Posts Tagged ‘Iowa tax administration’

Tax Roundup, 3/14/14: Unhappy with your state revenue exam? Iowans can appeal to the examiner’s boss! And: stealing the wrong identity.

Friday, March 14th, 2014 by Joe Kristan

 

Via Wikipedia

Via Wikipedia

How would you feel about going to court and finding out that if you win, the appeal will be heard by your opponent?  That’s pretty much how the Iowa internal tax appeals process works.  And while a reform bill is getting attention in the legislature, that feature isn’t going to change just yet, reports Maria Koklanaris in a State Tax Analysts article

In a letter to legislators, DOR Director Courtney Kay-Decker said the department was able to successfully draft legislation for some of the priorities outlined in the report, including implementing a small claims process and eliminating the State Board of Tax Review for all matters except property tax protests. But she said it could not come up with language this year for what she called her highest priority, which is also the top priority of taxpayers in the eyes of many.
“Most importantly, we were unable to cohesively and comprehensively incorporate the recommendation to remove the Director from the appeals process,” Kay-Decker said in her letter. “This is disappointing as it was perhaps my highest priority.”

The Council on State Taxation gives the current Iowa system failing marks.  From Tax Analysts:

Ferdinand Hogroian, tax and legislative counsel at the Council On State Taxation, said Iowa’s tax appeals process is the only area in which the state earns poor marks in COST’s most recent report on tax administration.  The report specifies the director’s involvement in tax appeals as a major problem.
“Although an Administrative Law Judge of the Department of Inspections and Appeals conducts evidentiary hearings, IA DOR can retain jurisdiction and override,” the report says.

Attorney Bruce Baker, who frequently does battle against the Department of Revenue, points out the obvious problem with the current system: “I’ve often joked that my clients would like to be able to appeal to the chairman of the board.”  But the Department of Revenue will retain that option, at least for now.

While the legislation they are working on (SSB 3203) is an improvement, I still think Iowa needs an independent tax court — perhaps three judges from around the state who will agree to serve as tax judges as part of their caseloads to develop expertise.  It could be modeled on the specialty business litigation court that Iowa is experimenting with.  Now if you leave the current internal Department of Revenue Process — appealable by the Department to the Director of the Department — you litigate before generalists judges who may have never heard a tax case before.  They tend to defer to the Department, even when it seems clear the department is wrong.

 

Paul Neiffer, A Bad Day in Court.  A bookie who tried to hide funds overseas does poorly.

Tony Nitti, Professional Gambler Bets Wrong In Tax Court – Takeout Expenses Are Gambling Losses, Not Business Expenses   

TaxGrrrl, Taxes From A To Z (2014): G Is For Garnished Wages .  I hope not yours or mine!

Kay Bell, Sorry tax pros, more taxpayers filing on their own.  Taxpayers always have that option, and preparer regulation would drive more taxpayers to do so by increasing the cost of preparers.  Whether that will improve compliance is left as an exercise for the reader.

 

taxanalystslogoChristopher Bergin, It’s Not Just About Lois Lerner (Tax Analysts Blog):

But we need to remind ourselves that there is a lot more potential abuse going on at the IRS than what’s been associated with Lois Lerner. Here are a few examples. I talk to many practitioners who (a) don’t want to be identified, probably for fear of retaliation, and (b) question the independence of the IRS Appeals Office. That is a big problem.

In 2012 a high-ranking IRS executive said in a speech that she believes the government has a higher duty than that of a private litigant. “The government,” the executive said, “represented by the tax administrator, should not pursue a particular outcome and then look for interpretations in the law that support it. The tax administrator should do nothing more or less than find the law and follow it, regardless of outcome. The separation of powers, a bedrock principle of our Constitution, demands it.”

I have a few questions. How many private tax litigators believe that’s actually how the IRS operates? If this noble statement is taken seriously by others in the IRS, why did Tax Analysts have to go to court to get training materials? And why is the IRS being questioned so strongly by Congress on its belief – or, more accurately, the lack thereof – in the bedrock principle of the separation of powers?

The results-driven IRS approach to non-political issues doesn’t lead you to think Lois Lerner was acting with Olympian detachment in the Tea Party scandal.

TaxProf, The IRS Scandal, Day 309

Len Burman, How the Tax System Could Help the Middle Class (TaxVox)

My most “innovative”—some would say “radical”—policy option would replace across-the-board price indexing, which exists under current law, with indexation that reflects changes in economic inequality.

