The Shulman-era IRS preparer regulation program is dead. The Appeals Court for the DC Circuit today upheld the DC District decision in Loving, a decision holding that the IRS had no authority to enact its elaborate “Registered Tax Return Preparer” regime. The winning attorneys at the Institute for Justice issued a press release:
Today, the D.C. Circuit Court of Appeals ruled that the IRS had no legal authority to impose a nationwide licensing scheme on tax-return preparers. The decision affirms a January 2013 ruling by U.S. District Court Judge James E. Boasberg, which struck down the IRS’s new regulations as unlawful. Both courts rejected the agency’s shocking claim that tax-preparer licensure was authorized by an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses.
“This is a major victory for tax preparers—and taxpayers—nationwide,” said Dan Alban of the Institute for Justice, the lead attorney for the three independent tax preparers who filed the suit. “The court found that Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority.”
It’s great news for taxpayers, who will not have their return prep costs artificially increased by a regulatory scheme written by a former H&R Block CEO. It’s good news for preparers, who will not have to waste time and effort in futile paperwork that will do nothing to solve the real problems of the tax system — baroque complexity and internal controls so weak that petty grifters steal billions through refund fraud annually.
The court was blunt in dismissing IRS arguments that a Reconstruction-era statute on Civil War claims gave them the authority to invent an elaborate preparer regulation scheme out of thin air:
In our view, at least six considerations foreclose the IRS’s interpretation of the statute.
Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer’s behalf. They cannot legally bind the taxpayer by acting on the taxpayer’s behalf. The IRS cites no law suggesting that tax-return preparers have legal authority to act on behalf of taxpayers. Indeed, a tax-return preparer who tried to act on the taxpayer’s behalf would run into trouble with the IRS…
The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330.
Former IRS Commissioner Shulman, showing how big is legacy is.
It’s bad news for the already battered legacy of The Worst Commissioner Ever, who let identity theft balloon while he wasted his time on this pointless exercise.
Congratulations to Dan Alban and the Institute For Justice for their winning work in this case. I’m glad to have played a small role as an early agitator against preparer regulation and as a participant in an Amicus brief to the D.C. Circuit opposing the rules.
The ISU Farm and Urban Tax School is in Waterloo, Iowa today for another sold-out session. Only Red Oak, Denison and Ames after this, so register now! Then I drive to Cedar Rapids to talk about the Net Investment Income Tax and how it affects trusts before heading home tonight. Coffee vendors all over Iowa will have a good day today.
Today seems like a different kind of Waterloo for IRS — their web site is down this morning.
In order to claim the Credit, a 2013 Return must be filed by October 31, 2014, which is the extended due date. To avoid penalty, Iowa income tax returns normally must be filed by and 90% of any tax owed must be paid by April 30. The Credit will be applied to the computed Iowa tax after first applying any other refundable and nonrefundable tax credits. Any amount of the Credit that is in excess of the tax due is not refundable and cannot be carried back or carried forward to another tax year.
The $54 Credit amount and additional information will be reflected in the IA 1040 instructions for the 2013 tax year.
For all farms since 2007, the percentage of Section 179 to total depreciation averaged about 70% and in 2012 the number was slightly over 75%. For purchases over $100,000 the percentages has been even higher. Based on this table, it appears that most farmers have just about fully depreciated their farm equipment purchases over the last few years using Section 179.
Section 179 limits are slated by law to fall to $25,000 next year. I think it’s likely that Congress will eventually extend the $500,000 limit currently in effect to 2014, but it will make a big difference if they don’t.
It turns out that the “Midco” intermediaries were relying on variations of what Joe Kristan calls the Tax Fairy - the magical sprite that can make your taxes go away with fancy tax footwork. Of course as someone who just sold their corporation to someone, that’s not your problem – or so you would like to think. The IRS has been thinking otherwise. Since the corporations that have been sold are dry husks by the time taxes are assessed the IRS has been asserting transferee liability against selling shareholders. Results have been mixed.
been indicted for, among other things, filing liens against the IRS Commissioner. Everyone knows that you can’t just file baseless liens.
