Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
David Brunori doesn’t think much of the tax wisdom of the Iowa House of Representatives ($link):
The Iowa House of Representatives recently passed the Iowa Reinvestment Act, which would allow companies to keep sales tax revenue they collect rather than turning it over to the general fund as the citizens think will happen. Basically, the act is designed to allow businesses to recoup the cost of development. The state has done that before to allow the public to help finance a speedway and other projects that apparently can’t be justified in the free market. The vote for that abomination of tax policy was 87 to 9. That’s what we call bipartisan bad tax policy.
Just more of using your money to subsidize the well-lobbied and well-connected.
The idea of the IRS preparing individuals’ returns is a classic example of a theory that cannot survive in a practical world. Like most theories, it deserved an experiment. It had that chance, in California, and it failed, with only a tiny portion of the eligible population deciding to participate.
Making taxpayers’ lives easier is a matter of simplifying the tax law, not enabling the complexities by turning tax preparation over to the IRS.
This strikes me as wise. I just can’t imagine IRS data processing ever making this possible, considering the complexity of the income tax and the way Congress changes it all the time.
On one hand, $3.4 million is a lot of money — nobody should doubt that. But we’re also nearly completely blind in America to how much is “enough” for retirement. Many people would say the word “millionaire” and imagine Uncle Pennybags or Uncle Scrooge. But consider this: If you wanted to get $40,000 a year in retirement income and do it just on interest payments alone (in other words, if you were trying to avoid taking anything out of your nest egg and just live on the interest), then if you had your money in “safe” 10-year Treasuries earning 1.78%, then you’d have to have more than $2.2 million in the bank. Under those conditions, “rich” doesn’t really look so rich anymore.
I don’t think the nation’s biggest problem is people saving too much.
Holding your breath for tax reform? Exhale. Martin Sullivan says tax reform is on the Fast Track to Nowhere. (Tax.com)
We have written several times about the dangers of nontraded or thinly traded REITs. They are a popular way of investing in real estate but they can be difficult to sell or liquidate if an investor suddenly needs cash.
I saw an elderly, ill client with severe cash problems while holding a private REIT investment that he couldn’t cash out. This really does happen. This is not a problem with widely-traded REITs, which are as liquid as any stock.
Jim Maule, Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad. I never throw away tax returns, and you need to keep records to support the cost of shares and big assets. If you have loss carryforwards, you need to keep the records that support the losses as long as you are using the carryforwards.
Potassium forever? An accused embezzler apparently was in no hurry to stand trial. From StarTribune.com:
A Texas man faces more than 16 years in federal prison for his role in a scheme to bilk nearly $400,000 from his former Eagan employer, Advantage Transportation.
Clayton “Craig” Hogeland, 43, also obstructed justice by faking a life-threatening medical condition, U.S. District Judge Patrick Schiltz found. That caused delays for both his trial and sentencing hearing.
How did he delay his trial?
Further health-related delays stretched out the trial before his conviction on Dec. 6, 2011. He was placed in custody Jan. 8, 2013, and the erratic blood potassium readings stopped. Six days later, his wife reported to federal authorities that she found in his belongings four zip-top bags of what turned out to be potassium chloride.
Despite his continuing complaints about symptoms after being jailed, tests revealed no abnormal blood potassium levels, the prosecution said.
I’m not sure this was well thought-out. What’s the next move? More potassium? Maybe when you are looking at 16 years in federal prison, delay is its own reward.
Fine. It’s important. Let’s expand our discussion and talk about how the IRS is spending the money it already has. For example, it is spending lots of money to go to court to expand its power over tax preparers. It is spending money lobbying Congress to overturn the court decision thwarting its preparer regulation power grab. If it succeeds, it will spend millions imposing busy work requirements on preparers that will cost taxpayers many millions more while lining the pockets of the big franchise tax prep firms.
So yes, let’s talk about IRS spending. And let’s talk about what they should be spending it on. Spending more on not sending money to thieves would be a good start.