An awful idea.  The tax code will never “solve” the problem of inequality.  This is a clever-sounding idea that will do nothing but create complexity.

 

Sauce for the gander, indeed.  Identity Thief Sentenced for Filing Tax Returns in the Names of the Attorney General and Others:

A federal judge sentenced Yafait Tadesse to one year and one day in prison for using the identities of over ten individuals, including the Attorney General of the United States, to file false and fraudulent tax returns.

I don’t wish identity theft on anybody, not even a politician.  It can lead to all kinds of expensive and time-consuming inconveniences and embarrassments.  But if it had to happen to someone, why couldn’t it have been Doug Shulman, who let identity theft spin out of control while he pursued his futile and misguided preparer regulation crusade?

 

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Tax Roundup, 2/12/14: Lawless and Unregulated edition. And: Lincoln!

Wednesday, February 12th, 2014 by Joe Kristan

20130121-2As we reported yesterday, the IRS preparer-regulation power grab failed in the D.C. Court of Appeals.  The three-judge panel unanimously ruled that “The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading” of the law.

One grumpy IRS person told us that we would regret it, that Congress will pass a worse IRS-run preparer regulation regime.  While it’s possible, I don’t think Congress is in any mood to give the IRS more power right now (see TaxProf, The IRS Scandal, Day 279).

It’s a victory for taxpayers, for preparers, and for the rule of law.  One hope it is a good omen for future court decisions on the on-the-fly rewrites of the Obamacare effective dates.

My endzone dance is here.  The Tax Prof has a roundup of coverage, as well as a guest op-ed: Johnson: The D.C. Circuit Rejects the IRS’s Regulation of Tax Return Preparerswhich says “At bottom, Loving stands for the proposition that exigency does not excuse illegality.” 

Other tax bloggers weigh in:

Russ Fox, DC Court of Appeals Rules Against IRS: Loving Decision Upheld.  “The real problem is the huge complexity of the Tax Code, and the biggest villain here is Congress. Rather than regulating tax professionals, we need to regulate (gut) the Tax Code itself.”

Leslie Book, Initial Reactions to the Government’s Loss in Loving (Procedurally Taxing):  “The government may seek to get Supreme Court review of the matter, or may work with Congress to get specific legislative authority. I offer no views on the odds of the government seeking cert, but its sound beating in two opinions leaves the possibility of obtaining cert and a victory in the Supreme Court seemingly small.”

Joseph Henchman, Big Win for Taxpayers: IRS Loses Effort to Expand Power Over Tax Preparers (Tax Policy Blog).  “In May 2013, we filed a brief opposing an IRS appeal of a court decision striking down their regulation of small tax preparers.”  That’s the brief I joined, along with fellow tax bloggers Russ Fox and Jason Dinesen.

Trish McIntire, The IRS Lost!  “I don’t know if there can be any more appeals (not a lawyer) but I bet there will be a tax preparer bill in Congress soon.”

 

20130419-1Paul Neiffer, When Farmers Barter.  While bartering is taxable, Paul muses: “Some of these barter transactions are properly reported, however, my educated guess is that much higher percentage is not.”

William Perez, How to Handle Owing the IRS

Tony Nitti, Tax Geek Tuesday: Allocation of Partnership Liabilities “Admit it. Nobody really understands what’s going on in this remote corner of the K-1; typically, most tax preparers just apply the tried-and-true “same as last year” approach to allocating liabilities, and trust that it won’t matter in the end.”  Oh, it does, it does.

Jana Luttenegger, “Extensive Wait Times” Ahead with the IRS (Davis Brown Tax Law Blog).  And it’s not like they were brief before.

Kay Bell, The pros and cons of tax refunds.  While logically you don’t want to let the taxman sit on your money, clients always seem happiest with a fat refund.  That leads many tax advisors to sandbag a bit on payments.

TaxGrrrl, Yes, Olympic Wins Are Taxable (And Should Stay That Way) 

 

Peter Reilly, Pilot To Black Panther To Pastor Calls For Financial Transparency In Churches 

 

Jack Townsend, Corporate Corruption Case Charged With Swiss Bank Accounts to Hide the Loot 

Tax Trials, The Tax Education of Lauryn Hill

Annette Nellen links to the Video of IRS Commissioner Koskinan on the filing season.

