Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
Kyle Pomerleau, TPC, What About the “Pass-Throughs?”. (Tax Policy Blog). Measuring business taxes needs to look beyond corporation taxes when most businesses are taxed on 1040s.
David Cay Johnston, Promises, Promises(Tax.com). “Candidate Obama promised in 2008 to reform the Alternative Minimum Tax, and President Obama promised at least an honest accounting in his first budget, but his proposed budget for Fiscal 2014 is silent on the issue.”
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.
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.
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.
Tax Freedom Day for Iowans will arrive April 9, according to the Tax Foundation. That’s nine days sooner than for the whole country. From the Tax Policy Blog:
Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. A vivid, calendar-based illustration of the cost of government, Tax Freedom Day divides all federal, state, and local taxes by the nation’s income.
In 2013, Americans will pay $2.76 trillion in federal taxes and $1.45 trillion in state taxes, for a total tax bill of $4.22 trillion, or 29.4 percent of income. April 18 is 108 days, or 29.4 percent, into the year. Americans will spend more in taxes in 2013 than they will on food, housing, and clothing combined.
You can find Tax Freedom Day for your state from this Tax Foundation Map:
The national Tax Freedom Day is five days later than last year:
Tax Freedom Day is five days later than last year, due mainly to the fiscal cliff deal that raised federal taxes on individual income and payroll. Additionally, the Affordable Care Act’s investment tax and excise tax went into effect.
But cheer up! If taxes were high enough to pay for all government spending without borrowing, it wouldn’t be until May 9.
TaxProf, ESPN: Athletes’ Charities Fall Short of IRS, Nonprofit Standards. Chis Zorich might agree. Actually, the arguments against athletes setting up their own charitable foundations are the same as those for anybody else. They take more work and expertise to run than most people realize. Compliance with federal tax laws and state laws can be costly. It’s easy to get into trouble with them, like Mr. Zorich did. It’s much wiser for athletes with a charitable interest to work with an established charity that knows what it’s doing.
Jason Dinesen, Taxpayer Identity Theft — Part 14 . The latest adventures in trying to get the IRS to pay the refund of his client, an identity theft victim, for 2010. She may have it in “another 6-8 weeks.” We’ll see.
For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.
Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)
Of course Mr. Hatch failed to pay the taxes on income he earned in front of millions, serving a prison sentence as a result. Sometimes watching somebody else get into real trouble can be instructive.
Illegal procedure. Former Chicago Bear Chris Zorich has been flagged. CBS Chicago reports:
Zorich, 43, was charged Thursday with four misdemeanor counts of failing to file federal income tax returns, for the years 2006 through 2009, according to the U.S. Attorney’s office. During that time, he allegedly had an income of more than $1 million.
Federal prosecutors said Zorich was cooperating with the investigation and has agreed to plead guilty.
His lawyer says that he owes no more than $70,000 after withholding on the non-filed years is applied.
I wonder why he was charged. While it’s a bad idea, it’s not extremely rare for people to just get behind on filing their returns. It doesn’t usually lead to criminal charges. Much of his income for the years at issue was W-2 income, so it wasn’t as though the IRS would miss him.
Perhaps he did something to annoy an examiner enough to call in the Criminal Division. Maybe it’s because he is an attorney [update: he apparently never passed the bar exam]. Or maybe he’s just unlucky to be famous-enough for the IRS to use his celebrity to frighten the rest of us into getting our returns done. (Via Reason 24/7)
Update: This Chicago Tribune report suggests that self-dealing with his charitable foundation may have been a factor.
These wages cannot include wages paid to your children under age 18 (if a sole proprietor farmer) and commodity wages. However, wages paid in cash to spouses and children over age 17 are allowed as part of these wages.
If you are a schedule F farmer with no employees, the W-2 requirement makes the Section 199 deduction worthless.
Seventh, ask the tax professional about data security. Where and how is paper data stored while in the hands of the preparer? Where is the digital data stored? What precautions are in place to minimize the chances of a third party breaking into the office or the digital servers and obtaining information? If the individual hands over paper records without keeping copies, which is an unwise move, what happens if the tax professional’s office burns down?
Berkeley City Councilman Gordon Wozniak has tossed out the idea of an email tax to help save snail mail.
The financial straits of the U.S. Postal Service became an issue for Berkeley lawmakers when the paper mail delivery system proposed closing that northern California city’s downtown post office and selling the building.
It won’t happen, but a state where somebody who thinks it could happen can be elected to public office is pretty much doomed.
Michael Giberson, Sequester Reporting Scavenger Hunt: Official Rules (Knowledge Problem): “If you find a news story emphasizing the pain of sequester budget cuts that also clearly indicates that alternatives such as raising taxes or increasing the national debt also cause pain, you are a winner.”
She proclaimed herself the First Lady of tax refund fraud. Investigators say Rashia Wilson helped cheat taxpayers out of millions of dollars. But she is just one of a countless number of women in trouble for the crime.
