“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.
A reporter for a nationally prominent publication has contacted me to help him get in touch with people who have gone through one of the OVDI/P programs to discuss their experiences and thoughts about the programs. If you are interested and/or willing to do that, please contact me at jack@tjtaxlaw.com and I will put you in touch with the reporter.
So maybe it’s a chance for those of you who’ve been put through the ringer for a foot-fault violation to get a little justice.
The opposite of a sales tax holiday: Retailer Target Jumps The Gun On Sales Tax (TaxGrrrl). A South Carolina Target store probably made few friends when it started charging a higher sales tax rate a month early.
Are you irritable? Sleeping less? Impatient with your friends? Putting on weight? Thinking about divorce? Yes? Sorry to hear, you must be going through a stressful time.
Oh, wait, are you an American? Yes?! Whew, you’re behaving normally then. If you were to read this AICPA press release, you might be inclined to believe that your take home pay being 2% lower than last year would have been the cause of all those things…
Our politicians have tried to do too much through the tax law. And that has created a complicated mess of winners and losers that makes the task of trying to reform it, even to some level of sensible, a daunting one.The poster child for this mess is the Earned Income Tax Credit. Like it or not, the EITC is welfare administered through the tax system. Do we really want our tax system to do that?
The tax law works best if it is seen solely as a tool to finance the government. Much of its hideous complexity comes from using it is the Swiss Army Knife of public policy. As you add more gadgets it becomes less useful at being a knife.
Mr. Bergin isn’t afraid to mention the elephant in the room:
And there is another huge problem. The EITC program leaks like a sieve. More bluntly and honestly stated, well-intentioned as it may be, the EITC has been corrupted. Don’t take my word for it. Recently, the Treasury Inspector General for Tax Administration released a report stating that up to one-quarter of EITC payments made in fiscal 2012 were improper. How much does that represent? Try $13.6 billion. In one year. Using a ten-year budget window, that’s $136 billion, and that’s just thetainted stuff.
Supporters say the EITC is a program that “works.” Can you say that something “works” when it sprays billions to thieves every year?
Read the whole thing.
Fairness:
But the compliance costs imposed by the Marketplace Fairness Act would place smaller upstarts at a distinct disadvantage, which is, I suspect, one reason that market incumbents such as Amazon support the tax. The real cost of taxes is not the revenue out the door to the taxman; it’s the revenue out to the door to the taxman plus all of the costs involved in complying with the tax code.
24 current and former employees of the Internal Revenue Service have been charged for crimes relating to fraudulently obtaining more than $250,000 in government benefits. Thirteen of the current and former IRS employees have been charged federally with making false statements to obtain unemployment insurance payments, food stamps, welfare, and housing vouchers. All thirteen, individually charged in separate indictments, are alleged to have falsely stated that they were unemployed while applying for or recertifying those government benefits.
They may have been right about being unemployed, just wrong about the timing.
The headline producing data in the report was that revenue loss – about $181 billion – from corporate tax expenditures in 2011 was “approximately the same size as the amount of corporate income tax revenue the federal government collected that year.” That makes a headline grabber; here would be my version: “Corporations Got More in Tax Breaks Than They Paid in Taxes, Government Says.”
It’s almost like the tax exists only so the politicians can carve loopholes for their friends.
Iowa Senate Republicans advance income tax plan. TheGazette.com reports:
Sen. Randy Feenstra, R-Hull, said all 24 minority Senate Republicans have signed onto a proposal to significantly lower state personal income tax rates and simplify the Iowa tax code by offering a two-pronged approach that would eliminate federal deductibility and benefit most Iowans.
…
The Hull Republican said the proposed new tax structure would flatten the current nine income tax brackets into three, elimination of federal deductibility as a competitive impediment, enhance the current standard deduction for all taxpayers and provide an extra boost for blind, elderly and dependent Iowans, eliminate itemized deduction, increase personal exemption credits, and raise filing thresholds.
So far I have been unable to find the bill (though it being April 11, I’m not going to spend a lot of time looking for it today). As Senate Republicans have no chance of advancing a bill in the face of majority Democratic opposition, it’s really a gesture. Still, it’s nice to see that income tax reform remains alive, in spite of the Governor’s indifference this year. It’s also nice to see that the insistence on keeping the deduction for federal taxes is eroding. Much better to build it into a lower rate.
This is a bit weird given that President Obama rides on what is essentially the nicest corporate jet in the world. To be fair, the President is quite right that companies do not need a tax break to buy corporate jets. But since they don’t really get a tax break for buying corporate jets, we probably don’t need to spend this much valuable presidential time worrying about this non-problem.
Anything to make life difficult for a high-tech U.S. manufacturer. As long as the President continues to beat dead horses like this and the “Buffett Rule,” we know he is not at all serious.
Sure, Democrats pay lip-service to infrastructure, education, and the like. But for the most part, they are profoundly unwilling to make a wholistic case for activist, progressive government.
Actually, they probably wouldn’t get very far making the case honestly.