 

The Iowa Department of Revenue has a Facebook page!  It’s a good idea, and they actually answer questions, like this:

 20140212-1

It’s great that they are answering disgruntled taxpayers for everyone to see.  Best thing is that it’s available to anybody, not just Facebookers.  You don’t have to bring yourself to “like” the Department of Revenue to read it.

 

David Brunori, Tax Breaks for Lawyers — No Joke (Tax Analysts Blog):

I read recently in the Kansas City Business Journal that Missouri gave a big law firm $2.8 million in tax incentives to move to Kansas City. I thought there must be some kind of mistake. Certainly, no politician would agree to give citizens’ hard-earned money to lawyers. And certainly, they would not give citizen money to big-firm, wealthy lawyers. But once again, reality trumps good tax policy. The Missouri Department of Economic Development gave the nearly $3 million to attract the international law firm Sedgwick LLP to downtown Kansas City. 

Must be a rough neighborhood if that’s considered an improvement.  Or, more likely, Missouri has completely lost its mind.

 

Tax Justice Blog, The States Taking on Real Tax Reform in 2014.  One blog’s “real tax reform” is another blog’s march to madness.

News from the Profession: Big 4 Dude Says Dudes at His Firm Rewarded For Treating Non-Dudes Like Dudes (Going Concern)

 

LincolnToday is Abraham Lincoln’s birthday.  He was born 205 years ago today in Kentucky, before anybody thought of an income tax.  His presidency saw the first U.S. federal income tax, passed to finance the Civil War.  The Revenue Act of 1861, Section 49, imposed a flat 3% levy “upon the annual income of every person residing in the United States, whether such income is derived from any kind of property, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatever” over $800.  It was replaced by a progressive levy in 1862, with a 3% rote on income over $600, with a 5% rate kicking in at $10,000.

The tax expired under its own terms in 1866, after Lincoln’s death.  Lincoln never came back, but the income tax returned to stay in March 1913.

 

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Tax Roundup, 12/2/2013: Remember the January 15 property tax credit deadline! And: final 3.8% tax regs.

Monday, December 2nd, 2013 by Joe Kristan

20130117-1There’s a new deadline this year for Iowa business owners with real property.   Iowa business owners have a January 15, 2014 deadline to apply for the business property tax credit enacted in this year’s legislative session.  Many have yet to apply, reports gazette.com:

Commercial property owners have been slow to apply for a new property tax credit designed to give a little boost to small businesses.

Most business owners who own the property in which the business operates are eligible for the Iowa Business Property Tax Credit.

A $50 million pool of money is available for the first year of the new tax credit. The state legislature included the credit in an historic property tax relief bill signed into law on June 12.

“It is important they get them in now so we can process them,” said Cedar Rapids City Assessor Scott Labus.

Businesses can find the form online here.  It should be filed with the local county assessor’s office. The gazette.com article says the maximum credit for the coming assessment year is $523.

 

Paul Neiffer,  Final Net Investment Income Regs Have Good News For Farmers:

In Final Regulations issued earlier this week, the IRS changed their interpretation of this rule and have now indicated that any self-rented real estate or rental real estate that has been properly grouped with a material participation entity will not be subject to the tax.  In even better news, any gain from selling this type of property will also be exempt from the tax.

Good news not just for farmers, but for any business where the owners rent property to a corporation they control.

 

Tony Nitti, IRS Issues Final Net Investment Income Tax Regulations: A First Look And More   It was a dirty trick to issue them over Thanksgiving, when I wasn’t watching.   I will be posting on some key issues.

 

20130419-1Illinois storm victims get filing relief (IRS news release):

The President has declared the counties of Champaign, Douglas, Fayette, Grundy, Jasper, La Salle, Massac, Pope, Tazewell, Vermilion, Wabash, Washington, Wayne, Will and Woodford a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Nov. 17, and on or before Feb. 28, 2014, have been postponed to Feb. 28, 2014.

The IRS is also waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Nov. 17, and on or before Dec. 2, as long as the deposits are made by Dec. 2, 2013.

You don’t have to be damaged to qualify, you just have to be located in the affected area.

 

No, that’s not the real threat.  The Muscatine Journal mistakes the painkiller for the ailment:

Tax breaks for wind-power producers are set to expire in a little more than a month, threatening hundreds of manufacturing and energy jobs in the state if nothing is done.

In Iowa, much of the attention has focused on the federal Renewable Fuel Standard in which the federal government guarantees a market for biofuels. But for Iowa’s turbine manufacturers and power companies, it’s the federal production tax credit that takes precedence.