“The males tell them what to do, how to file, where to file,” said Hillsborough Sheriff’s Corporal Bruce Crumpler.
Crumpler says most of the time his task force’s refund fraud investigations lead straight to women first, not men. Almost every mug shot on Crumpler’s board is female. He says they’re the ones out front, taking big risks for boyfriends, exes, and spouses.
I see. They cheat on taxes because they care. Out of love. Because they are fragile little flowers:
“Typically, what you’re going to see is a woman who is more dependent, a woman who has more vulnerability and has some insecurities about her own abilities for self-care, both financially and also personally,” said McClain.
Rashia Wilson may not be the best example of an insecure little violet driven to a life of crime by the man in her life. Let’s go to the tape on Ms. Wilson’s alleged criminal career, courtesy TBO.com:
Rashia Wilson called herself the First Lady and claimed to be an income tax fraud pioneer, schooling others on how to commit fraud.
She bragged on Facebook about taking expensive trips and having so much money she forgot about a purse full of cash in her closet, investigators say.
But what about dependence, vulnerability, and insecurity?
“YES I’M RASHIA THE QUEEN OF IRS TAX FRAUD,” reads a May posting on her Facebook page described in the affidavits. “IM’ A MILLIONAIRE FOR THE RECORD SO IF U THINK INDICTING ME WILL BE EASY IT WONT I PROMISE U!”
Poor dear. If she’d have been a little more insecure, maybe she would have been a little more careful.
How H&R Block guy got to write preparer regs. Civil Service! Tim Carney reports:
In 2009, the Obama administration hired Mark Ernst, the previous CEO of tax prep giant H&R Block, as IRS deputy commissioner. Ernst became a “co-leader” (in the words of an IRS spokesman) in drafting new regulations for tax preparers.
This seems to clash with President Obama’s executive order barring appointees from working on regulations directly affecting their former employers.
But thanks to a fine legal distinction, these rules didn’t cover Ernst. “Mark Ernst is a civil servant at the IRS; he is not a political appointee,” an IRS spokesman wrote me. “The Presidential Executive order on Ethics Commitments by Executive Branch Personnel only applies to political appointees.”
Nobody here but us chickens.
Jason Dinesen has a new installment about his client whose identity was stolen in the ID theft epidemic that really got rolling while the IRS was busy regulating preparers. “If you hired the best comedy writers and satirists in Hollywood, they couldn’t come up with a more farcical script about government ineptness.”
A new working paper recently released by the Mercatus Center at George Mason University… finds that contrary to conventional wisdom, sin taxes are often not used to correct externalities but rather for general fund spending. My take on that is politicians don’t really care about externalities. They would like to raise money from people whose activities they despise. The report also found that the goal of “sin taxes” has changed from correcting market failures to protecting consumers from their own choices. That is, people are too stupid to run their own lives and they need help. Finally, the report finds that sin taxes are regressive, i.e., they punish the poor. Unfortunately, my liberal friends never get exercised over this issue. Maybe it’s as the great PJ O’Rourke surmised, liberals hate poor people.
If they would just not wear those icky Wal-Mart clothes and watch their weight, like they tell them to… (Tax.com)
Even accepting that he spent 520 hours working on his own properties, he still lost. Two of the properties were short-term vacation rentals and one was being readied for sale. The time spent on those properties could not be grouped with the time spent on properties dedicated to long term rentals.
Meanwhile, somewhere an ID thief is trying to get cash from an ATM with a peanut butter sandwich. TBO.com reports:
A 6-year-old pupil at Symmes Elementary School in Riverview was asked to take her homework out of her backpack, according to Cpl. Bruce Crumpler of the Hillsborough County Sheriff’s Office.
The girl reached into her bag and pulled out a baggie containing 52 debit cards, Crumpler said.
The cards, which can be used as accounts for depositing tax refunds are commonly used by people who use stolen personal identities to file tax returns to obtain fraudulent refunds.
Maybe she’s the little princess of tax fraud. Meanwhile, the same TBO.com has an update on Rashia Wilson, who allegedly proclaimed herself the “Queen of IRS Tax Fraud:”
Wilson may not have been the biggest player in Tampa’s income tax fraud explosion, but she was one of the most brazen — “flashy,” a sheriff’s investigator called her, “in your face about it.”
The affidavits show Wilson even had a picture of herself with a cool smile on her face, wearing an oversized jewel-encrusted pendant spelling out her first name as she held bundles of cash.
“YES I’M RASHIA THE QUEEN OF IRS TAX FRAUD,” reads a May posting on her Facebook page described in the affidavits. “IM’ A MILLIONAIRE FOR THE RECORD SO IF U THINK INDICTING ME WILL BE EASY IT WONT I PROMISE U!”
Easier than she thought, apparently. She has been indicted on 57 federal tax fraud charges for collecting $1.3 million through fake tax returns, apparently claiming earned income credits and refundable education credits. That should make the politicians think twice before they expand these fraud-ridden credits, but it won’t.