Cage Match: Iowan Peter Fisher takes on the Tax Foundation. Mr. Fisher has written a study for Good Jobs First, a left side advocacy group. Mr. Fisher who shows up in The Tax Update occasionally, doesn’t care for the Tax Foundation’s Business Tax Climate Index:
The TF, on the other hand, despite claims to the contrary, ignores the consensus approach to assessing business taxes in the economic literature and attempts to portray the effect of state and local tax law on business profits in an entirely different fashion: by stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number. That number turns out to bear very little relationship to what businesses actually pay.
A good business tax climate, to the Tax Foundation, doesn’t take money from some businesses and give most of it to other businesses; good policy is based on “simplicity, neutrality, transparency, and stability.” I agree.
The problem here is that we do not claim to measure business tax burdens. We measure and rank tax structures, and this because the size of a tax is less important than the economic distortions it creates. This is a fundamental error in Fisher’s understanding of tax policy.
Mr. Fisher seems more focused on “equity,” whatever that means. But even if you think the tax law should be used to punish the rich and reward low incomes, cross-border mobility makes state tax systems an awful place to to that.
Trish McIntire, First Time Penalty Abatement. The IRS will usually abate minor penalties for first-time infractions, but they don’t like to talk about it.
Jen Carrigan, Should You Expect an Audit? A guest poster at Missouri Tax Guy’s place explains the IRS exam process.
Video! The Iowa Bar Association now is selling DVDs of “Notes from the Fiscal Cliff,” a January webcast I did with Roger McEowen of the ISU Center for Agricultural Law and Taxation. The outline is here. Supply your own popcorn.
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.
Just because an LLC is taxed like a partnership doesn’t mean that every LLC owner can act like a general partner, as Colleen MacRaeexplains:
Last week the Iowa Court of Appeals in Three Minnows, LLC v. Cream LLC, held that a non-managing member did not have the authority to bind an LLC to a contract the member signed on behalf of the limited liability company.
Kyle Pomerleau, TPC, What About the “Pass-Throughs?”. (Tax Policy Blog). Measuring business taxes needs to look beyond corporation taxes when most businesses are taxed on 1040s.
David Cay Johnston, Promises, Promises(Tax.com). “Candidate Obama promised in 2008 to reform the Alternative Minimum Tax, and President Obama promised at least an honest accounting in his first budget, but his proposed budget for Fiscal 2014 is silent on the issue.”
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.
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.
IRS waives late payment penalties for returns containing delayed forms. If you can’t file or pay taxes on time, it’s always better to extend your return while you round up the information or the cash. The penalty for filing a late unextended return is 5%, plus an additional 5% for every additional month of late filing. The penalty for paying late on a timely extended return, in contrast, is only 1/2%, plus 1/2% per additional month.
While penalties will be waived, the IRS will charge interest on amounts paid after the deadline.
The notice has a complete list of forms that allow taxpayers to qualify for the late payment exception. The most commonly-seen ones are probably Form 4562, for depreciable assets and the section 179 deduction, and Form 8582 for passive activities.
By issuing this notice early, the IRS has also given taxpayers a planning opportunity. If you have a big balance due on April 15, and you have one of the qualifying forms, you now are eligible for what amounts to a low-interest loan for up to six months, until the October 15 extension deadline. Many taxpayers accelerated income into 2012 to beat the 2013 tax hikes, and they loan might come in handy. The current IRS interest rates:
three (3) percent for underpayments;
five (5) percent for large corporate underpayments
But if you have the cash, you probably want to pay up on April 15. There aren’t many places left where you can get a 3% after-tax return on your money for six months.
David Cay Johnston, Level Playing Fields Under Attack. (Tax.com). Because we don’t want Wal-Mart to be at the mercy of some guy selling stuff from his basement.
The road not taken. I left a national accounting firm to start a new firm. A (purported) alumna of the same firm took a somewhat different path. (Going Concern)
The 1040 filing deadline is five weeks from today. The 1120 and 1120S deadline is this Friday. The penalty for filing an 1120-S late is $195 per shareholder, with the penalty repeated each additional month the return is late. Proceed accordingly.