It’s not the loss of the tax credits that threatens these industries.  It’s their inability to survive without subsidies or, in the case of ethanol makers, their inability to sell their product unless people are forced by law to buy it.  The subsidies only dull the recipients awareness of their real ailment.

 

David Brunori, Confusing Tax Cuts with Tax Reform (Tax Analysts Blog):

But increasing or decreasing tax burdens should not be confused with tax reform. Tax reform should mean something. I define tax reform as meaningful changes to the tax system that comport with the general notions of sound tax policy. The goal should be to make the system fairer, neutral, more efficient, and more stable. The changes should also increase economic development and job growth. And they should ensure that the government raises enough revenue to meet the public service demands of the citizenry. Changing the rates or tinkering at the margins is not reform.

Nor is giving tax spiffs to influential or sympathetic constituencies, but that’s been the Iowa way for some time now.

 

20120529-2Lyman Stone, Missouri Considering “Massive” Incentives for Boeing (Tax Policy Blog):

This is bad tax policy in spades. Governor Nixon rejected a flawed, but still broad, tax cut on the grounds that taxes don’t matter much for businesses, but government services do. Now Missouri policymakers may try to attract one specific company with a “massive” and narrowly-targeted tax break, despite lack of evidence that incentives lead to economic growth, and ample evidence that they create problems.

It’s all about directing funds to insiders with good lobbyists.

 

Cara Griffith, A Change of Culture (Tax Analysts Blog).  She talks about the natural tendency of tax authorities to conceal information and make tax practice an insiders’ game.  She notes that North Carolina doesn’t release private rulings and hasn’t updated public corporate directives since April 2012.  Iowa is better, but they haven’t updated their “What’s new” website since August.

 

William Perez, Updated Form W-9.  With the additional rules of FATCA piled on top of existing foreign withholding rules, you should make sure to get a W-9 from your vendors, depositors and ownership groups.

 

Jason Dinesen reminds us of the Iowa Insurance Premium Deduction

Trish McIntire reminds us that Refund Advances are really expensive loans.

Robert D. Flach, TO PER DIEM OR NOT TO PER DIEM – THAT IS THE QUESTION.

 

Kay Bell offers some Tax-saving moves to make by Dec. 31, 2013

Howard Gleckman,  Obama Will Try to Clarify the Role of Tax-Exempt Groups in Politics.  Your new role in furthering public debate?  Shut up!

TaxProf, The IRS Scandal, Day 207

Tax Justice Blog: This Holiday, The Tax Justice Team Is Thankful For…  In other words, watch your wallets, folks.

The Critical Question: Do We Need A Clergy Tax Simplification Act Of 2014?    (Peter Reilly)

Going Concern, 10 Things Accounting Professionals Should Be Thankful For This Year

TaxGrrrl, This Man’s Nuts: Plan To Sell Testicle For New Car Is Taxable   As if there weren’t enough non-tax arguments against this plan.

 

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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.

 

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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)

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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!

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Home is where the heart is. And the house, wife, kids, cars…

Thursday, September 20th, 2012 by Joe Kristan

An executive got transferred from his employer’s Iowa office to Dakota Dunes, South Dakota.  His wife balked at the move, so he rented an apartment in South Dakota and came home on weekends.  Noting the difference between the income tax rates in South Dakota (0%) and Iowa (8.98%), he chose to file as a South Dakota resident.  But he did it wrong.  Ericka Eckley of the ISU Center of Agricultural Law and Taxation explains the rules:

Every Iowa resident must pay Iowa income taxes. A resident  for income tax purposes can be identified in two ways. The first is through the  establishment of a permanent home in the state, which involves spending about  half the year living in the state.  Alternatively, a domicile is another way to  prove residence. Domicile is established through the intention of the  individual to permanently or indefinitely reside in Iowa whenever absent from  the state.

An individual can only be domiciled in one place at a time  and once established, domicile is retained until the individual takes  affirmative steps to establish a domicile in another state. In Iowa, there is a  rebuttable presumption that the individual’s Iowa domicile has not changed if  an individual retains the rights of citizenship in Iowa.

A change in domicile can be established through proof of a  definite abandonment of the former domicile, actual removal of the individual’s  physical presence to the new domicile, or a bona fide intention to change and  remain in the new domicile indefinitely.

