Posts Tagged ‘greg mankiw’

Tax Roundup, 4/21/14: Clearing the wreckage edition. And: Tax Court penalty abuse.

Monday, April 21st, 2014 by Joe Kristan

20140330-2So I took a five-day weekend.  I needed the sleep, and to see something besides the office, my bed, and my commuting route.  So now to clear the debris of the last few weeks from my desk, and my email inbox.

And I come back to see perhaps the dumbest thing ever to come out of the Tax Court.  Janet Novack reports:

“Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered  on April 15th —an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590,  Individual Retirement Arrangements (IRAs), says is allowed.

Which is more astounding: he IRS decision to seek penalties against a taxpayer for following IRS guidance, or the Tax Court going along?  A great deal of what we do as professionals, and what taxpayers do, is in reliance on IRS guidance, because often that’s all there is to go on.  If you can get hit with a penalty for following IRS guidance if the IRS changes its mind, we’re all avoiding disaster only as long as the IRS is in a good mood.

This unwittingly goes to the heart of the IRS non-enforcement of the Obamacare employer mandate. The statute provides that the penalty tax on those with 50 or more employees starts this year if they fail to provide specified health insurance.  Nothing in the statute provides otherwise.  The only thing standing between all these employers and massive penalties is IRS guidance — y0u know, the guidance that Judge Nega just said taxpayers rely on “at their own peril.”

The whole Tax Court should reconsider this order.  If they decide that something that stupid really is the law, Congress should reverse with legislation providing that taxpayers relying on written IRS guidance should never be penalized for it.

 

20130419-1Megan McArdle kindly linked to me last week in You Can’t Fight the IRS – specifically, to Tax season tip: when you owe and can’t pay.  She added some thoughtful commentary, including:

 There are basically three types of tax trouble. There is “I was underwithheld at work because my salary changed over the course of the year but didn’t realize it” or “I’m a freelancer or small-business owner, and I forgot to put away enough money for taxes, or I incorrectly estimated what my tax bill would be.” Then there is “I am a small-business owner or otherwise self-employed, and I am on the brink of financial collapse; the money with which I hoped to pay the taxes had to go to keep my creditors (barely) at bay.” And, of course, though I hope this is not you, there is “I have been cheating on my taxes.”

She notes that different troubles require different solutions.

Thanks to her link, and to one from Instapundit to the same post, last week was the busiest around here all year.  My thanks to them, and to everyone who takes the time to link here.  You rock my little world.  If you ever want to link to just a piece of a Tax Roundup, you can do so if it starts in blue bold letters, like the words “Megan McArdle” at the beginning of this segment.

 

While I was too busy to do Tax Roundups at the end of tax season, I missed some excellent Bozo Tax Tips from Russ Fox, including Bozo Tax Tip #1: The Eternal Hobby Loss

 

Greg Mankiw,Transitory Income and the One Percent:

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution….  

-Quoting a NY Times article by Mark Rank

Occupy… yourselves!

 

Jason Dinesen, Another Tax Season Down — 2014 Tax Season Recap 

Paul Neiffer, Another Tax Season Bites the Dust.  “This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with).”

TaxGrrrl, IRS Reports Tax Filing Numbers As Expected, Issues Statement On Refund Delays 

Robert D. Flach, THAT WAS THE TAX SEASON THAT WAS.  “43 down – 7 to go!”  I hope to stop before 43, myself.  Robert is tougher than I am.

In case you missed it, you can see my April 15 interview with local TV station KCCI here.

 

 

Locust Street, Des Moines

Locust Street, Des Moines

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part I.  “…if we spend the time necessary to uncover and understand our clients’ non-tax and tax goals, we will typically find that choosing an ideal transaction structure is largely a process of elimination, and when the dust settles, there will often be only one option that works.”

Peter Reilly, Sawyer Taxi Heirs Midcoast Fortrend Deal – Could Have Been Worse.  It involves a C corporation attempting to have its cake while eating it too, by paying stock-deal tax on an asset sale.

Christopher Bergin, Tax Day – It Just Isn’t Fair (Tax Analysts Blog)  “I suppose the only good news is that in the last several days, there have been dozens of items in the news reporting that the IRS is doing fewer audits.”

Tax Justice Blog, Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits

Kyle Pomerleau, Why Many People are Wrong about Executive Pay and the Corporate Tax Code.  “A neutral tax code that properly defines business income would place no restriction on how much a business can deduct in compensation.”

Howard Gleckman, If Congress Lets Firms Expense Investments, It Should Take Away Their Interest Deduction.  Fine, if you let them deduct dividends.

 

Going Concern, Utah Man Discovers Liberty Tax Not as Effective as Maury Povich in Determining Paternity.

 

 

Share

Tax Roundup, 3/31/14: A little fire won’t stop us!

Monday, March 31st, 2014 by Joe Kristan

There was a little disruption around the Tax Update neighborhood over the weekend.  The 115 year-old Younkers Building, kitty-corner from our quarters in The Financial Center, burned over the weekend.  It was being renovated into apartments and shops when it caught fire early Saturday morning.  Here’s how it looked yesterday from one of our conference rooms:

20140330-1

 

While our neighbors in Hub Tower and the EMC Building are closed today, Roth & Company is open for business.  If you need to visit us, you have to enter on the Mulberry Street side; the Walnut side is closed by police order.  You can still reach the parking garage, but you have to come from Mulberry and turn north onto the little stub of Seventh Street left open to allow garage access (it’s normally one-way, Southbound, but it’s one-way northbound until they can re-open Seventh Street, and that doesn’t seem likely for awhile).  We are cut off from the skywalk system, for now. (Update, 8:54: we have Skywalks!  Both to Hub Tower and the EMC building).

Other Tax Update coverage:

Sunday Morning Skywalks.

Goodbye, Younkers Building.

A VISIT(ATION) TO DOWNTOWN YOUNKERS

DOWNTOWN YOUNKERS PICTURES

And some sound advice from Brian Gongol: “Make sure you have an offsite, offline backup of your critical work and personal files. You never know when a catastrophe will strike.”

Roger McEowen, U.S. Tax Court Deals Blow to IRS on Application of Passive Loss Rules to Trusts: “The case represents a complete rejection of the IRS position that trust aren’t “individuals” for passive loss purposes and the notion that only the trustee acting in the capacity of trustee can satisfy the test.”

William Perez, April 1st Deadline to Take Required Minimum Distributions for 2013:

Individuals who reached age 70 and a half years old in 2013 are required to begin withdrawing funds from their tax-deferred retirement plans no later than April 1, 2014. This applies to traditional individual retirement accounts (IRAs) and employer-based retirement accounts, such as a section 401(k), 403(b) or 457 plan.

You can get hit with a 50% excise tax on the required distribution amount if you fail to take it.

Jana Luttenegger, FICA Taxes on Severance Payments (Davis Brown Tax Law Blog)

Kay Bell, Selfies used as tax claim documentation, audit defense.  Not a bad idea.

 

20131206-1Arden Dale, A New Reason to Hoard Assets (WSJ):

In particular, taxpayers are taking advantage of a tax break known as the “step-up in basis,” in which the cost basis of a house, stock or other asset is determined by its current market price rather than when the deceased person acquired it.

Heirs get the step-up when they inherit the asset, and it can save them a lot in capital-gains taxes when they sell.

Gift recipients get only the donor’s basis, while the basis of inherited property is the value at the date of death.  Now that couples can die with over $10 million without incurring estate tax, it often makes tax sense to hold low-basis assets until death so heirs can dispose of them without incurring capital gains taxes.

 

Greg Mankiw,  The Growth of Pass-Through Entities:

Over the past few decades, there has been an amazing shift in how businesses are taxed.  See the figure below, which is from CBO.  Businesses are more and more taxed as pass-through entities, where the income shows up on personal tax returns rather than on corporate returns.  (Here is an article discussing how the mutual giant Fidelity recently switched from one form to the other.)

This phenomenon complicates the interpretation of tax return data.  For example, when one looks at the growth of the 1 percent, or the 0.1 percent, in the Piketty-Saez data, that growth is likely exaggerated because some income is merely being shifted from corporate returns. I don’t know how much.  If someone has already quantified the magnitude of this effect, please email me the answer. If not, someone should write that paper.

This is clearly true.  While I can’t quantify the effect on inequality statistics, it has to make a difference, now that a majority of business income is reported on 1040s:

Source: The Tax Foundation

Source: The Tax Foundation

In 1980, corporate returns reported about 2/3 of all business income; by 2010, the Form 1120-share of business income was down to about 43%.

 

Lyman Stone, Maryland Threatens to Confiscate “House of Cards” Set (Tax Policy Blog).  “High taxes and big incentives don’t seem to be working very well in Maryland right now.”  They should follow Iowa’s example and limit filmmaker subsidies to three hots and a cot.

BitcoinMegan McArdle, The IRS Takes a Bite Out of Bitcoin

Annette Nellen, Guidance on taxation of virtual currency

TaxProf, The IRS Scandal, Day 326

Tax Justice Blog, Grover Norquist cares a lot about Tennessee taxes. You should too.

Renu Zaretsky, Tax Reform, Tax Expenditures, and Kevin Spacey (TaxVox).  A roundup of tax headlines.

Jack Townsend, Tenth Circuit Opinion on Mens Rea for Tax Obstruction – What Does Unlawful Mean?

 

The Critical Question.  Am I a Hypocrite on Preparer Regulation?  (Jason Dinesen): 

I oppose regulation of tax preparers. But yet, I will tout my own licensing at the expense of an unlicensed preparer if the situation presents itself.

But nobody makes Jason do this, and if somebody wants to pay less for an unlicensed preparer, Jason isn’t preventing that.  If he replaced “but yet, I will” with “I prefer to,” it would be correct.

 

News from the Profession.  Per Criminal, PwC is Preferred Audit Firm for Criminals (Going Concern)

 

Share

Tax Roundup, 3/27/14: NASCAR subsidy heads to Governor. And lots more!

Thursday, March 27th, 2014 by Joe Kristan

20120906-1Don’t worry, our subsidies are carefully crafted to only help Iowans, and only for a limited time.  Until it’s slightly inconvenient.

When they built the big new racetrack in Newton, they had a unique deal: the track got to keep the sales tax it collected.  The deal was crafted to require the track be partly owned by Iowans, and that it would expire at the end of 2015.

Then NASCAR bought the track.  NASCAR is controlled by a wealthy North Carolina family , with nary an Iowan.  No problem!  The Iowa House sent a bill to the Governor yesterday (SF 2341) repealing the Iowa ownership rule and extending the subsidy through 2025.

The stories in Radio Iowa and the Des Moines Register only quoted the giveaway’s supporters.  For example:

Representative Tom Sands, a Republican from Wapello, said it’s a “performance based” tax break because NASCAR won’t get the rebate unless there are on-site sales.