Fred’s federal taxes have increased by 9% with no change in his earnings. If Fred does not increase his distributions from his business to pay these increased taxes, his disposable income will decrease by 19%. Might these increased taxes have no substantial impact on the prospects of his small business and its employees? Not a chance.
David Cay Johnston pushes for harsher accumulated earnings tax. As I predicted, we’re starting to see people pushing for enforcement of the Accumulated Earnings Tax to deal with the pretend problem of corporations “hoarding” cash. Mr Johnston takes the podium in an (unfortunately gated) article in Tax Notes:
American nonfinancial corporations held more than $2.2 trillion of cash and near cash offshore at the end of 2010 in current dollars, IRS and Federal Reserve data shows. And that is on top of the almost $1.7 trillion of liquid assets owned by firms and subsidiaries with U.S. addresses that we will see when the 2012 corporate income tax data becomes available in a few years. That global cash and near cash pile of almost $4 trillion came to $12,600 per American — well more than triple the $3,500 in per capita federal income tax revenues that year.
There is no possible business justification for that much cash. As Tax Court Judge David Laro wrote in Haffner’s Service Stations Inc. v. Commissioner, T.C. Memo. 2002-38 “a need to retain earnings must be directly connected with the needs of the corporation itself and must be for bona fide business purposes.”
No “possible” business justification for that much cash? It’s pretty easy to come up with potential justifications. If you are a corporation sitting on a lot of cash, you have a lot to think about. You have unusual opportunities, which you need to evaluate carefully. The imposition of the shareholder-level tax on earnings is certainly a factor. Does that mean I trust corporate management and boards? No. But I trust them a lot more than second-guessers at the IRS.
The Judge Laro cite that Mr. Johnston uses only restates the legal background of the accumulated earnings tax — not the economics of it.
If you want to really encourage corporations to free up their cash, end the double-taxation of corporate income by allowing full deductibility of dividend payments — with an excise withholding tax on non-profit and non-U.S. distributees to ensure the income is taxed once. That will give corporations a powerful incentive to distribute cash they aren’t using – one that will work a lot better than beefing up the IRS Second-Guess Division.
Update: Mr. Johnston e-mails:
I have written in favoring of restoring tax-free dividends for modest sums or encourage savings, partly because most Americans have little saved in the tax system and even though only one in four gets dividends directly: [$link Ed.]
And I called for a two-year test of dividend deductions in this column a few months later, arguing that dividends have the virtue of separating actual value-added managers from those who play accounting games since you need need cash to make dividend payouts. [gated links here and here. Ed.].
Unfortunately I don’t have links to free versions of the original articles.
No more paper Internal Revenue Bulletins. The IRS has discontinued its old paper Internal Revenue Bulletin, where it published tax guidance. From Announcement 2013-12:
The IRB is available on IRS.gov before printed copies are available. Also, the majority of items (about two-thirds) that appear in the IRB are released with a News Release about a month ahead of when the item appears in the IRB. Since all items in the IRB are available electronically, almost a month in advance of being available in the printed IRB, we are eliminating the printing of paper copies of the IRB, which are distributed directly from the IRS. The cost savings to printing and postage would be $148,000 annually.
It makes sense. Another bit of my accumulated tax training goes the way of the Dodo.
Going Concern, No, We Can’t Help You Pass the Ethics Exam. When I took it, it was mailed to successful CPA candidates to do at home and mail in. No wonder there are no ethical problems with our generation. Oh, wait…
A federal judge Friday sentenced a key player in the once-lucrative Jenkens & Gilchrist tax shelter practice to eight years in prison. From the AP:
U.S. District Judge William H. Pauley III sentenced 52-year-old Donna Guerin, of Scottsdale, Ariz., after she pleaded guilty to conspiracy to defraud the United States and tax evasion. He ordered her to pay $190 million in restitution besides the $1.6 million she agreed to forfeit when she pleaded guilty in September.