Only they can do that.
TaxGrrrlreports on a Michigan couple whose bank account was emptied by the IRS when they suspected they were “structuring” bank deposits to stay below the $10,000 disclosure limit. She takes up the story:
Instead, they insist that the deposits were generally less than $10,000 because their insurance policy covers the theft of cash only up to that sum. As a result, they do not let their employees carry more than that amount at any time, including walking deposits to the local bank.
That didn’t stop the feds from seizing the Dehkos’ remaining funds. Using a process called civil forfeiture, the federal government can seize assets on the basis of suspicion: there is no requirement for firm evidence nor are the property owners entitled to notice. The government didn’t ask the Dehkos about their deposits or they would have found out about the insurance policy.
Months after the seizure, prosecutors had never offered any evidence to prove that the Dehkos were engaged in money laundering or that they were avoiding income tax. In fact, a Bank Secrecy Act examination from last year resulted in a notice stating that “no violations were identified.”
Fortunately, the Institute for Justice stepped up and financed court action by the Dehkos, who run a grocery store in Michigan. The IRS has said it will return their funds. But unlike the California couple who went after the Commissioner, nobody at the IRS will ever be disciplined for slapping a lien on the Michigan grocers and seizing their cash, with no due process and, admittedly, for nothing. This sort of thing will continue until there is a Sauce for the Gander Rule, where taxpayers can sue IRS officials who make baseless filings on the same basis the IRS can sue taxpayers.
With less than three weeks left in filing season, the US Federal Circuit Court of Appeals has denied the IRS attempt to overturn the injunction against their preparer regulation scheme. From the Wall Street Journal Total Return blog:
This doesn’t mean the IRS has permanently lost its case, but it does mean that the IRS cannot move forward with its power grab unless and until it convinces the appeals court that it has the authority to regulate preparers.
Meanwhile, filing season continues, with no evidence that taxpayers have been harmed by the availability of preparers who haven’t passed an IRS open-book exam on Publication 17.
Iowa preparer indicted – for helping clients report too much income. From KCRG.com (my emphasis):
Keith Rath, of Shellsburg, was arrested last week by IRS agents after a grand jury indicted him on eight counts of aiding in the preparation and presentation of a false tax return.
The indictment says that on eight occasions over the years 2008, 2009 and 2010, Rath helped clients falsely claim thousands of dollars in business income that he knew they did not earn.
Mr. Rath has pleaded not guilty.
You might wonder why anyone would claim business income they didn’t earn. The answer, of course, would be to claim refundable earned income tax credits. A taxpayer with no “earned income” is ineligible for the credit. The EITC is “refundable,” which means that when there is the credit exceeds the computed tax, the IRS will send you a check for the difference. By reporting imaginary Schedule C income, taxpayers can (illegally) increase their refund check.
In fact, the OECD itself recently issued a report – known as the BEPS report – on how these techniques create base erosion and profit shifting. The problem is so serious, according to the report, “What is at stake is the integrity of the corporate income tax.”
The “integrity of the corporate income tax” is in the third aisle next to the chastity of the bordello.
Not surprisingly, the judge who ordered the IRS to shut down its preparer regulation program declined to stay his order. The IRS asked James Boasberg, the U.S. District Court Judge who ordered the IRS to stop its preparer regulation program, to stay his order pending an appeal. The judge declined:
As the factors beyond likelihood of success do not decisively tilt in favor of the IRS — indeed, they tip somewhat against — the Court sees no basis to lift its injunction pending appeal. Nor does the Court believe it warranted to suspend the injunction for fourteen days to permit the IRS to seek a stay in the Court of Appeals. This would only lead to more confusion for preparers and their clients as the tax season gets underway. While nothing in this decision prevents the IRS from seeking such relief there, the Court sees no benefit of a brief stay while it does so.
