Posts Tagged ‘EITC’

Tax Roundup, 10/16/15: Is the Earned Income Credit really all that great? And: Ed Brown house back on the block.

Friday, October 16th, 2015 by Joe Kristan

20150929-1Can a program that wastes 25% of its cost be worthwhile? While many economists left and right say the Earned Income Credit is a great poverty fighting tool, some of us who do tax for a living aren’t so sure. Now two scholars at the libertarian Cato Institute have published a report that fleshes out some of these doubts: Earned Income Tax Credit: Small Benefits, Large Costs. The report provides this background:

While the EITC is administered through the tax code, it is primarily a spending program. The EITC is “refundable,” meaning that individuals who pay no income taxes are nonetheless eligible to receive a payment from the U.S. Treasury. Of the $69 billion in benefits this year, about 88 percent, or $60 billion, is spending.

Articles by liberal and conservative pundits regarding the EITC often make it seem as if there are few downsides to the program. The EITC is aimed at reducing poverty and encouraging work. Who could be against that?

Alas, there is no free lunch with subsidy programs. The EITC has a high error and fraud rate, and for most recipients it creates a disincentive to increase earnings.

The waste and the “disincentive effects” are the things that bother me the most. The phase out of the benefits makes it very expensive to earn a little more, after a certain low-income point. My computation of the Iowa marginal rates on EITC recipients is in chart:eic 2014

That’s a 55% tax on every dollar earned, which doesn’t exactly encourage you to earn more dollars. And I don’t try to account for the hidden tax resulting from the loss of other welfare benefits as income increases.

Unfortunately, the study doesn’t really address what should replace the EITC, other than calling for generic good tax policy: “For example, cutting the corporate income tax rate would boost business capital investment. That would generate higher demand for labor, and thus raise wages and create more opportunities for American workers over time.”

I wish they had discussed the “universal benefit” that Arnold Kling and others have set forth. Arnold describes this version:

For a universal benefit, I propose something like $6000 for each adult in a household and $4000 for each child. [Charles] Murray proposed $10,000 per adult and zero per child.

Murray described the program as a cash grant. I describe it as flex-dollars that can only be used for “merit” goods, meaning health care, food, housing, and education.

Each of us presumes that people will purchase health insurance. I am explicit that catastrophic health insurance would be mandatory.

I propose something like a 20 percent marginal tax rate, or phase-out rate, for the universal benefit.

Arnold would have the phase-out as an addition to the income tax; I would couple it with the standard deduction so it phases out as part of the income tax, not as an addition to it. In any case, it would address many of the fraud and administration problems we see in the EITC.


honey princesses 2014


Robert D. Flach has your fresh Friday Buzz! Last minute filing, neglected beneficiary designations, and Dance Moms are highlighted.

Laura Saunders, Beware of Tax Surprises Lurking in Mutual Funds (Wall Street Journal). “Here’s why: By law, each year mutual funds must pay out to investors nearly all their income, which includes interest, dividends and net realized capital gains—in short, the profits on their trades minus offsetting losses… Already, one fund has announced the largest capital-gains payout some experts can remember.”

William Perez, I don’t make too much money, does the new health insurance rule apply to me?

Annette Nellen, Worker Voice, Classification and Taxes. “One of many things the “on demand” economy means is more clear and consistent rules on worker classification.”

Jason Dinesen, Glossary: S-corporation. “S-corporation is a tax term that refers to a corporation or an LLC that elects to be taxed under the rules of Subchapter S of the Internal Revenue Code.”

Jim Maule, Taxes, Consumption, Soda, and Obesity. “It is not unlikely that people who find soda to be too expensive because of the tax will spend their dollars on pies, cakes, candy, doughnuts, cookies, ice cream, and similar items.”

Leslie Book, Tax Court Holds Preparer Who Placed Truncated Social Security Number on Returns Subject to Penalties. He didn’t use a PTIN or Social Security Number on the returns he signed. The penalty is $50 per return. He prepared 134 returns in 2009. I’ll leave the math as an exercise for the reader.

TaxGrrrl, ‘Dance Moms’ Star Abby Lee Miller Accused Of Hiding Income, Indicted On Fraud Charges. So many TV shows I’ve never seen, so many indictments.

They both eat brains. Presidential candidate debates outdraw zombies (Kay Bell)




Howard Gleckman, The Debt Limit: Here We Go Again (TaxVox):

The House is largely leaderless and a significant minority of its Republican caucus will oppose any increase in the federal borrowing limit. In the Senate, CNN reports that GOP leader Mitch McConnell wants major concessions from the White House on such hot button issues as Social Security and Medicare before he moves a debt bill. And a lame-duck President Obama seems increasingly disinclined to negotiate with Hill Republicans on any issue. 

Pass the popcorn.


Jeremy Scott, Democrats Offer Nothing Much on Tax Reform (Tax Analysts Blog):

Taxes were discussed. Bernie, of course, wants to use them to reduce the gap between the rich and the poor, something it’s not clear his plan even addresses. Chafee wants a new 45 percent bracket on higher incomes. And Hillary talked some about the numerous small tax provisions she would like to enact to accomplish extremely specific, targeted goals. But nothing said onstage Tuesday night should give any tax reform observers hope that a Democratic White House in 2017 will be any more behind a broad tax reform effort than President Obama has been.

A complicated tax code that meddles in everything is exactly what you would expect from big government fans. There’s no reason to expect reform from the avowed party of big government.


Kyle Pomerleau, Governor Lincoln Chafee’s Modest Tax Proposal (Tax Policy Blog).

Bob McIntyre, Although He Left out Key Details, It’s Clear Kasich’s Tax Plan Is a Deficit-Busting Giveaway to the Wealthy (Tax Justice Blog). We don’t need no stinking key details.


TaxProf, The IRS Scandal, Day 890

News from the Profession. Will the CPA Exam Become Optional? (Caleb Newquist, Going Concern)


The Brown house. Photo from IRS Auction web site.

The Brown house. Photo from IRS Auction web site.

6,000 Sq. Ft., Handyman’s and Ordnance Clearance Specialist’s Dream! The IRS is going to once again try to auction the home of Ed and Elaine Brown, the couple serving loooong prison terms as a result of an armed standoff following their conviction on tax charges. It has some unusual features, reports

In the back of a closet, a hidden door can be found. A ladder leads to a small bunker with a passageway that leads just outside. Dirt hides the manhole cover that provides an exit to the passage.

Admit it, you’ve always wanted one of those.

“There’s a lot of stuff that you need to look at and say, ‘Do I want to finish it that way? Do I want to go a different direction?'” said Roger Sweeney, liquidation specialist for the IRS. “But it also comes with 100 acres, and with that price, it’s a heck of a deal.”

There are solar panels and a wind turbine on the land, but investigators have found explosive devices, as well. A warning is included in the notice of sale.

The article has a little photo tour of the property. You can learn more at the IRS auction website. The starting bid is only $125,000.

Related: Tax Update Blog Ed Brown coverage.



Tax Roundup, 9/4/15: Labor day and the Earned Income Tax Credit. And more three-day weekend goodness!

Friday, September 4th, 2015 by Joe Kristan

20140711-2Happy Labor Day!  While getting ready to put in your token appearance at work today before you head for the lake, you may want to ponder the hot “labor” issue of the moment — the minimum wage and its alternatives.

In spite of claims otherwise by supporters, a minimum wage has to cause job losses for the least skilled and connected. That’s part of what it was originally meant to do. If raising the price of wages didn’t affect how much labor is purchased, you could set a $100 per hour minimum wage. That, is, of course, absurd. So advocates have to argue that somehow small increases in the minimum wage are worth the job losses because of the benefits for those who keep their jobs, or that there are no job losses.

Recognizing the weakness of these arguments, many economists argue that an increased Earned Income Tax Credit is a better way to support the working poor.   For example, in The minimum wage versus the earned income tax credit for reducing poverty, Cornell University economist Richard V. Burkhauser states:

Introducing or increasing a minimum wage is a common policy measure aimed at reducing poverty. But the minimum wage is unlikely to achieve this goal. While a minimum wage hike will increase the wage earnings of some poor families and lift them out of poverty, some workers will lose their jobs, pushing their families into poverty. In contrast, improving the earned income tax credit can provide the same income transfers to the working poor at far lower cost. Earned income tax credits effectively raise the hourly wages only of workers in low- and moderate-income families, while increasing labor force participation and employment in those families.

The argument for a perfect earned income tax credit is compelling, but the credit is far from perfect. It is estimated that around 25% of the Earned Income tax credit paid out is paid improperly, including billions in fraud. Earned income tax credit fraud is a big part of the business of corrupt preparers. Many other taxpayers who could properly claim it fail to because of its complexity.

Even if the waste and fraud problem could be solved or overlooked, a properly-functioning EITC is still a poverty trap. The credit phases out as incomes rise, creating a high effective marginal tax rate on each additional dollar earned by a low-income family. It provides help at low income levels, but it discourages improving those income levels.

eic 2014

The marginal tax rates get even worse when phase-outs of other income-based benefits are taken into account.

welfare benefits marginal rate

Chart via the Mises Institute


Arnold Kling is a proponent of a “Universal Benefit” providing everyone a basic amount of income in place of the current array of welfare benefits:

One of the advantages of a universal benefit is that you give the money to everyone. My idea is that you would then tax some of it back at a marginal rate of 20 or 25 percent. That is, for every dollar that someone earns in the market, they are lose 20 cents or 25 cents in universal benefits. Compared to a marginal tax rate of zero, 25 percent is more complex and has a disincentive. But it is much less complex and de-motivating than our current system of sharp cut-off points for benefits like food stamps and housing assistance. And having a non-zero tax rate allows you to have a higher basic benefit at lower overall budget cost.

I’m not entirely convinced that giving everyone a benefit is wise, but it may be a better idea than what we have. It deserves consideration before we concede that a fraud-ridden and complicated EITC is the best we can do for the working poor.


Jared Walczak, Location Matters: Effective Tax Rates on Call Centers by State (Tax Policy Blog). California is a surprisingly cheap place for this.




buzz20150804Robert D. Flach brings today’s Buzz roundup from the National Association of Tax Professionals Tax Forum in Philadelphia. Today he links to posts about small business survival tips and the flight of taxpayers from New York state.

Jason Dinesen, Glossary: Hobby Loss Rules, “This is important because deductions for hobbies are limited, whereas deductions are (generally) unlimited for business activities engaged in with a for-profit motive.”

William Perez, What the Recent Uber Worker Classification Ruling Means for Tax Professionals. It has tax implications that William ably discusses, but what it really means is that the government wants to protect well-connected taxi monopolies.

Kay Bell, Uncle Sam to pay $133 million to protect OPM hack victims. But at least they won’t send you a 1099 for the “value” they provide.

Robert Wood, IRS Offshore Account Penalties Increase, Hunt Continues. Offshore bank account secrecy is pining for the fjords.

Jack Townsend, Another Swiss Bank Obtains NPA Under DOJ Swiss Bank Program

Peter Reilly, Presidential Candidate Tax Plans Coming In Slow.


TaxProf, The IRS Scandal, Day 848. Today the prof links to a John Hinderaker post that includes this:

So someday–not any time soon–the IRS will finally be forced to answer the question that Koch Industries asked it five years ago, in 2010. The Obama administration’s strategy is always the same–stonewall, assert every possible theory, no matter how frivolous, and try to run out the clock. Whether an honest answer to the question will be given, years after the fact, is of course another question.