Guerin, a former partner at Jenkens & Gilchrist, a Texas-based law firm with offices throughout the United States, had admitted that she helped market tax shelters from 1994 through 2004 to some of the world’s richest investors, including the late sports entrepreneur Lamar Hunt, trust fund recipients, investors, a grandson of the late industrialist Armand Hammer and one of the earliest investors in Microsoft Corp.
The biggest prosecution target at Jenkens, Paul Daugerdas, faces his second trial on the charges in September. His 2011 trial was voided because of juror misconduct.
Dare we attempt to guess what the income tax might look like in another 100 years?
Personally I think it will still exist, but it will have company. The big question for policymakers is whether it should operate as a “mass” tax — as it strives to do today — or whether it will function as a “class” tax that applies only to the upper income strata. Given that roughly 47% of American households currently don’t pay the income tax (distinguished from payroll taxes, which almost everyone pays), one could argue it is already starting to resemble a class tax. Perhaps the future is already here.
I can state with some confidence that if there is an income tax in 2113, I won’t be preparing returns.
There are many ways to get in trouble with tax law. As I have said in the past, if you want to get indicted it’s a bit harder. It helps to be a celebrity, have a very large tax debt, not report large amounts of funds in foreign financial accounts, or abscond with trust fund taxes. I need to add another item to that list: File liens against IRS employees who are investigating you.
Governor Branstad has signed the bill conforming Iowa’s tax law to federal changes enacted last month. The Governor signed SF 106 yesterday afternoon.
The bill allows taxpayers to use several federal provisions in computing their 2012 Iowa taxes, including:
- The federal Section 179 deduction of up to $500,000.
- The federal above-the-line deductions for tuition and educator expenses.
- The exclusion for IRA distributions to charity for taxpayers who have reached age 70 1/2, and the transitional rules for January 2013 charitable rollovers of IRA distributions.
- The optional deduction for state and local sales taxes.
The bill does not conform Iowa to federal bonus depreciation; Iowa filers will normally use federal standard MACRS depreciation instead.
Tony Nitti, Senate Proposal for Tax Reform Part II: Democrats Seek To End S Corporation Payroll Tax Loophole. It’s similar to nonsensical proposals put forward in prior years to tax S corporation K-1 income when 75% or more of revenues are “attributable” to three or fewer shareholders — an impossible standard to evaluate in many cases, and one that discriminates against the smallest S corporations. It shows they are lazy — the problems with the approach are well known, yet the won’t make the effort to correct, instead trotting out the same old bill. It just shows they aren’t serious.
David Cay Johnston finds the cuts to IRS funding that would result from the impending sequester “Particularly Devastating” (Tax.com)
Iowa legislature goes 0-for-January. The Iowa General Assembly has been completed the first three weeks of its 2013 session without settling what Iowa’s tax law is for last year. The legislation needed to update Iowa’s 2012 tax law for the retroactive federal changes enacted in the Fiscal Cliff bill at the beginning of this year hasn’t cleared either house of the legislature. The Senate Ways and Means Committee at least moved its bill (SF 106) out of committee Wednesday, while House Ways and Means hasn’t even done that much with its bill (HF 110)
Many Iowans were affected by the retroactive changes, including educators and people who made energy-saving home improvements. Almost all businesses are affected by the Federal extension of $500,000 Section 179 expensing of depreciable property for 2012. Yet these taxpayers can’t complete their Iowa 2012 tax returns until the legislature decides what parts of the federal changes to accept.
The silliest part: we pretty much know what the bill will look like. It’s almost certain that it will adopt federal Section 179 rules and the other “extender” rules, without adopting federal “bonus depreciation.” That means there’s no reason to dawdle. But dawdle they do.
50 years for Wasendorf. The Wasll Street Journal reports:
Russell Wasendorf Sr., was sentenced to the maximum 50 years in jail after admitting to orchestrating a fraud at his futures brokerage and misleading regulators for almost 20 years.