How many lawyers does it take to lose a tax case? 15. At least that’s how many lawyers were listed on the losing side yesterday in Bank of New York Mellon Corp., a Tax Court case disallowing foreign tax credits in a tax shelter case. Six lawyers are listed on the IRS side, for a total of 21. The losing side was led by former IRS Chief Counsel B. John Williams. If nothing else, the legal expense deductions should take a bite out of the losing side’s tax bill. The TaxProfhas more.
Iowa’s push for a 4.5% optional flat tax — which I call an “alternative maximum tax” – puzzles David Brunori ($link)
Many liberals in Iowa are complaining that a flat tax wouldn’t require the rich to pay their fair share, whatever that means. But a lot of those people seem more interested in soaking the rich than in helping the poor. Personally, I am much more in favor of reducing the tax burdens on the poor and dispossessed than I am in making rich people suffer.
I think a flat income tax with few deductions (and a sizable exemption for low-income people) is the way to go. I’m unsure why the state would continue its horribly complicated personal income tax system that benefits return preparers, tax lawyers, and tax accountants.
It’s because of a peculiarity of Iowa politics. The powerful lobbying group Iowans for Tax Relief opposes a repeal of the Iowa deduction for federal taxes paid. ITR has shown that it can provoke successful primary challenges of Republican legislators who displease the Muscatine-based lobby. Yet significant rate reduction is impossible if the deduction is retained. Making the lower rate an “alternative” rather than a replacement appeases Muscatine, though at a cost in incoherence.
Will we see a revival in enforcement of the accumulated earnings tax? The obscure depression-era tax on C corporations that retain cash in excess of their “needs,” as second-guessed by the IRS, is rarely asserted. With left-side economists like Paul Krugman asserting that corporate cash-hoarding is one reason why the economy remains weak, don’t be surprised if his friends in the Obama administration try to revive enforcement of this archaic and foolish penalty tax. (Via Tyler Cowen).
As the chart below shows, mandatory spending represents the majority of the federal budget, and the part that has grown most dramatically in recent years. Mandatory spending was about 10 percent of GDP for most of the 30 years prior to 2008. It leapt to 15 percent of GDP in 2009 and now remains at 13.1 percent. It is projected to increase to 14.1 percent of GDP by 2023. Meanwhile, discretionary spending, on programs like defense, roads, and other infrastructure, is on a steady decline. Discretionary spending is now 8.3 percent of GDP and set to go to a 50 year low of 5.5 percent of GDP by 2023.
No spending is really “mandatory.” Congress and the President can always change the “mandatory” programs. And they will, or we will face fiscal disaster and crushing taxes.
In 2012, the IRS says its investigations and in-house filtering systems prevented $20 billion in would-be fraudulent refunds, up from $14 billion the year before. But [Acting IRS Commissioner] Miller acknowledged that thieves still get away with stealing numerous tax refunds, although the IRS could not provide exact loss figures.
“In terms of how much got past us, we’re quite sure some did,” Miller told reporters in a conference call. “I know it doesn’t approach the number that we stopped.”
How much might that be? Maybe $5 billion a year, maybe more. That’s means about 20% of the fraud gets through. If your “in-house filter” let 1/5 of the grounds of your coffee into the pot, you’d change filters.
This is the first highly-publicized nationwide IRS crackdown on identity theft, years after the problem began to spiral out of control. It’s surely coincidence, but it almost is as if the IRS, now that it has been barred from it’s preparer regulation power grab, has decided that maybe it really should do something about ID theft after all.
DES MOINES – The first bill the Iowa Legislature will send to the governor this year will align the Iowa and federal tax codes, a move that will reduce the amount of taxes Iowans pay to the state.
Although Republican Gov. Terry Branstad will thoroughly review the legislation, his spokesman said the governor supports the intent of Senate File 106 “and will likely support it.”
That’s good news. The sooner he signs it, the sooner the state can begin processing 2012 returns with Section 179 deductions, educator expenses, and a number of other provisions affected by the Fiscal Cliff legislation.
Up until now, I’ve given the President the benefit of the doubt about reforming our broken tax system. I just didn’t think tax reform was a big issue for his administraiton. But now I’m beginning to think he doesn’t care about tax policy at all.
What was the tip-off?
No matter the fiscal crisis, the President never misses an opportunity to propose tax increases on “the fat cats.” To the President, the fat cats are the people and the businesses he thinks can pay a “little more” to support their government. I’m not sure I buy his definition of fat cat. But I certainly don’t buy his definition of tax reform. Tax reform is about building a tax system that is fairer, simpler, and more economically efficient. If in the process it raises revenue, I’m fine with that, but I don’t think the primary goal of tax reform is to wring more money from the well-to-do simply because they are doing better than you are.
It’s been blindingly obvious from the beginning that the President has no interest in tax policy. Look at his record:
- Increases in top marginal rates, which creates incentives for more loophole-carving.