“One of the questions might be: ‘What kind of return do we, taxpayers, get in the state of Iowa?’ And I drive on Interstate 80 twice every week like many of you do coming to Des Moines and have seen the construction that has happened around that Speedway just since it’s been there,” Sands said, “and we’ve got probably lots more of that we can expect into the future.”

The answer to that is: what makes this private business more worthy to keep its sales taxes than anyone else?  It’s a special deal that every other Iowa business competing for leisure dollars doesn’t get.  It’s the government allocating capital, and if anybody thinks the state is good at that, I’d like my Mercedes, please.

While this corporate welfare passed, at least some legislators are starting to wonder about this sort of thing.  14 representatives joined 9 state senators in opposing the bill.  When the Iowa Film Tax Credit passed, there were only three lonely opponents.  The 14 representatives who stood up for the rest of us: Baudler (R, Adair), Fisher (R, Tama), Heddens (D, Story), Highfill (R, Polk), Hunter (D, Polk), Jorgensen (R, Woodbury), Klein (R, Washington), Olson (D, Polk), Pettengill (R, Benton), Rayhons (R, Hancock), Salmon (R, Black Hawk), Schultz (R, Crawford), Shaw (R, Pocahontas) and Wessel-Kroeschell (D, Story).  Maybe we have the makings of a bi-partisan anti-giveaway coalition.

 

20120702-2Jason Dinesen, Iowa Tax Treatment of an Installment Sale of Farmland By a Non-Resident.  “The capital gain is recognized in the year of the sale and is taxable in Iowa. But what about the yearly interest income the taxpayer receives on the contract going forward?”

TaxGrrrl, Taxes From A To Z (2014): N Is For Name Change   

Paul Neiffer, Painful Form 8879 Process is on its Way.  The IRS, which has forced us to go to e-filing, now plans to make it a time-consuming nightmare for practitioners and clients because of the IRS failure to prevent identity theft.

Tax Trials, U.S. Supreme Court Reverses Sixth Circuit on FICA Withholding for Severance Payments

Margaret Van Houten, Digital Assets Development: IRS Characterizes Bitcoin as Property, Not Currency

William Perez, Tax Reform Act of 2014, Part 2, Income

 

Illinois sealLiz MalmHow much business income would be impacted by Illinois House Speaker Madigan’s Millionaire Tax?

These data indicate that:

  • 54 percent of total partnership and S corporation taxable income in Illinois would be impacted by Speaker’s Madigan’s millionaire surcharge. That’s almost $10 billion of business income.

  • 6 percent of sole proprietorships AGI would be impacted. Important to note here is that not all sole proprietorships earn small amounts of income. Over three thousand would be hit by the millionaire tax, impacting $674 million of income.

  • Taken together, this indicates that 36 percent of pass-through business income is earned at firms with AGI with $1 million or more.

I don’t think this will end well for Illinois.  When you soak “the rich,” you soak employers.  When states do this, it’s easy to escape.

 

Christopher Bergin, Good Grief! Tax Analysts v. Internal Revenue Service (Tax Analysts Blogs)

I have been involved in two Tax Analysts FOIA lawsuits against the IRS. Neither one of them should have gone to federal judges. But the IRS’s secrecy, paranoia, and belief that it has the absolute right to hide information drives it in this area. This lawsuit was a waste of time and money – against an agency that argues that it doesn’t have enough of either — over documents that should have been public from the beginning.

I’m left to quote Charlie Brown: Good grief! What an agency.

Commissioner Koskinen’s pokey response to Congressional document requests needs to be considered in this context.  The IRS has not earned the benefit of the doubt.

Kay Bell, IRS chief Koskinen spars with House Oversight panel

 

Greg Mankiw, Not Class Warfare, Optimal Taxation:

Today’s column by Paul Krugman is classic Paul: It takes a policy favored by the right, attributes the most vile motives to those who advance the policy, and ignores all the reasonable arguments in favor of it.

In this case, the issue is the reduction in capital taxes during the George W. Bush administration. Paul says that the goal here was “defending the oligarchy’s interests.”

Note that when Barack Obama ran for President in 2008, he campaigned on only a small increase in the tax rate on dividends and capital gains. He did not suggest raising the rate on this income to the rate on ordinary income. Is this because Barack Obama also favors the oligarchy, or is it because his advisers also understood the case against high capital taxation?

Oligarchists everywhere.

 

20140327-1Leigh Osofsky, When Can Concentrating Enforcement Resources Increase Compliance? (Procedurally Taxing)

Cara Griffith, Taxing Streaming Video (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 322

Renu Zaretsky, Friendly or Penalty? Taxes on Married Couples, Businesses, and the Uninsured (TaxV0x).  Rounding up the tax headlines.

Jack Townsend, Scope and Limitations of this Blog: It Is a Tax Crimes Blog, not a Tax Crimes Policy Blog.  “I conceive my blog as a forum to discuss the law as it is, including how it develops.  It is not a tax policy blog addressing issues of what the law ought to be.”

 

Russ Fox, Bozo Tax Tip #9: 300 Million Witnesses Can’t be Right.  Richard Hatch is not widely considered a tax role model.

News from the Profession.  Frustrated EY Employee Vandalizes Office Breakroom in Protest Over March Madness Blocking (Going Concern)

 

Share

Tax Roundup, 12/9/2013: Denison! And 56 cents a mile for 2014.

Monday, December 9th, 2013 by Joe Kristan

The Tax Update is in sunny, but very cold, Denison, Iowa today.

20131209-1

I’m participating in the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School here.  The only remaining session is in Ames next Monday, so register now!

 

The IRS has issued updated standard mileage rates for 2014:

- 56 cents for business travel (down from 56.5 cents for 2013);

- 23.5 cents for medical travel;

- 14 cents for charitable travel.

Gas is down.  (Notice 2013-80)

Related: Paul Neiffer, IRS Almosts Eliminates the 1/2 cent

 

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.

Mickey Kaus, Big Obamacare payoff for tax cheats?:

Doesn’t Obamacare create a big new incentive to fudge your income on your tax returns? The subsidies available on the health care exchanges seem to be based on adjusted gross income (line 37 on Form 1040)– and there’s a huge, conspicuous difference between the subsidy available at, say, a $25,000 income and a $46,000 income. (The subsidy cutoff of is $45,960 for a single person). In California, for the “bronze” policy I’m interested in, at $46,000 I’d pay $507 a month. At $25,000 I’d pay … $63. A difference of $444 a month.

I have mentioned quite often the high hidden marginal rates caused by the phase-out of the earned income tax credit.  The Obamacare subsidy phase-outs worsen this.  The government pays you to stay poor, or to cheat on your taxes if you aren’t poor anymore.  You get what you pay for. (via Instapundit)

William Perez,  Year End Review of Choice of Business Entity. “There is definitely no one-size-fits-all answer when it comes to deciding on an appropriate tax structure for a business.”

Margaret Van Houten, What our Estate Planning Clients Need To Know – What are Digital Assets? (Davis Brown Tax Law Blog).  On the importance of including “digital assets” in your estate planning.

Kay Bell,  Freezing? Home improvements provide warmth, tax savings

Jason Dinesen, Colorado Tax Guidance for Same-Sex Marriage 

Tony Nitti, IRS Addresses Deductibilty Of Organizational And Start-Up Costs Upon Partnership Technical Termination 

 

 

Lyman Stone, Missouri Gives In With $2 Billion Incentive to Boeing.  Missouri taxes its residents and existing businesses to give cash to an insider with good lobbyists.

How do you know that the new proposed 501(c)(4) regulations are designed to silence right-side speech?  The left-side advocacy groups have dropped their lawsuit demanding the IRS enact regulations to silence right-side speech (Huffington Post).

TaxProf, The IRS Scandal, Day 214 and Smith: The Latest IRS Power Grab

Robert D. Flach, HERE’S A THOUGHT – A FEW MORE CENTS ON A VOLUNTARY CREDENTIAL FOR TAX PROS.  “If the IRS does not decide to go ahead with a voluntary RTRP program after it loses the appeal of Loving v IRS, I have proposed an independent industry-based organization to administer a voluntary RTRP-like tax preparer credential in my ACCOUNTING TODAY editorial ‘It’s Time for Independent Certification for Tax Preparers. ”  It would be an improvement over the IRS system.

Peter Reilly, Cigarette Importer Sees $300M Deduction Go Up In Smoke   

 

 

Greg Mankiw, The Progressivity of the Current Tax Code :

20131209-2

 

Jack Townsend,  Swiss Banks Scrambling to Commit to Participation in U.S.Swiss Bank Initiative

TaxGrrrl, IRS To Rapper: It’s Hammertime!  Remember M.C. Hammer?  The IRS does, even if you don’t.

 

Share

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.

 

Share

Tax Roundup, 10/3/2013: Three-day shutdown retroactively responsible for 8-month ID theft refund delay! And… standards!

Thursday, October 3rd, 2013 by Joe Kristan
Wikipedia image courtesy Tallent Show under Creative Commons license

Wikipedia image courtesy Tallent Show under Creative Commons license

Never mind the last eight months, it’s the last three days that are the problem.  KCRG.com reports:  Government Shutdown Holding Up Tax Refund for Local Family:

A Cedar Rapids woman and her family have been waiting for a $3,250 tax refund for 8 months now, and with late bills piling up, she doesn’t know how much longer she can hold out.

The problem is that during a government shutdown, there’s no way for her to contact the Internal Revenue Service to find out where her check is.
The troubles began for Autumn Alicea when she filed for her tax return back in February. A while later, she discovered someone in Florida had stolen her identity. Alicea said it took the IRS several weeks to investigate and verify that she was the real Autumn Alicea. “So they said it would take about 8 weeks to process my return now that they knew the one from Iowa was indeed the valid return, and the one from Florida was not.”

So the shut down for the last three days is responsible for the late refund?  Not likely.  It can take a lot longer than eight weeks for the IRS to get a stolen refund back in the right hands in the best of times.  It took 121 weeks to for Jason Dinesen’s widowed ID theft client to get hers.

It’s fascinating what the government considers “essential.”  Paying people to keep 90-year old veterans away from an unstaffed open-air memorial and to barricade private businesses is “essential,” but getting money it fairly owes to honest taxpayers after carelessly mailing it to two-bit grifters, well, that’s strictly optional.

 

More shutdown coverage:

William Gale, It’s Groundhog Day Over the Debt Ceiling

Christopher Bergin, ‘Your Voice at the IRS’ Silenced (Tax Analysts Blog).  Like I said, interesting priorities.

Kay Bell,  ‘Essential’ Representatives, Senators get paid during shutdown.  If they paid truly essential politicians, the federal payroll would go to about zero.

 

 

20131003-1Casey Mulligan, How ObamaCare Wrecks the Work Ethic (Wall Street Journal)

The chart nearby shows an index of marginal tax rates for non-elderly household heads and spouses with median earnings potential. The index, a population-weighted average over various ages, occupations, employment decisions (full-time, part-time, multiple jobs, etc.) and family sizes, reflects the extra taxes paid and government benefits forgone as a consequence of working.