Mr. Wasendorf, 64 years old, pleaded guilty last September to the fraud at Peregrine Financial Group Inc. that federal prosecutors said had cost clients $215.5 million and masked a business that never was profitable. He also was ordered to pay the full amount of missing funds in restitution.
Mr. Wasendorf got away with it by forging paper bank statements for the regulators and auditors. The scam blew up when Peregrine was forced to move to electronic account verification. Sadly, the chances of full restitution being paid to his victims are less than the chances he will walk out of prison at the end of his sentence.
The IRS also claimed that it would suffer unspecified “costs associated with . . . finding other positions for the 167 Service employees currently working on the return preparer project.” [Institute for Justice attorney Dan] Alban noted, in response, that just over two weeks ago, the IRS complained about understaffing, since “[o]verall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.” You’d think that the IRS would welcome, not rue, the idea of having nearly 200 employees available for other tasks – like answering the phone (at current staff levels, they only do that about 70% of the time).
The preparer regulation program has always seemed a frivolous use of IRS resources when tax complexity and identity-theft fraud are making the tax law almost impossible to administer.
I hate extra apostrophes. Careful Tax Update readers know that I have a terrible habit of inserting extra apostrophes, creating an unintended possessive. I know the rules, but my fingers betray me when typing. Fortunately I can easily change a blog post to turn “it’s” to “its.” Not everybody is so fortunate.
Unless, of course, Steven owns “Steven’s” building.
Iowa House and Senate Republican leaders today proposed to give a flat $750 to every Iowa household in an effort to return to taxpayers the state’s $800 million budget surplus.
The money would be returned to taxpayers in the form of a tax credit, said Senate Republican Leader Bill Dix, R-Shell Rock, and House Speaker Kraig Paulsen, R-Hiawatha.
That seems pretty straightforward. Better still to give it back as part of simplifying the tax code, but better that than just spending it. Yet just spending it has its advocates:
Senate Democrats who control their chamber said that since it’s early in the session they are open to talking about the Republicans’ proposal, but they have other ideas.
Sen. Joe Bolkcom, D-Iowa City, who chairs the tax-writing Iowa Senate Ways and Means Committee, said Democrats are interested in providing earned income tax credits for lower-income Iowa families and raising the threshold for filing state income taxes. He added that Iowa needs to invest more tax money to clean up dirty rivers and streams, repair crumbling roads and bridges, upgrade the state’s education system and make other improvements.
The earned income credit is a welfare program run through tax returns, with a tremendous rate of fraud. It’s also a poverty trap. The phase-out of benefits with rising income serves as a stiff tax on improving your income. And spending doesn’t become something else just because you call it “investing.”
Taxpayers who took an IRA distribution in December can also roll that into a charity by January 31 and avoid having the distribution included in 2012 income.
These provisions were part of the Fiscal Cliff tax bill, which extended the tax-free status of IRA rollovers to charity along with a bunch of other expired provisions.
Just because your bank is a country bank doesn’t make the banker a bumpkin. Four Nebraskans have been charged with “structuring” — breaking deposits into chunks under $10,000 to avoid federal cash reporting requirements. Federal law requires banks to report cash transactions over $10,000. Folks who don’t want the government to know about their cash sometimes attempt to use multiple smaller transactions to fly under the radar; that’s illegal. Theindependent.com reports:
Randy L. Evans, 59, of Grand Island is charged in a 15-count indictment. In the first 14 counts, it is alleged that between March 29, 2010, and Dec. 27, 2011, Evans structured financial transactions to evade reporting requirements when he made deposits in the amount of $210,381 at Five Points Bank. Count 15 charges him with structuring financial transactions to evade reporting requirements when he made 449 transactions between Jan. 4, 2010, and Feb. 28 at Five Points Bank in the amount of $2,030,322.
Bankers are required to report suspicious transactions, and if you make yourself a regular, they’ll notice — especially in a small-town bank.