So where do things stand? The IRS will be allowed to continue to administer the Registered Tax Return Preparer test and issue PTINs, but it cannot require RTRP tests or CPE, or collect fees for them. Whether the IRS will continue testing on a voluntary basis, or whether there will be takers, remains to be seen.
You surely didn’t miss the 100th anniversary of the 16th Amendment yesterday. They had a football game and everything to observe it. The 16th Amendment, which gave rise to the current income tax, was ratified by Delaware on February 3, 1913, making it official. And yes, it is official. While some tax protesters insist that the 16th Amendment was never properly ratified, all the federal judges say otherwise — not to mention the folks at IRS, the U.S. Marshals Service and the Bureau of Prisons. So, in any way that matters, it’s official. Still, I can’t bring myself to say “Happy” anniversary.
The study’s conclusion is disheartening. The authors conclude that incumbents can get themselves elected by associating themselves with good news for which they ought not take credit because they are not responsible, support policies that generate good news for their districts even if they are bad for the nation, and to use rhetoric to distract voters from the incumbents’ histories.
It’s the little things. The mark of a true craftsman is attention to detail. Two Ohioans’ alleged failure to mind the details has led to trouble. From the Columbus Dispatch:
Roma L. Sims, 34, and Samantha C. Towns, 30, were arrested on Thursday and charged with aggravated identity theft, conspiracy and wire fraud for using the identities to file tax returns and rake in $1.3 million.
But they misspelled several cities when they listed return addresses: Louieville and Pittsburg, according to the criminal complaint. Those geographic goofs caught the attention of investigators.
So did misspelling some of the occupations they listed on the phony tax returns.
I bet they thought those spelling drills in grade school were pointless.
Today is the last day to make a charitable IRA rollover for 2012. Yes, 2012 is over, but taxpayers who are required to make IRA minimum annual distributions may still have one 2012 transaction left in them.
- Taxpayers who are born before July 1, 1942 who took cash from an IRA in December 2012 can contribute up to $100,000 to a charity today and have it excluded from their 2012 income.
- Taxpayers who have failed to take their required minimum 2012 distribution can avoid the 50% penalty for failing to take their distribution by arranging for the IRA to transfer the minimum amount, up to $100,000, to a charity today.
For an example of the disruption routinely caused by the IRS’s misadministration of the RTRP regulations, see Alban Decl., Ex. 3 (the comments from preparers are illustrative and reference previous examples of similar disruptions); see also Joe Kristan, IRS quietly delays CPE requirement under new preparer regulation scheme , Tax Update Blog (January 8, 2013), http://rothcpa.com/2013/01/irs-quietly-delays-cpe-requirement-under-new-preparer-regulationscheme/ (describing IRS message as “a quiet admission of failure”).
With the Tax Update Blog on their side, who can be against them?
What does a poor college student have that could be lucrative to a thief? A Social Security number. From the Memphis Business Journal:
With tax season bearing down, the IRS has a warning about a new refund scam aimed at college students, seniors and church members.
The Internal Revenue Service said Tuesday the scam tries to get students to give their personal identification and file tax returns claiming fraudulent refunds. It has sent misleading and bogus refund claims using the American Opportunity Education Tax Credit on college campuses throughout the Southeast.
Be very cautious about giving anybody but your employer, your bank, a medical provider or the IRS your Social Security number. And never give it to a scammer.
1. Plaintiffs’ Motion for Summary Judgment is GRANTED;
2. Defendants’ Motion for Summary Judgment is DENIED;
3. Defendants lack statutory authority to promulgate or enforce the new regulatory scheme for “registered tax return preparers” created by 76 Fed. Reg. 32,286;
4. Defendants are permanently enjoined from enforcing such scheme; and
5. Judgment is ENTERED in favor of Plaintiffs.
The IRS can, and almost certainly will, file an appeal to preserve its preparer regulation power grab, but losing on summary judgment and being enjoined from enforcing the new rules is a complete shutout for them in District Court.