Like many other “anti-poverty” programs, it fights poverty by punishing efforts to escape poverty.

(Via Greg Mankiw)

David Brunori, State Taxes and the Poor (Tax Analysts Blog): “As importantly, ITEP highlights the problems with states reducing their earned income tax credits”  I think the high implied marginal tax rate of EITC phaseouts on taxpayers trying to escape poverty is underappreciated.

 

TaxProf, IRS Waives Individual Mandate for Americans Living Abroad.  Finally a portion of the tax law where Americans abroad actually get better treatment than the rest of us.

 

Wikipedia image

Wikipedia image

It’s official.  Beanie Babies Creator Pleads Guilty to Tax Evasion (Wall Street Journal).  The article cites Tax Crimes Blog proprietor Jack Townsend: 

An analysis done earlier this year found U.S. courts have been more lenient in cases tied to the government crackdown on secret offshore accounts. The average sentence in criminal offshore cases has been about half as long as in tax shelter schemes, according to a comparison of Internal Revenue Service statistics and data compiled by Houston attorney Jack Townsend, who publishes the Federal Tax Crimes blog. In many cases, judges are also opting for shorter sentences than recommended under federal guidelines.

He will have to pay $53.6 million in FBAR penalties under the plea agreement.

 

Related: Jack Townsend, Ty Warner, Beanie Babies Creator, Pleads Guilty

Slightly related:  Green card received in 2006? Give it up in 2013 (Phil Hodgen)

 

Me, Creativity fails to protect custom homebuilder from capitalizing costs.  Section 263A snags custom homebuilder.

Andrew Lundeen, Blank Slate Tax Reform Could Damage Economic Growth (Tax Policy Blog)

Why partisan tax law enforcement is always a scandal.   Vietnam dissident Le Quoc Quan jailed over tax evasion (BBC).  I think “dissident” is key to understanding the “jailed” part.

Tax Justice Blog,  State News Quick Hits: Andrew Cuomo Loves Tax Cuts, So Does ADM, and More

Cara Griffith, Floating on a State Tax Revenue Bubble (Tax Analysts Blog):

According to a report by Lucy Dadayan and Donald Boyd of the Rockefeller Institute, the record income tax receipts are a “temporary ‘bubble.’” 

Related: Iowa tax revenue up 4.1 percent past three months (Des Moines Register)

 

 

Robert D. Flach,  STANDARDS? DON’T MAKE ME LAUGH:

I had to laugh at the H+R official referring to “the same standards as we do”.  I am not aware of any evidence of such standards.  In fact the evidence is to the contrary.

They have high standards of placing their people in high places in the IRS, at least.

 

Speaking of high standards:

Cop used his job to commit identity theft, feds say. (sun-sentinel.com)

Ex-W. Pa. deputy faces fed tax evasion sentence (AP)

 

Share

Tax Roundup, 9/3/2013: Iowa’s multi-talented revenue examiners. And social media dos and don’ts.

Tuesday, September 3rd, 2013 by Joe Kristan

 

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

Iowa income tax examiners don’t just deal with state issues.  In recent years the Iowa Department of Revenue has been examining hobby loss issues by itself.  This is a departure from past practice, where Iowa usually only examined state-specific issues, like residency and allocation of multistate income.

A new protest resolution released last week shows that while the Department may start an examination on hobby loss issues, it doesn’t have to stop there.  The department examined a couple’s horse operation and concluded that it wasn’t operated for profit, disallowing the resulting “hobby losses.”  That’s not a shocking result, as horse operations are often challenged on hobby loss grounds.   But the department wasn’t done (my emphasis):

In regards to the day care business, the Department explained in previous correspondence that the taxpayers cannot take a deduction for the business use of the home, except for real estate taxes and mortgage insurance which are allowable on Schedule A.  The taxpayers have already filed amended returns reducing the meal expense claimed on the original returns.  The Department accepts the amended meal expenses.  The Department also denies several other items because they are not ordinary and necessary business expenses, such as landscaping, auto repair, and picture frames.  All items denied are on the enclosed schedule. 

The final adjustment is to charitable contributions on Schedule A.  The Department denies the  “Haiti” contributions for all three years because there is no evidence the contributions were made to a qualified  charitable organization.  See IRC Sec. 170(c).  Contributions made directly to an individual or to groups of individuals are not deductible.  Also, the Department denies the contributions to Covenant House on the 2009 return.  There is not enough information to confirm that Covenant House is a qualified organization.

If the Department comes for the hobby losses, they just might stay for the whole return.

Cite: Van Veldhuizen, Document Reference: 13201028

 

Peter Reilly, $10,000,000 North Carolina Domicile Case Shows Importance Of Planning   If you want to move to low-tax Florida before selling a business, you need to do it early and do it right.

Greg Mankiw, Marginal Tax Rates under Obamacare.  He quotes a new paper: “Measured in percentage points, the Affordable Care Act will, by 2015, add about twelve times more to average marginal labor income tax rates nationwide than the Massachusetts health reform added to average rates in Massachusetts following its 2006 statewide health reform.”

What does that mean?  Tyler Cowen quotes the same paper:

The law increases marginal tax rates by an average of five percentage points (of employee compensation), on top of the marginal tax rates that were already present before the it went into effect. The ACA’s addition to labor tax wedges is roughly equivalent to doubling both employer and employee payroll tax rates for half of the population. 


I’m sure that half is all in the top 1%.


The great Ronald Coase has died at a still too-young 102.  An appreciation. (via Tyler Cowen)

Courtney Strutt-Todd, IRS Provides Answers to Filing Questions for Same-Sex Couples (Davis Brown Tax Law Blog) 







After a big three-Buzz week last week, Robert D. Flach Buzzes again!



20130903-1Finland follies.  Finns normally sensible and wonderful people.  Our Finnish exchange student is terrific.  But like everyone else, they have politicians who won’t mind their own business,  reports Lyman Stone (Tax Policy Blog):
The Wall Street Journal reports that Finland’s 2011 tax on sugary goods is driving ice cream trucks out of business, and that Mexico is considering implementing its own sugar and sweets tax under the auspices of curbing obesity. In 2014, Finland will add more products, like cookies and jam, to its list of taxed goods. These taxes are particularly notable because Mexico has the second highest per capita soda consumption in the world, while Finland has among the highest rates of ice cream consumption.

Finland has some of the worlds highest consumption rates of alcohol and coffee.  And there’s no sugar in vodka.

TaxGrrrl, Would ‘Very High Taxes’ Keep Unemployment Rates Low?  Ask the Finnish ice cream truck drivers.



Career Advice Department, Social Media Section.  In my recent interview, I answered the question “what advice would you offer to the new accountant concerning the role of social media in their profession.”   If I were answering the question today, I would just say don’t do this.

 

Share

Tax Roundup, 7/19/2013: You can run a red light edition. And saving the republic, one tail light at a time.

Friday, July 19th, 2013 by Joe Kristan

gatsoThe first central Iowa town to install revenue cameras has turned them off.  The Des Moines Register reports:

 The Clive City Council on Thursday night voted to discontinue the use of red-light cameras to enforce traffic violations.

The council voted 3-2 to reject a contract with Redflex Traffic Systems Inc., which has provided the city red-light camera service since the program began in 2006. The nine cameras positioned along Hickman Road now will no longer be in service.

So carnage on Hickman Road, now, right?  Yeah, right.  But it’s not over yet:

Mayor Scott Cirksena said after the meeting that city staff would work to reach an agreement with the camera provider that could gather a majority vote.

Council members Ted Weaver and Michael McCoy said they would like to see the city wean itself away from using red-light revenue for general fund expenditures. City Manager Dennis Henderson said the city expects the red-light camera program to bring in approximately $700,000 during the current fiscal year, which began July 1

It’s obviously about the money, though you find the pro-forma claims that ticketing people who don’t quite stop when making a right turn on red at an empty intersection makes us all safer, if you read down to paragraph nine.  Let’s hope Des Moines and Polk County follow suit, but don’t hold your breath.

 

 

Of course they do.  Four Cedar Rapids-Metro Area Mayors Support Local Option Sales Tax Extension (KCRG.com). And RAGBRAI riders support free beer extension.

 

I bet the IRS heard about this guy through the grapevine.  From Star-Telegram.com:

Larry Lake, part owner of Grapevine Drug Mart, and his son, Travis Lake, who managed the drug store, each failed to report income on their federal tax returns, according to a news release from the U.S. Attorney’s office.

Larry Lake was sentenced to 14 years in prison and ordered to pay a $550,000 fine as well as taxes, interest and penalties, which equal about $25 million, the release said.

The Texas men may well have gotten in trouble not just from evading taxes, but from the way they did their banking:

From August 2006 to November 2009, Larry Lake and his spouse, Kathy Lake, agreed to structure hundreds of currency deposits into at least 13 bank accounts, according to a federal indictment. The couple created at least two shell companies that were used to open up the accounts involved in the structuring scheme, which amounted to $9.3 million, federal officials said.

“Structuring” involves breaking cash deposits up into amounts under $10,000 to avoid the rules requiring banks to report currency transactions.  But banks are also required to report if it looks suspiciously like somebody is trying to get around the $10,000 reporting rule.  You come into a bank enough times with wads of cash, but never $10,000, and the tellers will remember you.

 

TaxProf, The IRS Scandal, Day 71.  A bad day for the “nothing to see here” folks.

Robert W. Wood, IRS Inspector Shellacs Oversight Committee About Tea Party Scandal

 

Kay Bell, Tax reform’s chances are better than 50 percent:

Rep. Dave Camp (R-Mich.), head of the Houses Ways and Means Committee, and Sen. Max Baucus (D-Mont.), leader of the Senate Finance Committee, each put the possibility of tax reform passage at greater than 50 percent.

The gung-ho comments were made during an appearance today at the Economic Club of Washington.

I’d agree, if you are talking about in the time before the sun curls into a cold cinder.  If you are talking about this Congress, I’ll bet the other way.

Kyle Pomerleau, Japan to Lower its Corporate Rate Further? (Tax Policy Blog)

David Cay Johnston, More Tax Dollars There, Not Here (Tax Analysts Blog)

 

Jason Dinesen, Patient-Centered Outcomes Trust Fund Fee – An Exercise in Bureaucratic Futility $100 of cost to compute a $3 tax.

Peter Reilly, Real Estate Pro Status Does Not Mix With Full Time Day Job.   Back from the Civil War, Peter has been busy with new tax posts.  This one explains the difficulty of being a “real estate professional” when you have other work.

 

Sean Raisch,  Medicare Taxes on High Earners (Davis Brown Tax Law Blog)

William Perez, IRS Update for July 19, 2013.  Sort of a web weekly bulletin of IRS releases.