And his big current proposals are to limit deductions for corporate jets and screwing around with how private equity is taxed — symbolic and political gestures that would make the tax law even more complex. Any belief that the Obama administration cares a fig about tax reform requires more unfounded faith than a fourth marriage.
Central Iowa Culture Watch. The State Fairgrounds in Des Moines hosts the cultural event of the season this weekend: the Blue Ribbon Bacon Festival. Tickets routinely sell out in minutes, so if you have to ask, you can’t go. What will you miss? KCCI.com reports:
Start with the dress. It is made of real bacon, created by an East Des Moines dressmaker – and it is actually worn by the Bacon Queen…
“It wildly surpassed anything I thought was achievable. I mean, look at it, it sparkles,” said Porter.
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)
When your identity is stolen, the IRS will be happy to bounce you around the bureacracy. The Taxpayer Advocate testified yesterday at a House hearing on identity theft. The IRS, which does a bang-up job of rapidly mailing fraudulent refunds, is less streamlined when it comes to helping taxpayers whose identities are stolen:
“Yet today the IRS is moving backward toward a decentralized approach, creating specialized identity theft units within 21 separate functional areas,” Olson told the House Oversight and Government Reform Subcommittee on Government Organization, Efficiency and Financial Management. “If, as seems likely, the IRS reduces the role of the IPSU and directs taxpayers to deal directly with the 21 specialized units, I am deeply concerned that we will revert to back where we were in 2008, with large numbers of taxpayers that have cross-functional issues unable to get their problems resolved without multiple contacts with multiple functions, and that would in my opinion be a disaster for the victims.”
She says that the IRS will have to choose between fast refunds and stopping fraud:
Specifically, we may need to ask all taxpayers to wait longer to receive their tax refunds, or we may need to increase IRS staffing significantly. Under current circumstances, I have come to the conclusion that it is simply not possible for the IRS both to process legitimate returns rapidly and to combat refund fraud effectively at the same time.
So it’s too much to ask for the IRS to make better use of existing resources by not wasting them on the futile and expensive return preparer registration program — a program unwisely supported by the Taxpayer Advocate.
IRS makes doing business in the U.S. even more of a hassle for foreigners. The IRS and Congress are doing their best to make it impossible for Americans to do business abroad with FATCA and the offshore compliance jihad. Now they are doing a bit of the same for foreigners trying to do business here with new rules for International Tax Identifiction Numbers (ITINs).
ITINs are needed when foreigners invest in US real property or other assets where a US tax identification number is needed. U.S. taxpayers just use their Social Security numbers. The process is a hassle, with exacting documentation requirements that often require applicants to send passports to the IRS for extended periods while the IRS processes the paperwork.
While the new rules provide more options for applying for the paperwork, they now make the ITINs expire after five years, requiring taxpayers to repeat the whole process to stay in tax compliance. This hassle isn’t just an issue for offshore taxpayers; it also makes compliance more difficult for U.S. taxpayers with offshore investors. Just another little effort by the IRS does to make staying legal as difficult as possible.
The injunction didn’t go through, so on to the indictment. A few years ago the IRS tried to close down the practice of a St. Louis-area tax preparer after making spectacular allegations of malfeasance. The effort ended in a settlement that looked much like a victory for the preparer. The IRS apparently didn’t take that well. Stltoday.com reports:
Frank L. “Tiger” Zerjav, Jr., 39, of Wildwood, has been indicted for allegedly submitting four years of false tax returns and trying to dodge $182,000 in taxes, the U.S. Attorney’s office said Thursday.
Zerjav was indicted on four charges of federal income tax evasion for the returns covering 2001-2004. He also faces an obstruction of justice charge for allegedly producing altered computerized accounting records after receiving a grand jury subpoena.
They couldn’t put Mr. Zerjav out of business through civil procedures. A tax fraud conviction would do the trick. They’ll need to make a much more convincing showing than they apparently were able to do on the injuction effort. This does remind us that if you get on the bad side of the IRS, your own filings had better be squeaky clean.
Unless something changes, we’re headed toward one of two uncomfortable places. Either we veer over the fiscal cliff and the economy crashes—or we keep going down the road we’ve been taking for more than a decade, delaying hard choices while assuring voters that no really hard choices need to be made. That road probably ends in an even nastier smashup.
I just posted about the fact “that the IRS is getting more out of hand with its ‘due diligence’ requirements for tax preparers who are claiming the Earned Income Tax Credit for clients” here in “WE ARE NOW NOT ONLY TAX PREPARERS, BUT SOCIAL WORKERS AS WELL!”, which was a response to Trish McIntire’s post “EITC Checklist Expanded” at OUR TAXING TIMES.
At the seminar we reviewed in detail the new Part IV “Due Dilligence Requirements” on Pages 3 and 4 of the form. In my opinion the new hoops that we are required to jump through are TOTALLY RIDICULOUS!