It’s worked for the IRS and the administration so far.




Howard Gleckman, Why Individual Tax Revenues Will Grow Even If Congress Doesn’t Raise Taxes (TaxVox):

Since 1985, income tax brackets have been adjusted for inflation so that someone whose annual raise tracks the Consumer Price Index is not thrown into a higher tax bracket. However, that adjustment doesn’t fully protect rising income from higher taxes.

In part, that’s because some key parts of the income tax are not indexed. They include the child tax credit, the surtax on net investment income, and the income ceiling for making contributions to Individual Retirement Accounts. But the real problem is that when income grows faster than inflation, it is pushed into higher tax brackets.

When they say the want to just soak the rich, that’s just to fool the rubes. It’s your pocket they want to pick.


Jenice Robinson, H&R Block Uses Corporate Lobbying Might to Make Sure the Poor Use Its Services. (Tax Justice Blog)Earned Income Credits are involved.


Career Corner. Please Don’t Be Like This Accountant Who Got Scammed Over Email (Caleb Newquist, Going Concern). “Yeah, it’s a little sloppy that a single email from a CEO along with a lone signature over a company seal would be enough to wire $737k.”



Tax Roundup, 8/27/15: Iowa cheap for the factory, costly for the headquarters. And: Instant Tax indictments.

Thursday, August 27th, 2015 by Joe Kristan

All the state taxes. The Tax Foundation has issued its 2015 Location Matters report, “a comparative analysis of state tax costs on business.” It provides a summary of the costs of operating different kinds of business, state by state, with wonderful charts like this one for Iowa:

Source: The Tax Foundation

Source: The Tax Foundation

This chart seems to show that Iowa is relatively easy on manufacturing, but a very expensive place for a service business or a distribution center — with an effective state and local rate of around 40% for distribution facilities. It also shows that the corporation income tax really only clobbers retailers and corporate headquarters.

The charts really get interesting when you compare states. Let’s turn to our neighbors in South Dakota:


Source: The Tax Foundation

While most industries fare much better in South Dakota than in Iowa, capital-intensive manufacturers — especially new ones — do a little worse. This is because South Dakota has a higher sales tax, and, presumably, because of the presence of Iowa’s tax incentives for new manufacturers. Once you settle in, there is little difference.

Here’s what the report says about Iowa (my emphasis):

Despite having the highest top corporate income tax rate in the nation at 12.0 percent, Iowa’s mature capital-intensive manufacturing firm experiences the lowest effective tax burden in the nation at 3.9 percent, due in large part to Iowa’s single sales factor apportionment formula and the lack of a throwback rule, which have the effect of exempting nearly all of a firm’s income from in-state taxation. The operation also experiences a relatively low property tax burden due to the lack of property taxes on equipment and inventory.

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

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

Iowa offers a 50 percent deduction for federal income taxes paid, which helps mitigate the burden of the state’s high corporate and individual income taxes but is also responsible for those high rates.

In addition to its favorable apportionment factors for businesses selling goods out of state, Iowa’s benefits-based sourcing rules work to the advantage of Iowa-based firms selling services out of state. However, effective property tax rates can be exceedingly high for some firms—nearly double the national average for mature distribution centers, for instance—greatly increasing overall tax costs. Qualifying new firms (the manufacturing operations and the distribution center) receive a full abatement of the property tax on improvements for three years, though the abatement does not cover taxes on the value of the land itself.

Manufacturing machinery and research and development (R&D) equipment are exempt from the state sales tax, and the R&D facility receives other incentives as well. Iowa also offers generous investment and job creation tax incentives to new firms, though due to the state’s high tax rates, most new firms continue to experience above-average tax burdens.

This offers some lessons for Iowa’s ongoing tax reform debate:

– The Iowa Corporation Income Tax, where it isn’t futile, is a job killer, making it very expensive to locate a corporate headquarters here.

– Iowa’s vaunted tax incentives benefit the lucky and the well connected, while stifling start ups: “most new firms continue to experience above-average tax burdens.”

– Despite the recently enacted property tax reforms, Iowa’s real estate taxes still are a big cost for Iowa businesses.

The full report can be found here.


Can Iowa tax reform happen?

Tax Update’s Quick and Dirty Iowa Tax Reform Plan




Instant tax unhappinessThe tax prep franchise outfit Instant Tax Service had a colorful history before it was ordered to close by a federal judge. It was notorious for “paystub” returns, prepared to claim refunds for a mostly low-income clientele before they got their W-2s. That’s something preparers aren’t supposed to do.

Yesterday things got worse for the owners of Instant Tax Service with an indictment on tax charges. A Department of Justice Press Release lists some of the allegations (my emphasis):

From about January 2004 through November 2012, Ogbazion and Wade executed a scheme to obstruct the Internal Revenue Service (IRS), wherein numerous ITS franchises filed false federal income tax returns without valid Forms W-2 and without the permission of their taxpayer clients.  The false returns included false and inflated sole proprietorship Schedule C income in an attempt to increase the Earned Income Tax Credit.  Over the course of several years, Ogbazion also instructed an ITS employee to electronically file large volumes of unsigned tax returns on the first day of the “tax filing season,” then falsely backdated customer filing authorizations.  In an attempt to obstruct IRS civil compliance audits, ITS maintained and filed false documents with the IRS, including fabricated Forms W-2 created by ITS employees using tax preparation software, and forged client signatures on various false IRS forms.

Earned income tax credit skeptics are often scolded that the 25% rate of improper payments isn’t all due to fraud; it’s because taxes are hard and all. Taxes are hard, but if there isn’t massive fraud, it’s not for lack of trying. Rather than trying to run a welfare system through the tax code, we should be looking at a universal benefit along the lines proposed by Arnold Kling.


Arnold Kling, The EITC in Practice

Tax Update, Helping the poor by increasing their marginal tax rate., H&R Block snuck language into a Senate bill to make taxes more confusing for poor people (Via the TaxProf).

H&R Block’s entire business model is premised on taxes being confusing and hard to file.

Well, that and promoting IRS preparer regulation to put competitors out of business.

Robert Wood, Trump Firing H&R Block Could Actually Help Immigrants




Jason Dinesen, Things a Business Owner Needs to Know Before Hiring Employees


Tony Nitti, 2013 Tax Changes Raised The Tax Bill On The Wealthiest 2 Percent By $60 Billion. “Whether an additional $60 billion in revenue is enough to satisfy the current administration remains to be seen.” No, we already know it won’t.

TaxProf, The IRS Scandal, Day 840. More about Toby Miles. Meanwhile, Commissioner Koskinen dismisses the revelations of Lois Lerner’s canine email address under the “old news” ploy, and tells Tax Analysts ($link) that even though she hates Republicans and Tea Partiers, Lerner’s team was fair and square in dealing with their exemption applications.

Kay Bell, Lois Lerner used her dog’s email to conduct IRS business


Joseph Thorndike, When it Comes to Taxes, Americans Are of Two Minds – or Three, or Five or Eight. “While trying to make sense of Donald Trump’s statements on tax policy, I was struck by their disparate quality; to call them random is to exaggerate their coherence.”


Tax Roundup, 8/26/15: The Twins defeat the IRS, so IRS may try to change the rules. Also: EITC fraud, and more!

Wednesday, August 26th, 2015 by Joe Kristan

20150826-2The Minnesota Twins have won five in a row. Six, if you count a recent IRS victory by the family that owns the ballclub. It is recounted by Ashlea Ebeling, Estate Of Late Minnesota Twins Owner Carl Pohlad Settles With IRS (via the TaxProf):

The main issue in the estate tax case was how to value Pohlad’s stake in the Minnesota Twins at the time of Pohlad’s death in January 2009 (he was 93). The Pohlad estate valued it as just $24 million for tax purposes, while IRS auditors pegged it at $293 million. Pohlad used typical wealth transfer techniques to limit estate taxes: splitting ownership and control of assets to theoretically reduce what an unrelated buyer would pay for them. 

But the administration doesn’t approve of valuing split interests based on their actual value:

Estate planning with family entities (family limited partnerships and limited liability companies) and the accompanying availability of valuation discounts is in the spotlight. Advisors have been warning clients all summer that the Treasury Department may be coming out with proposed regulations curtailing discounts by next month, and that the new rules could be effective immediately.

That will surely lead to litigation, as it isn’t clear the IRS has that power. It does add great uncertainty to succession planning, which is uncertain enough to begin with.




The St. Louis Post Dispatch reports on tax preparers indicted on allegations of earned income tax credit fraud. The charges say the operators of a business known as Tax King are alleged to have:

…trained Tax King employees how to falsify certain information to maximize returns.

Clients, for example, were allegedly encouraged to fill in false business information in order to qualify for earned income credits. They were allegedly also instructed to submit false education expenses, as well as inaccurate information regarding fuel taxes in order to qualify for tax credits.

Up to 25% of earned income tax credits are paid “improperly.” We are regularly assured that “improperly” doesn’t mean “fraudulently.” Taxes are hard, and all that. Well, if they aren’t stolen, it’s not for lack of effort.


William Perez, What to Do if You Contributed Too Much to Your Roth IRA. “There are four ways to fix this problem that are all pretty straightforward.”

TaxGrrrl, Making Sure You Eat: Paying Yourself As A Small Business Owner

Tony Nitti, Tax Geek Tuesday: Understanding Partnership Distributions, Part II –The Mixing Bowl Rules. “If a partner contributes property with a built-in gain or loss to a partnership and the partnership later distributes the property to a partner other than the contributing partner within seven years of the contribution, the contributing partner recognizes gain or loss equal to the built-in gain or loss…”

Kay Bell, NRA lawsuit takes aim at Seattle’s new gun and ammo taxes. A “gun violence” tax on guns and ammo makes as much sense as “drunk driving tax” on all alcohol purchases. It doesn’t tax what it purports to tax.

Peter Reilly, About That Kenneth Copeland Mansion You Saw On John Oliver. On abusive parsonage allowances.

Carl Smith, Tenth Circuit Hook Opinion: Interest and Penalties Must Also Be Paid to Satisfy Flora Full Payment Rule (Procedurally Taxing).  You can’t sue for a refund of a tax you haven’t paid.

Jack Townsend, Category 2 Banks under DOJ Swiss Bank NPA Program. A listing of the Swiss banks that have cut deals with the U.S. tax authorities.



Scott Greenberg, Four Tax Takeaways from the Most Recent CBO Report (Tax Policy Blog).

Over the last fifty years, on average, the federal government has collected 17.4% of GDP in revenues. Yet over the next ten years, the federal government is expected to take in 18.3% of GDP in revenues, nearly a whole percentage point higher than the historical average. The CBO forecasts that, in 2016, the federal government will collect 18.9% of GDP in taxes, higher than any year since 2000.

I don’t think that’s a good thing.


Howard Gleckman, Should College Endowments Be Taxed? (TaxVox).

But why not just make the endowments taxable and use some of the huge revenue windfall to boost tuition assistance and other supports for those students who really need it?

Maybe taxing amounts that aren’t used to reduce tuition. A rich university shouldn’t be saddling its students with debt — or asking for more federal subsidies — while its money managers are living high.


TaxProf, The IRS Scandal, Day 839. Toby Miles figures prominently.

Robert Wood, IRS Reveals Lois Lerner’s Secret Email Account Named For Her Dog.


The dangers of premature tweeting:


Oops. An hour later, the Dow closed down another 204 points.