 

Greg Mankiw, The Changing Distribution of Income:

20130719-1

Mark Perry points out:  “Yes, the middle class has been disappearing, but they haven’t fallen into the lower class, they’ve risen into the upper class.”

It’s Friday, so it’s Buzz Day at Robert D. Flach’s place!

 

The Critical Question:  Do Low-Income Taxpayers Cheat? (TaxVox)  He has a lot more faith in the good nature of humankind than I do.

 

TaxGrrrl, How To Stay Out Of Jail: Lessons Learned From The ‘Queen Of IRS Tax Fraud’:

If you do steal, and you talk about it, don’t do it on Facebook I don’t care what you think you know about privacy settings, when you put something out there on Twitter or on Facebook, it’s not protected. As a taxpayer, that means you should avoid posting personally identifying information like tax ID numbers and your address (the IRS Facebook page won’t allow you to post comments for that reason). And you should certainly avoid posting photos of yourself surrounded by stacks of cash with such gems as:

20130717-1

Hard to argue with that advice.  Russ Fox has more.

 

Nude drunk guy saves the republic. Police: Drunk naked man broke out car tail lights (press-citizen.com, via The Beanwalker):

According to the complaint, Flaherty broke out the tail lights to three cars and told officers that he was breaking the red in the tail lights because red means danger to the republic.

I’ll have what he’s having.

Share

Tax Roundup, 4/8/13: One week to go! And thinking out of the envelope

Monday, April 8th, 2013 by Joe Kristan
Wikipedia image

Wikipedia image

Greg Mankiw,  The President’s Latest Bad Idea:

Apparently, President Obama’s budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts.  The details are not yet known, but I think we know enough to say that this is a terrible idea.

A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes.  Completely replacing our tax system with a better one is, however, hard.  Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax.  The use of these accounts should be encouraged, not discouraged.   

Unlike some of his other bad ideas, this one isn’t going anywhere.

William McBride, President Obama’s New Tax Increases (Tax Policy Blog)

 

TaxProf,  NY Times: Former Baucus Staffers Cash in as Finance Committee Tees Up Tax Reform.  Ah, the sacrifices of public service.  I bet they aren’t proposing the Instapundit revolving door tax.  Related: Max Baucus and Dave Camp,  Tax Reform Is Very Much Alive and Doable.  (Wall Street Journal).

 

Paul Neiffer. 3%-6%-12%:

One of our last posts indicated that the IRS had issued a notice indicating they might not assess the late payment penalty for returns that are extended and paid after April 15, 2013 if the return included certain forms that were delayed by the new tax law.

However, when you read the fine print, it appears that you still need to accurately estimate your tax and pay in at least 90% of this extra tax to escape the penalty.

The IRS language is:

For each taxpayer who requests or has requested an extension to file a 2012 income tax return that includes one of the forms listed in Exhibit 1 of this Notice, the IRS will deem the taxpayer to have demonstrated reasonable cause and lack of willful neglect, provided a good faith effort was made to properly estimate the tax liability on the extension application, the estimated amount is paid by the original due date of the return, and any tax owed on the return is fully paid no later than the extended due date of the return.

I suspect that the IRS will not be very strict in making taxpayers demonstrate reasonable cause, but if you have the cash, you should  pay up.

 

William Perez,  Filing Protective Claims for 2009 Tax Returns for Same-Sex Married Couples

Kay Bell, 6 ways to prepare and e-file your federal taxes for free

TaxGrrrl, Ask The Taxgirl: Home Offices And Capital Improvements

Roberton Williams, How Much Will 2013’s Payroll Tax Hikes Cut Your Take-Home Pay?

 

Peter Reilly,  Wesley Snipes Almost Out – Kent Hovind Remains In Prison

Russ Fox, Bozo Tax Tip #5: Don’t Seal the Envelope!

One of her clients mailed his tax return to the IRS but forgot to seal the envelope.  The return did make it to the IRS, but without page two of Schedule C.  The first that the client found out there was a problem was when the IRS sent him a letter noting the omission.  The second time he knew that there was a problem was when she found she was a victim of identity theft.

E-filed returns never fall out of the envelope.

 

Jack Townsend,  Good Overview Article on Financial Issues for Americans Living Abroad

Phil Hodgen,  Form 1040NR Filing, Tax Payment Deadlines

 

The criminal masterminds that the IRS can’t stop.  Tampa exotic dancer sentenced for tax fraud (tbo.com)

The Critical Question.  News Analysis: Why Are Fee Waivers Like Deep-Fried Twinkies? (Lee Sheppard, Tax Analysts; gated).

 

Stay tuned for my first 2013 filing season tip going up later this morning!

 

Share

Tax Roundup, 1/18/2013: Iowan gets 87 months on Ponzi, tax charges.

Friday, January 18th, 2013 by Joe Kristan
87 months?  Holy Cow!

87 months? Holy Cow!

Iowan gets 7 years on Ponzi scheme, tax charges.  An Ottumwa man who used funds he was supposed to invest to finance his online dating life was sentenced yesterday to 87 months in federal prison on federal fraud and tax charges.  John Holtsinger, 52, will serve the federal sentence after he completes a state OWI sentence.

Mr. Holtsinger entered a guilty plea last year.   The indictment said he sold this improbable investment opportunity:

After conducting trades on behalf of investors for a short period of  time, Holtsinger offered and sold investments to the investors in the form of promissory notes.  He represented that the notes would yield high returns with no risk including, but not limited to, what he called an “inheritance investment” that would be invested through his mother and pay out upon her death.  The “inheritance investment” required a $20,000 deposit and was to pay annual returns of 9% with automatic liquidation and payout if the investment dropped below 3% of its initial value.

“High returns with no risk” is a rare beast indeed, nearly as rare as the Unicorn.  I doubt if they show up in Ottumwa very often.

 

IRS stimulates prison system economy by $35 million in 2010.  From a report by the Treasury Inspector General for Tax Administration:

Refund fraud committed by prisoners remains a significant problem for tax administration. The number of fraudulent tax returns filed by prisoners and identified by the IRS has increased from more than 18,000 tax returns in Calendar Year 2004 to more than 91,000 tax returns in Calendar Year 2010. The refunds claimed on these tax returns increased from $68 million to $757 million. Although the IRS prevented the issuance of $722 million in fraudulent tax refunds during Calendar Year 2010, it released more than $35 million.

The new IRS regulation of tax preparers isn’t going to do much for this problem.  (via the TaxProf)

Related: Doing Your Time (Jack Townsend)

 

TaxGrrrl, As We Creep Closer To The Debt Ceiling Limit, Is Your Tax Refund At Risk?

Kay Bell, Government report fuels fear (again) of federal mileage tax proposal

Russ Fox, The Walking Dead Come Back.

Brian Mahany,  Taxpayer Advocate Questions OVDI, FBAR Penalties

David Cay Johnston, Foundering Tax Avoidance (Tax.com)

Paul Neiffer,  Watch Out For Those Retroactive State Tax Gotchas!

Nanette Byrnes, Facebook’s slump hits California’s budget, and more (Tax Break)

Joseph Henchman and Elizabeth Malm, New Report: Gasoline Taxes and Tolls Pay for Only a Fraction of Road Spending (Tax Policy Blog)

Catch your weekend Buzz early!  From Robert D. Flach.

Howard Gleckman,  A Tiny Little Blog Post on a Tiny Little Tax Bracket. (TaxVox).  Hey, I noticed it first!

News you can use:  Retaining CPAs Is As Easy As Letting Them Work in PJs and Attend Boring Meetings, Says Guy (Going Concern)

 

When outsourcing goes too far.  A story of how a model employee outsourced his own job. (Greg Mankiw).  Nice work if you can get paid while some guy in China does the dirty work.

Share

Tax Roundup, 1/3/2013: Now Iowa’s filing season is a mess.

Thursday, January 3rd, 2013 by Joe Kristan
The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Fiscal Cliff Bill complicates Iowa tax returns for 2012.  Iowa doesn’t automatically adopt federal tax law changes, so some retroactive tax law provisions in the Fiscal Cliff bill won’t apply to Iowa state income taxes absent action by the Iowa General Assembly.  From an Iowa Department of Revenue e-mail to practitioners yesterday:

The federal legislation passed on January 1, 2013 to avert the “fiscal cliff” included provisions for what are commonly referred to as the federal “extenders.” The federal “extenders” are not currently reflected on Iowa tax forms for 2012 and will require approval by the Iowa legislature before being allowed for Iowa tax purposes. Should legislative approval be given, Iowa online forms will be updated accordingly. The federal extender provisions include:

  • Educator Expenses (Line 24; IA 1040)
  • Tuition and Fees (Line 24; IA 1040)
  • Itemized Deduction for State Sales /Use Tax Paid (Line 4; IA Schedule A)
  • Treatment of mortgage insurance premiums as qualified residence interest (line 11, schedule A)
  • The federal section 179 expensing limit of $500,000 for 2012 and 2013 

Iowa income tax returns must be filed based upon current Iowa law. Therefore, the extenders should not be included on Iowa returns at this time.

Let’s hope the legislature acts quickly to pass conformity legislation, or we will have another messy Iowa tax season.

 

Why 12%?  Today’s Des Moines Register story on reactions by Iowa business people to the Fiscal Cliff bill quotes me as saying that Iowa businesses may face a 12% reduction in their after-tax income.  Where did I get that number?

I started by computing the after-tax amount of a dollar earned by a top-bracket taxpayer under 2012 law, assuming full detectability of Iowa taxes on the federal return and vice-versa.  That results in a combined rate of 38.92%, leaving 60.18 cents in the taxpayer’s pocket.  Under the same assumptions using the 2013 39.6% top rate and the 3.8% surtax on “passive” income, the combined federal-state effective rate goes up to 46.39%, leaving 53.61 cents after-tax.  That’s a 7.48 cent reduction in after-tax income — 12.24% of the 60.18 cent 2012 after-tax number.

The 12.24% number is actually too low because it doesn’t account for the phase-out of itemized deductions for high-income taxpayers in the new bill.  For top-bracket taxpayers, itemized deductions will be reduced 3 cents for each additional dollar of income.  The result is a hidden 1.188% additional tax.  Plugging that into our tax computation gives a combined federal and Iowa rate of 47.46%, leaving 52.54 cents after-tax.  That reduces after tax income from 2012 law by 8.54 cents, or 13.99%.

Should I assume the 3.8% passive income tax, like I do in the above examples?  It won’t apply to K-1 income if all owners “materially participate” in a pass-through business.  Those taxpayers face “only” an 8.41% reduction in their after-tax income.  If you don’t think that’s significant, consider whet your reaction would be if your employer said that your after-tax pay was going down that much.

But the 3.8% tax will apply to family members that don’t participate in the business, like out-of-town siblings, retired founders, or children of owners.  The business has to distribute at least enough to let owners pay their taxes, which means the taxpayer in the highest bracket has to be covered.  For that reason many family-owned businesses will have to distribute enough to cover the 3.8% Obamacare net investment income tax, making the combined 47.46% rate their real rate.