Like with the preparer regulations, honest preparers are saddled with rules they don’t need in response to tax cheaters who will ignore the rules anyway.
The Tax 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.
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 $1,200 billion annual budget deficit. The big attempt to tax “the rich” is just a distraction; the rich guy isn’t buying.
Obamacare rules prominent in IRS plans for new guidance. The Treasury and IRS have released their “Priority Guidance Plan” for the current fiscal year. Tax Analysts reports ($link)
The plan contains 18 healthcare-reform-related projects that will likely take up a considerable portion of Treasury and the IRS’s time. Some time-consuming, tax-related portions of that law, such as the net investment income tax, the excise tax on some medical devices, and the indoor tanning tax, become effective on January 1.
Actually, the tanning tax has been in effect since 2009. The Section 1411 tax on investment income is a huge tax planning issue. Three years after the enactment of Obamacare, many basic questions about the tax remain unanswered, including:
Will “self-charged” rental income that is non-passive under the passive loss rules be subject to the 3.8% tax?
Will rental income earned by “materially participating real estate professionals” be subject to the tax as rent, or exempted as business income?
Will pass-through interest earned by S corproation banks be interest, subject to the tax, or business income exempt from the tax for materially-participating shareholders?
Will farmers be taxed at the 3.8% on CRP and crop share income?
We should expect at least a set of temporary regulations next month.
Norquist: some Democratic senators will rebel against letting high-income tax cuts expire. From The Hill:
Conservative anti-tax advocate Grover Norquist says the 20 Senate Democrats facing re-election in 2014 will be the “hostages” who will ensure that President Obama does not raise the Bush-era tax rates.
That isn’t the party line, as Democrats have said they would go over the fiscal cliff before letting ”the rich” keep current tax rates. Grover thinks not:
But Norquist thinks vulnerable senators up for re-election in two years will force Democrats to back down, as they did in 2010 by extending virtually all of the Bush tax cuts for two years.
“Last time Republicans won the House and [were] a little strengthened in the Senate and Obama folded completely. We’re going to be stronger this time than after last time; our hostages are the 20 Democrats up in ’14.
Grover is an astute observer, but President Obama may play the role of Russian special forces in this hostage drama, ensuring destruction all around.
Paul Neiffer, Talk Brewing of Extending the Payroll Tax Cut. That would be news, as this had not been part of the year-end tax legislation discussion. It seems unwise to accelerate the demise of social security by reducing funding, but wisdom isn’t found much in our political class.
Ex-lineman suspended from life for 28 months. While everyone who goes through big-time college football programs can claim some level of higher education, it doesn’t always do a lot of good. A case in point:
Former Syracuse University lineman Louis Gachelin has been sentenced to 28 months in federal prison in an undercover FBI tax fraud investigation.
The U.S. Attorney’s Office reports that the 31-year-old Gachelin was sentenced Monday. He pleaded guilty in July to theft of government money and identity theft.
It apparently doesn’t go better for players in “skill” positions. The same report says two former NFL players, including a running back, have pleaded guilty in related cases out of an FBI sting using an “undercover check cashing store in North Miami” to catch identity thieves.
I’m speaking at the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. There’s still time to register for the remaining five sessions!
“‘There are a lot of sales right now,’ explains Steve Bruere, president of Peoples Co. in West Des Moines.” From IowaFarmerToday.com:
“I see a drop off (in the number of sales) after the first of the year.”’s one logical response to the looming increase in capital gain rates.
…
With potential sellers concerned they may have to pay a 20 percent capital gains tax rate instead of 15 percent, and with many of them questioning what other tax changes may be coming, there has been a push to sell now.
The logic says if you were seriously considering a land sale, you would make sure it happened before the end of the year, Bruere says.
Actually, the rate will probably be 23.8%, including the new Obamacare tax on investment income.
More to look forward to: “The IRS Small Business/Self-Employed Division plans to increase its audit activity for passthrough entities beginning in 2014, SB/SE Commissioner Faris Fink said November 7,” reports Tax Analysts ($link). But if you operate a C corporation, don’t be smug:
SB/SE is planning a one-year National Research Program project to study areas of noncompliance. Under the project, the division will examine 2,500 returns from corporations with assets of less than $250,000, Fink said.
Something to look forward to, like a colonoscopy appointment.
Tomorrow is Doug Shulman’s last day as IRS Commissioner. So how is the fight against tax refund fraud going?
Tampa Police Chief Jane Castor went public with her irritation at the slow pace of the investigation into a piece of the tax fraud scourge spreading among street criminals. Authorities say hundreds of millions of dollars in bogus income tax returns have been processed from the Tampa area alone.
“We have an individual that we know did in the ballpark of $9 million in tax fraud,” Castor said in February. “He was arrested and charged in September. And there’s no reason for us to believe that he’s slowed down at all.”