I am glad that the IRS lost in court. I have hoped the regulations would be overturned, and I thought they should be illegal, but I am not a master of the law covering IRS regulatory problems. Regardless of whether they are legal, I have always thought the regulations unwise.
The regulations have been sold as a way to assure taxpayers of quality preparation by making them pass a test and take CPE. Yet the test is a joke, an open-book review of Publication 17. The IRS has already waived the CPE requirement for 2013. The IRS has already undermined their own arguments.
What does it mean? It looks to me that the IRS has to stop its RTRP regime in its tracks, absent a stay on the ruling from the District Court or the D.C. Circuit Court of Appeals. No more rulemaking, no more RTRP open book tests, and no more approval of tax CPE by the IRS. No more cashing the $63 RTRP checks. Refunds? It would serve them right, but I don’t know.
Meanwhile, it’s back to the Wild West days of two years ago, when taxpayers had to rely on the reputations and credentials of individual preparers, rather than on a worthless pretend certification from the IRS. Oh, the humanity! Congratulations for the Institute for Justice, the legal team behind the suit.
Some practitioners are upset about the ruling (see Trish McIntire). None of us should have the right have the government lock potential competitors out of the market — even if we don’t think the competitor is adequately trained. It’s the customers’ money, and it’s up to them to make the choice.
In a quiet admission of failure, the IRS Return Preparer Office posted on its Facebook page that it won’t be enforcing the new 15-hour CPE requirement for Registered Tax Return Preparers this year:
We’ve received some questions from people who didn’t get their 15 hours of CE completed in 2012. Here’s the deal: In addition to the 15 hour requirement for 2013, you must also make up any hours not completed in 2012. There is no need to designate or notify us that hours earned in 2013 are for 2012. Be sure to keep records of the programs you attend. Additionally, for those people who answered “no” to the CE requirement question on their PTIN renewal, we will be sending them a letter soon advising them they are still responsible for the hours.
There are about 370,000 tax preparers that the IRS estimates are covered by the new rules. The whole regulation scheme was a stupid idea anyway, except as a power grab by Doug Shulman, Worst IRS Commissioner Ever.
The rules will do little or nothing to improve the quality of tax return preparation. By driving seasonal preparers out of the market, they will raise prices. At the margin, that will cause some taxpayers to self-prepare, and others to not file at all. That does nothing for the taxpayer, except for taxpayers who are shareholders in the nationwide tax return franchise businesses that are the real beneficiaries of the rules.
Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.
The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.
You can see the same dynamic in Iowa, with its highest-in-the-nation corporation tax rate. That’s just fine for the lucky and the well-lobbied, some of whom actually make money from the Iowa tax law through refundable tax credits, especially the Research Credit. For a little guy without connections or lobbyists, it’s a great reason to set up in South Dakota.
An influential state senator said lawmakers will have to take a harder look at the state’s tax-credit programs this session, including the economic development credits used to entice companies to build in Iowa.
Sen. Joe Bolkcom, D-Iowa City, who was reappointed to chair the Senate Appropriations Committee on Wednesday, held a Statehouse hearing on tax-credit programs Wednesday. He has been a vocal critic of the how the state uses incentive programs to compete against other states for economic development.
That will be a lot easier if it is accompanied by a drastic lowering of rates — or better yet, a repeal of the Iowa corporation income tax. Yet there’s always a voice for breaks for those with connections — in this case Tom Sands (R-Wapello), Chairman of the Iowa House Appropriations Committee. From the story:
Sands said the people in Lee County and Woodbury County — for the most part — aren’t complaining about the incentives offered to the companies and are looking forward to the jobs they’ll bring.
For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.
While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit.
Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.
Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents.
If it’s worth backing up, it’s worth backing up twice.