So a Blonde and a lawyer walk into Tax Court. She loses.
No, the Tax Court has not started to report petitioner hair color in its decisions, along with the names of the attorneys and the resident state (“petitioner resided in Iowa and was brunette during the tax years at issue but gray at trial”). This taxpayer’s first name is actually Blonde. And she was an attorney, at least until 2006, when she pleaded guilty to failure to file tax returns. From the Tax Court:
Since the only issue currently before the Court is whether Blonde Grayson Hall signed the Form 4549 under duress we will refer to Blonde Grayson Hall as petitioner.
Petitioner attended the University of Michigan Law School and was admitted to practice law in 1982. Petitioner was the chief executive officer of Hall & Associates, LLC, a law firm in Philadelphia, Pennsylvania, from 1995 to 2006.
As part of her plea deal, the taxpayer filed Form 4549 agreeing to assessment of additional tax liabilities for several tax years. She apparently had second thoughts:
Thus, the issue before us is whether Blonde Grayson Hall should be relieved of her agreement in the Form 4549 because it was signed under duress.
Of course, duress is what a plea deal is all about. You accept a bitter pill because you think it could get a lot worse if you go to trial. While this is a fearsome and sometimes abused weapon in the hands of prosecutors, the Tax Court said it wasn’t the kind of duress that makes the Form 4549 go away (my emphasis):
The requirement that petitioner sign the Form 4549 stems from the Government’s efforts to prosecute her for admittedly criminal conduct and to collect taxes and penalties. No doubt, given the circumstances, these efforts were zealous and disadvantageous to petitioner. However, every criminal defendant who is offered a plea agreement faces an equally unpalatable decision — accept a legally authorized plea agreement that will include terms disadvantageous to the criminal defendant or go to trial which may result in significantly worse consequences for the criminal defendant. This unpalatable decision does not constitute duress or involuntariness.
The taxpayer is stuck with the Form 4549 that she signed.
The moral: If you plead guilty to criminal tax charges, it is very hard to fight the assessment for the years covered by the plea. Even if you are a lawyer, and even if you are Blonde.
Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.
Not, hard, not inefficient, not socially wasteful, not immoral: Impossible.
Yet the effort to do so never ends. Nor the harm it causes.
The Internal Revenue Service is currently without a Commissioner. Douglas Shulman, the 47th IRS Commissioner stepped down last November.And from what I’m starting to hear, the IRS may not have a new Commissioner for as long as close to two years. That is not a good thing.
David Cay Johnston, Unkind to Charity(Tax.com) “The tax rules on charities, both the many good and the few bad, are about to get much more anti-giving.”
According to this report, dozens of people supporting a bill to repeal a state sales tax on amounts charged by dance establishments decided to dance in protest. According to the report, the protestors demonstrated the salsa, the flamenco, the tango, and even a conga line. Considering the speed with which legislatures get things done, perhaps they engaged in some slow dancing, though the report does not mention it.
Calendar-year corporation returns are due today! They are easy to extend on Form 7004 if you can’t finish them today. If you don’t extend an S corporation return and you file late, the penalty starts at $195 for each late K-1, and $195 each for every additional month the return is late.
If Iowa’s tax law were a car, it would look like this.
I’ve never filled out an Iowa income tax form but it looks like one of the harder state tax returns. Iowa allows you to deduct what you pay in federal income tax, which is nice but is that much more calculation work (and probably drives up tax rates). There are lines for the lump-sum tax, the minimum tax, the K-12 textbook credit, the school district surtax, the motor fuel tax credit, and the earned income tax credit. I’m sure each one of these has their explanations of necessity but together it sounds like a lot of paperwork, record-keeping, and Tax Filing Day frustration.
…
Hence, I’m impressed by a bill passed yesterday (House File 478) by the Iowa House which would offer an alternative to all Iowa taxpayers: a 4.5 percent tax on all income above about $15,000, which no further deductions or exemptions. It’s not perfect: our friend Joe Kristan pointed out that a credit for taxes paid to another state and a deduction for federal interest are probably constitutionally required, and offsetting deductions to certain kinds of income (allowing gambling losses if you tax gambling winnings) is good policy. But as Joe said, the bill “is a welcome step towards improving Iowa’s income tax.”
Far be it from me to let either the Internal Revenue Service or tax prep giant H&R Block off the hook for the current mess which has delayed refunds for more than 600,000 taxpayers claiming college tax credits by up to eight weeks. In addition to their operational missteps, both did a poor job (at least initially) of communicating with taxpayers who desperately need those refunds to pay tuition or other bills.
But let’s put some of the blame where it rightly belongs: on the Washington politicians. For more than two decades, Congress has been expanding “tax expenditures” with little regard for how complicated such provisions might be for taxpayers to use and for the IRS to administer, let alone for whether they do enough good to justify their cost and the economic distortions they create. A new 1065-page Congressional Research Service compendium lists 250 different tax expenditures. Happy reading.