Jim Maule, A Rudeness Tax?:

Modern American tax policy, which is in tatters, is of such a wrecked nature that it is only a matter of time before someone proposes a refundable politeness credit. The form would be fun, would it not? “How many times during 2017 did you hold a door open for another person?” Even better, the audits and the Tax Court litigation.

Prof. Maule is right: not every problem is a tax problem. Yet the politicians propose a tax solution for every problem anyway.



Tax Roundup, 6/23/15: A foolproof tax prep scam! And more.

Tuesday, June 23rd, 2015 by Joe Kristan

One week left! To file your FBAR Form 114 reports of foreign financial accounts.


ice truckDid a Davenport preparer e-file different returns than he showed his clients? That’s what federal prosecutors allege. They have accused a Davenport man of preparing accurate tax returns for clients, but then e-filing different returns claiming larger refunds, diverting the extra refunds to his own account.

If true, the case is interesting in two ways.

First,It appears to have been based on fraudulent Schedule C sole proprietorship filings. These can be used to create sham losses to create extra refunds, or to create sham earned income to generate earned income tax credit. It was most likely an EITC scam, as fake schedule A deductions work as well for deductions, but not at all for generating refundable EITC.

Second, it was a horrible idea. It’s hard to imagine how he thought he would ever get away with filing returns different from what the client approved. Inevitably there would be a notice or other problem that would bring the scam to light. But the cops don’t spend their days chasing geniuses.


Robert Wood, Record 27 Years Prison For Tax Fraud, Beating Tax Fraud Queen’s 21 Years. The guy allegedly collected 7,000 Social Security numbers and scammed $1.8 in stolen refunds. Considering the hassle he created for the rightful holders of those numbers, that sounds about right.

buzz20141017Robert D. Flach has Tuesday Buzz for you, covering the ground from Trump to Kansas.

William Perez, Tax Advice for Cannabis Entrepreneurs. Speaking of buzz.

Hank Stern, CO-OPs: That flushing sound you hear…  It appears that other Obamacare health co-ops may go the way of Iowa’s CoOportunity.

Keith Fogg, Contrasting the Compromise Standards between the Chief Counsel, IRS and the Department of Justice in Litigated Cases (Procedurally Taxing)

Jack Townsend, Two More Swiss Banks Enter DPAs under US DOJ Swiss Bank Program. Swiss bank privacy is over. Taxpayers who have been counting on it need to check in with their attorneys.


Jeremy Scott, Supreme Court Could Create $353 Billion Deficit Problem (Tax Analysits Blog):

The wait continues for the Supreme Court’s decision in King v. Burwell — the Court did not release the opinion on June 22. If the Court decides in favor of King — basically making residents of 34 states ineligible for healthcare credits — that will gut President Obama’s healthcare reform effort, essentially leaving lawmakers with the choice to either fix or repeal the Affordable Care Act. Republicans are eager to do the latter, but the Congressional Budget Office may have made that more difficult. The CBO says that outright repeal would cost $353 billion over 10 years based on a static scoring model.

It’s a bit strange to think that it’s the Republicans’ responsibility to fix a law that was incompetently drafted by a Democratic Congress. And the House and Senate don’t seem inclined to follow that path anyway. 

It’s not the Supreme Court that would create the problem. It would be the administration and its Congressional allies that passed an unworkable and incoherent lawwith no support at all from the other party.

Kay Bell, No Supreme Court word yet on Obamacare subsidies,
but another part of the health care law is closer to repeal
. “The House voted on June 18 to get rid of the medical device tax.”




Dita Aisyah, Tax Extenders: Take Them or Leave Them, Part 2 (Tax Policy Blog):

Currently, all 50 or so tax extenders are expired for 2015, but Congress will likely pass them retroactively as they have in the past.

Some tax extenders are genuinely good policy, while some are bad. However, the concept of an extender is silly. They create unnecessary uncertainty for individuals and businesses who need to make important long term financial plans.

This very uncertainty creates the need for lobbyists to make annual pilgrimages to Congress to beg for another year of tax breaks. I suspect that Congress likes it that way.


Kyle Pomerleau, Senator Rand Paul’s Payroll Tax Swap. “One striking feature of the tax plan is that it eliminates payroll taxes.”

Bob McIntyre, Detractor Dangles Shiny Objects to Obscure Facts about Rand Paul’s Deficit-Inflating Flat Tax Proposal. (Tax Justice Blog). A left-wing tax site calls the Tax Foundation right-wing.

Steven Rosenthal, The Rich get Richer, with a Little Tax Help (TaxVox).

TaxProf, The IRS Scandal, Day 775. Today’s entry covers a non Tea Party organization whose exemption was stalled because it held views disapproved by the Administration.


News from the Profession. There’s a Lack of Talent to Succeed Accounting Firms Because the Talent Doesn’t Exist (Caleb Newquist, Going Concern). “A recent survey of accounting firm partners from the CPA Consultants’ Alliance found that over half of respondents (51.7%) said procrastination or denial was a primary cause for firms’ succession troubles.”



Tax Roundup, 5/27/15: 104,000 taxpayers compromised by IRS transcript app breach. And: EITC is no free lunch!

Wednesday, May 27th, 2015 by Joe Kristan

20130419-1That took some work. The IRS disclosed yesterday that 104,000 taxpayer accounts have been compromised by identity thieves who did it the hard way. The Wall Street Journal reports:

The IRS said that to access the information, crooks had to clear a multistep authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The process also involved answering personal identity-verification questions, such as “What was your high school mascot?”

Mr. Koskinen, when asked how impostors obtained answers to these so-called “out-of-wallet” questions, suggested social media might have played a role.

“This is not a hack or data breach. These are impostors pretending to be someone who has enough information” to get more, said Mr. Koskinen, who said thieves might be using sophisticated programs to aggregate and mine data.

This is much more difficult than your standard ID theft, where all you need is a Social Security number to go with a name, and maybe a birth date. Getting through the IRS transcript access system requires a fair amount of data entry and outside information.

The breach will complicate filing for the 104,000 taxpayers whose data was accessed, and possibly for another 96,000 taxpayers whose records the thieves failed to breach. Tax Analysts reports ($link):

The IRS will provide credit monitoring and protection to the 104,000 victims at the agency’s expense, Koskinen said. Victims will also be given the IRS’s identity protection personal identification numbers so they are not targeted again, he said. All 200,000 of the taxpayers affected by the raid will be sent notification letters from the IRS and will have their accounts flagged on the agency’s core processing systems, he added.

The IRS has been losing the IT security wars for some time. It’s a shame, because the transcript service has been very useful for taxpayers needing return information for loans or to resolve IRS notices. I think the IRS will eventually have to delay refunds and processing so that it will be able to match third-party information — W-2s and 1099s — with returns before issuing refunds. The era of “rapid refunds” is coming to an end.

Lots of coverage of this. The TaxProf has a roundup. Other coverage:

William Perez, IRS Data Breach: Hackers Gain Access Through ‘Get Transcript’ Web App. “The IRS emphasized that taxpayers don’t need to do anything further. The agency will be sending letters to affected taxpayers explaining what to do next.”

TaxGrrrl, IRS Says Identity Thieves Accessed Tax Transcripts For More Than 100,000 Taxpayers “IRS was alerted to the problem when its monitoring systems noted an unusual amount of activity related to the [transcript] application.”

Russ FoxIRS “Get Transcript” Application Hacked; 104,000 Tax Returns Illegally Accessed. ” It would be time consuming but entirely possible for a stranger who had my social security number and date of birth to answer all the other verification questions.”

Accounting Today, IRS Detects Massive Data Breach in ‘Get Transcript’ Application

J.D. Tucille, Details About 100,000 Taxpayer Accounts Stolen From IRS (

“[T]he vast databases held by the IRS, HHS, security agencies, etc, will be leaked on purpose, leaked because of bureaucrat sloppiness, or be hacked. The more they collect, the more that will eventually leak.” Chris Edwards, director of tax policy studies at the Cato Institute, predicted to me last year. That “eventually”—at least, the latest round of it—is now.

Oh, goody.




Kay Bell, Winners of meet-the-candidate contests face tax costs:

True, you won’t pay from your own pocket for the flights, hotel stay, chauffeur or meal with a future president. But the value of those things, like all prizes, is considered taxable by the Internal Revenue Service.

The winners can’t simply ignore the potential tax bill. The political contest organizers should send them, and the IRS, 1099 forms stating the value of the prize.

Well, that’s one tax problem I won’t be having, unless they start paying voters enormous amounts to talk to us. I will meet any candidate who will pay me $100,000 for 10 minutes of my time. Meet me at the Timbuktuu on the EMC Building skywalk.


Jason Dinesen, From the Archives: You Won the Dream Home, Part 4 — Changing My Mind

Jack Townsend, Switzerland Publishes Certain Identifying Information of Certain Foreign Depositors in Swiss Banks

Bob Vineyard, Bad Moon Rising (Insureblog). “Obamacare news isn’t good.”




David Brunori, Scalia is Right (Tax Analsyts Blog). “The dormant commerce clause is here to stay, with precedent and established expectations and all, but it would be nice if we just admitted that we made it up.”

Robert Wood, Why Aren’t Those $26.4M Speech Fees Taxable To Bill & Hillary Clinton?

James Kennedy,Pennsylvania Senate Considers Hiking Income and Sales Taxes (Tax Policy Blog). They’re pretty high already.

TaxProf, The IRS Scandal, Day 748


Howard Gleckman, Marco Rubio Wasn’t the Only One Who Cashed Out an IRA Last Year (TaxVox). “Substantial assets leak because people under age 59 ½ take early withdrawals or borrow against their IRAs or 401(k). And the problem raises an important and challenging policy question:  Should the money in these accounts be available for non-retirement purposes?”


eic 2014Leslie Book offers thoughful consideration of Warrren Buffet’s support for an expanded Earned Income Tax Credit (Procedurally Taxing). You should read the whole thing, I’ll highlight this part:

As Mr. Buffet knows, there is no such thing as a free lunch. Using the tax system to deliver benefits is no silver bullet when it comes to addressing inequality. To administer the tax system as we know it today is no easy task. When Congress asks the IRS to do more, there are costs to taxpayers and the system overall. As Congress considers whether to ratchet up EITC, it should do so with the absence of rhetoric. It should also consider the tools it wants to give IRS to combat errors as well as address what costs it wants to impose on claimants and third parties. The current system passes costs on others, many of which are hidden. As with lunch, someone has to pick up the tab.

Among the costs is the 20-25% improper payment rate. Another cost is the high hidden marginal tax rate caused by the phase-out of the credit as incomes increase — a combined federal and state rate that can exceed 50%. And there is a cost to an already-stressed tax system of administering a social program.

Sebastian Johnson, Some States Support Earned Income Tax Credits for Working Families, Others Fall Short. (Tax Justice Blog) A piece that is oblivious to the issues raised by Leslie Book.


News from the Profession. EY Law Continues to Not Threaten Law Firms By Poaching Lawyers (Caleb Newquist, Going Concern).


Tax Roundup, 3/18/15: In Spite of all the Danger, state shuts down revenue cameras. And more!