Regrettably, yes. Libertarian writer Sheldon Richman breaks the bad news: just because the income tax is a bad thing doesn’t make it unconstitutional:
Where does this leave liberty’s advocates? First, we have to face the facts. Like it or not, the U.S. Constitution empowers the Congress to levy any tax it wants. Anyone is free to come up with a contrary interpretation, but the constitutionally endowed courts have spoken. Reading one’s libertarian values into the Constitution is futile. For better or worse, the Constitution means what the occupants of the relevant constitutional offices say it means.
In other words, it doesn’t matter if you think the income tax is unconstitutional if the IRS, the federal judge, the Marshals Service and the Bureau of Prisons think otherwise. Fighting the income tax by not filing ruins your finances without hurting the Leviathan one little bit.
Luring and subsidizing your competitors with your tax money. Left-side advocacy group Good Jobs First has released a report slamming “incentive” tax breaks like those used for two fertilizer companies in Iowa last year. The report doesn’t mention Iowa’s programs, but it provides a depressing list of corporate bribery in other states, including subsidies to lure employers from Kansas City, Kansas across the river to Kansas City, Missouri, and vice-versa. Their press release gets it right:
Interstate job piracy is not a fruitful strategy for economic growth, [report author Greg] LeRoy noted: “The costs are high and the benefits are low, since a tiny number of companies get huge subsidies for moving what amounts to an insignificant number of jobs.” LeRoy added: “The flip side is job blackmail: the availability of relocation subsidies makes it possible for companies that have no intention of moving to extract payoffs from their home states to stay put.”
For all the abuse, the organization’s recommendations are modest. I would eliminate all such subsidies and replace them with a simple low-rate tax system for everyone. The Tax Update Quick and Dirty Iowa Tax Reformwould be a great start here.
Jamaal Solomon, Tax Organizer for Entertainers. Independent entertainers who cross state lines can find their taxes complicated, so good recordkeeping is essential.
Ottumwa man pleads guilty to tax charges in connection with Ponzi scheme. Known to TV viewers of a certain age as the home of Radar O’Reilly, Ottumwa, Iowa now also has its own Ponzi scam. CBSNews.com reports:
An Ottumwa, Iowa investment manager is likely heading to prison after pleading guilty to charges of wire fraud and tax evasion stemming from a $1.1 million Ponzi scheme.
John Francis Holtsinger pleaded guilty Friday during a hearing in federal court in Des Moines as part of a plea agreement with prosecutors.
The plea deal says that Mr. Holtsinger told people that he would invest their money, and he instead spent most of it. On what? Things that might be sold to recover funds for the investors? The indictment doesn’t offer much hope for recovery (my emphasis):
Of the $493,000 in funds received from investors, only $155,000 was transferred to an investment account at Interactive Brokers. The remainder was deposited into accounts controlled by Holtsinger and used by him to further his scheme and for his personal use including, but not limited to, legal expenses, cas withdrawals, payment of living expenses, trips, accessing web-based “dating” sites, and other purposes different than he represented to investors.
Interesting scare quotes around “dating.” In any case, it’s not an investment likely to produce anything that his victims would want.
The indictment and plea deal together show that there were warnings to his investors. He wasn’t a registered investment advisor, for starters. And this from the indictment should have triggered BS detectors:
After conducting trades on behalf of investors for a short period of time, Holtsinger offered and sold investments to the investors in the form of promissory notes. He represented that the notes would yield high returns with no risk including, but not limited to, what he called an “inheritance investment” that would be invested through his mother and pay out upon her death. The “inheritance investment” required a $20,000 deposit and was to pay annual returns of 9% with automatic liquidation and payout if the investment dropped below 3% of its initial value.
The “high returns with no risk” fairy is the Tax Fairy’s evil twin sister. When she shows up, it’s time to back away quickly from whoever brings her into the room. Other red flags:
- When he couldn’t come up with cash, he came up with excuses, like “informing investors… that their funds had been frozen as a result of actions taken by state or federal authorities.”