Every little break like this diverts IRS resources from actually collecting income taxes and makes the income tax a little less effective and useful. Yet Congress still sees the tax law as the Swiss Army Knife of public policy.
No matter how well a student in the basic tax course masters the depreciation deduction to the extent it is studied, that student knows that the total depreciation with respect to a property cannot exceed its cost. All of the students would find themselves bewildered by the proposition that depreciation deductions on a property that cost $34,799 would total $56,000.
Argo pay your taxes. It turns out Iowa isn’t the only government whose film tax credits attract scammers. From London comes this via Boston.com:
In some ways ‘‘A Landscape of Lies’’ was a typical indie film, with a tiny budget, a B-list cast and an award from an American film festival.
What made it special is that it was created solely to cover up a huge tax fraud.
…
In fact, officials say, the project was a sham, set up to claim almost 1.5 million pounds in goods and services tax for work that had not been done, as well as 1.3 million pounds under a government program that allows filmmakers to claim back up to 25 percent of their expenditure as tax relief.
No word on whether Leo Bloom prepared the fraudulent returns.
Will there be tax reform? I think there has to be. But I don’t think it will look like theTax Reform Act of 1986 because, in short, it’s not 1986, and we don’t have the same problems or even the same tax system. That doesn’t mean there aren’t a lot of lessons to be learned from the ’86 experience. But I don’t think tax reform will happen soon. And a few of the reasons I think that come right out of “Gucci Gulch.”
I have a copy of Showdown at Gucci Gulch, the book about how the 1986 tax reforms were enacted. I haven’t brought myself to open it; it seems too much like reading about my job.
The TaxProf Reports:IRS Whistleblower Office Issues Annual Report to Congress. It looks like ratting out tax cheats could be lucrative. Changes requiring the IRS to issue more awards were enacted in 2006, and it appears that the whistleblowers have done well. In 2012, for example, 128 awards were paid totalling $125,355,799, according to the report. That works out to nearly $1 million each.
Awards may well be one of the most effective ways to enforce the tax law, as well as one of the most creepy. They make every disaffected employee a potential IRS mole. Sure, it may make employment awkward for the whistleblower, but $1 million cash can be very consoling.
But before you go racing to the IRS, consider this sobering news from the report: From 2008 through 2012, whistleblowers reported 33,064 cases to the IRS, but awards were paid only 630 times. That means about 1 in 50 claims cashed out. Because the IRS collection process is slow, some more of those claims will get paid out, but the great majority won’t.
The moral? If you have a Valentines Day date, be careful how much of your tax life you share. Love is one thing, but cold hard cash is something else entirely.
I’ll start that diet right after I finish this cheesecake:
A federal court in Cleveland has barred MAI-designated real estate appraiser Michael Ehrmann and his firm, Jefferson & Lee Appraisals Inc., from preparing property appraisals for federal tax purposes, the Justice Department announced today. Judge Dan Aaron Polster of the U.S. District Court for the Northern District of Ohio signed the civil injunction order against Ehrmann and Jefferson & Lee Appraisals. The defendants consented to the injunction without admitting the allegations against them.
Federal law allows a taxpayer in certain limited circumstances to claim a charitable deduction for the value of a conservation easement donated to a qualified organization. The easement’s value must be determined by a qualified appraiser. According to the government complaint, Ehrmann’s appraisals repeatedly overstated the value of conservation easements placed on historic properties, including the Book Cadillac Hotel in Detroit and the Powerhouse Building in the Flats District of Cleveland.
The tax law is very touchy about the rules for appraisals. The obvious potential for abuse shows why.
A sad story from Buffalo. A tax preparer scammed his own clients, reports buffalonews.com:
Elizabeth Wopperer lost everything. She lost her business. She lost $40,000 in cash. And by the time it was all over, she found herself filing for bankruptcy.
On top of all that, the IRS now wants the money that was stolen from her.
The man she blames is going to federal prison for up to 30 months, but that won’t return the cleaning business she was forced to sell or pay the taxes she now owes because of his fraudulent actions.
What happened?
Mangione, the operator of a North Tonawanda payroll and tax preparation business, was supposed to pay federal income taxes on behalf of his clients but didn’t.
He chose instead to pocket some of the money, which means Schunke, Wopperer and several others are still on the hook for those taxes.
There’s no reason to give money to your preparer to pay your taxes.
The tax code also is loaded with disincentives to work, save, and study. They include PEP and Pease (reductions in tax allowances for personal exemptions and itemized deductions), child tax credits, and the earned income tax credit. These implicit taxes combine with explicit taxes to create incentives for many households that are often inefficient and inequitable, to say nothing of strange and anomalous.
That’s why proposals to increase the earned-income credit are pernicious. The phase-outs of the benefits as incomes rise punish taxpayers for improving their lot.
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.
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.
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.
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.
Central 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.
Today is the last day to make a charitable IRA rollover for 2012. Yes, 2012 is over, but taxpayers who are required to make IRA minimum annual distributions may still have one 2012 transaction left in them.