Wednesday, March 18th, 2015 by Joe Kristan
Flickr image by Robert Couse-Baker under Creative Commons license

Flickr image by Robert Couse-Baker used under Creative Commons license

Des Moines to lose freeway revenue cameras. The Iowa Department of Revenue moved to reduce the tax on strangers driving through Des Moines yesterday by ordering the city to shut down its speed cameras in I-235. From The Des Moines Register:

Ten of 34 automated traffic enforcement cameras on or adjacent to Iowa highways must be shut down by April 17 because they are not making roads safer, the state’s Department of Transportation ruled Tuesday.

Among the 10 that would be powered down are speed enforcement cameras on eastbound Interstate Highway 235 near Waveland Golf Course in Des Moines.

Department of Transportation traffic and safety director Steve Gent explained:

Gent said that that section of I-235 is safe, with a crash rate that is significantly lower than the state average for urban interstates. In addition, the crash rate there has not changed significantly since the cameras’ installation, he said.

People who live here know where the cameras are. It’s people who are new to town, who have been driving 75 all the way from Omaha, and who hit town when traffic is light, who are likely to get the tickets. Of course, the municipal highwaymen are not pleased:

“We give out 43,000 tickets a year there to people who that are going 11 miles an hour or more over the speed limit,” Des Moines Mayor Frank Cownie said. “It’s amazing to me that the DOT doesn’t think that that is a safety issue.”

Hmmm. The cameras aren’t reducing speeding; the number of tickets issued is holding steady. They aren’t reducing the accident rate. But safety is at risk! The the safety of the municipal revenue stream. “Last year, 43,032 citations were issued, which generated about $1.2 million for the city, officials said.”


The city needs to pick your pockets for four more years to be sure you are safe.

Des Moines revenue cameras: $32,305 per accident ‘prevented’


eic 2014The TaxProf reports GAO: Improper Government Payments Increased 18% in 2014, to $125 Billion; EITC’s 27% Error Rate Is Highest of Any Program. That’s $17.7 billion either misdirected or stolen annually under “our most effective anti-poverty program.” It certainly helps reduce the poverty of the scammers and grifters that rob the program, and the shady preparers who make it easier.




TaxGrrrl, Understanding Your Forms: Form 1098, Mortgage Interest Statement

And probably not YOUR situation. Clothing tax deductions are OK, but just in certain situations (Kay Bell)

Peter Reilly, Dude Ranch Shareholders Stuck With Corporate Tax – It’s All About Execution. A “Midcoast” transaction falls afoul of “transferee liability.”

Robert Wood, There’s Still Time To Turn Your Hobby Into A Tax Write-off. “Will the IRS pay for your hobby? The short answer is no, at least if you ask the question this way. But sometimes, the IRS will foot the bill provided you make your pastime enough of a real business to qualify.”

Jason Dinesen, Marriage in the Tax Code, Part 4: Joint Returns Still the Norm in 1917

Tony Nitti, Take The Tax Bracket Challenge: Which Is The Best Code Section Of Them All?. My favorite is Sec. 6313, without which the whole edifice must fall. It reads in full:

In the payment of any tax imposed by this title, a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent.


If only the whole tax law were that clear and easy to understand.




TaxProf, The IRS Scandal, Day 678. The IRS role in criminalizing political opposition is discussed.

Clint Stretch, How to Make Tax Return Filing Easier (Tax Analysts Blog)

Scott Hodge, A Response to Josh Barro on Dynamic Scoring (Tax Policy Blog).

Howard Gleckman, The House GOP Budget As Can Opener: An Impossible Task and A New Lesson in Dynamic Budget Scoring (TaxVox)

Caleb Newquist, Triple Entry Accounting: Harebrained or Genius? (Going Concern). “I’ve never been to SXSW, but I imagine that all the smart people talking about smart ideas and getting all smart with each other is nauseating.”


Hiryu, the fourth and last Japanese aircraft carrier destroyed at the Battle of Midway 70 years ago today.

Hiryu, the fourth and last Japanese aircraft carrier destroyed at the Battle of Midway

Yes, because it worked so well the last time.  Japan should follow wartime slogan to deal with tax evasion, LDP lawmaker says:

Junko Mihara, a House of Councilors member from the ruling party, referred to the slogan hakko ichiu at a meeting of the Upper House Budget Committee on Monday, saying it represented “values Japan has cherished since its founding.”

The term roughly translates as “all the world under one roof.”

During the Sino-Japanese war and World War II, the Japanese government used the slogan to justify its Emperor-centered policies and overseas expansion.

If that doesn’t work, they can always rebrand it as The Greater East Asia Co-Prosperity Sphere. I’m sure neighboring countries would be on board.



Tax Roundup, 1/30/15: Earned Income Tax Credit Awareness Day Edition! And: judging your golf score

Friday, January 30th, 2015 by Joe Kristan

daydrinkersDid you know that today is “Earned Income Tax Credit Awareness Day“? Most of us don’t get the day off, but as it is Friday, we can celebrate after work into the wee hours.

What are we celebrating? Well, the EITC is a refundable tax credit designed for poor working families with children. A “refundable” credit generates a tax refund if there is no tax to offset, so the EITC works as a welfare payment for poor families with some earned income. It phases out as incomes increase.

Some economists praise the EITC as a useful anti-poverty program that doesn’t kill jobs the way minimum wage laws do. Others look at it as a way to achieve “tax justice” by redistributing taxes to the poor.

Still, if you really want to be fully aware of how the EITC works, you should know about a few things that aren’t on the IRS EITC Awareness Day web page.

For example, you should know that the EITC phase-outs make it a poverty trap. The effect of the phase-out of the credit as income rises is to impose a marginal rate on additional earnings of EITC recipients as high as that imposed on some of the top income earners. The Federal-Iowa combined rate, taking into account phaseouts and payroll taxes, can exceed 50%.

eic 2014

This is a serious disincentive for EITC recipients to improve their earnings. Combined with the loss of other benefits, it can make self-improvement an unrewarding pastime.


Up to 25% of the EITC goes to people who shouldn’t get it, according to TIGTA. Part of it is because taxes are complicated and math is hard. A significant part, running into the billions, goes to fraudsters. Even in a good cause, you have to question the value of a program that misdirects so much money.

EITC error chart

Like all refundable credits, the EITC is a fraud magnet. Any time the government will write a check just for the effort of filling out a form, fraud happens. Just a few random instances:

Waterloo, Iowa preparer get 30 months for earned income tax credit fraud. A preparer invented earnings to get Iowa clients EITC refunds.

Tax Preparer Sentenced For Fraud Scheme. “The fraudulent returns sought refunds of $354,000 based on bogus expense deductions and refundable credits, such as entitlement to the First Time Home Buyers Credit and the Earned Income Tax Credit when the filer had little, if any, taxes withheld from income in that year.”

Tax preparer who bilked IRS out of $4M for poor clients: Fraud a ‘spiritual calling’. “As it turned out, Reed was inflating the incomes of his clients – generally unemployed women with children – so that they could claim an earned income tax credit.”

So as you observe this festive day in your own way, you can ponder whether the guy celebrating at the next table is buying because he just got his fraudulent EITC refund.


20140826-1Get your Buzz now! Because Robert D. Flach has posted his final Buzz for this tax season, with a kind shout-out to the Tax Update Blog. Don’t miss his thoughts on choosing a tax pro.

Kay Bell, What would you pay for professional help in filing your taxes?

William Perez, Head of Household Filing Status, Explained

Accounting Today, Obamacare Penalty to Be Owed by as Many as 6 Million Taxpayers. That will make it popular.

Robert Wood, Senators Blast IRS Commissioner Over Waste, Bonuses, Bad Service, More. Well, shooting fish in a barrel can be fun.

TaxProf, The IRS Scandal, Day 631. More government stonewalling. Well, it’s worked so far.


William McBride, Federal Government Lost Money from 2013 Tax Increases on Investors (Tax Policy Blog):

As President Obama prepares to roll out another tax increase proposal targeting capital gains and dividends, it’s instructive to look at what happened the last time he did that. Fortunately, the IRS just released preliminary data on tax year 2013, the year the top tax rate on capital gains and dividends went from 15 percent to 23.8 percent. The fiscal cliff deal raised the top rate to 20 percent and the Obamacare investment surtax added 3.8 percentage points.

From the IRS data, we can see that investors didn’t just sit there and pay the higher tax rate. Qualified dividend income dropped 25 percent, from $189 billion in 2012 to $141 billion in 2013. Capital gains dropped 12 percent, from $475 billion to $416 billion. Recall this was in the midst of a historic stock market boom.

Not all tax increases lose money, and not all tax cuts make money. This shows, thought that increases in capital gains rates can backfire. The realization of many capital gains is discretionary, and many taxpayers will discreetly hold on to gains, rather than cash them out, when rates rise.


Perhaps this might not have been the best way to impress the sentencing judge. The Denver Post reports Convicts in $100 billion tax fraud skipped sentencing to play golf

The three Colorado Springs defendants were arrested Thursday after they failed to appear for sentencing Wednesday. They were escorted into court Thursday afternoon in handcuffs, all wearing street clothes.

“We did go golfing. I shot a 49, which was pretty good for me,” Pawelski told the judge after she emphasized the seriousness of the felony charges he faced.

Judges always understand you skipping a court date if you have a tee time.

Arguello reset sentencing for all three tax fraud convicts for Feb. 10. The judge brought each offender into the courtroom separately. Brokaw and Pawelski each told the judge they are a “natural man.”

“I am a natural man, a legal person, a legal man; something I didn’t know before,” Pawelski said.

Good thing he figured that out. He’ll likely have plenty of time to ponder that starting about February 11.



Tax Roundup, 1/8/15: Tax shelter turned upside down: S Corp – ESOP structure produces pretend income. And: you are the 1%!

Thursday, January 8th, 2015 by Joe Kristan

tack shelterFlaky tax shelters are supposed to generate pretend losses. You know a shelter has gone very bad when it generates pretend income instead. Yet that’s how it worked out for an “S corporation ESOP management company” plan considered by the Tax Court yesterday.

The plan involved a partnership, a C corporation, an S corporation, and an Employee Stock Ownership Plan. The ESOP owned 100% of the S corporation. S corporation income is taxed to its owners. As a tax-exempt entity receiving special treatment from the tax law, ESOP-owned S corporations can achieve Tax Fairy-like results. The ESOP’s can earn non-taxed business income passing through from the S corporation (though this gets very tricky and dangerous when there are few ESOP beneficiaries).

The plan was hatched by A. Blair Stover, who has shown up in these pixels before. Mr. Stover started his tax career with a national firm in Nebraska, moving on from there to Kansas City and then to California, leaving questionable tax shelters in his wake. He was barred from promoting shelters like the one in this case in an injunction affirmed by the Eighth Circuit in 2011.

This plan involved the payment of “management fees” and other purported expenses by a partnership owned by the taxpayer and his spouse that ended up in his ESOP-owned S corporation. The partnership appears to have had no other purpose than to gin up deductions by paying pretend management fees and other expenses. The taxpayers deducted the “expenses” on their 1040, with the idea that they would avoid tax because they flowed through the S corporation to the ESOP.

tax fairyWhen the IRS went after Mr. Stover’s shelters, his clients received unpleasant IRS attention. In yesterday’s Tax Court case, the taxpayers signed a settlement agreeing to include in income on their 1040 the purported management fees paid to the ESOP.

So far, so good. But the agreement didn’t address the other side of the deal – the deduction for the payment of the purported fees by the partnership. The taxpayers claimed that if they had to pick up the pretend fees in income, they should get to deduct them too. Fair’s fair.