It may possible to have a domicile in a different state than your spouse — like former power couple Arnold Schwarzenegger and Maria Shriver.  But it isn’t easy, and you can’t take shortcuts if you try.  An Iowa appeals court yesterday said the taxpayer didn’t try hard enough.  For example:

  • He kept a joint Iowa bank account
  • He kept his Iowa drivers license
  • He registered to vote in Iowa
  • The family cars (five of them) were registered in Iowa.
  • His personal car had Iowa vanity plates.
  • He claimed a homestead property tax credit for his Iowa home; the credit application included the statement “I declare residency in Iowa for purposes of income taxation and no other application for homestead credit has been filed on other property.”

The court found factors like these, which indicate Iowa residency, outweighed those indicating South Dakota domicile, such as his South Dakota job, seeing a South Dakota doctor, and membership in a South Dakota  church (though not spending weekends in South Dakota probably weakened that argument).

That was a bad result for the taxpayer; the appeals court upheld the Iowa assessment of $290,472.19 in taxes, penalties and interest.

The Moral?  If you want to change your tax domicile from a high-tax state to a low-tax one, you need to mean it.  You need to burn your bridges and change as much of your life as possible to the new state.  And for heaven’s sake, don’t cheap out and claim an Iowa homestead exemption when you are filing tax returns saying you don’t live here.

Cite: Schmitz vs. Iowa Department of Revenue, Court of Appeals of Iowa No. 2-583. Additional coverage:  Dar Danielson,  Appeals Court says taxes are due as man lives in Iowa, not South Dakota (Radio Iowa).

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When state tax credits go bad.

Friday, August 31st, 2012 by Joe Kristan

So your investment in that biodiesel plant didn’t go like you had hoped:  $400,000 down the tubes.  Well, at least you got some nice Iowa investment tax credits.

Then you get a letter from the nice folks at the Iowa Department of Revenue saying that those tax credits you got from the biodiesel plant aren’t good anymore, so please write us a big check for those credits you used to offset your Iowa taxes.

That happened to some unfortunate investors in the East Fork Biodiesel plant in Algona, Iowa.  An administrative decision released this week by the Department of Revenue gives some background:

DED approved an investment tax credit of approximately $5.2 million through an enterprise zone agreement with East Fork and Kossuth County.  The tax credit was amortized over five-year period.  The credit was to be taken in the year the plan was placed in service.  The agreement made clear that East Fork would not receive benefits if it failed to comply with the contract terms, including terms regarding job creation and payment of wages. 

The East Fork plant was substantially completed in December of 2007 and started production.  It produced 1.1 million gallons of biodiesel in December and then shut down due to “adverse market conditions,” that is, an increased price in soy beans.  The plant did not reopen. 

Well, we got it up and running for a month.  That should get us our tax credits, right?  Not according to the Department of Revenue.  The department notified the partnership owning the plant that it was in default of the job-creation and wage promises made to get the credits, and that the state wanted them back:

The taxpayers had claimed investment tax credits for 2008 and 2009 after East Fork had shut down.   In February of 2011, the department filed notices of assessment against each of the taxpayers, claiming repayment of the tax credits and interest.  The department sought repayment from the individual taxpayers [owning the] LLCs, so the credits flowed through to the individual members.   

The taxpayers filed protests to the assessments.  They argue they should be able to claim the credits because the plant was built and is capable of operation.  The only reason it closed is the high cost of inputs, which was not expected at the time it was built.  They lost their investment, so they are seeking the tax credit to minimize their losses.

It appears that the taxpayer’s interest in East Fork represented about .81% of the deal, worth about $42,000 in tax credits.  That by itself would be a poor return on a $400,000 investment, but if the administrative ruling holds up, they won’t get even that (my emphasis):

The taxpayers argue that repayment must come from the “business” as opposed to the individual shareholders.  The statute does not support that reading.  The statute references the business being eligible for the tax credits, but allows the benefits to flow down to individual taxpayers if the business is an LLC.  If the business utilizes the tax credits by allowing the individual partners to claim the credits on their individual tax returns, it necessarily follows that the department would have to seek repayment of the business credits by the same means.  This interpretation is supported by the language in section 15E.193(3) allowing the department to recover the “value of state taxes or incentives provided.”  The taxpayers received the value of the tax credit provided, so the department can recover the value of that credit from the individual taxpayers.

The Moral?  In the wake of the film tax credit fiasco, Iowa has become sensitive to concerns that tax credits aren’t doing their job (though they honored the fraudulently-issued film credits).  Many “economic development” credits come with strings attached.  If the project fails, Iowa will pull those strings.  Taxpayers need to keep that in mind when considering an investment in a project promising tax credits.