- Taxpayers who are born before July 1, 1942 who took cash from an IRA in December 2012 can contribute up to $100,000 to a charity today and have it excluded from their 2012 income.
- Taxpayers who have failed to take their required minimum 2012 distribution can avoid the 50% penalty for failing to take their distribution by arranging for the IRA to transfer the minimum amount, up to $100,000, to a charity today.
For an example of the disruption routinely caused by the IRS’s misadministration of the RTRP regulations, see Alban Decl., Ex. 3 (the comments from preparers are illustrative and reference previous examples of similar disruptions); see also Joe Kristan, IRS quietly delays CPE requirement under new preparer regulation scheme , Tax Update Blog (January 8, 2013), http://rothcpa.com/2013/01/irs-quietly-delays-cpe-requirement-under-new-preparer-regulationscheme/ (describing IRS message as “a quiet admission of failure”).
With the Tax Update Blog on their side, who can be against them?
What does a poor college student have that could be lucrative to a thief? A Social Security number. From the Memphis Business Journal:
With tax season bearing down, the IRS has a warning about a new refund scam aimed at college students, seniors and church members.
The Internal Revenue Service said Tuesday the scam tries to get students to give their personal identification and file tax returns claiming fraudulent refunds. It has sent misleading and bogus refund claims using the American Opportunity Education Tax Credit on college campuses throughout the Southeast.
Be very cautious about giving anybody but your employer, your bank, a medical provider or the IRS your Social Security number. And never give it to a scammer.
So the pro tax people managed to shut Mickelson up. Rather than engaging in a discussion about why it is okay to take his money, they stifled him.
Shut up, they explained.
Paul Neiffer points out that now that penalties are waived for farmers who file after March 1, they may not want to file by their usual deadline: File Your Return After March 1 Not Before!
Have you mailed your 1099s and W-2s? Today is the deadline for sending them to recipients. Russ Fox has the scoop.
Alternative 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.
The bill would be a huge step forward for Iowa tax policyif 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 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.
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.
Don’t forgive them, because they have no idea what they’re doing. Last night I taught a session on the Fiscal Cliff tax law and the Obamacare Net Investment Income tax to Iowa chapters of the Institute of Management Accountants over the Iowa Cable Network. Using the controls to talk to remote classrooms in Marshalltown, Dubuque, Marion and Cedar Falls was a challenge, but a piece of cake compared to working with the tax law.
When they passed the Net Investment Income Tax as part of Obamacare, there were only two concerns for the guilty congresscritters:
- Did it apply only to “the rich,” as defined that day? and
- Did it raise enough revenue for them to help them pretend that they weren’t raising the deficit?
Nobody who voted for the bill took the time to ask: “should we really set up an all-new tax, unlike anything we have ever done before, requiring all new regulations and recordkeeping requirements, just to collect 3.8% of something?” And that’s exactly what they did.
If you have any illusions that they have any clue what they are doing, a look at the new bracket schedule for 2013 for single filers should cure you of that:
If taxable income is: The tax would be:
-------------------- ----------
Not over $8,925 10% of taxable income
Over $8,925 but not $892.50 plus 15% of the
over $36,250 excess over $8,925
Over $36,250 but not $4,991.25 plus 25% of the
over $87,850 excess over $36,250
Over $87,850 but not $17,891.25 plus 28% of the
over $183,250 excess over $87,850
Over $183,250 but not $44,603.25 plus 33% of the
over $398,350 excess over $183,250
Over $398,350 but not $115,586.25 plus 35% of the
over $400,000 excess over $398,350
Over $400,000 $116,163.75 plus 39.6% of the
excess over $400,000
Notice something funky about that 35% bracket? It covers only $1,650. While you have to earn $215,100 to get through the 33% bracket, you skip through 35% to 39.6% with only $1,650 of additional income. Why? Because the administration wanted to only tax “the rich,” and they decided for that day that “rich” starts at $400,000 income, if you are single.
The only sure cure is to make congresscritters, the President, and the Cabinet prepare their own returns in a live webcast, with a comment bar for viewers to mock them. It would serve them right if they had to do it a la Robert Flach, with no computer.
Think hard. That’s the equivalent of 8,758 lifetimes. Yes, lifetimes.
It’s also how much time taxpayers spend every year trying to comply with tax filing requirements. That, according to the 2012 annual report as prepared by the National Taxpayer Advocate Nina E. Olson.
Having agreed to tax increases, Republicans are now more insistent than ever that tax reform must be revenue neutral.
The big change is from Democrats– who have become so adamant on the need for tax increases in addition to the $600 billion raised by the fiscal cliff deal, and who realize additional rate hikes are absolutely impossible–are hell-bent on preserving the most politically feasible loophole closers for raising revenue.
It’s a hopeless game. The deficit is too big to deal with by “loophole closers.” Behind the push to raise taxes by closing loopholes is a delusion that you can pay for our incontinent government spending just by hitting “the rich” harder. But the rich guy can’t cover the check. Either spending comes down or everyone pays a lot more tax.