In March, Tampa Police Detective Sal Augeri testified before a U.S. Senate subcommittee in Washington about tax refund fraud and described the Simmons case without naming him.
“We have no reason to believe he has stopped committing this crime,” Augeri said then.
Russell B. Simmons, the man referred to above, pleaded guilty this week to tax fraud. He has to give up ill-gotten goods, including “… a $60,000 Bentley coupe and diamond jewelry that included a $30,000, 18-karat gold Rolex watch with a diamond dial; a 14-karat gold men’s bracelet with 2,420 diamonds; a 14-karat chain and “RS” pendant with 703 diamonds; and a 14-karat ring with 110 diamonds.”
Every day the IRS let the identity thief continue to operate, he created new little nightmares,like those experienced by Jason Dinesen’s client, for the innocent taxpayers whose identities he stole. Meanwhile, Commissioner Shulman was focusing IRS resources on creating a big, expensive and futile preparer regulation bureaucracy. A man has to have priorities, after all.
The IRS failed to investigate thousands of reported identity theft cases because taxpayers failed to follow inconsistent and confusing instructions for submitting a form to report tax fraud, the Treasury Inspector General for Tax Administration said in a report released October 3.
The IRS instructs individuals to use Form 3949-A, “Information Referral,” to report suspected cases of tax fraud, but not identity theft. However, thousands of people have used the form to report identity theft cases because the instructions for the form are confusing, TIGTA said. Before May, the IRS did not have procedures in place for processing the Forms 3949-A that had been used to report identity theft, and in 2010 the IRS destroyed some 3,000 of the forms that had been used to report identity theft because there was no way to process them, the report says.
The explosion of identity theft has been the biggest IRS problem under Commissioner Doug Shulman’s watch. Yet he has neglected and bungled the response to the thievery of up to $5 billion annually from the taxpayers so he could botch the “amnesties” for offshore bank paperwork foot-faults and build a new and useless preparer regulation bureaucracy. His term ends soon; the next Commissioner has a lot of repair work to do.
Brutal Assault on Reason watch. I hate campaign debates and won’t watch them. I agree with Arnold Kling:
To me, political campaigns are not sacred events, to be eagerly anticipated and avidly followed. They are brutal assaults on reason. I look forward to election season about as much as a gulf coast resident looks forward to hurricane season.
Bad idea. The Romney campaign has floated a proposal to cap itemized deductions at $17,000 as a way to reduce tax rates. That’s a bad idea for many obvious reasons. If you are going to do that, why even bother? Just have a $17,000 maximum standard deduction based on income. By eliminating the deduction for state taxes paid, it would be a big tax increase on pass-through businesses operating in high-tax states. William McBride at The Tax Policy blog gets it right:
Today Romney proposed to cap itemized deductions at $17,000, as a way to pay for his cut in personal tax rates. This is not sound tax policy, as it would complicate the code, and likely require a number of exemptions and other loopholes. For instance, how would legitimate business deductions be dealt with? Which ones are legitimate? … It would be better to eliminate entirely certain wasteful tax expenditures, while lowering rates.
Jason Dinesen, Would a New Name Help Enrolled Agents? The new IRS “Registered Tax Return Preparer” designation can only be bad news for Enrolled Agents, whose much more stringent standards are little understood outside the professional world. Many taxpayers have no idea of the distinction between these IRS-awarded titles.
Twin Cities hotel magnate gets 4 1/2 years accommodation. From TCBmag.com:
Local real estate developer Jeffrey Wirth was sentenced Wednesday to four-and-a-half years in prison for tax evasion, Minnesota’s U.S. Attorney’s Office said.
In addition, U.S. District Judge Ann D. Montgomery ordered Wirth to pay $6.46 million in restitution to the U.S. Internal Revenue Service (IRS).
Wirth, owner and CEO of Brooklyn Center-based The Wirth Companies, is also the former owner of the Grand Hotel in downtown Minneapolis, the Grand Rios Hotel & Waterpark in Brooklyn Park, and the Grand Lodge Hotel & Waterpark of America in Bloomington—as well as nearly 30 other businesses, according the U.S. Attorney’s Office.
Mr. Wirth is known for his purchase of a $2 million island in Minnetonka, where he built a $3 million house that now sits derelict. How did he get in such trouble?
They often recorded personal expenses as business expenses and claimed false “management fees” in an effort to “reduce the company’s overall taxable income to nearly zero,” the U.S. Attorney’s Office said. Wirth also admitted to understating his own salary to the IRS.
“The defendants in this case allegedly tried to steal $65 million using stolen identities to obtain refunds to which they were not entitled,” U.S. Attorney Paul Fishman said in a statement. They succeeded in getting $11.3 million in refunds.
The Treasury Inspector General for Tax Administration says identity theft refund fraud is a $5.2 billion annual problem. At this rate, it’s going to take a long time to solve.