Cite: Trebilcock, IDA No. 11DORFC042-44

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Time to retire the kangaroos

Wednesday, March 14th, 2012 by Joe Kristan

Iowa could use a real tax court. Jason Dinesen says efforts to set up a tax court in Louisiana might be instructive.

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Iowa Department of Revenue shreds the Commerce Clause

Thursday, March 8th, 2012 by Joe Kristan

If an Iowa Department of Revenue position on interstate income taxation stands, the limits set by Congress in 1959 on taxation of out-of-state corporations (PL 86-272) will become a dead letter. The Department is attempting to tax Jack Daniels — whose only connection to Iowa is the sale of liquor to the Iowa state wholesale liquor monopoly — based on the use of its trademarks in Iowa.
PL 86-272, enacted under the Constitutional authority given to Congress to regulate interstate commerce, prohibits states from taxing corporations whose only business in the state is the shipping of goods from out-of-state. The states are always trying to get around this, and Iowa gave itself a victory on this score when the Iowa Supreme Court ruled that KFC was taxable on royalties received from its Iowa franchisees even though KFC itself had no property, employees or operations in Iowa. Now the Department is turning this victory up to 11. From the Administrative Law Judge ruling in favor of the Department in an appeal by Jack Daniels Properties, Inc. and Southern Comfort Properties, Inc, members of the Brown-Forman group.

The department

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Iowa Department of Revenue goes after law prof’s Schedule C losses

Wednesday, September 21st, 2011 by Joe Kristan

The Iowa Department of Revenue has historically stuck to state-only issues. They would do exams to see if non-residents were reporting all of their Iowa income, for example, or they would examine taxpayers claiming Iowa-only breaks, like the 10-year capital gain deduction. But for the most part Iowa tax law piggybacks federal law, and if the IRS missed an error, Iowa wouldn’t come looking for it.
No more. At least when it comes to hobby losses, Iowa has begun its own examination program. A Des Moines resident recently lost an argument before an administrative law judge over his Schedule C losses.
The taxpayer is a former Drake University law professor who took emeritus status in 2004 — meaning he retired. He continued to keep his hand in, though, working with the Drake Legal Clinic and developing a motivational program for law students, among other activities. Over a five year period he reported gross income from these activities of $12,670 and expenses of $84,669, for a net loss of $71,199. No single year of the five showed a profit. The hearing officer decided that the professor had not established a profit motive:

Rather, my assessment of the record leads me to conclude that as he approached retirement Professor Power continued to be involved in the same activities that he had throughout his career

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Iowa needs a tax court

Tuesday, August 9th, 2011 by Joe Kristan

humpty.jpg

“When I use a word,” Humpty Dumpty said in a rather scornful tone,” it means just what I choose it to mean — neither more nor less.”

An Iowa district court has ruled that the Iowa Department of Revenue can take the Humpty Dumpty approach to the tax law.
The case covered the pre-1997 version of the Iowa Capital Gain Exclusion. This break exempts some capital gains from income when a taxpayer has both “held” a business asset for 10 years and has also “materially participated” in the business for 10 years
IDOR regulations cooked up a definition of “held” for this purpose that doesn’t appear anywhere else in the tax law — one that ignores holding periods that carry over for other purposes, like gifts or tax-free exchanges. The legislature overrode the IDOR interpretation for post-2006 years, but did not address the pre-2006 regulation.
The Department’s regulation is abusive and ridiculous. As we noted in 2005,

Iowa has had no difficulty adapting federal holding period rules for other “unique” Iowa purposes. For example, Iowa has a special exclusion for farmers for sales of cattle or horses held for 24 months. The Department adopted federal holding period rules for this deduction, which has no direct federal counterpart. (Subrule 40.38(2))
If the legislature doesn’t provide a specific definition of a word when it passes a tax law, the sound and sensible assumption is that it means the same thing that it means elsewhere in the tax law.

Even so, the Iowa District Court upheld this ridiculous reading (footnotes omitted, emphasis added):

This term was not defined within the statute at the time the petitioners filed the return in question. In addition, the term has substantive meaning within the special expertise of the agency relating to when or to what extent an asset is considered a capital asset. This, along with the aforementioned rulemaking and enforcement authority delegated to the agency by the legislature, leads the court to conclude that the interpretation of the term “held” in 422.7(21)(a) has been clearly vested with the agency. Accordingly, the court will affirm the agency unless it concludes that its interpretation of the term is irrational, illogical or wholly unjustifiable.