- After learning he was being investigated, “…he attempted to convince investors to lie to law enforcement and under oath regarding the purpose of the funds they had given to him. The defendant instructed these individuals to describe their payments to him as ‘interest-free loans,’ when in reality they were investments. The defendant also threatened that anyone who cooperated with law enforcement would not be repaid.”
Unfortunately, the not getting repaid part was already true. The plea deal says that Mr. Holtsinger faces a four-to-seven year sentence.
One question that often comes up is how a domestic U.S. business should treat payments to a foreign contractor for services performed outside the U.S. Is a Form 1099 required? Is withholding required?
As long as the foreign contractor is not a U.S. person and the services are wholly performed outside the U.S., then no Form 1099 is required and no withholding is required.
After winning a new trial, Jenkens partner pleads guilty in tax shelter case, one of the Jenkens & Gilchrist attorneys accused of crimes in connection with the tax shelter frenzy of the late ’90s and early ’00s gave up the fight yesterday. The Wall Street Journal reports:
Donna M. Guerin, 52 years old, admitted she wrote false opinion letters designed to justify complex financial transactions that reduced the potential taxes to be paid by the firm’s clients. The overall scheme created more than $400 million in false tax losses, she said.
“I knew in my heart then, and I acknowledge to Your Honor today, many of our clients were only interested in reducing their tax liabilities,” Ms. Guerin said.
At a hearing in Manhattan federal court on Thursday, Ms. Guerin pleaded guilty to conspiracy to defraud the U.S. and tax evasion. She faces up to five years in prison on each charge. Sentencing is set for Jan. 11.
Ms. Guerin had been convicted of the charges last year, but the verdict was thrown out because of a juror’s misconduct, and a new trial was set. Two of her partners still face charges, including the prosecutor’s biggest target, Paul Daugerdas, who was the mastermind of tax shelters that created hundreds of millions of dollars of tax losses. Many of these shelters failed in court.
This is a commonly misunderstood area of tax law. In short, S corporations have more flexibility than you realize to make distributions that are not perfectly pro-rata to its shareholders. That being said, I wouldn’t tempt fate.
S corporations can only have one class of stock, which means that all distributions must be equal among shares (though differences in voting rights are allowed). The hair-trigger proposed rules that would have terminated S elections for trivial violations of the one-class-of-stock rule were never enacted, thank goodness. But disproportionate distributions should be avoided, and if they happen, they should be corrected with make-up distributions or reimbursements.
Howard Gleckman, Who Pays the Corporate Income Tax?(TaxVox). Mr. Gleckman is with the Tax Policy Center, an influential center-left think tank. Their conclusion is important:
The bottom line: For the first time, TPC assumes that workers bear some of the corporate tax burden.
In newly-published assumptions, TPC figures 20 percent of the corporate income tax is borne by labor and 80 percent by capital. TPC further refines the capital share by dividing it into two chunks. Twenty percent of the levy is reflected in normal returns (essentially, equal to the return from low-risk bonds) and 60 percent in any additional returns received by shareholders.
The revision, similar to adjustments made recently by the Treasury Department and the Congressional Budget Office, will be important as TPC analyzes tax reform plans that reduce corporate rates.
That’s because, until now, TPC assumed investors ultimately paid the entire corporate tax in the form of lower returns to capital. Now, TPC concludes that labor also pays through lower wages. As a result, workers, as well as shareholders and other owners of capital, would benefit from any cut in the corporate tax. Similarly, both would take a hit if corporate taxes are hiked.
So corporations are people, too. No, corporations don’t bleed, but corporations are ultimately voluntary organizations of cooperating individuals. If you take money from a big evil corporation, you don’t hurt some insensate Balrog. You hurt shareholders, retirement investors and employees.
It amuses me to listen to the private sector claim that “we built it.” Surely the private sector has built things, but the public funding of sports arenas and other private enterprise facilities, such as warehouses, factories, and office buildings, makes it impossible to consider the private sector claim as anything other than, at best, a gross exaggeration, and at worst, a calculated lie.