 

Fiscal Cliff Notes

TaxProf,  House Approves Fiscal Cliff Tax Deal

Megan McArdle, After the Fiscal Cliff: What do Democrats Want?  “I submit that just as Republicans are more interested in entitlement cuts as talking points than as actual new laws, Democrats will prove much more interested in tax hikes in theory than in practice.”

Robert D. Flach, THE AMERICAN TAXPAYER RELIEF ACT OF 2012

William McBride, Fiscal Cliff Resolved, Still Likely to Get Downgraded

TaxGrrrl, The World Will Keep Turning, Even With The Expiration Of The Payroll Tax Cuts

Patrick Temple-West, Cliff bill means some pay more taxes, and more

Trish McIntire, American Taxpayer Relief Act of 2012

Paul Neiffer, Help! What Is My Capital Gains Tax Rate?!

Kay Bell,  What’s your 2013 tax rate and other fiscal cliff tax bill questions

Margaret Van Houten,  Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation (Davis Brown Tax Law Blog)

Courtney A. Strutt Todd,  A Permanent Fix to the AMT Problem (Davis Brown Tax Law Blog)

Jana Luttenegger, Individual Tax Rates, Deductions, and Credits (Davis Brown Tax Law Blog)

 

Greg Mankiw has a pithy post that I hope he doesn’t mind me reproducing in full:

Here are the effective federal tax rates (total taxes as a percentage of
income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9
Top 0.1 percent: 39.6

 

Russ Fox,  Your Mileage Log: Start It Now!  Great advice.  If you travel on business and the IRS comes by, you’ll be glad you have that log.

David Brunori,   Only Tax Professionals Benefit from the State Corporate Tax.  (Tax Analysts Blog) Well, the loophole lobbyists do pretty well by it too.

Peter Reilly, Form 8332 – Don’t Let The Kids Live In Another Home Without One ?

TaxTV, IRS Penalty Relief-First Time Penalty Abate Program

Robert Goulder, The Unspoken Tax Expenditure (Tax Analysts Blog)

Jack Townsend, New Article on the Emerging Consensus for Taxing Offshore Accounts

William Perez,  Social Security Tax For 2013

 

Career planning news you can use:  Life After Public Accounting: Harassing Auditors For a Living Isn’t a Bad Gig If You Can Get It  (Going Concern)

Share

Tax Roundup, 1/2/2013: Yay, we didn’t fall off the cliff! Too bad we’re still doomed.

Wednesday, January 2nd, 2013 by Joe Kristan

So tax season can go on.  The IRS will have to activate some of the “reserved” boxes on its forms, but with the passage of HR 8 yesterday, filing season should be able to continue without catastrophic disruption.  I summarized the key pieces yesterday here.

So what did they accomplish?  They permanently “patched” the alternative minimum tax, and that is a real accomplishment.  Far better to repeal a deeply dishonest tax, but at least now they have stopped placing a time bomb in the tax law set to go off every year or two.

They raised the top marginal rate on “the rich” to something over 40%, with a stated top rate of 39.6% and the dishonest phase-outs of itemized deductions and personal exemptions.  They redefined “rich” as single filers with incomes over $400,000 and married taxpayers over $450,000.

They raised the top dividend and capital gain rate to something over 24%, taking into account the 3.8% Obamacare levy, the 20% rate on the rich, as newly defined, and the phase-outs of deductions and personal exemptions.  In doing so, they left the top rate at 15% (or 18.8%) for other taxpayers.

They delivered another kick in the teeth to successful entrepreneurs.  Taxpayers who operate successfully as pass-through entities represent much of the income hit by the new tax rates, and much of business income in general.  They have that much less after tax income to take chances on new locations, new employees, new products.  That means there will be less of all of these.

20121019-1

Source: Tax Foundation, “Putting a Face on America’s Tax Returns: A Chartbook

Most people don’t realize just how big a part of the economy pass-throughs run by “the rich” are.  This might give you an idea:

201130102-1

Source: Tax Foundation, ‘Putting a Face on America’s Tax Returns: A Chartbook”

This isn’t exactly going to help hiring.

They once again passed the dishonest batch of “expiring provisions.”  These provisions, from the windmill subsidy and research credits to special breaks for speedways, are passed with annual expiration dates, enabling the politicians to pretend that they are temporary so they don’t have to face the real costs of these breaks for their freinds.

What they failed to accomplish is just as important.  They failed to pass the wretched ideas of dollar caps on itemized deductions or a limit on the rate benefit of the deductions.  They failed to apply the top rates to incomes of $200,000 and up, which was their initial plan.

Most importantly, they utterly failed to address the ongoing fiscal catastrophe.  The new revenues will barely touch the $1.2 trillion annual deficit.  It’s not clear whether there will even be any deficit reduction when all of the pieces of the deal are added together.  That means we careen almost immediately to a new debt-ceiling battle and ultimately to a confrontation with arithmetic.

Perhaps that will ultimately be the benefit of this deal, though not one that is intended.  The President finally got his tax hikes on “millionaires and billionaires,” and they won’t do a thing to deal with the fiscal crisis.  If people finally realize that the choice is between bringing spending and entitlements under control or higher taxes on everybody, there might actually be some value to this mess.  After all, the rich guy isn’t buying.

 

Fiscal Cliff Notes

TaxProf, House Approves Fiscal Cliff Tax Deal

Tyler Cowen, Ross Douthat asks

If a newly re-elected Democratic president can’t muster the political will and capital required to do something as straightforward and relatively popular as raising taxes on the tiny fraction Americans making over $250,000 when those same taxes are scheduled to go up already, then how can Democrats ever expect to push taxes upward to levels that would make our existing public programs sustainable for the long run?

Greg Mankiw, President rejects his bipartisan commission

Stephen Entin, Measuring the Economic and Distributional Effects of the Final Fiscal Cliff Bill (Tax Policy Blog)

Howard Gleckman, Congress Kicks the Fiscal Can off the Front Stoop (TaxVox)

William Perez,House Approves the American Taxpayer Relief Act of 2012

Journal of Accountacy, Congress passes fiscal cliff act

Andrew Mitchel, Senate Fiscal Cliff Bill Includes Retroactive Reinstatement of CFC Look-Thru Rule

Kay Bell, House passes tax bill to avoid fiscal cliff

Paul Neiffer, Some Major Tax “Goodies” in Senate Bill For Farmers!

Robert D. Flach, SURPRISE! SURPRISE! SURPRISE!

Joseph Thorndike, Is Obama the Worst Legislative Negotiator of the Last Century?

Finally, this from Daniel Shaviro, a tax man of the left, on the fiscal cliff and the larger budget picture:

The biggest problem, as others have noted, is that Obama appears to be a once-in-a-generation lame and inept bargainer, who can take even a strong hand and not get all that much, because he is so predictably ready to fold.  But again this is not mainly an issue about the New Year’s Eve deal itself, which is more or less defensible as a one-off solution.  Rather, it’s about the debt ceiling crisis to come in a few weeks.

That is the one that really counts.  I think the Administration should play that, not merely as hard as they are saying they will now, but about 20 levels harder.  I would not just refuse to negotiate, but would have Administration officials use words such as treason, sabotage, and terrorism.

Mr. Shaviro is a very bright man.  He knows that the present fiscal course is unsustainable.  The solutions are some mix of spending less or taxing more.  If a guy that smart is ready to equate “spending less” with “treason, sabotage and terrorism,” the debate will get very ugly.  Maybe we aren’t far behind Argentina and Greece.

Share

Tax Roundup, 12/31/2012: No cliff deal yet. And Branstad won’t try to fix income tax this year.

Monday, December 31st, 2012 by Joe Kristan

No cliff deal.  As of this morning, the President and Congress continue to fail to to make a “fiscal cliff” deal.  Rest assured, though, that even when they cobble together a lame and harmful deal, as they will today or weeks from now, they won’t even begin to address the real fiscal calamity — the government’s incontinent spending.

The unforgivable sin of the current president, and the last one, and their Congressional enablers, is spreading the idea that the government can buy us all free stuff, and the rich guy will pick up the tab.  Sorry.  The rich guy isn’t buying.

 

Income taxes: the redheaded stepchild of Branstad tax policy?  It looks more and more like the Branstad agenda for the 2013 Iowa legislative session  won’t include income tax reform.  From the Sioux City Journal:

Asked during a recent interview if there was room in all that for income tax reductions during the 2013 session, Branstad replied: “Probably not.”

“Honestly, property tax would be my priority and I’d love to do income tax, too, and maybe, if revenues exceed expectation, we could provide some income tax relief in addition,” Branstad said. “But I think I would rather focus and get something permanent done on the property tax. That’s the place where we’re the least competitive.”

That’s a shame.  Given the economically unwise attitude of the Senate leader, maybe nothing is possible:

Senate Majority Leader Mike Gronstal, D-Council Bluffs, said he would need more details but at first blush he doubted it would go very far in the legislative process if it proved to be “just a way for the wealthiest Iowans to cut their taxes dramatically” while middle-class families picked up a greater share of the tab for the cost of state government.

That’s just silly.  The rich guy isn’t buying for Iowa either.  The wealthiest Iowans always can dramatically cut their taxes with a moving van, until Senator Gronstal figures out a way to keep them from escaping to zero-tax South Dakota or Florida.

Iowa’s income tax is way overdue for replacement.   Instead, it will get more Bondo and bumper stickers.

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

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

 

Fiscal Cliff Notes:

Greg Mankiw, New York Times:

When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.       

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.

Think Finland.  Unless we choose to be Greece or Argentina.

Gongol: Fiscal Cliff…not resolved. I note a false choice:

The people who make the decisions at the highest level in this republic are either dishonest or utterly economically incompetent if they don’t say the following out loud: “We are demanding more out of our government than we can presently afford. We need to pay more, get less, or both.”

“Either?”  I say “both.”

Kay Bell: Senate ready for some football; adjourns Sunday without reaching fiscal cliff deal

TaxGrrrl, Budget Talks Stall As Reid Calls Latest GOP Move A ‘Poison Pill’

Kevin Drawbaugh, Fiscal cliff talks down to the wire (Tax Break)

Nick Kasprak, 2012 Likely to be First Year Without AMT Patch

Peter Reilly, Dysfunctional Congress – At Least They Are Not Maiming One Another.  If they don’t, maybe we should.

 

The roundup:

Cara Griffith, What Will Become of Physical Presence? (Tax.com)

Paul Neiffer,  Be Careful Of Fiscal Year Section 179 Issues!

Jason Dinesen,  6 Tax Predictions for 2012 — How Did I Do?

Tres Bien. French Court:  75% Tax Rate on Millionaires Is Unconstitutional (TaxProf)

Robert Goulder, Gérard Depardieu: Tax Exile (Tax.com)

TaxGrrrl, Congress Hasn’t Fixed The Budget Yet, Getting A Raise Anyway.  Courtesy of the President, who maybe thinks they make him look good by comparison.