Christopher Bergin, Permanent Insanity: “Only in Washington would you find folks who would brag that they did a good thing by making permanent an unfair and indecipherable tax system that wastes billions of dollars to administer.” (Tax.com)
The good news for states is that American Tax Relief Act of 2012 will end much of the uncertainty that has plagued the income tax code in recent years. No longer will states have to guess what will happen to many provisions of the federal revenue code that were set to expire. The bad news is some states will lose revenue they were counting on from scheduled changes in the federal estate tax that won’t happen.
Plan C through Z? House Speaker Boehner’s effort to pressure the White House into compromise with “Plan B,” a proposal to retain 2001 tax rates on incomes below $1 million, died last night. The Speaker cancelled a vote on the plan when it was clear that it lacked enough support to pass. The Wall Street Journal reports:
After pulling his bill without taking a formal vote, Mr. Boehner unexpectedly disbanded the House until after Christmas, leaving behind uncertainty about whether Congress and President Barack Obama would be able to avoid $500 billion in spending cuts and tax increases that begin in January.
So what now?
“The House did not take up the tax measure today because it did not have sufficient support from our members to pass,” Mr. Boehner said in a written statement after a brief meeting with House Republicans. “Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff.”
Indeed. If Boehner couldn’t even get the GOP to support a law that would let taxes revert on millionaires, how is he going to get GOP support on a deal that would let taxes revert on those making $250K or $400K, as the President would like to sign?
Here’s the thing with that. Boehner doesn’t need to get all of his caucus, because in the end, if Obama supports the ultimate compromise, then it’s safe to say that the Democrats will bring about 100+ votes in the house to support the bill. And this was always true. It was always the case that the eventual compromise would see Boehner lose 70 or more Republicans, to be made up with Democrat support. So nothing changes on that front.
There’s 10 days left before 2012 expires. Even then it’s possible that they will make a retroactive deal next year with the new Congress. The legislative and leadership malpractice continues.
So, I would suggest that while General Boehner wants things to look like he is negotiating a budget deal, he is actually seeking the best surrender terms that he can get. And if the President is a good enough general to understand his position, he will not try to over-exploit it.
Paul Neiffer, Farmers Might Delay Higher Tax Rates for Three Years? Thanks to income averaging, a trick available only for farmers, “…you might be able to earn $1 million from farming and have most of it still subject to the old lower tax rates” if rates go up next year.
St. Louis area preparer “Tiger” Zerjav pleads guilty to tax crimes. A St. Louis-area CPA who survived an IRS effort to shut down his practice through a civil suit lost a much bigger fight yesterday. Frank “Tiger” Zerjav pleaded guilty to four tax crime counts in Federal District Court. Courthouse News Service reports:
Frank L. “Tiger” Zerjav Jr., 39, of Wildwood, Mo., pleaded guilty to four counts of tax evasion from 2001 to 2004, prosecutors said. He and his father, Frank L. Zerjav Sr., were principals in two entities: Zerjav & Company, a full service accounting firm, and the Advisory Group USA, which offered tax planning and asset protection strategies. Zerjav admitted that he funneled his income into several S-corporations and failed to include that income on his tax returns.
Your marital status for tax purposes is determined as of December 31. That means if you get married on New Year’s Eve, you are considered married for the entire year and can file as a married couple. Likewise, if a divorce is finalized by the end of the year, you will be considered unmarried for the entire year. Trust me, I am not the only one that has wondered if certain people getting married on New Year’s Eve did it for tax purposes.
It’s a special Friday Buzz at Robert D. Flach’s place!
Not so Fat Joe not so good at taxes. A rapper who performs as “Fat Joe” is in tax trouble, reports AP. The story says Joseph Cartagena pleaded guilty yesterday to not reporting nearly $3 million in income over two years.
Oddly, he’s not so fat, according to the story:
Wearing a navy suit, Cartagena looked fit and considerably slimmer than the former size that had earned him his rapper nickname. He has been very public about his efforts to shed weight after fellow rap stars died from obesity-related issues and was recently in Newark to speak to schoolchildren about health and fitness.
It’s nice that the schools find such good role models for the kids.
Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.
The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.
You can see the same dynamic in Iowa, with its highest-in-the-nation corporation tax rate. That’s just fine for the lucky and the well-lobbied, some of whom actually make money from the Iowa tax law through refundable tax credits, especially the Research Credit. For a little guy without connections or lobbyists, it’s a great reason to set up in South Dakota.
An influential state senator said lawmakers will have to take a harder look at the state’s tax-credit programs this session, including the economic development credits used to entice companies to build in Iowa.
Sen. Joe Bolkcom, D-Iowa City, who was reappointed to chair the Senate Appropriations Committee on Wednesday, held a Statehouse hearing on tax-credit programs Wednesday. He has been a vocal critic of the how the state uses incentive programs to compete against other states for economic development.