Studies examining the impact of cutting personal income tax rates on job growth or economic activity generally have been inconclusive, said Will McBride, chief economist for the Tax Foundation.
It is true there are a lot of studies that find only a weak statistical connection between personal income taxes and economic growth, including my own regression analysis of OECD countries. However, in the same study which will be published shortly, I find a strong statistical connection between corporate income taxes and economic growth. This is in line with other research, such as that by Gordon and Lee.
Iowa Republicans hint at income tax reform. Governor Branstad has pushed hard for property tax reform in the first two years of his term, but has done nothing about Iowa’s awful income tax. At a press conference yesterday Iowa Republican leaders hinted that they might try do change that. From Radio Iowa (via thebeanwalker.com):
House Speaker Kraig Paulsen, a Republican from Hiawatha, said tax reform is a key portion of the plan the call “Iowa Strong.”
…
Paulsen said property taxes aren’t the only focus. “We also need changes in our income tax code. We need to reduce both personal and employer income taxes,” according to Paulsen. “And we’re going to do this, we’re going to … lower out our extremely high rates so that all Iowans can keep more of their hard-earned money and that entrepreneurs can better compete on a worldwide basis, and encourage them to invest right here in the state of Iowa, invest in our workforce.”
A shortcut for refunds for identity fraud victims? Taxpayers whose identities have been stolen have a tough time getting refunds out of Doug Shulman’s IRS. A Clearwater, Florida lawyer is looking for a way to cut through the red tape. From TBO.com:
Clearwater lawyer Jim Staack may have found a way for frustrated identity theft victims to get their overdue tax refunds: Sue the IRS.
Last year, Staack represented James and Christine Gordon in their effort to pursue a class action on behalf of identity theft victims who were unable to obtain their rightful tax refunds. The Gordons got their refund 12 days after the suit was filed.
Then Staack added Crystal Lake as a plaintiff in the case. Twelve days later, she got her refund.
But the IRS says that the quick refunds were just a coincidence, and that suing won’t help. Still, it’s easy to understand why taxpayers will give it a try:
People trying to get their tax refunds are forced to navigate a byzantine system of unreturned phone calls, conflicting regulations and unskilled Internal Revenue Service employees who give them incorrect information, according to the report.
Staack said that after he filed the Gordon lawsuit last year, his office was contacted by a steady stream of identity theft victims who all tell the same story.
“They get the runaround from the IRS. They make promises that are not kept. They’re told it will take 60 days. Nothing happens. Then they call back and are put off again.”
These frustrated taxpayers will find comfort in knowing that the IRS open-book tests for preparers are going strong.
Back in March David Cay Johnston took offense at my discussion of how public sector unions have helped cause the public sector pension mess.
The public pension plans that are underfunded are in that shape because politicians, Christie Whitman when she was governor of New Jersey being a prime example, cut money going into the plans and used them to finance tax cuts. The workers fought like hell to prevent that, but failed.
Hmmmm, how interesting. Unionized workers negotiate for a solid and sound compensation package and along come vote-seeking (dare we say rent-seeking) anti-tax politicians who end up costing the taxpayers more, not less, because they violated well established, centuries old economic practices.
Most city workers spend decades in public service to build up modest pensions. But for former labor leader Dennis Gannon, the keys to securing a public pension were one day on the city payroll and some help from the Daley administration.
And his city pension is more than modest. It’s the highest of any retired union leader: $158,000. That’s roughly five times greater than what the typical retired city worker receives.
Not bad for one day. But for somebody fighting like hell to ensure that public employee plans are adequately funded, it’s surely a bargain.
Via Death and Taxes.
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.
Iowa Republicans hint at income tax reform. Governor Branstad has pushed hard for property tax reform in the first two years of his term, but has done nothing about Iowa’s awful income tax. At a press conference yesterday Iowa Republican leaders hinted that they might try do change that. From 
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