Russ Fox, Ref Fouls Out. A group of rec-league refs set up an identity theft-based tax fraud scheme. It worked great, until suddenly it didn’t. Russ wisely points out:
All told, the four individuals involved in the scheme must make restitution totaling $200,000. As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.
These guys ran their scheme for 12 years before it blew up. The longer you do something like this, the closer your chance of getting caught approaches 100%.
More than 10,000 people remain on a waiting list for federally subsidized housing in Hillsborough County.
Not LaSandra Gamble, 27-year-old mother of five.
Last summer, between housing, utilities and food stamps, she drew benefits of $2,363 a month, Tampa Housing Authority files show.
Yet, in August 2011, she put down $9,000 on a black 2006 Lexus GS430, police said. Three days later, they said, she put down another $9,000, this time on a red 2007 Lexus ES 350. Combined, the monthly payments were nearly $2,000.
Gamble, in an interview, said police have it wrong. She said she got the cars because she was involved with the car dealer.
“I didn’t have to put nothing down,” she said. “We were in a relationship.”
Legally, she was in a relationship with her husband, 33-year-old Angelo Juan Pedrosa, whom she had married a year earlier.
Police got involved Oct. 8, when they stopped Pedrosa driving the black Lexus. Pedrosa is a convicted cocaine dealer. Along with marijuana residue, the officers reported finding $6,000 and a dozen debit cards in other people’s names.
Reloadable debit cards, sold online, carry Visa or MasterCard logos. Some people use them to shop on the Internet, control spending or get around poor credit. Tax thieves use them to collect refunds from the IRS.
Police filed a report with the IRS. Ms. Gamble denies any involvement with tax fraud.
The gist of the TampaBay.com story is that the multi-billion dollar refund fraud — much of which is based in Tampa — is largely the work of thieves who are also collecting money from you through public assistance, and a motley array of petty thieves. And Doug Shulman’s IRS is helpless to stop them.
Under new regulations imposed last year—without congressional approval—the IRS now requires all paid tax preparers to become “registered tax return preparers” by paying extra fees, passing a government exam, and taking continuing-education classes annually. (Exempted from the mandate are attorneys, CPAs and politically powerful “enrolled agents.”) Big tax-preparation firms such as H&R Block and Jackson Hewitt supported the licensing scheme, as did lobbying groups representing CPAs and others who are exempted from new regulation.
So while petty thieves loot the Treasury, rest assured that Doug Shulman’s IRS is doing what it can for the well-connected. For a taste of what it Doug Shulman is doing for those whose identities are being stolen (darn little), check out the newest installment in Jason Dinesen’ssaga of a client’s identity theft nightmare.
Billy Hamilton of State Tax Notes has a fine history of the Iowa Film Credit up today. Unfortunately at the moment it is only available to State Tax Notes subscribers (here). He uses a “film noir” theme to tell the story:
Unless all of the main characters are dead, life continues past the closing credits, and in Johnny’s case, that means arrest and a return to the Big House. But filmmakers and audiences seldom bother with what is, in effect, the story after the story.
That probably helps to explain why there was minimal press attention when opening arguments began on July 23 in the trial of the last of 10 defendants charged in the Iowa film tax credit scandal that erupted three years ago and was a hot topic at the time in Iowa, in the movie community, and in tax circles.
The business culture that both Romney and Warren Buffett have operated in, as have I at a much less ethereal level, considers overpaying taxes to be irresponsible. That is the story of Romney’s tax returns.
I’ve not encountered a business culture that considers overpaying taxes to be “responsible.” Peter’s post is worth reading for the “It’s a Wonderful Life” references alone.
The libertarian public interest legal advocate Institute for Justice has joined the fight against the impending tax prep regulation regime. In an article in the Daily Caller, IJ attorney Dan Alban rips the proposed IRS power grab:
This scheme would disproportionately hurt small tax-return preparation businesses and independent preparers, many of whom may be forced out of business. Part-time and seasonal preparers