But if you want fairness, the tax law might not be the place to seek it.  The court held that while they agreed to pick up the extra income, their settlement said nothing about a deduction, and they were stuck with the results (my emphasis, citations omitted):

Generally, recognition of income does not inexorably prove a corresponding deductible expense. For example, payments to a promoter in furtherance of a tax avoidance scheme constitute income to the promoter, but they are not deductible under section 162 by the payor.  Furthermore, that petitioners might otherwise be obliged to recognize phantom income does not relieve them of their obligation to identify some legal authority for the deduction, nor does it permit the Court to manufacture such authority from whole cloth.

Petitioners’ phantom income argument amounts, in essence, to a plea for fairness. This Court strives to avoid unjust results, but “we are not a court of equity and cannot ignore the law to achieve an equitable end.” Moreover, the parties’ recent stipulation assuages our fairness concerns. In our order of July 1, 2014, we directed the parties to stipulate if possible, or to otherwise brief, the source of and factual and/or legal basis for the income inclusions required by the SOSI. The parties stipulated that the required income inclusions represent “the amount of taxable income petitioners avoided reporting” for tax years 2001 through 2003 because of their use of the management S corporation/ESOP structure. Taxable income is a term that is defined in the Code. Section 63 generally defines taxable income as gross income less allowable deductions. The parties’ chosen language thus implies that the $84,837 of income petitioners must include for 2003 pursuant to the SOSI represents not “phantom income” but bona fide, net taxable income that petitioners received and should have reported. So interpreted, the stipulation is difficult, if not impossible, to reconcile with petitioners’ theory for deducting the administration fee.

The result: a reverse tax shelter, generating only phantom income.

I’m not sure this too-bad-to-be-true result would hold up on appeal, but it does serve a warning. The Tax Fairy is a fickle sprite, and she can magically generate income for those seeking magical deductions. And if you agree to include phantom income when the IRS comes after you, make sure they allow the offsetting phantom deduction in writing.

Cite: Wakefield, T.C. Memo 2015-4.


IMG_0598Leslie Book, Bank of America on Hot Seat For Issuing Allegedly Incorrect 1099C to Disabled Veteran (Procedurally Taxing)

Robert D Flach explains WHAT’S NEW FOR THE 2014 FORM 1040?

Kay Bell, Daily Tax Tip #2: A tax quiz!

Robert Wood, The 1031 Exchange That Ate New York City. A lesson on the scalability of swaps.

TaxProf, The IRS Scandal, Day 609. The Worst Commissioner Ever comes out the other side of the revolving door.


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

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

Scott Sumner on low-income use of untraceable cash at Econlog:

College professors who advocate the elimination of currency are often unaware of how important currency is for those with low incomes, many of who lack bank accounts. For instance, consider someone getting government benefits that are conditional on income (food stamps, EITC, disability, welfare, Medicaid, etc.) This group often faces relatively high implicit marginal tax rates. However currency allows them to supplement their meager benefits with additional earned income, perhaps doing home repair for neighbors, or working as a nanny. Lots of those jobs are paid in cash. If we eliminate physical cash then all transactions will be easily traceable by the government… That’s bad for two reasons; low-income people would see reduced incomes (increasing inequality), and the rest of us will be denied the services that they might have produced in the underground economy. Economists who advocate the elimination of currency need to consider those side effects.

This highlights one of the dangers of the earned income tax credit: its phase-outs serve as a hidden high tax rate on low incomes, resulting in a poverty trap on those earning their way out of poverty.



Russ Fox, The Tax Court Looks for $1,410 in Dividends. Sometimes you can fight a small injustice and win.


We are the 1% Admit It: You’re Rich (Megan McArdle):

The cutoff for the global 1 percent starts quite a bit lower than the parochial American version preferred by pundits. I’m on it. So is David Sirota. And if your personal income is higher than $32,500, so are you.  

It’s all a matter of perspective.



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

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

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

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

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

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

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

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

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

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

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

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


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



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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

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


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

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

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


TaxProf, The IRS Scandal, Day 370

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



Tax Roundup, 1/5/14: President proposes $1 million Sec. 1031 cap. And: other doomed stuff!

Wednesday, March 5th, 2014 by Joe Kristan
Economic supergenius

0-99, 0-414

The President trotted out his old petty tax increases in his 2015 budget yesterday, and a few new ones.  The  new taxes would go towards, among other spending increases, an increase in the Earned Income Tax Credit welfare program for childless taxpayers.

If history is a guide, the Obama budget isn’t going to do well in Congress.  His own party leadership in the Senate has already pledged to pass no budget at all.  When his 2013 budget plan came up for a vote in Congress, it was rejected 99 -0 in the Senate and 414-0 in the House.

Still, it is worth mentioning some of the tax proposals, just so you are aware of them and their low likelihood of passage anytime soon.  Also, in light of the recent Camp “tax reform” proposal, apparently no tax provision is too dumb to get bipartisan consideration, so some of these might even pass someday.

– S corporations: the bill would tax as self-employment income 100% of K-1 income from professional S corporations and partnerships of materially-participating owners.  Businesses covered would include health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, brokerage services, and lobbying.  For some reason, regular compensation would no longer be wages, but would instead be self-employment income.  That would wreak havoc on everybody’s 401(k) and profit-sharing plans.

– Like-kind exchange benefits would be capped at $1 million per taxpayer per year.  That won’t be popular with the real estate industry.

The bill also drags out dozens of the old proposals from his prior budgets, including LIFO repeal, ordinary income treatment for carried interests, capping the value of deductions at 28%, and capping build-ups in retirement plans.  Nothing at all is likely to happen before the next election on these proposals, but as many Obama proposals are also included in some form in the GOP Camp plan, they all have to be considered viable next time a major tax bill shows signs of moving.

The TaxProf has a good link-filled roundup.  The official explanation of the revenue-raisers is here.

Other coverage:

Kay Bell, Obama budget proposes more child care help for younger kids

Leslie Book, President’s Budget Proposes Major Procedural and Administrative Changes (Procedurally Taxing).  “The popular media has generally described the plan overall the way Reuters did in reporting that it ‘stands little or no chance of being approved as is by Congress, where Republicans, who control the House of Representatives, disagree with the president’s policy priorities.'”


Des Moines Register, Voters OK increasing franchise fee in Des Moines.  The vote is the result of the city being ordered to repay an illegally-collected utility tax:

The money raised by increasing the franchise fee to 7.5 percent from 5 percent for seven years will be used to pay off about $40 million in bonds issued by the city to pay for the refund and administrative costs.

Among the “administrative costs” is $7 million in legal fees Des Moines was ordered to pay to the winning taxpayer attorneys after a scorched-earth court battle by the city to avoid repaying the illegal tax.  Next time, don’t collect an illegal tax, and pay up if you’re called on it.


Alan Cole, True Marginal Tax Rates under Chairman Camp’s Proposal (Tax Policy Blog).  Full of high-income phase-outs, it creates all sorts of goofy marginal rate anomalies:

Marginal Tax Rates Camp Tax Reform

Note the spike in rates at the low-end as a result of the earned-income tax credit phase-out.  That doesn’t even include the effect of the state EITCs that piggyback on the federal credit.  All of this is the opposite of tax reform.  Apparently neither party is ready for reform.

William Gale and Donald Marron, The Macro Effects of Camp’s Tax Reform (TaxVox): “How would Camp’s plan increase growth, and why is the range of estimates so wide?”


Paul Neiffer, Additional Tax Reform Items.  “Remember, this is just a proposal and nothing will happen this year.”

Gene Steurle, A Camp-ground for Tax Reformers (TaxVox).


20130419-1Russ Fox, Deadlines for Us, but Not for Them:

For practitioners, the current state of the IRS is such that you can expect a lot of delays in responding to notices. Think months instead of weeks. Expect to have to call the IRS to verify that your response was received, and make sure clients are aware that the IRS is moving like molasses rolling uphill. Make sure anything you send is documented: certified mail with proof of receipt if by mail; if faxing, make sure you have the proof of receipt. Given the lengthy delays our clients are going to be in fear for far longer…

For taxpayers, you need to be aware that expediency is not part of today’s IRS. You have to be expedient in responding to notices but don’t expect the IRS to be expedient in getting back to you. Do not worry if it takes a long, long time to resolve something with the IRS. That’s just par for the course today.

Unfortunately, clients generally assume that if the IRS has sent a letter, that means the practitioner screwed up.  Many people, especially old folks, just pay up when they get an IRS notice.


William Perez, Tax-Deductible Relocation Expenses

TaxGrrrl, Taxes From A To Z (2014): B Is For Basis   

David Brunori, Taxing Coca Cola while Exempting Broccoli is Bad Policy Even for Native Americans (Tax Analysts Blog):

 In any event, several newspapers reported that one of the sponsors of the proposal was himself obese. He decided to change his life and lost 100 pounds. And he did it without any tax increases or help from the government.

Like so many reformed smokers/overeaters/drinkers, he has become annoying about it.

Tax Justice Blog, State News Quick Hits: State Policy Makers Need a Tax History Lesson


TaxProf, The IRS Scandal, Day 300.


Cheer up!  Filing Your Tax Return Is Terrible — But It Was Worse 100 Years Ago (Joseph Thorndike, Tax Analysts Blog).

News from the Profession.  The Real Loser at the Oscars This Year Was PwC.  (Going Concern)

20140305-1Jason Dinesen shares his Tax Season Tunes:

Here’s a sampling of other tunes I listen to while working when not getting my Gordon Lightfoot fix:

  • Neil Diamond. Generally not his “famous” songs. I detest — and I mean absolutely revile — “Sweet Caroline,” for example. The original recording is okay, but he’s turned it into a hokey, over-the-top, karaoke show-tune over the last few decades. Blech. I like the more introspective songs like “Shilo,” “If You Know What I Mean,” “Stones,” pretty much anything from his relatively new “12 Songs” and “Home Before Dark” albums,  and a host of other Neil Diamond songs that most people have probably never heard of.

  • An mix of songs that include Billy Joel, pop rock from the 60s and early 70s, Elvis, Willie Nelson, Conway Twitty, AC/DC, Juanes, Bon Jovi, CCR, Johnny Cash and Jimmy Buffett.

In case you were wondering, I believe Jason works alone.



Tax Roundup, 2/10/14: The New Mexico double-dip edition. And: we got it right. We’ll fix that!

Monday, February 10th, 2014 by Joe Kristan

bureauofprisonsTwo bites at the apple were two too many for a New Mexico man.  Evading $25 million in federal taxes is bad enough, but illegally collecting $225,000 in farm subsidies on top of that seems like piling on.  From a Department of Justice Press Release:

Bill Melot, a farmer from Hobbs, N.M., was sentenced to serve 14 years in prison today to be followed by three years of supervised release for tax evasion, program fraud and other crimes, the Justice Department, Internal Revenue Service (IRS) and U.S. Department of Agriculture’s (USDA) Office of Inspector General announced today.  Melot was also ordered to pay $18,469,998 in restitution to the IRS and $226,526 to the USDA. 

Melot was previously convicted of tax evasion, failure to file tax returns, making false statements to the USDA and impeding the IRS following a four-day jury trial in Albuquerque, N.M.  According to court documents and evidence presented at trial and at sentencing, Melot has not filed a personal income tax return since 1986, and owes the IRS more than $25 million in federal taxes and more than $7 million in taxes to the state of Texas.  In addition, Melot has improperly collected more than $225,000 in federal farm subsidies from the USDA by furnishing false information to the agency.  