Chris Sanchirico, New Ways to Think About a Tax on Public Companies

Insureblog,  Cavalcade of Risk #173: Post-Mayan Apocalypse Edition

The Critical Question: Is This Tax Preparation Nightmare Reawakening? (Jim Maule)
Share

Tax Roundup, 12/17/2012: Ames! And fixing the cliff by fudging withholding.

Monday, December 17th, 2012 by Joe Kristan

The expectant crowd gathers in Ames, Iowa for the final 2012 session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School. 

 20121217-1

350 practitioners are signed up, and the coffee’s on!

20121217-2 

Fiscal Cliff Notes

 Because writing big checks in April is always popular.  A few commenters have said that the Treasury Secretary can prevent Fiscal Cliff disaster by just setting the withholding tables to pretend that the tax law isn’t changing January 1.  Marie Sapirie of Tax Notes says it’s not that simple ($link)

Commentators have suggested that Geithner may even be able to prospectively implement the administration’s policy of raising taxes on taxpayers making more than $250,000 per year by increasing withholding only on income above that level. That is almost certainly wishful thinking. Whatever the “most appropriate” amount of withholding to reflect the tax rates in section 1 may be, section 3402(a) does not give the Treasury secretary the power to create withholding tables that have no basis in current or recently expired law.

Of course Secretary Geither hasn’t always been big on following the tax law.

TaxProf,  NY Times: Itemized Deduction Cap: Popular, But Unfair 

KayBell,   National Taxpayer Advocate Nina Olson discusses fiscal cliff tax complications

TaxGrrrl,  Budget Resolution May Come Down To One Question

Steven Rosenthal,  Paying Taxes on Capital Gains Early: How Investors are Avoiding Tax Hikes (TaxVox): “All of this planning suggests that sophisticated taxpayers are outracing Congress again.” 

Nick Kasprak,Alternative Minimum Tax Increase Looming Over Fiscal Cliff Negotiations (Tax Policy Blog)

Robert D. Flach,  WHAT FOOLS THESE POLITICIANS BE!

Remain calm, all is well.  Deficit Hysteria and Debt Denialism (Joseph Thorndike, Tax.com)

 

TaxProf,  Sullivan: Why the SALT Deduction Is Always Under Attack

Megan McArldle discusses an interesting pension funding approach:

Big news in pensions today: Silverdex, a major US-based conglomerate with fingers in just about every economic pie, from mining to solar cells, turns out to have been stuffing its main pension fund full of… it’s own corporate bonds

Just kidding. 

I don’t really know how to say this, but sorry, I lied a little bit.  I’m not talking about a private company at all, because of course, if a private company did this, it would be completely and totally illegal.  Regulators would have shut this down decades ago and probably at least a few lower-level executives would have spent a little time in the pokey.  Instead this is, of course, a description of how the United States Social Security “trust fund” works.

Like so many things: private sector does it, it’s scandal and ruin.  Government does it, it’s Tuesday.

Courtney A. Strutt-Todd,  Tax Law Blog: Attacks on the Exemption for Municipal-Bond Interest and Why it is Important to the Average Taxpayer (Davis Brown Tax Law Blog)

Paul Neiffer,  Another Nice Feature of a Living Trust

Brian Strahle,  D.C. Combined Reporting: How Much Will it Cost Your Company?

Missouri Tax Guy,   Capital Gains, What you need to know 

Trish McIntire links to the annoying new 2013 EIC Interview Sheet, so practitioners can double up as welfare caseworkers.

Russ Fox,  What Happens When Cigarette Taxes go Through the Roof?

Martin Sullivan,  Capital Gains Frustration for Tax Reformers (Tax.com).  His “reformers” want to increase the problems inherent in capital gains taxes by increasing them.  May their frustrations endure.

The Critical Question:  Naming Spousal IRAs After Senator Hutchison – Is That A Priority ?  (Peter Reilly)  I still think Roth & Company should get royalties for the Roth IRA…

Linda Beale,   Goggle’s Bermuda hideaway/HSBC’s too-big status: time to rein in the corporations!  Too big, eh?  Google’s entire market capitalization is about $234 billion this morning.  That’s how much the federal government spends in 23 days.  And it’s Google that’s too big? 

 Sorry, I think there’s already a mortgage on it.  A New Way to Reduce Our National Debt – Sell Alaska. (Greg Mankiw)

Share

Tax Roundup, 12/14/2012: I want to lose weight. And I want more dessert!

Friday, December 14th, 2012 by Joe Kristan

Flickr image courtesy seriousbri under Creative Commons license.

Cause and effect: the Iowa Chamber Alliance can’t quite put them together.  The umbrella group for Iowa’s chambers of commerce has issued its 2013 legislative agenda.  The Des Moines Register reports (my emphasis):

TAXES: Iowa’s tax system is among the highest for businesses, the alliance contends, and commercial and property tax relief are needed. In addition, the group supports addressing unfunded mandates, public employee pensions and other measures to help offset rollback effects on local governments. The alliance also supports efforts to simplify and reduce corporate income taxes, and to streamline the personal income tax code.

So far, so good.  But then:

ECONOMIC DEVELOPMENT: The Iowa Economic Development Authority needs money for flexible incentives to compete for investments and jobs, the allliance said. It backs a variety of tax credits to retain, grow and attract investments in Iowa, including restoration of the $185 million cap on economic development tax credits.

Let’s spell this out: Iowa’s tax code needs simplification because it is larded with “economic development” provisions, including dozens of “economic development tax credits.”  The rates are high because if they weren’t, the special breaks would keep it from raising any revenue.  To say you want lower rates, a simpler tax code, and economic development credits is like saying you want to lose weight and you want some more cookies.

There is a better way: The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

Fiscal Cliff Notes

Tax Offer for Firms Pits Big vs. Small (Wall Street Journal):

If ideas proposed by the White House take hold—a long shot—rates for big companies likely would fall next year while those paid by many small-business owners through the individual tax system would rise.

That potential gap could encourage more companies to organize as corporations. For now, the prospect is strengthening alliances between Democrats and big-company CEOs on the one hand, and Republicans and small-business groups on the other.

It’s Warren Buffett and Goldman Sachs vs. the entrepreneur — influence and pull vs. the rest of us.

Patrick Temple-West,  Tax offer pits big companies against small, and more (Tax Break)

Martin Feldstein,  The Tax Hike Canard (via Mankiw)

Janet Novack,  Will Your Retirement Be Thrown Off The Fiscal Cliff?

Howard Gleckman,  Why the Senate’s Tax Bill is No Way Out of the Fiscal Impasse

 

IRS reminds taxpayers of “Savers Credit” (IR-2011-121)  This non-refundable credit matches as much as 50% of taxpayer contributions to their IRA or 4o1(k) accounts.  It works on joint returns with incomes up to $57,500 and single filers with incomes up to $28,750.  Savings made when young can do great things when compounded over a career, and this credit makes it painful.  Giving your recent grad starting out in the world some cash to fund an IRA can help build a nest egg and net a nice tax refund.

 

Andrew Mitchel,  Doctrine of Constructive Receipt.  You can’t avoid the income this year by waiting until next year to cash the check.

Kay Bell,  Reindeer year-end tax tip games 2012: Dasher says use up your FSA funds

Paul Neiffer,  Some Interesting Ag Cooperative Facts.  Iowa leads the nation with total co-op sales of $22.4 billion.

Jason Dinesen,  This Accountant’s Idea for Eliminating Kickoffs in the NFL.  Without kicking, where does the “F” in NFL go?

The Critical Question:  When a Tax Argument is Nonsense, Why Not Say So? (Jim Maule?

Why not?   The 2012 Holiday Kitchen Gift Guide (Megan McArdle)

I can quit any time.  I just need six more drinks.  Wind Energy Association Says Industry Can Survive Without Tax Credit” (Tax Analysts, $link):

The wind energy industry could be self-sustaining over the long term if its primary federal incentive is renewed in 2013 and then gradually phased out over six years, the industry’s trade association said December 12.

Because the last 20 years of the tax credit just weren’t enough for a good buzz.

Share

Tax Roundup, 12/11/2012: Red Oak! And impossible dreams.

Tuesday, December 11th, 2012 by Joe Kristan

The Tax Update is in Red Oak, Iowa today for the seventh tour date for the Iowa State University Center for Agriculture and Taxation Farm and Urban Tax School.  This is our first visit to Red Oak.  From Wikipedia:

Red Oak is a city in and the county seat of Montgomery County, Iowa, United States,[3] located along the East Nishnabotna River. The population was 5,742 in the 2010 census, a decline from the 6,197 population in the 2000 census.[4][5]

..

The community has had a disproportionate number of casualties in the Civil War and World War II.

In the American Civil War, the area provided more Union troops per capita than any other in the state.[10] Company M (which also included residents from Montgomery County had 160 casualties among its 250 members; 52 men were killed in action.[11]

Early World War II battles claimed a disproportionate number of soldiers from Red Oak (although the final casualty statistics tend to disprove the oft-repeated statement that Red Oak suffered more losses per capita than any other American community).[10][12][13] In the Battle of the Kasserine Pass in February 1943, forty-five soldiers from Red Oak alone were captured or killed.[14] At the time more than 100 telegrams arrived in Red Oak saying that its soldiers were missing in action.[15]

Here is the crowd:

 

I can confidently endorse the Red Oak coffee and donuts.  Register now for the last session next Monday in Ames!

 

Eric Toder,  The Coming AMT Debacle. (TaxVox)   If Congress fails to pass an alternative minimum tax “patch,” the AMT is slated to rise drastically for 2012:

Overall, AMT liability will rise from $34 billion to $120 billion. Of that $86 billion increase, new AMT taxpayers will owe $64 billion—an average of about $2,250–while those currently on the tax will pay another $22 billion—an increase of about $5,500 each over the nearly $8,500 average they would pay with a patch.

If you suspect that a tax that affects 32 million households is not limited to the rich, you are right. It is true the enhanced AMT will hit upper middle-income taxpayers the hardest – 98 percent of those with adjusted gross income between $200,000 and $500,000 will pay an average of almost $11,000 in AMT on top of their regular tax liability.

With our political class, failure is always an option. 

 

David Henderson, When Taxes are Cut, What Does Regressive Mean?:

The bottom line is this: Start with any system of progressive taxation, cut everyone’s taxes by the same percent, and you will have implemented, by their standard, a regressive tax cut.

Exactly.  If you only tax rich people, any tax cut “disproportionately benefits the rich.”

Greg MankiwMake Your Own Deficit-Reduction Plan, links to a Wall Street Journal’s interactive graphic featuring deficit reduction options.

Janet Novack, Gucci Match: Fiscal Cliff Tax Fight Pits The 2% Against The 0.1% And The Richest 400

Anthony Nitti,   Here’s Your Update On The Fiscal Cliff Negotiations: Both Parties Agree That the Other Party’s Proposal Stinks.  This time, they’re both right.