It is all three, but the court sided with the Department anyway.

(more…)

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Losing the llama loss in Fairfield

Friday, May 6th, 2011 by Joe Kristan

Fairfield is an Iowa hotbed of Eastern thought, so you wouldn’t be too surprised to find a one-L Lama there. There are also quite a few two-L llamas.* The Iowa Department of Revenue thinks they’re there for fun, not profit.
The Department this week published an administrative ruling rejecting deductions for a Fairfield Llama farm as an activity not engaged in for profit — a “hobby loss.”
20110506-2.jpg
Flickr image courtesy Jonty Sewell under Creative Commons license.
The Llama farm is conected with the Overland Store in Fairfield, a seller of “Shearling Sheepskin Coats, Leather Jackets, Fur Coats, UGG Boots, Sheepskin Rugs and more.” The “more” apparently includes llamas. From the store’s web site:

Behind the Overland building, you can find one of the largest llama herds in the Midwest. There are some 240 registered llamas with blood lines from Peru, Bolivia, Chile, New Zealand, and several from some of the best North American ranches. Bring your kids and visit the farm!

The llama business had losses over the years as follows, according to the ruling:
1998: $83,089.00
1999: $77,072.00
2000: $75,826.00
2001: $65,587.00
2002: $60,197.00
2003: $89,533.00
2004: $115,681.00
2005: $63,411.00
2006: $39,481.00
2007: $45,141.00
The department appeals panel applied the factors in the Section 183 “hobby loss” rules:
1. Manner in which the taxpayer carries on the activity.
2. Expertise of the taxpayer or his advisors.
3. Time and effort expended by the taxpayer in carrying on the activity.
4. Expectation that assets used in activity may appreciate in value.
5. Success of the taxpayer in carrying on other similar or dissimilar activities.
6. Taxpayer

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Nonresidents taxable in Iowa on sale of stock?

Tuesday, May 3rd, 2011 by Joe Kristan

A disturbing policy letter out of the Iowa Department of Revenue says that some S corporation stock sold by Iowa non-residents would produce gain taxable in Iowa.
The letter addresses gain on stock sold “to create an ESOP.” The Department says:

In your scenario, the Department contends that the creation of an ESOP results in the stock attaining an independent business situs since the stock is being used as an integral part of the business activity occurring in Iowa through the creation of the ESOP. Therefore, the Department contends that the capital gain earned by the nonresident should be considered Iowa source income.

There’s no telling where that standard would end. If the business redeems a shareholder to resolve a business dispute, will that be “an integral part of the business activity”?
This is an informal opinion, and Iowa’s regulations don’t really require this result. Let’s hope they back off.

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Iowa’s tax season officially ends today

Monday, May 2nd, 2011 by Joe Kristan

While the federal due date was two weeks ago, Iowa’s 1040s are due today. Iowa’s usual April 30 deadline fell on Saturday, so today is the day.
Iowa automatically extends returns without a separate filing if you have paid 90% of your liability through withholding and estimated tax payments. If you need to pay in to get to the 90%, use the Iowa Individual Tax Payment Voucher, or pay online.
In the spirit of extensions, Iowa’s legislature has extended its session beyond its normal adjournment. They are trying to work out a property tax and budget compromise. We’re waiting to see if they’ll also pass a technical bill to allow Iowans who filed their returns before the state changed the 2010 tax law last month to claim their new benefits on 2011 returns, instead of amended returns. We’ll keep you posted.
Our hard-working legislative supergeniuses will no longer get per-diem money for any remaining days in session. I say they should get their whole annual pay on the first day of the session. If they decide to go home on Day 2, it’s money well spent.

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Iowa late changes: should you amend your returns?

Thursday, April 28th, 2011 by Joe Kristan

Iowa’s legislature saw fit to change the rules of the 2010 tax game this month, after most Iowans had probably already tallied their scorecards. So should we amend our Iowa 2010 returns right away?
I understand that the Iowa Department of Revenue is working on a legislative proposal that would enable taxpayers to take some of these fixes on 2011 returns, rather than amending their 2010 returns. The Department isn’t really staffed to handle a flood of amended returns, and many taxpayers would rather not pay to have an amended 2010 return preparered if they can use their new 2010 deductions in 2011.
If you can take your Iowa 2010 $250 educator expense in 2011, it’s hardly worth filing an amended return to claim a $17 refund. Even a big additional Section 179 deduction might be worth waiting for if it is coming out of an S corporation or partnership on a batch of K-1s, where each individual owner would also have to file an amended return.
Iowa may also come out with a streamlined amended return process for 2010 refunds. So it may well be worth waiting two or three weeks to see what the legislature and the Department of Revenue come up with before filing your refund claims.