He had been sentenced to only five years, but the appeals court decided he needed some more time before putting in another crop.

For a little farmer, Mr. Melot got around:

  Additionally, Melot maintained a bank account with Nordfinanz Zurich, a Swiss financial institution, which he set up in Nassau, Bahamas, in 1992, and failed to report the account to the U.S. Treasury Department as required by law.

If the government’s sentencing memorandum is to believed, Mr. Melot isn’t down with this whole paying taxes thing, filing a blizzard of “baseless” motions and attempting to conceal assets.  For example:

Defendant’s disregard for this Court commenced immediately… Within 24 hours of his release, between August 21 to August 24, 2009, Defendant and his immediate family were observed purchasing 19 money orders for $1000 each at a Moneygram counter, which is located at the Walmart in Hobbs, New Mexico.

a. Each money order was for $1,000.
b. Each money order listed “Bill Melot” in the memo line. The money orders also each listed Defendant’s home address, 2805 E. Rose Road.
c. Each money order was payable to Mueller, Inc., a Ballinger, Texas company, which builds outdoor sheds.

Videos from Walmart showed Defendant wearing the same clothing that he wore when he was released from custody. The money orders, along with an additional $5,260.94 in cash, were used to pay off the balance due on a metallic shed for Defendant’s farm, which he claimed not to own in his statement to Pretrial Services. The purchase of this barn flatly contradicted Defendant’s earlier claim of near indigence

The appeals panel seems to have believed the prosecution, as Mr. Melot got the full sentence requested.

Russ Fox has more at Really Big Tax Evasion Leads to Really Long Sentence at ClubFed.


Via Wikipedia

Via Wikipedia

Oops.  It appears the Iowa legislature accidentally repealed the state sales tax on heavy equipment purchases in 1998, reports

The inadvertent change – which slipped by the department, the legislative code editors, and lawmakers and their staffs in the vetting process — didn’t come to light until last summer, when an attorney contacted the department about the Iowa Code section. At that time, legal staff at the department and the Iowa Attorney General’s office determined that the 2008 action had “rendered that tax obsolete,” Daniels said.

“It was not the department’s intention, nor do we believe that it was the Legislature’s intention, to remove that tax or repeal that tax,” said Daniels, whose agency has asked lawmakers in Senate Study Bill 3117 to restore the sales tax on heavy equipment retroactive to July 1, 2008. 

Sound tax policy tells the legislature to expand the exemption, rather than repeal it.  The heavy equipment will normally be used in business, and business inputs shouldn’t be subject to sales taxes.  It just shows that the General Assembly can occasionally get it right, but will immediately take corrective action when it finds out.



William Perez offers An Overview of the Income, Deductions, Tax and Payment Sections of the Tax Return

Kay Bell comes through with 6 steps to help you become the best tax client. She omits step number seven: pay your preparer promptly.  No matter how good you are with the first six steps, omitting step seven disqualifies you from the “best” list.

TaxGrrrl, Delayed Tax Refunds, The EITC & How We’re Getting It Wrong   

 And despite its original intent, if the idea is to encourage taxpayers to work more, the current iteration of the EITC fails miserably. As you earn more, your benefits go down, not up. At some point, the incentive to work more is mitigated by the specter of a lesser credit.

It’s a poverty trap.

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

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


TaxProf, The IRS Scandal, Day 277

Sounds like a good reason to me.  Broken Tax Code Offered as Reason for Reform (Annette Nellen)

Peter Reilly, Benefit Of Clergy – Why Special Tax Treatment For Ministers Needs To Go.  Constitutional Does Not Equal Sound Tax Policy”

Stephen Olsen, Summary Opinions for 02/07/2014 (Procedurally Taxing).  It’s a roundup of tax procedure cases and posts.

Jack Townsend, Germany Moves Against Offshore Bank Evaders 

An unwarranted meattax approach: Scientist Proposes Discouraging Meat Consumption with New Tax (Joseph Henchman, Tax Policy Blog).

Flicker image courtesy Michael Coghlan under Creative Commons license.

Flicker image courtesy Michael Coghlan under Creative Commons license.


Career Corner.  No Shirt, No Shoes, No Accounting Degree, No Probl– Actually, Small Problem (Going Concern).



Tax Roundup, 2/6/14: Mortgage credit program revived for Iowa. And: why your state budget surplus is a mirage.

Thursday, February 6th, 2014 by Joe Kristan

IFA logoThe Iowa Finance Authority has opened a program that will allow some Iowans to claim a credit, rather than a deduction, for mortgage interest.  From an IFA press release:

The Iowa Finance Authority has announced that eligible Iowans may buy a home and reduce their federal income tax liability by up to $2,000 a year for the life of their mortgage.

The 2014 Take Credit Mortgage Credit Certificate program will be available beginning this week through IFA Take Credit Program Participating Lenders. Approximately 585 Iowa home buyers are expected to benefit from the program.

It has been some years since these credits were available in Iowa.

The credits aren’t for everyone.  They are targeted to lower-income borrowers, with income limits varying by county.  IFA has a “quick check” page for users to determine eligibility.  But for those who qualify, they are a handy way to reduce mortgage costs.  The credit is claimed on Form 8396.


TaxProf, TRAC: IRS Criminal Prosecutions Up 23.4% in Obama Administration.  This is probably due to the explosion in tax-refund theft that was less of a priority than regulating preparers was for the Worst Commissioner Ever and the Obama Administration.


taxanalystslogoCara Griffith, The Myth of the Budget Surplus (Tax Analysts Blog):

There seems to be a lot of good news about state budgets lately. Newspaper headlines have changed from doom and gloom over budget crises during the recession to questions about how states will manage budget surpluses. Unfortunately, there are financial problems lurking beneath the surface, and one of the largest may be the underfunding of state and local government pension and healthcare plans.

Even Iowa’s relatively well-funded pension plan is 20% underfunded actuarially, and even that uses an absurd assumption of 7.5% investment returns.  The Taxpayers Association of Central Iowa has a lengthy, but excellent, analysis.  Public defined benefit plans are a lie.  They are a lie to taxpayers understating the cost of current pension accruals, a lie to public employees about what they will get after retirement, or both.


Elaine Maag of TaxVox raises Questions About Expanding the Childless EITC:

The EITC is often criticized for its built-in marriage penalty. Imagine a single mom with three kids who earns $17,500. Prior to marriage, she qualifies for the maximum credit of $6,143. But if she marries someone with identical earnings, the additional income will reduce her EITC to just $3,670.

If the childless EITC were expanded and the husband had his own EITC, he would lose all or part of his benefit when the couple married, magnifying the tax increase this couple would face relative to when they were not married. As long as the EITC phases out at higher incomes and is tied to joint income, this will remain an issue.

Not to mention the massive level of EITC fraud and the punitive marginal tax rates on taxpayers working their way out of poverty.

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


Jana Luttenegger, Expired Housing-Related Tax Rules (Davis Brown Tax Law Blog).  The exclusion for forgiven mortgage debt is the biggie.

William Perez, Finding the Right Filing Status.  If you are legally married, it’s either joint returns or married filing separate.  Single status is unavailable, even for same-sex couples married in a state that allows them to get married who live in a state that doesn’t.  William provides some excellent explanation.


20130419-1Janet Novack, IRS: Don’t Call Us, Look It Up On IRS.Gov.  Well, you might actually get a correct answer that way.

Kay Bell, What the ‘Taxman’ does and doesn’t collect 


TaxProf, The IRS Scandal, Day 273

Howard Gleckman, The Cruel Political Paradox of Deficit Reduction (TaxVox)

Carl Smith provides Another Update on Rand Cases in Tax Court at Procedurally Taxing.  The Rand cases hold that an “underpayment” for purposes of penalties does not include the portion of refundable tax credits that tax tax below zero.

Going Concern, Pot Taxes May Not Be Such a Cash Cow Due to, Well, the Cash.  Not to mention the disallowance of all non cost-of-goods-sold deduction for legal dealers.



Tax Roundup, 2/4/14: Sometimes the tax crime isn’t the worst crime. And the Carnival moves on.

Tuesday, February 4th, 2014 by Joe Kristan

WashingtonRule 23 of George Washington’s Rules of Civility has a lot going for it:

When you see a Crime punished, you may be inwardly Pleased; but always show Pity to the Suffering Offender.

Yet even the Father of His Country might have had a hard time suppressing a smile over a federal tax sentencing in California yesterday.  From the Contra Costa Times:

A former San Ramon family law attorney was sentenced to two years in prison Monday for evading taxes and illegally eavesdropping on a client’s estranged spouse with the help of a now-incarcerated private investigator who set up divorcing men for drunken-driving arrests.

Mary Nolan, 62, of Oakland, already relinquished her law license and paid $469,000 in back taxes Sept. 27 after she pleaded guilty to four counts of tax evasion and one count of illegal eavesdropping.

Nolan represented the ex-wives of two men who were arrested after [the private investigator’s] attractive female employees lured them into drinking and driving. Those convictions were expunged after the scheme became known in 2011, when Butler and jailed former Contra Costa Narcotics Enforcement Team Commander Norman Wielsch were caught selling drug evidence and admitted to pimping and robbery, among other crimes.

Oddly, the sentencing judge not only failed to impose the 33-month sentence requested by the prosecution, but he also seemed to think the tax charge was more serious than the honey-trap thing, reports Concord Patch:

Breyer told Nolan during the sentencing today, “To eavesdrop on conversations that clearly weren’t intended for an adversary to hear is a
very unfair thing to do.”

But he said he was especially concerned about the failure of Nolan, as a lawyer, to pay the taxes due.

“What I find most troubling is the fact that you were a lawyer. Lawyers have that special responsibility not just to know the law but to follow it,” he told Nolan.

Yes, evading $400,000 of taxes is a bad thing, whether or not you are a lawyer.  Still, ruining lives setting up and framing people to win divorce cases strikes me as worse than making the IRS work hard for its money.   Maybe when you’re a federal judge, things start to look a bit funny.



Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Well, technically “a bunch” isn’t “a smidgeon.”   ‘Not Even a Smidgeon of Corruption’ at IRS, Obama Says.  (Tax Analysts, $link).   If so, it sure is funny how Lois Lerner was so quick to invoke her 5th amendment right against self-incrimination.  

Clint Stretch, Dumb Mistakes Aren’t Crimes.  (Tax Analysts Blog)  He says “IRS employees will not knowingly do someone’s political bidding.”  History shows otherwise.



TaxProf, OMB: EITC Is 4th Most Error-Prone Federal Program, With 22.7% Error Rate.  If it makes you feel better, the three worse ones are all Medicaid or Medicare.  Makes you want the government and IRS to pay in a bigger role in health care, for sure.


Minnesota:  Come for lovely winter weather, and stay for the annual tax hit!  The Minnesota Center for Fiscal Excellence has computed the annual cost for a high-earning individual of life in the tundra.  It’s not cheap:


Of course, beautiful Iowa doesn’t have a lot to crow about, as it looks good only by comparison with Minnesota.  While the hypothetical taxpayer could only buy a nice new sedan annually for the savings of moving from Minnesota to Des Moines, she could buy some really nice wheels every year with a move to Sioux Falls.