That will be a lot easier if it is accompanied by a drastic lowering of rates — or better yet, a repeal of the Iowa corporation income tax. Yet there’s always a voice for breaks for those with connections — in this case Tom Sands (R-Wapello), Chairman of the Iowa House Appropriations Committee. From the story:
Sands said the people in Lee County and Woodbury County — for the most part — aren’t complaining about the incentives offered to the companies and are looking forward to the jobs they’ll bring.
That’s why it’s hard to get rid of these things. Politicians point to the jobs they “create” by bribing companies to do what they would probably do anyway. They don’t have to call press conferences for all of the anonymous businesses that never come to Iowa, or that never get started to begin with, because of Iowa’s expensive and byzantine tax law.
For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.
While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit.
Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.
Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents.
If it’s worth backing up, it’s worth backing up twice.
Russ Fox, Ref Fouls Out. A group of rec-league refs set up an identity theft-based tax fraud scheme. It worked great, until suddenly it didn’t. Russ wisely points out:
All told, the four individuals involved in the scheme must make restitution totaling $200,000. As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.
These guys ran their scheme for 12 years before it blew up. The longer you do something like this, the closer your chance of getting caught approaches 100%.
A decade after the state tried to spark investment in young innovative companies, Iowa taxpayers will foot a $26 million bill — and potentially more — to meet the program’s obligations.
State attorneys reached an agreement in August to avoid a lawsuit from two lenders who backed the Iowa Fund of Funds, a program lawmakers created in 2002 to attract more venture capital investment in Iowa startups.
In August? And we’re just hearing about this now? Maybe it’s because it’s an embarrassment to the entire Iowa political class that they just want to have go away. While signed by a Democratic governor, it passed the Iowa House 90-3 and the Senate 39-5 — lots of votes from both parties there. When the state is giving millions in new tax credits for fertilizer companies, it would poop the party.
Let’s set the wayback machine to one of the earliest Tax Update posts — number 48 of over 8,000 — to see what we had to say about the Funds of Funds when it was enacted:
…is the concept behind the venture capital legislation. A state-owned for-profit corporation will set up a “fund of funds” partnership to invest in venture capital pools. The venture capital pools are to be chosen based on their commitment of funds to Iowa.
Investors in the “fund of funds,” which we will call the FOF, will receive certificates maturing no sooner than 2005 entitling them to a tax credit. This credit will reduce their Iowa tax dollar for dollar to the extent the return on the FOF is less than a fixed return computed on the certificate. In other words, the investors in the FOF get the upside, but the state absorbs the downside – and even some of the upside, to the extent that there is a positive return lower than the amount set by the certificate.
At the time we received a note from Steven Ringlee, described in today’s Register story as “an architect of the program,” telling us that this was still a terrific deal for Iowa taxpayers because the bill also had a cap on investor return as well as a taxpayer-funded guarantee against losses:
In fact, you fail to notice that, due to the tax credit which provides full repayment security to Iowa taxpayers purchasing the preferred stock of the Fund of Funds, their required rate of return will be similar to that on medium-term governmental debt instruments. In Oklahoma, where this plan was first implemented, the return on their Fund of Fund instruments (circa 1995) was approximately 8 percent. In today’s environment, it will approximate 5 to 5.5 percent. However, the average long-term rate of return on investments in venture capital limited partnerships has been in excess of fifteen percent over an extended period. Oklahoma experienced a 19 percent positive return during the five year period from inception through 2001.
So how did those 15 percent returns work out? From the Des Moines Register story:
“It’s been a disaster. As a model for creating jobs, it doesn’t work. … It’s turning into another bad deal for taxpayers,” said Sen. Joe Bolkcom, D-Iowa City.
Jeff Thompson, a deputy attorney general who helped negotiate the agreement, says Iowa taxpayers have always been on the hook for the program, originally authorized at $100 million and later limited to $60 million. This agreement reduces the potential costs and, perhaps more important, prevented lenders from cashing in up to $40 million in tax credits this summer to cover their loans, he said.
That sounds like a return of something less than 15%. The Register story doesn’t quantify the losses. Mr. Ringlee didn’t exactly rule out the possibility of losses in 2002, but he made them seem unlikely (my emphasis):
As a result, appropriate compensation-for-risk-assumed is in fact given to the State, the grantor of the contingent tax credits. For what is likely to be zero cash outlay, the State of Iowa, (at the end of the FoF lifetime) receives all accumulated net profits above a nominal return in the range of 5.5%. Of course, the probability of this occurring is directly related to the skill sets of the VC managers selected to invest the funds. Because VC historical returns are in fact measurable and venture managers’ skills may be examined in detail, and because good managers tend to have consistent track records, the Fund should be able to select those managers able to deliver above-average results. Hence, the Fund can improve its ability to deliver stellarreturns to the State (the residual legatee) by carefully selecting and supervising its venture capital limited partnership managers. It will do so through the judicious selection of a skilled, experienced “gatekeeper” fund allocation manager, a common practice in the venture industry.
Oops.
