. Absent a patch, the AMT exemption for 2012 will decline drastically, throwing tens of millions of new taxpayers into AMT and increasing the tax bill for some taxpayers by over $8,000. Tax Analysts reports ($link)
Asked by reporters about the AMT patch, which has caused anxiety for IRS officials preparing for the coming tax return filing season, Ways and Means Chair Dave Camp, R-Mich., responded, “I’m hopeful that we will address AMT by the end of the year.” He added that he doesn’t think a patch will be passed as stand-alone legislation.
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Ways and Means ranking minority member Sander M. Levin, D-Mich., also expects the AMT patch and the extenders to be included in a larger deal on the fiscal cliff. “I think it’s preferable for everything to be put into a package. They relate to each other,” he told Tax Analysts.
The IRS warned last week that failure to patch AMT will delay filing season for affected taxpayers to, at best, sometime in March, with punishing big tax bills for millions of unsuspecting taxpayers. Now Congress ties the immediate catastrophe of not patching the AMT to the impending catastrophe of the scheduled tax rate increase. No small failures for these guys.
The clean, placid appearance of post-harvest Iowa farmland appears to be far removed from the messy fog of Congressional politics and the fiscal cliff.
But pressure is intense to sell land before Jan. 1 when, if Congress doesn’t intervene, capital gains taxes will rise from 15 percent to 23.8 percent and deductions on estate taxes will drop from $5 million to $1 million.
Yes, taxes do affect behavior:
“The tax changes are on everybody’s minds. We have a sale every day, except Sundays, between now and Thankgiving,” regional sales manager Sam Kain of Farmers National Co. said before selling 169 acres of Bremer County farmland from the estate of Alvin and Maxine Walther on the day before the election.
“I’ve been in this business for 30 years and I’ve never seen it this busy,” Kain said.
Selling now doesn’t necessarily help with the estate tax problem (unless, improbably, farm prices continue to rise), but it can make a big difference on income taxes.
As we wind down for Thanksgiving week, lets give thanks for not being in California. David Henderson discusses the Golden State’s self-inflicted pending disaster in It’s not Go Galt: It’s Go to Texas:
As I have noted before, the Laffer Curve–the curve that relates tax revenues to tax rates–must be correct. The relevant question is where we are on the Laffer Curve. Are we on the part of the curve–the “prohibitive region”–where an increase in marginal tax rates will reduce revenues and a decrease in marginal tax rates will increase revenues? For the United States, I think the answer is pretty clearly no.
But what about for California? We are about to have an empirical test.
The Laffer Curve is the idea that there is a revenue maximizing tax rate. It’s not zero, and it’s not 100%, because people would do very little that would result in a 100% tax. The maximum rate is different for different taxes — a gross receipts tax would have a lower revenue-maximizing rate than an income tax because it would not have deductions, for example. Mr. Henderson says that’s also true for state income taxes:
When state governments increase tax rates, people in those states have a relevant option that is not relevant to a discussion of increases in federal tax rates. Specifically, they can move to one of the other 49 states. So a simple estimate of the elasticity of taxable income with respect to marginal tax rates will underestimate the actual elasticity. Some of those other states with lower marginal tax rates on high-income–and that includes virtually all the other states–will be attractive substitutes. Texas, for example, has no income tax. Neither do Washington, Florida, and Nevada, to name just 3 others.
That could cause the tax take for California from its new tax increases to be much less than they are hoping for:
Notice one powerful implication of this second reason that makes the analysis quite different from the analysis for federal tax-rate increases. Whereas when the federal government raises tax rates, any loss in revenue is due mainly to people cutting back on their income somewhat, when a state government raises marginal tax rates, people who move to another state cut the income that the state taxes to zero.
A hint to California: As you continue making the state more and more hostile to businesses, businesses are forced to react. No business wants to move (it’s expensive and disruptive), but like my business that moved last year, eventually the desert wastes of Las Vegas or Phoenix start looking really attractive.
The California weather’s nice, but not at any price.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
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The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Gotta start somewhere. The Hill reports “Rand Paul introduces bill to roll back parts of tax evasion law“:
Answering the wrong questions. The Iowa Chamber Alliance asked 
After most of us stopped paying attention Friday afternoon, a federal judge in Washington D.C. stunned the tax world by 
So preparer regulation wasn’t really the solution? Taxpayer Advocate Nina Olson says tax complexity is the biggest problem for taxpayers in her 
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