Tony Nitti, Tax Geek Tuesday: Reasonable Compensation In The S Corporation Arena:

The IRS Fact Sheet provides “The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly. However, if cash or property…did go to the shareholder…the level of salary must be reasonable and appropriate.”  This language would seem to indicate that there is no requirement that compensation be paid to a shareholder-employee provided the shareholder also foregoes distributions. Even with that bit of guidance from the IRS, it is prudent advice to encourage a profitable S corporation to start making reasonable salary payments to its shareholder-employees as soon as it has the means to do so.

Unfortunately, the IRS has shown that it will attempt to force a salary even when the means are lacking.

Paul Neiffer, You Can File Income Tax Returns Now (Maybe)


Jeremy Scott, Making Tax Reform a Partisan Issue (Tax Analysts Blog):

And it isn’t hard to see why. Linking tax reform to the debt ceiling risks making it a partisan issue. Forcing Congress to take up reform is a GOP victory, because it causes Democrats to give up on a clean bill. So Democrats, many of whom are sympathetic to the tax reform process, will have to oppose tax changes because Republicans have politicized the debate, defining tax reform as a win for their side.

Ah, the majesty of government.


Lyman Stone, New Study: High Excise Taxes Drive Cigarette Smuggling in Boston, New York, Providence (Tax Policy Blog).  That has to be the most predictable news of the day.

Sad news from Kay Bell “The time has come, however, to put the Tax Carnival on hiatus.”  It’s a lot of work to put one together.  Thanks, Kay, for all of the help you’ve given tax bloggers over the years with the Carnival of Taxes.  So until she feels like reopening the Carnival, let’s have one last ride on the Midway.



Going Concern, Here Is a Short List of People Less Deserving of Bonuses Than IRS Employees.  Hard to argue with the list, especially the first two, but I would throw in the other branches as well.



Tax Roundup, 1/31/14: Earned Income Tax Credit Awareness Day party edition! And: e-filing begins.

Friday, January 31st, 2014 by Joe Kristan

EITC error chart
Yes, for those of you not already taking the day off to observe it, today is Earned Income Tax Credit Awareness Day!  Let’s celebrate with a true story of EITC awareness.

Cedar Rapids tax preparer Demetries Johnson displayed her awareness of the credit in a big way:

Defendant DEMETRIES JOHNSON notified some taxpayers seeking her services that she could obtain larger tax refunds than they would otherwise receive.  To obtain refunds, defendant DEMETRIES JOHNSON would knowingly report false information on taxpayers returns. The claims made in the tax returns were false, fictitious, and fraudulent in that the claims for refunds, for example: 1) falsely reported income when little or no income was earned, thereby substantially and materially overstating taxpayers’ income in a manner that made the taxpayer appear eligible for a refund by virtue of the EITC; and 2) falsely included a child or children on taxpayers’ returns who did not in fact qualify under the EITC.  Through submission of these false claims, defendant DEMETRIES JOHNSON increased payments made by the Internal Revenue Service to the taxpayers or to bank accounts controlled by the defendant.

Her awareness ended up earning a two-year prison sentence after she pleaded guilty to tax charges.  Her keen level of awareness isn’t uncommon; a recent Treasury Inspector General analysis showed that 21-25% of the $13 billion of the credit issued annually is claimed “in error.”  No small amount of those errors are deliberate.

Those who scam the system are especially aware that the credit is “refundable.”  If you claim more credit than you owe in taxes, the IRS will send you a check for the excess.  Like all refundable credits, it attracts fraudsters.

Come to think of it, maybe “awareness” isn’t the real problem with the Earned Income Credit.


Flickr image courtesy Shock264 under Creative Commons license

Flickr image courtesy Shock264 under Creative Commons license

When you buy a round, it’s always popular Wind industry fears slowdown as Congress considers future of popular tax credit  (Des Moines Register).  The recipients of wind subsidies delivered through the tax law are annoyed that there is a delay in getting their free stuff.

The headline says the wind turbine subsidy is “popular,” but nothing in the article backs that up, or even repeats the claim.  I suppose it’s as popular with the Warren Buffet-controlled utility that is a big recipient of the credit as the Earned Income Tax Credit was with Demetries Johnson’s clients.


Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 267.  He highlights today’s Peggy Noonan piece:

 Meanwhile, back in America, conservatives targeted and harassed by the Internal Revenue Service still await answers on their years-long requests for tax exempt status. When news of the IRS targeting broke last spring, agency officials lied about it, and one took the Fifth. The president said he was outraged, had no idea, read about it in the papers, boy was he going to get to the bottom of it. An investigation was announced but somehow never quite materialized. Victims of the targeting waited to be contacted by the FBI to be asked about their experience. Now the Justice Department has made clear its investigation won’t be spearheaded by the FBI but by a department lawyer who is a campaign contributor to the president and the Democratic Party. Sometimes you feel they are just laughing at you, and going too far.

For a case where a key figure promptly hid behind the Fifth Amendment, the FBI was sure quick to conclude there was no crime.


William Gale, Benjamin Harris, David John, State of the Union Speech Promotes New Retirement Savings Vehicles (TaxVox):

 Similar to the R-Bond discussed in a recent AARP Public Policy Institute paper written by William Gale, David John and Spencer Smith, MyRA would allow individuals to save in a government bond account similar to the one offered as an option to federal employees through the Thrift Savings Plan. The details are unclear (there’s a WhiteHouse fact sheet here), but MyRA would allow new savers and those with small balances to accumulate retirement savings without either having to pay administrative charges or face market risk.

Just inflation and government policy risk.


20130916-1TaxGrrrl, IRS Officially Opens Tax Season Today, Begins Processing Returns and Refunds

William Perez, IRS’s Electronic Filing Systems Opens January 31

Kay Bell, Are you ready to e-file your federal tax return? Here’s how.

Trish McIntire, IRS Notice Prevention


Fear the Family (and other related parties).  My new post at, the Des Moines Business Record Business Professionals Blog.


Kyle Pomerleau notes A Few Contradictions in President Obama’s State of the Union Address (Tax Policy Blog)

Keith Fogg, Does Treasury’s Policy Restraining Referrals to Low Income Tax Clinics Harm Individuals and the Tax System? (Procedurally Taxing)

Robert D. Flach serves up his last Buzz for awhile as he begins his tax season hiatus.  It’s his 43rd tax season.  If I hit my 43d tax season, it will be in my 68th year.  I admire Robert’s endurance, but I have no plans to match it.


haroldDirector of Chartered firm among 13 charged over £2.5m film tax fraud (  I think film tax credits are the bait car of tax incentives.

Useless tool.   Treasury Nominee Dynan Calls Home Buyer Tax Credit ‘Useful Tool’ (Tax Analysts, $link).  Not only should her nomination be rejected on the basis of her approval of the failed and fraud-ridden credit, she should be presumed self-disqualified from any public position ever.

While I think the court decision ending tax-free treatment for cash parsonage allowances is likely to stand, not everyone agrees.  Zelinsky: The First Amendment and the § 107 Parsonage Allowance (TaxProf)


Tax Trials continues its “Famous Fridays” series with Pete Rose, Gambling Winnings Are Income Too.

News from the Profession: PwC Doing Its Part to Keep Dog Tails Wagging in Northeast Ohio (Going Concern)



Tax Roundup, 1/29/14: E-cigarette panic! And: SOTU, SALY.

Wednesday, January 29th, 2014 by Joe Kristan


Jeff Stier, Iowa should tread carefully on e-cigarette rules, on the weird impulse to restrict and tax water vapor:

Restricting the use of e-cigarettes, known as “vaping” for the vapor they emit, would undermine the very goal of this law.

First, it wouldn’t reduce exposure to environmental smoke, better known as second-hand smoke, because there is no smoke. There isn’t even any first-hand smoke.

More important, a ban on vaping in public places would damage public health because it would make e-cigarettes a less convenient alternative to cigarette smoking. It would also send the implicit (and incorrect) message that they are also equally dangerous, not only to the user, but to those exposed to the vapor.

All true.  There are two explanations for the why politicians have their dresses over their heads over what amount to very small room vaporizers.

First, because people vaping look a little like smokers, and smoking is a great sin these days, they must be sinning, and sin must be stopped.  For the children!

The second explanation is more cynical, so it probably is true.  The state has a nicotine addiction.  Iowa collected $227 million in tobacco taxes in 2013.  If smokers use e-cigarettes to quit, that money dries up.  We can’t have that.


EITC error chart
Tax Analysts’ 
headline ($link) on its story about the tax proposals in the State of the Union doesn’t exactly scream Hope and Change:  “Obama Proposes EITC Expansion in State of the Union, Otherwise Reiterates Old Tax Proposals.”

One hopes that Congress will do something to keep 20-25% of the EITC from being issued “improperly” to grifters before it increases the theft pot.  We can expect the President’s other tax proposals to go nowhere, as they went nowhere when he was in better political shape.  The dead-on-arrival proposals include disallowing more of the Section 199 deduction for f0ssil fuels and tax credits to “build fuel infrastructure” and to subsidize alternative fuels.

His budget also provides for a hodgepodge of other tax incentives.  His revenue-raisers include repealing LIFO inventories, slower depreciation for aircraft, changing grantor trust rules so they are treated the same for income and tax purposes, and limiting the size of retirement accounts — all doomed absent an unlikely comprehensive tax reform.

Related:  Tax Policy is MIA in the State of the Union (Howard Gleckman, TaxVox). “The president perfunctorily restated his support for business tax reform but added no new twist to make his plan any more acceptable to congressional Republicans.”

Good Jobs First, a left-side think tank, has released Show us the Subsidized Jobs, a report on state tax incentives.  Iowa only scores 27%, largely because there is no online disclosure of recipients of the Industrial New Jobs Training program and the Iowa New Jobs Tax Credit.  I would give Iowa zero percent, because these hidden subsidies wouldn’t exist in a well designed tax system.  They should be repealed and replaced by the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.


Broadbandits.  Speaking of corporate welfare, SSB 3319 was introduced yestarday in the Iowa Senate.  Among other ways to pay providers for something they will do anyway if customers want it, the bill includes a 3% credit on the cost of “new installation of broadband infrastructure.”  Just one more step away from simplicity and transparency.


20111040logoDavid Henderson, Marginal Tax Rates: Singing Taxman to My Class:

Think about the Beatles’ earnings. Late 1963 was when they first started making real money. Then in 1964, they hit it big. Presumably they didn’t spend it all but started investing, figuring that they would get interest and dividends on their investments. They probably did. But those returns would be taxed at the 95% rate. When would they start noticing this? Probably some time in 1965. Thus the 1966 song. 

And we all know what an economic dynamo the UK was then.

Martin Sullivan, The Obama Administration’s Backdoor Bailout of Puerto Rico (Tax Analysts Blog):

But here’s a little secret that the powers that be inside and outside government don’t want you to know: The Obama administration has already provided a multibillion-dollar bailout to Puerto Rico. Nobody in the major media outlets has noticed because the issue is highly technical.

And because Look!  Justin Bieber!


Tony Nitti, Tax Geek Tuesday: Why You Should Never Hold Real Estate In A Corporation? 

William Perez, Filing Requirements for Tax Year 2013

TaxGrrrl, ‘Same Love’ Grammy Wedding: Married Is Married For Tax Purposes

Leslie Book, Corbalis v Commissioner: Tax Court Holds it Has Jurisdiction to Review Interest Suspension Decisions (Procedurally Taxing)


Scott Hodge, President Obama Signs Executive Order to Increase Minimum Wages Paid by Federal Contractors (Tax Policy Blog).  Spending our money to show us how generous he is.