 

Paul Neiffer,   Watch Your Timing On Year-End Gifts 

Brian Strahle, D.C. Ruling Presents Franchise Tax Opportunity

Jack Townsend, I Should At Least Mention Stolen Identity Refund Fraud

To dream the impossible dream… Musical theater maven Robert D. Flach tilts at a windmill:

I have a dream that our elected officials in Washington can create a simple and fair Tax Code.
 
I have a dream that our elected officials in Washington are really not just self-centered and self-absorbed idiots.

That’s right up there with my dream of winning the Triple Crown. As a horse.

No, we’ve been trying that for a long time here.  Can tax on witch-doctors cure Swaziland’s fiscal pain? (Nanette Byrnes, Tax Break)

That’ll work:  Alan Simpson goes ‘Gangnam Style’ in deficit reduction video effort  (Kay Bell)

Sacre Bleu!  Gerard Depardieu Leaves France After Tax Increases (Joseph Henchman, Tax Policy Blog)

Robert Goulder,  Timeless Tax Policy & The Other Colbert (Tax.com)

It might someday help him clear the AGI floor for health cost deductions:  Law Student Wins Krispy Kreme Doughnuts for a Year and Wonders: What Are the Tax Consequences? (Tax Prof)

Share

Tax Roundup, 12/10/2012: Fund of Follies tax credits!

Monday, December 10th, 2012 by Joe Kristan

Tails.  We lose.   In 2002 Governor Vilsack signed into law a bill creating an Iowa “Fund of Funds” tax credit.  It’s back in the news:

Register Exclusive: Fund’s bailout costs Iowans $26 million

The Iowa Fund of Funds for startups never took off and a deal was needed to avoid a ‘train wreck.’

From the Des Moines Register:

A decade after the state tried to spark investment in young innovative companies, Iowa taxpayers will foot a $26 million bill — and potentially more — to meet the program’s obligations.

State attorneys reached an agreement in August to avoid a lawsuit from two lenders who backed the Iowa Fund of Funds, a program lawmakers created in 2002 to attract more venture capital investment in Iowa startups.

In August? And we’re just hearing about this now?  Maybe it’s because it’s an embarrassment to the entire Iowa political class that they just want to have go away.  While signed by a Democratic governor, it passed the Iowa House 90-3 and the Senate 39-5  — lots of votes from both parties there.  When the state is giving millions in new tax credits for fertilizer companies, it would poop the party.

Let’s set the wayback machine to one of the earliest Tax Update posts — number 48 of over 8,000 — to see what we had to say about the Funds of Funds when it was enacted:

HEADS YOU WIN, TAILS WE LOSE?

…is the concept behind the venture capital legislation. A state-owned for-profit corporation will set up a “fund of funds” partnership to invest in venture capital pools. The venture capital pools are to be chosen based on their commitment of funds to Iowa.

Investors in the “fund of funds,” which we will call the FOF, will receive certificates maturing no sooner than 2005 entitling them to a tax credit. This credit will reduce their Iowa tax dollar for dollar to the extent the return on the FOF is less than a fixed return computed on the certificate. In other words, the investors in the FOF get the upside, but the state absorbs the downside – and even some of the upside, to the extent that there is a positive return lower than the amount set by the certificate.

At the time we received a note from Steven Ringlee, described in today’s Register story as “an architect of the program,” telling us that this was still a terrific deal for Iowa taxpayers because the bill also had a cap on investor return as well as a taxpayer-funded guarantee against losses:

In fact, you fail to notice that, due to the tax credit which provides full repayment security to Iowa taxpayers purchasing the preferred stock of the Fund of Funds, their required rate of return will be similar to that on medium-term governmental debt instruments.  In Oklahoma, where this plan was first implemented, the return on their Fund of Fund instruments (circa 1995) was approximately 8 percent.  In today’s environment, it will approximate 5 to 5.5 percent.  However, the average long-term rate of return on investments in venture capital limited partnerships has been in excess of fifteen percent over an extended period.  Oklahoma experienced a 19 percent positive return during the five year period from inception through 2001.

So how did those 15 percent returns work out?  From the Des Moines Register story:

“It’s been a disaster. As a model for creating jobs, it doesn’t work. … It’s turning into another bad deal for taxpayers,” said Sen. Joe Bolkcom, D-Iowa City.

Jeff Thompson, a deputy attorney general who helped negotiate the agreement, says Iowa taxpayers have always been on the hook for the program, originally authorized at $100 million and later limited to $60 million. This agreement reduces the potential costs and, perhaps more important, prevented lenders from cashing in up to $40 million in tax credits this summer to cover their loans, he said.

That sounds like a return of something less than 15%.  The Register story doesn’t quantify the losses.  Mr. Ringlee didn’t exactly rule out the possibility of losses in 2002, but he made them seem unlikely (my emphasis):

 

As a result, appropriate compensation-for-risk-assumed is in fact given to the State, the grantor of the contingent tax credits.  For what is likely to be zero cash outlay, the State of Iowa, (at the end of the FoF lifetime) receives all accumulated net profits above a nominal return in the range of 5.5%.  Of course, the probability of this occurring is directly related to the skill sets of the VC managers selected to invest the funds.  Because VC historical returns are in fact measurable and venture managers’ skills may be examined in detail, and because good managers tend to have consistent track records, the Fund should be able to select those managers able to deliver above-average results.  Hence, the Fund can improve its ability to deliver stellar returns to the State (the residual legatee) by carefully selecting and supervising its venture capital limited partnership managers.  It will do so through the judicious selection of a skilled, experienced “gatekeeper” fund allocation manager, a common practice in the venture industry.

Oops.

Folks, when the government guarantees something, the proper assumption is that the guarantee will be called upon (Solyndra, anyone?).  If private investors aren’t willing to make a deal, they probably have good reasons.  If it’s a good company, private money will probably be there, if perhaps on stiffer terms.  And just because the guarantees are run through tax returns doesn’t make them somehow not spending.

Senator Joe Bolkcom  (D-Iowa City)– who was one of the few who voted against the program in 2002 – makes a good point:

Bolkcom said the state needs to rethink how it approaches economic development.

“The idea that we can create these third-party arrangements, where we turn over taxpayers’ money and not expect problems to develop, is folly. We have very little control after the law was created,” he said.

The best the state can do for economic development is to leave it alone.  The Quick and Dirty Iowa Tax Reform would get rid of all of the dozens of “economic development” tax credits, and do more for the Iowa economy than all of them.

 

TaxProf,  NY Times: Tax Arithmetic Shows Top Rate Is Just a Starter

Oh, Goody:  “Taxpayers and the IRS could be looking at three filing seasons in 2013 if Congress and President Obama fail to prevent the government from going over the fiscal cliff at year’s end, according to National Taxpayer Advocate Nina Olson.”  (Tax Analysts, $link)

Greg Mankiw,  Fiscal Cliff Fact of the Day:

As reported in the NY Times:

Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years.

Like I say, the rich guy isn’t buying.

Gene Steurle,  Current Revenue Solutions Will Barely Reduce the Deficit.  (TaxVox)

Patrick Temple-West,  Fiscal talks spur charitable giving, and more

TaxGrrrl,  Obama, Boehner Reach Compromise?  No.

Scott Drenkard,  New Federal-State Rate Calculation in Full Fiscal Cliff/Obamacare Scenario (Tax Policy Blog)

Christopher Bergin,  ‘Small Ball’ — Obsessing about the Rich:  “Sticking it to rich people may play well to a populist theme, but it’s “small ball” and does little to address our fiscal problems or our broken tax system.”  (Tax.com)

Martin Sullivan,  Is the Charitable Deduction a Sacred Cow? (Tax.com)

So how are the tax increases working out for you? California Revenues Below Expectations (Russ Fox)

 

TaxProf,  Supreme Court Grants Cert to Decide Whether Estate Tax Marital Deduction Applies to Same-Sex Couple.  I predict the court will reverse DOMA.  If your taxes have been boosted by the denial of marriage benefits to same-sex couples, you should consider filing a protective refund claim; 2009 is the oldest year still open.

Kay Bell,  Supreme Court to review estate tax challenge to Defense of Marriage Act

 

KCCI.com:  GOP to introduce death penalty bill.  Apply it first to legislators who vote for new tax credits and I’ll be interested.

 

Great tool for understanding new net investment income tax regs: Cheat Sheets To The Obamacare Investment Income Tax (Anthony Nitti)

Peter Reilly,  Can Real Estate Professionals Beat The 3.8% Obamacare Tax ?

 

Jack Townsend,  DOJ Tax and IRS Entreaties to Join OVDP 2012:

These are in effect pleas / warnings to taxpayers to turn themselves in by joining OVDP 2012.  I suspect that the truth is that, if a significant number of taxpayers do not turn themselves in, the IRS will have limited ability to discover, investigate and prosecute criminally or civilly all of that dataset.  DOJ Tax and the  IRS are trying to convince taxpayers that the form of audit lottery they play going far now will have worse odds than it had previously.  Perhaps everyone involved will not suffer the consequences, but many will and, among the many that will, could be you.  And the consequences could be far worse than if you come clean now and get right for the past and going forward.

 If you really are a tax cheat, by all means consider using the OVDP program.  Still, it would probably be much more attractive if the IRS didn’t treat foot-fault violators as international tax criminals.

 

Robert D. Flach gets it right in WHY WE NEED TAX REFORM:

The purpose of the Tax Code is to raise the income necessary to run the government.  It should not be used to solve all the financial and social problems of the country.  It should not be used as a method of distributing social welfare program benefits.  It should not be used as a means of “redistributing” income among the “classes”.  The Tax Code is not Robin Hood.

It’s hard enough to determine taxable income, compute a correct tax, and remit it.  You can’t also ask Iowa tax authorities to administer filmmaking or venture capital.   And to expect the undertrained and undermotivated members of the shrinking IRS work force to administer industrial growth, social justice and, oh yeah, the health care system is folly.  And official policy.

Share

Tax Roundup, 12/3/2012: Medicare 3.8% tax guidance issued. Meanwhile, to the cliff!

Monday, December 3rd, 2012 by Joe Kristan

The IRS issued proposed regulations for the 3.8% Obamacare tax on investment income Friday.  I will do detailed posts on the in the coming days as I study them.

I’ll note two important items from my first overview of the proposed rules:

  • The rules allow taxpayers a free opportunity to redo their activity “grouping” elections for the passive loss rules for 2013. “Passive” business activities are subject to the the 3.8% tax.  Because “passive” status often depends on how much time a taxpayer spends working in a business, how different operations or locations are grouped can determine whether they are passive.
  • The rules appear to allow you to pro-rate state income taxes in determining “net” investment income.  That’s taxpayer-friendly, but it adds another level of complexity.

For an initial take on the rules, see Anthony Nitti at Forbes.