Folks, when the government guarantees something, the proper assumption is that the guarantee will be called upon (Solyndra, anyone?). If private investors aren’t willing to make a deal, they probably have good reasons. If it’s a good company, private money will probably be there, if perhaps on stiffer terms. And just because the guarantees are run through tax returns doesn’t make them somehow not spending.
Senator Joe Bolkcom (D-Iowa City)– who was one of the few who voted against the program in 2002 – makes a good point:
Bolkcom said the state needs to rethink how it approaches economic development.
“The idea that we can create these third-party arrangements, where we turn over taxpayers’ money and not expect problems to develop, is folly. We have very little control after the law was created,” he said.
The best the state can do for economic development is to leave it alone. The Quick and Dirty Iowa Tax Reform would get rid of all of the dozens of ”economic development” tax credits, and do more for the Iowa economy than all of them.
Oh, Goody: “Taxpayers and the IRS could be looking at three filing seasons in 2013 if Congress and President Obama fail to prevent the government from going over the fiscal cliff at year’s end, according to National Taxpayer Advocate Nina Olson.” (Tax Analysts, $link)
Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years.
Christopher Bergin, ‘Small Ball’ — Obsessing about the Rich: “Sticking it to rich people may play well to a populist theme, but it’s “small ball” and does little to address our fiscal problems or our broken tax system.” (Tax.com)
These are in effect pleas / warnings to taxpayers to turn themselves in by joining OVDP 2012. I suspect that the truth is that, if a significant number of taxpayers do not turn themselves in, the IRS will have limited ability to discover, investigate and prosecute criminally or civilly all of that dataset. DOJ Tax and the IRS are trying to convince taxpayers that the form of audit lottery they play going far now will have worse odds than it had previously. Perhaps everyone involved will not suffer the consequences, but many will and, among the many that will, could be you. And the consequences could be far worse than if you come clean now and get right for the past and going forward.
If you really are a tax cheat, by all means consider using the OVDP program. Still, it would probably be much more attractive if the IRS didn’t treat foot-fault violators as international tax criminals.
The purpose of the Tax Code is to raise the income necessary to run the government. It should not be used to solve all the financial and social problems of the country. It should not be used as a method of distributing social welfare program benefits. It should not be used as a means of “redistributing” income among the “classes”. The Tax Code is not Robin Hood.
It’s hard enough to determine taxable income, compute a correct tax, and remit it. You can’t also ask Iowa tax authorities to administer filmmaking or venture capital. And to expect the undertrained and undermotivated members of the shrinking IRS work force to administer industrial growth, social justice and, oh yeah, the health care system is folly. And official policy.
Grassley said Republicans are willing to ignore the pledge and tap more tax money “from the same wealthy people (President Barack Obama) wants to get it from.”
Where they differ is that Obama would bump the marginal tax rate to 39.6 percent, Grassley said, while “we would suggest raising the same amount of revenue the president wants to raise by capping deductions for wealthy people.”
If Iowa Senator Grassley and the other tax increase lemmings get their way, it will be a big backdoor tax increase on owners of pass-through businesses that have their income taxed on their 1040s. While corporations get to deduct their state income taxes on their businesses in full, individuals have to take their state income taxes on business activities “below the line” as itemized deductions. Treasury Regulation 1.62-1T(d) explains:
To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but state taxes on net income are not deductible even though the taxpayer’s income is derived from the conduct of a trade or business.
This would be bad news for business owners in high-tax states or whose businesses operate in multiple states — one of their bigger business expenses would become non-deductible if itemized deductions are capped at, say, $50,000. Somebody should mention to Senator Grassley that Iowa has a high state tax rate.
The push for deduction caps adds another wrinkle to year-end planning. With rates going up, you would normally defer deductions to next year to get a greater benefit from them. The cap changes that for taxpayers with high itemized deductions. If a deduction cap is enacted, it is likely to be effective for 2013. Better a lower-rate benefit this year than no benefit at all next year under a deduction cap.
The saddest thing about this is the whole game of “taxing the rich” is a stupid distraction. The $80 billion or so it would raise annually is rounding error in a $1.2 trillion deficit. Even taxing 100% of the income of “millionaires and billionaires” won’t cover the budget deficit. The rich guy isn’t buying.
More than 50 uninsured part-time workers for the city of Cedar Falls will see their hours cut this week so the city can avoid paying for their health insurance under President Barack Obama’s signature health care law.
The move comes as a 12-month “look back” period begins under the new Patient Protection and Affordable Care Act. During the 12 months leading up to 2014, employees working more than an average of 30 hours a week must be offered health care insurance in January 2014.
Just think of the insanity. Millions and millions of taxpayers, who every year plan on their refunds (the wisdom of which is an issue for another day) won’t get them on time. They get screwed (a technical tax term).
There are four sessions of the school left — Muscatine, Red Oak, Sheldon and Ames. Sign up today!
Whither Wandry? The IRS made clear that the withdrawal of their appeal of the Wandry case does not mean they are going along with it.