Tax Justice Blog, Has the Tax Code Been Used to Reduce Inequality During the Obama Years? Not Really.   They’ve tried, but it doesn’t work.

Jeremy Scott, BEPS Project Should Include Digital Economy Permanent Establishment (Tax Analysts Blog).   Should companies be taxable in a country because they have a “digital permanent establishment”?  I say they shouldn’t be taxed at all.


TaxProf, The IRS Scandal, Day 265

Jack Townsend, DOJ Tax AAG Keneally Reports on Swiss Banks Joining DOJ Swiss Bank Program

Kay Bell, Mortgage tax break contributes to fading American dream.


Robert D. Flach is a sensible man:

I did not watch the State of the Union address last night.  Instead I watched the wonderful film GAMBIT with Michael Caine and Shirley MacLaine on TCM.

I ate a delicious dinner and had pie for dessert, with the TV off.  My view of the whole SOTU thing is well-reflected here.


Career Corner: You Can Run But You Can’t Hide. Therefore, Sabotage Your Coworkers (Going Concern)



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

Tuesday, November 19th, 2013 by Joe Kristan


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

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

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

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


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

The Tax Court seems to agree:

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

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

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


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

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

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

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


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

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


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

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

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


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


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

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

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


Jason Dinesen, Missouri Guidance on Same-Sex Marriage


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

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

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

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


William Perez, Tax Provisions Expiring at the End of 2013

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

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

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

TaxProf, The IRS Scandal, Day 194

Robert D. Flach brings the Tuesday Buzz!


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

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



Tax Roundup, 11/13/13: Is more IRS money what we need? And why I’m hoping against hope!

Wednesday, November 13th, 2013 by Joe Kristan
Taxpayer Advocate Nina Olsen

Taxpayer Advocate Nina Olsen

Is more money the answer to “pitiful” IRS service?   That’s what Taxpayer Advocate Nina Olson believes, based on a story by Tax Analysts ($link):

National Taxpayer Advocate Nina Olson in a November 9 speech decried as pitiful the level of IRS customer service given to taxpayers, which she attributed to inadequate funding that has forced the Service to automate many of the most important tax administration functions and skimp on training employees on taxpayer rights.

Everything else being equal, you can do more with more money.  Yet we all face limits to our resources, so we prioritize.  The IRS — at the urging of Nina Olson — has directed resources unwisely to its misguided attempt to boss the tax prep industry.  It has been a debacle so far, and it appears headed to oblivion in the courts.

The IRS has another administrative problem that the Taxpayer Advocate has pointed out.  The tax law is too complicated to effectively administer even with a much larger budget.  The tax law is seen as the Swiss Army Knife of public policy, and like a knife with too many gadgets, it becomes hard to work as a knife.  This chart from Chris Edwards at the Cato Institute illustrates the problem:

irs budget cato 20131113


Chris Edwards explains:

The chart shows that the IRS has become a huge social welfare agency in recent decades. Handouts have soared from $4.4 billion in 1990 to an estimated $91.1 billion in 2013 (red line). Handouts are down a bit in recent years because some of the refundable credits from “stimulus” legislation have expired. IRS administration costs have grown from $7.7 billion in 1990 to an estimated $15.3 billion in 2013 (blue line). 

How should we reform the IRS budget? First, we should terminate the handout programs. That would save taxpayers more than $90 billion annually and cut the IRS budget by 86 percent. 

The largest IRS handout is the refundable part of the EITC, which is expected to cost $55 billion in 2013.

So true.  Considering that over $10 billion of the $55 billion is stolen or otherwise issued improperly, the EITC is a nightmare.  There would be plenty of funding available for tax administration if EITC could go away.

But the chart also shows something else: if the tax law was no more complicated than it was in 1990 — and believe me, it was plenty complicated — the IRS administrative budget would be adequate.  But with the IRS transformed into a monster multi-portfolio agency charged with healthcare administration, welfare, industrial policy, environmental enforcement, etc., etc., its budget is hopeless.


This will work out well:

This article examines the tax collection process to see how the IRS might enforce the individual mandate under the healthcare reform law. It concludes that resistant taxpayers can generally be forced to pay the tax penalty only if they are entitled to receive refundable tax credits that exceed their net federal tax liability. 

From Jordan BerryThe Not-So-Mandatory Individual Mandate, via the TaxProf.


Don’t trust the Tax Foundation?  Maybe you’ll trust the Congressional Budget Office.  A commenter yesterday took issue with a chart I reproduced showing not only the tax burden at different income levels, but the amount of government spending benefiting different income levels:

It’s not “the first chart for any tax policy debate,” it’s the last chart you should want to find on your side of the debate if you want to have any credibility.

If that doesn’t work for you, maybe this one from the CBO will be less objectionable:

cbo table

This chart is more focused on direct transfers, but it says pretty much the same thing.  It also covers 2006, and the tax law has hit the high end harder since then. (Via Greg Mankiw).


Scott Hodge, Andrew Lundeen,  54 Million Federal Tax Returns Had No Income Tax Liability in 2011 (Tax Policy Blog)


Paul Neiffer,  Sale of CRP Land – Is it Subject to the 3.8% Tax?  It depends a lot on whether an appeals court upholds the Tax Court Morehouse decision imposing self-employment tax on CRP income.  “And if the Morehouse case is overturned on appeal and the CRP is treated as rents, the land sale will also be subject to the 3.8% tax.”


Kay Bell, Tax tips for newlyweds saying “I do” on 11-12-13 or any day

Jack Townsend,  U.S. Banks File Long-Shot Litigation to Block FATCA Reciprocal Requirements

Leslie Book,  Disclosure and the 6-Year Statute of Limitation: S Corp Issues (Procedurally Taxing)

Jason Dinesen,  EAs are Partly to Blame for Our Obscurity  “Yes, we are treated as the red-headed stepchild of the tax world. But a big reason for this is that we ALLOW people to treat us this way.”

Russ Fox, Dan Walters with Another Example of California Dreamin’


TaxProf, The IRS Scandal, Day 188


Hope lives! 

It’s Time to Give Up on Tax Reform” – Joseph Thorndike, October 29, 2013

When Tax Reform Rises From the Dead, What Will It Look Like?Joseph Thorndike, November 12, 2013.

I should note that his vision of resurrected tax reform is hideous.  If that’s what hope for tax reform comes to, I’ll hope against his hope.



Tax Roundup, 10/31/13: A scary Iowa tax proposal, just in time for Halloween!

Thursday, October 31st, 2013 by Joe Kristan


hatchJack Hatch’s income tax plan would raise taxes on all but very small businesses.  

It’s all in the spin.  My headline is just as accurate as the headline in the Des Moines Register on the tax plan announced by Senator Jack Hatch, a Democratic candidate for Iowa Governor.  The Register’s article, though, spins the way the candidate would like: “Jack Hatch’s income tax plan would give break to all but most wealthy Iowans.”  From the article:

Hatch’s plan would get rid of federal deductibility, which allows taxpayers to deduct federal taxes from their state return. His plan would also raise filing thresholds. It would raise the per-child tax credit from $40 to $500. Married couples who are both employed would get a new $1,000 a year tax credit.

And Iowa’s eight rates and brackets, which range from 0.36 percent to 8.98 percent, would be reduced to four.

The top rate would fall slightly to 8.8 percent, although the income at which that rate begins would be raised by 26 percent, according to an analysis of Hatch’s plan by the nonpartisan Legislative Services Agency. The lowest rate would be 3 percent.

Taxes would go up for Iowans who make an adjusted gross income above $200,000, the Legislative Services Agency analysis says. The wealthiest taxpayers would see a small drop in the highest marginal tax rate, but their taxes would go up because they’d lose federal deductibility.

There are two things I hate about this plan and the way it is covered.  First, it makes no mention that a tax on “the wealthy” is really a tax on business.  Most business income is now reported on individual returns:

Source: The Tax Foundation

Source: The Tax Foundation


And 72% of that is reported by taxpayers with AGI over $200,000:


Cutting through the soak-the-rich stuff, what he’s really proposing is a great big tax increase on business.  How that helps Iowa’s economy isn’t explained — I suppose because it doesn’t.

The other part I hate is the whole idea that hurting “the rich” on behalf of “the middle class” is presumed to be just fine.   Heck, let’s go shoplifting at Wal-Mart, they have plenty of money — and it’s for the middle class!


I suppose I couldn’t expect Sen. Hatch to embrace the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  I suspect it makes too much sense for any politician to embrace it.


This would be a good thing for Iowa: The Benefits of Independent Tax Tribunals (Cara Griffith, Tax Analysts Blog):

States are increasingly turning to independent tax tribunals. Most states now have either a judicial-branch tax court or an administrative-level tax tribunal that is independent of the state’s tax authority. Taxpayers and practitioners have pressed states for independent decision-making bodies for several reasons, including that the judges or administrative law judges who write decisions are impartial and knowledgeable in tax issues and that the opinions should more consistently and transparently apply the tax law because they will be published. 

Iowa, unfortunately, has only administrative tribunals and regular courts.  The judges know little about taxes, especially income taxes, and tend to defer to the State, even when it tortures law and logic.


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

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

TaxProf, NY Times: The Marginal Tax Rate Mess.  Even the New York Times is noticing the high implicit marginal tax rates on means-tested welfare programs, like the earned income tax credit:

As a result of losing eligibility for means-tested benefits, low-income and middle-income families sometimes experience much higher marginal effective tax rates (sometimes exceeding 90 percent) than those at the top of the income distribution. Phase-outs for any one program may not be large, but participation in several programs creates a cumulative effect. 

They “help the poor,” as long as they stay that way.





59pdhyef59pdhyefJoseph Henchman, Remembering the Deceased Iowa Pumpkin Tax You Helped End (Tax Policy Blog).

59pdhyefTaxGrrrl,  Social Security Benefits Will Not Keep Pace With Tax Contributions In 2014 


Jana Luttenegger, Social Security Benefits to Increase in 2014 (Davis Brown Tax Law Blog)


Phil Hodgen, Chapter 3 – Paperwork for Expatriates and Covered Expatriates

Kay Bell, Colorado taxpayer group files lawsuit to overturn candy tax

Me, IRA is to startup funding as dynamite is to kindling.  My new post at, the Des Moines Business Record Business Professionals Blog.


Christopher Bergin, What’s a UDITPA? (Tax Analysts Blog)

Andrew Lundeen, Scott Hodge,  The Income Tax Code Is More Progressive than It Was 20 Years Ago (Tax policy Blog).  “The top 1 percent of taxpayers pay a greater share of the income tax burden than the bottom 90 percent combined, which totals more than 120 million taxpayers. In 2010, the top 1 percent of taxpayers—which totals roughly 1.4 million taxpayers—paid about 37 percent of all income taxes.”

Tax Justice Blog, Bruce Bartlett Is Wrong: New Conclusions on the Corporate Income Tax Change Nothing.  Nothing ever changes at TJB!

Government officials defend increased funding for their agencies.  Iowa police chiefs defend traffic cameras (



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

Wednesday, October 23rd, 2013 by Joe Kristan

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

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


EITC error chart

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

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

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

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

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

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


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

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

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

Other coverage:

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

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

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

TaxGrrrl, IRS Announces Delayed Start To 2014 Tax Season   



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

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

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

TaxProf, The IRS Scandal, Day 167


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


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

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

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

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


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


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


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

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

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


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

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