Related:   Obamacare: it’s a tax!

 

David Brunori of Tax Analysts on the fiscal cliff discussion:

     Everyone knows that taxing the very rich will have no perceptible effect on the deficit. It’s all for show. The president and Democrats in Congress can say they stuck it to the millionaires and billionaires. Fairness will abound. The Republicans can tell the world that they are reasonable people willing to compromise on issues as important as taxes. But Americans will still get more government than they are willing to pay for.

     Some liberals have called for us to go over the cliff and to raise taxes across the board. Like Norquist, they are miscalculating. If everybody had to start paying more, there would be a lot more questioning of massive defense spending, egregious subsidies for industries, and entitlements run amok. But for now, we must be content with the rich paying more so we can get more than we deserve from our government.

You can’t pay for mass welfare benefits with a class tax.  The mania for taxing “the rich” is a distraction from the enormous tax increases on everybody that will be required.  The Rich Guy’s not buying.

 

Why the fiscal cliff is such a big fall.  The Bush Tax Cut Issue in One Chart (Ed Krayewski, Hit and Run):

He adds:

And for those who would say “well of course the government has to spend more when the economy is hurting” only one question applies: has it helped? If you think so, I’ve got a tiger-repellant rock to sell you.

Related:  ‘Fiscal Cliff’ follies: Why it may pay to take deductions early.  My latest post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

Nobody’s serious I:  No ‘fiscal cliff’ deal without higher rates, Geithner says (CNN via Going Concern)

Nobody’s serious, II: Grassley and King push for extension of Wind Energy Tax Credit

 

Iowa admits its capital gain forms were a mess.  A protest rejection released by the Iowa Department of Revenue highlights how badly the Iowa 1040 has been designed with respect to the Iowa deduction for capital gains on the sale of businesses an business real estate.

The taxpayer had excluded regular capital gains from a brokerage account on her tax return.  Iowa properly rejected the deduction, but admitted her mistake was understandable:

Your position relies on the Department’s instructions for completing the tax return.  We found that you are not the only one that made this mistake, so our instructions now clarify that these types of capital gains do not qualify for the deduction as shown above.  In any event, the instructions are not controlling.

Iowa now has better wording on the deduction line and a flow chart to walk taxpayers through whether they should claim the deduction.  It’s a big improvement, but it should be better.  There should be a separate form to compute the deduction, with a checklist to complete to demonstrate eligibility.

The state examines every capital gain exclusion claim.  Taxpayers should be able to submit the information the state asks for with their returns to preclude the examination; even if it would have to be paper-filed, it would save the state the time and money spent on unneeded exams.

Related:  Iowa Capital Gain Break: how it works when you rent property to your business

 

NY Times: States and Cities Shovel $80 Billion/Year in Tax Incentives to Companies, With Little Proof of Their Effectiveness  (TaxProf):

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

It’s a chump’s game, and we taxpayers are the unwilling chumps.  These things are to economic growth what steroids are to long-term fitness.

 

When you don’t remit withheld taxes, it might not just be a matter of getting your payments caught up.  A New Jersey couple that ran an engineering firm failed to remit over $500,000 in withheld taxes to the IRS.  They were sentenced last week to 44 months in prison after being convicted of charges arising out of the nonpayment.  From the Department of Justice Press Release:

Evidence was also introduced that the DeMuros converted withheld funds for their business and personal use, including more than $280,000 in purchases from QVC, Home Shopping Network and Jewelry Television.

No doubt it was of the best-quality.  Oh, and the couple still has to pay over $1.3 million in restitution to the IRS.

Doug Shulman is no longer IRS Commissioner, but his legacy remains:

 ABC News: Alarming Rise in IRS Refund ID Thefts, Few Prosecuted: GAO Report

Dayton Daily News,  IRS says tax fraud attempts up 39 percent

Greg Mankiw,   Some Advice on Tax Planning

Richard Morrison,   The Tax Rate Paid by the Top 1% Is Double the National Average (Tax Policy Blog)

The Critical Question:  Will the Payroll Tax Cut Fall Silently Off the Cliff? (Elaine Maag, TaxVox)

Kay Bell:  Time to spend down your medical flexible savings account (FSA)

Paul Neiffer,  Senator Baucus Urges Extension of Current Estate Tax Laws

Jim Maule,  Passing the Tax Responsibility Buck

Peter Reilly,  Who Should Be Accelerating Income Into 2012?

Patrick Temple-West,  Most Americans face lower tax burden than in 1980, and more (Tax Break)

Robert D. Flach,  DAMNED IF THEY DO AND DAMNED IF THEY DON’T.

Tragedy:  Lindsay Lohan Has Yet To Settle Tax Bills With IRS, Faces Account Seizures (TaxGrrrl)

The Tax Update is also on Twitter (@joebwan) and Facebook!

Share

Tax Roundup, 11/27/2012: Rocking Sheldon! And billionaires and millionaires

Tuesday, November 27th, 2012 by Joe Kristan

The Tax Update is in Sheldon, in the Northwest Iowa, helping out at the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School today.

Some of the happy practitioners at today’s Farm and Urban Tax School in Sheldon, Iowa.

Two schools are left: Red Oak and Ames.  Register today!

 

How easy is it for rich folks to avoid higher rates?  Florida Senator and potential presidential candidate Marco Rubio said that tax rate increases would be largely futile.  From Huffington Post:

WASHINGTON — Sen. Marco Rubio (R-Fla.) said Thursday there isn’t much point in raising tax rates on the wealthy, because they also have the money to hire people who will help them get out of paying taxes.

“The billionaires and millionaires that are going to be impacted by higher rates, they can afford to hire the best lawyers, lobbyists and accountants in America to figure out how not to pay those higher rates,” Rubio told National Journal’s Major Garrett at The Atlantic Washington Ideas Forum. “The people that are going to get stuck by that bill are the small businesses, the partnerships, the S corporations, that cannot hire the lawyers to get them out of it.”

Is it really possible for “billionaires and millionaires” to get out of taxes through the best efforts of their lawyers?  To some extent.  Greg Mankiw explains how Warren Buffett does it:

1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings.  So the return on this investment is entirely in the form of capital gains.  By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.

2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain.  His unrealized capital gains are untaxed.

3. He is giving away much of his wealth to charity.  He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.

All of these are useful only to people who don’t need their cash right away.  If you want to use your cash, these aren’t very useful.  And many of these items are fraught with danger for taxpayers with less pull than Warren.  For example, a closely-held C corporation that pays no dividends runs the risk of being hit with the Accumulated Earnings Tax.  Many other tax-sheltering opportunities have been shut down through various crackdowns on tax shelters over the years, like the passive loss rules.

The real futility of taxing the rich is that it does so little to address the government’s insolvency.  Letting the tax cuts for “the rich” expire only covers about $80 billion of the $1,200 billion annual budget deficit.  The big attempt to tax “the rich” is just a distraction; the rich guy isn’t buying.

 

Tax Prof Poll: Taxes and the Fiscal Cliff (TaxProf)

Joseph Henchman,   Chambliss, Others Distance Themselves from ATR Tax Pledge (Tax Policy Blog)

Patrick Temple-West,  Consensus on increasing tax revenue, a wide gulf on how to do it, and more (Tax Break)

Daniel Shaviro, Broadening the base versus raising the rate

 

I vote yes:  Can We Kill the Death Master File? (Russ Fox). The publication of dead folk’s Social Security numbers is a boon for identity thieves.

TaxGrrrl,  Tax Breaks For Medical Expenses Under ObamaCare.  Hint: they are fewer and smaller.

Paul Neiffer,  2012 May Be Last Year for Section 179 Flexibility.  “What many farmers do not know about is the ability to go back and amend their tax return to change their Section 179 deduction.”

Trish McIntire,  Document Your Holiday Giving.  If you give over $250, no receipt=no deduction.

William Perez,  Tax Tips for Charitable Giving During the Holidays

Anthony Nitti,  Could Tax Savings Expedite Free Agent Baseball Signings?

Jack Townsend,  Swiss Bank Pictet & Cie On DOJ Tax Radar Screen

Robert D. Flach didn’t let Thanksgiving weekend stop his Buzz!

Howard Gleckman, How Can 98 Percent of Us be Middle-Class? (TaxVox)

Angus Young (Wikipedia image)

Kay Bell, More Cyber Monday shoppers this year are paying state sales taxes

News you can use:  Tax Dodger Alert: Your Friend in the Senate (Robert Goulder, Tax.com)

Jeremy Scott,  Why the Finance Committee Needs Angus King. (Tax.com)  I prefer Angus Young.

Share

Tax Roundup, 10/31/2012: Sandy washes away the tax news. Happy Halloween…

Wednesday, October 31st, 2012 by Joe Kristan

The IRS sends $5 billion in fraudulent refunds to ID thieves annually.  Surely they have figured out how to help out those whose ID’s have been stolen?  No.  Jason Dinesen updates the saga of his widowed client whose deceased husband’s identity was stolen:

The good news is, the IRS has finally gotten its systems coded correctly to show that Wendy did file a 2010 tax return. They won’t be sending any more “collection” notices to her, and I don’t have to call the collections department every 60 days.

The bad news is, I now have to figure out how to deal with the IRS Identity Theft Unit.

They wouldn’t talk to Jason, even though he has power of attorney.  So the IRS, rather than going out of its way to help identity theft victims whose tax lives are in turmoil, jerks them around.  After promptly issuing the fraudulent refunds to the thieves, of course.  But at least Doug Shulman’s IRS is doing a bang-up job of selling confidential preparer identification number information.

 

There isn’t much tax news today thanks to the Hurricane Sandy disaster.  Some appropriate coverage:

Kay Bell,  Hurricane Sandy major disaster declarations could mean federal tax help

Trish McIntire,  Isaac to Sandy

 

In other news…

 

Richard Morrison, Chart of the Day: Income Levels vs. Education Levels (Tax Policy Blog)

 

 

Brutal Assault on Reason Watch: 

TaxProf,  Bartlett: Romney’s Tax Plan Won’t Work Like Reagan’s Did

TaxGrrrl,  Why Romney’s ‘Tax Avoidance’ Strategies Don’t Deserve Criticism.  Making the important point that tax planning isn’t somehow unsavory.

Patrick Temple-West,  Essential reading: Fiscal cliff forces all sides to jockey, and more (Tax Break)

 

So government never fails?   When Privatization Fails: Yet Another Example (Jim Maule).  The difference is that when a business fails, it goes away and the assets are redeployed.  When a government program fails, it just goes on and on.

Greg Mankiw,  Tax Expenditure Fact of the Day

Sara Palovick,   Avoiding the Self-Rental Trap (Double Taxation)

Paul Neiffer,   Fiscal Cliff Example # 2

Dan Meyer,  IRA Holding Allocations: Do Demographics Matter?

And a Halloween Buzz from Robert D. Flach!

 

Share