The case involved a “defined value” formula that prevented the IRS from increasing the value of intra-family gifts for gift tax purposes. The formula said that if the IRS changed the value of the gift, the recipients would have to give part of the gift back to the donor so that the value of the remaining gift would be the amount reported on the gift tax return.
Cheating on business taxes just got a little scarier.CNNMoney reports:
An anonymous Wall Streeter is getting rich exposing alleged tax fraud through the IRS’s whistleblower program.
Washington law firm Phillips & Cohen announced Thursday that its client, a “Wall Street insider,” has netted a $2 million reward from the Internal Revenue Service for exposing an alleged tax-avoidance scheme by manufacturer Illinois Tool Works
This is interesting for many reasons. The report implies that the whistleblower is in the financial services business. That could mean banking, investment banking, or even accounting. That means somebody who knows how to work the whistle could be in your business.
If you can get a million dollars from the IRS and keep your identity secret, it becomes a lot easier to call the IRS. It also becomes a lot more dangerous for the boss to take flaky tax positions, let alone commit tax crimes; every staff accountant becomes a potential IRS mole. Because business taxes usually require some staff cooperation, this changes the odds in the tax game in favor of the IRS.
And does the President really believe, as he said, that if we bring back the Clinton tax rates we will bring back the Clinton economy? Does he really think we are that naïve?
Clearly, Mitt Romney thinks we are that naïve. He came to the debate loaded with the latest iteration – it seems to change by the day – of his hocus pocus tax reform plan.
Who know tax policy would finally take center stage in the presidential campaign? The Romney “secret video” saying 47% of taxpayers won’t be interested in him because they pay no taxes continues to crowd high unemployment and foreign policy disaster from the headlines. Will Freeland of the Tax Policy Blog takes an approach nobody else (besides me) seems to have, looking at both taxing and recipients of government spending. It’s worse than 47%:
The red top line is the top 1% of taxpayers; the remaing lines are quintiles of taxpayers, top to bottom. The bottom 3 quintiles (60%) receive more in government payments than they pay in taxes.
If this controls voting (and it doesn’t), Mitt is doomed.
If you’ve ever been snookered into buying a lame extended warranty for a car, you’ll like this. From the St. Louis Post Dispatch:
Cory Atkinson, a former co-owner of what was once one of the nation’s largest seller of auto service contracts, was sentenced in federal court here Tuesday to 40 months in prison on charges of tax fraud conspiracy and tax fraud charges for bilking both consumers and the IRS.
Atkinson, 42, of Chesterfield, will also have to pay $4.49 million in back taxes.
40 months? that’s less than a lot of extended warranties.
The company’s profit on a typically contract worth $2,000 or more was often more than $1,200. Fidelis kept 60 percent of that.
Unhappy customers canceled, sometimes at a rate as high as 60 percent, but US Fidelis staffers were told to arbitrarily withhold 10 percent to 40 percent of their money, according to plea documents.
I suspect few of the extended warranty customers will miss being able to work with this guy for the next 40 months.
I’m going to get even with you by getting myself sent to federal prison! A Nebraska couple has a funny idea of vengeance, based on this item from the North Platte Bulletin:
Evidence presented at trial showed that the Kleensangs had not filed any tax returns in 2003-06 or in 2008-11, U.S. Attorney Deb Gilg said.
The Kleensangs testified under oath in state court proceedings in Sheridan County that they did not have to file tax returns because they were not federal employees and did not live in the District of Columbia.
However, in 2008, together they filed a total of 67 returns for 2007, with David Kleensang filing 57 separate returns for himself and Bernita Kleensang filing 10 separate returns on her behalf.
That’s a lot of returns if you don’t have to file. What’s that all about?
During the investigation, Gilg said the Kleensangs admitted that they filed the bogus returns to “get justice” for judgments that were rendered against them in Sheridan County. The total amount of the refunds they claimed was $48.4 million.
Yeah, we’ll file bogus tax returns. That’ll teach Sheridan County! What could go wrong?
The frivolous returns were detected by the Frivolous Return Program Unit, established by the Internal Revenue Service around 2001, Gilg said. Frivolous returns are pulled and the filer is sent a warning letter that says if the returns are not corrected, the filer could be assessed a $5,000 penalty.
Not only did the Kleensangs not correct their initial returns, they continued to file similar returns for nearly four months, seeking refunds, Gilg said.
So they ended up convicted of fraud and false claims charges. It will be a long time before Sheridan County messes with that couple — six years, anyway.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Gotta start somewhere. The Hill reports “Rand Paul introduces bill to roll back parts of tax evasion law“:
Alternative 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. 
Don’t forgive them, because they have no idea what they’re doing. Last night I taught a session on the Fiscal Cliff tax law and the Obamacare Net Investment Income tax to Iowa chapters of the Institute of Management Accountants over the Iowa Cable Network. Using the controls to talk to remote classrooms in Marshalltown, Dubuque, Marion and Cedar Falls was a challenge, but a piece of cake compared to working with the tax law.
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