U.S. Sen. Chuck Grassley, R-Ia., said the way the new rules are being applied goes against legislative intent and undermines the federal government’s credibility with citizens. The low-level firings are even more problematic given the failure of the Obama administration to arrest even a single big bank executive for professional misconduct, he said.
“There’s a real disconnect between letting bank executives get away with malfeasance on the criminal front and regulations that lead to the firing of rank-and-file workers over minor infractions from decades ago that had nothing to do with bank fraud,” Grassley said.
That’s wonderful, Senator. You guys wrote a stupid law, and now that it’s being enforced, you say you didn’t mean to do that. It’s like if a logger tried his hand at surgery and things went predictably bad; “I didn’t mean to do that” wouldn’t cut it. Yet you guys routinely take your legislative chainsaw to the economy, with horrific results like Dodd-Frank, and Section 409A. Oh, you didn’t mean to do that.
Iowa Republicans hint at income tax reform. Governor Branstad has pushed hard for property tax reform in the first two years of his term, but has done nothing about Iowa’s awful income tax. At a press conference yesterday Iowa Republican leaders hinted that they might try do change that. From Radio Iowa (via thebeanwalker.com):
House Speaker Kraig Paulsen, a Republican from Hiawatha, said tax reform is a key portion of the plan the call “Iowa Strong.”
…
Paulsen said property taxes aren’t the only focus. “We also need changes in our income tax code. We need to reduce both personal and employer income taxes,” according to Paulsen. “And we’re going to do this, we’re going to … lower out our extremely high rates so that all Iowans can keep more of their hard-earned money and that entrepreneurs can better compete on a worldwide basis, and encourage them to invest right here in the state of Iowa, invest in our workforce.”
A shortcut for refunds for identity fraud victims? Taxpayers whose identities have been stolen have a tough time getting refunds out of Doug Shulman’s IRS. A Clearwater, Florida lawyer is looking for a way to cut through the red tape. From TBO.com:
Clearwater lawyer Jim Staack may have found a way for frustrated identity theft victims to get their overdue tax refunds: Sue the IRS.
Last year, Staack represented James and Christine Gordon in their effort to pursue a class action on behalf of identity theft victims who were unable to obtain their rightful tax refunds. The Gordons got their refund 12 days after the suit was filed.
Then Staack added Crystal Lake as a plaintiff in the case. Twelve days later, she got her refund.
But the IRS says that the quick refunds were just a coincidence, and that suing won’t help. Still, it’s easy to understand why taxpayers will give it a try:
People trying to get their tax refunds are forced to navigate a byzantine system of unreturned phone calls, conflicting regulations and unskilled Internal Revenue Service employees who give them incorrect information, according to the report.
Staack said that after he filed the Gordon lawsuit last year, his office was contacted by a steady stream of identity theft victims who all tell the same story.
“They get the runaround from the IRS. They make promises that are not kept. They’re told it will take 60 days. Nothing happens. Then they call back and are put off again.”
These frustrated taxpayers will find comfort in knowing that the IRS open-book tests for preparers are going strong.
Governor Branstad’s administration is making a big push to promote STEM education: Science, Technology, Engineering and Math. This headline in the Des Moines Register today shows how badly we need math education, especially in Iowa’s “Economic Development” bureaucracy:
This is the worst kind of smokestack chasing, which is always the preferred approach of “economic development officials.” Never mind that Iowa already has competing fertilizer plants — as Sioux Citian Debi Durham, Iowa chief official economic developer, surely knows. Never mind that Iowa and Illinois are getting played shamelessly by Orascom, the fertilizer company. Never mind that the money comes from taxes paid by existing competitors, and by thousands of unsubsidized businesses like ours, and our employees. Never mind all that — it’s about buying a ribbon-cutting, not about making the state a good place for everyone to do business. Unless, of course, Roth & Company gets a nice state check for $21.3 million for the jobs we have already created.
At least some folks are catching on to the game. From the article:
Orascom has attracted a diverse group of opponents, from parents, environmentalists and liberal groups such as Iowa Citizens for Community Improvement and Iowa Policy Project, to conservative groups such as Public Interest Group, Lee County Tea Party and Americans for Tax Reform.
So there’s agreement from left to right that it’s a bad idea for the state. But if politicians think it’s a good idea for them, it will go through.
Who catches the identity thieves? Hint: it’s not Doug Shulman’s IRS. From the Bradenton (Florida) Patch:
Det. B. Pieper from the police department’s gang unit put together the case by paying close attention during a routine drug bust…
Pieper was one of several detectives watching traffic coming to and from a house where police suspected drugs were sold. He said he and his partner watched a car leave the house and then run a stop sign. When they pulled over the car Brydson was in the passenger seat with a laptop and a bag of marijuana on her lap.
Brydson quickly closed the laptop, which made Pieper suspicious. When he searched her purse, he said he found several TurboTax debit cards with different names on them. He also noticed a 60-step instruction sheet on how to perform tax fraud through TurboTax.
GIGO: it’s Tax Court Doctrine! From a case rejecting a taxpayer’s use of TurboTax as an excuse for a bad return:
It is apparent that a portion of the information petitioner entered into the TurboTax program was incorrect; hence the mistakes made (which resulted in the underpayment) were made by petitioner, not TurboTax. TurboTax is only as good as the information entered into its software program. See Bunney v. Commissioner, 114 T.C. 259, 267 (2000). Simply put: garbage in, garbage out.
Sorry about that $2.1 million. Remember the world’s thriftiest tax cheat, the one who stole $2.1 million from Oregon and used it to buy a 1999 Dodge Caravan and some tires? An apology from the director of the Oregon Department of Revenue didn’t go well, according to this report from OregonLive.com:
SALEM — A contrite director of the Oregon Department of Revenue appeared before a legislative committee Wednesday and apologized repeatedly for dropping the ball on a $2.1 million fraudulent tax refund. But both Democrats and Republicans weren’t in a forgiving mood, demanding to know why four workers who failed to catch the return weren’t fired and whether the agency can do its job.
“It’s not going to be enough to sit here and say you’re sorry,” said Rep. Cliff Bentz, R-Ontario.
Why are they so upset? He said he was sorry, after all?
Two managers and one administrative clerk received written reprimands but no change in their salaries. A fourth worker was demoted and transferred to another part of the agency. That person, an administrative specialist, got a pay cut from $45,396 a year to $41,208.
Most private sector clerks have problems beyond reprimands if they let $2.1 million go out the door to a theif. Still, while the apology may not seem like much, it’s more than we’ve gotten from IRS Director Doug Shulman for letting over $5 billion per year go out the door to identity thieves.
Why is Doug Shulman too darn busy to apologize for letting ID thieves loot the Treasury? Maybe because he’s spending his time making life miserable for Canadians. Tax Notes reports ($link) that Frustration Grows for Canadians in OVDI:
Taxpayers and their advisers asked the IRS for guidance on how to deal with RRSPs [Canadian retirement accounts] in the summer of 2011 but received inconsistent replies The IRS’s delay in issuing the guidance… annoyed taxpayers because, at least regarding the requests for a letter ruling granting 9100 relief, it caused them to incur professional fees that turned out to be unnecessary.
“This decision could have been made in September, October, even November, and the clients could have avoided the additional costs,” said [attorney] Ciraolo. “While we appreciate the 9100 relief offered under FAQ 54, the fact that the IRS failed to acknowledge the inconvenience and cost caused by the delayed guidance, and failed to address whether the Canadians in the OVDI would be eligible for the new program open on September 1, only furthered the belief of the Canadian taxpayers that the IRS is acting without due consideration to the circumstances of those taxpayers who entered the OVDI in good faith.”
Of course. The program has been haphazardly administered, treating innocent noncompliance with obscure IRS rules as presumptive evidence of offshore money-laundering.
The frustration that the delayed guidance on late elections to file Form 8891 has caused for U.S. practitioners and their Canadian clients exacerbated an increasingly tense diplomatic situation and perhaps convinced some Canadian taxpayers who sat out the 2011 OVDI that noncompliance was the right choice.
So we’ve provoked our closest neighbor while convincng many that non-compliance is safer than expecting the IRS to be fair. Well done, Commissioner!
This looks like one of those kinds of things that happen when staffing at a government agency is reduced beyond what is reasonable for the kinds of tasks that have to be carried out.
I’d be more sympathetic to that argument if Doug Shulman’s IRS hadn’t taken it upon itself to devote massive resources to an intrusive and futile preparer regulatory scheme at the behest of the big national tax preparation firms and to requiring massive amounts of futile paperwork for international compliance.
There has been lots of talk over the past few days about how Bain Capital executives have used management fee waivers to effectively lower their tax payments (a tactic that is not unique to Bain). Some academics have argued that such waivers are an illegal dodge, while private equity tax attorneys I’ve spoken with call it “aggressive but accepted by the IRS.”
Here is the basic structure: Bain officially charges 2% management fees to investors in its private equity funds. The idea is to cover overhead, such as salaries, office leases, electric bills, etc. But Bain has lots of other business lines (venture capital funds, hedge funds, etc.) that generate sufficient cash flow, so it “waives” the PE fund management fees…
By doing so, Bain partners don’t pay ordinary income taxes on their management fees. Instead, they pay at capital gains rates if/when the deals generate profit (because it’s now considered carried interest).
Many commentators seem to think that Mitt Romney should have gone out of his way to pay the highest tax possible, rather than doing what his tax advisors and the rest of his industry did. I doubt that they direct their own preparers to forego deductions and exclusions that they think are poor policy or the result of poor administrative interpretations of the tax law.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Iowa Republicans hint at income tax reform. Governor Branstad has pushed hard for property tax reform in the first two years of his term, but has done nothing about Iowa’s awful income tax. At a press conference yesterday Iowa Republican leaders hinted that they might try do change that. From 
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