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Iowa: vacant land adjoining business fails to qualify for business capital gain exclusion

Thursday, March 24th, 2011 by Joe Kristan

Iowa’s tax law rewards persistence, but you have to have a lot of it. Iowa allows you to exclude from taxable income capital gain from real property used in a trade or business if you have both held the land for ten years and have “materially participated” in the business for ten years. The exclusion can also apply when you sell your business.
A policy letter released this week shows that even if you have ten years’ worth of persistence, you might not win. Iowa lays out the facts:

Your scenario involves a taxpayer who is a 50% owner of a limited liability company that purchased commercial real estate in Cedar Rapids in 1999. The property consisted of five acres, of which three acres included a large commercial building and two acres consisted of vacant land. The building was leased to several tenants and the vacant land was never rented out. The taxpayer’s participation in the rental business constituted substantially all of the participation in the rental business. In 2010, the two acres of vacant land was split off and sold, and the limited liability company still owns the building and the three acres. You are asking if the sale of the two acres of vacant land qualifies for the Iowa capital gain exclusion.

Iowa said that the vacant land wasn’t “used in the business,” so the exclusion was unavailable.
This continues a long-time trend at the Department of interpreting gain eligibility narrowly.

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A stocking-stuffer from the Iowa Department of Revenue

Monday, December 27th, 2010 by Joe Kristan

The 2010 health care act* permits tax-free inclusion of “children” up to age 26 in employer health-insurance coverage. Because it’s been years since Iowa’s income tax rules were fully linked to the federal law, the Department of Revenue had been threatening to require taxpayers to add the “value” of coverage of 25-year-old dependents to taxable income on their Iowa returns.
Fortunately, the Department has come to its senses. From a recent update to their website:

The Department has determined that Iowa Code

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Iowa 2010 interest rates on overpayments, underpayments declines to 5%

Friday, October 23rd, 2009 by Joe Kristan

Iowa has announced that the interest rate on late taxes or refunds will be 5% annually for 2010. The rate for 2009 is 8%.
Link: Historic Iowa interest rates.

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What happens when you’re big enough to fight the bully

Monday, August 31st, 2009 by Joe Kristan

The Iowa Department of Revenue will say the darndest things. And if you don’t like them, you can appeal to a Department of Revenue kangaroo court. If you don’t like what Joey has to say, then you get to go to court again and again and again. Most taxpayers give up somewhere along the line because they can’t afford the lawyers. That’s why it’s amusing when they run into someone big enough to keep fighting. David Brunori picks up the story ($link):

To see a strange litigation strategy on the part of government lawyers, you should read the Iowa Supreme Court’s decision in AOL v. Iowa Department of Revenue. Iowa has a law that says interstate Internet service is exempt from sales tax. AOL customers in Iowa used to dial a local number that connected them to the AOL megatron computer in Virginia. Actually, the AOL computer was not called megatron, but I think it was really big. So the connection went from Des Moines or Dubuque to Virginia.
The Department of Revenue decided that wasn’t an interstate connection and it could assess sales tax.

Never mind that all of AOLs servers are in Virginia. Iowa is everywhere.
So AOL took the case to the state district court. The district court found for AOL, holding that the department’s position was an “irrational, illogical, and wholly unjustifiable application of law to fact.” Ouch. Undaunted, the department appealed. The appellate court, however, affirmed the district court. The appellate court said it was obvious the interstate Internet service was not a taxable transaction. You might think that the department would have thrown in the towel at that point. No use going back in the ring when you are getting mauled. But like Rocky Balboa, the plucky Department of Revenue reached back and took one more swing. It took its ridiculous argument to the Iowa Supreme Court.
You know it will go bad when the state supreme court starts with “the director’s interpretation fails to meet even the most deferential standard of review.” The court went on to say that the department was engaging in legal jujitsu to escape the facts. The court called the department’s position illogical, irrational, and wholly unjustified.

Bully for AOL. But its sad that the Department is so bullheaded. There are at least two other positions where the Department is equally wrong and equally stubborn:
Their taxation of non-resident S corporation shareholders and partners on investment income from Iowa-sited investment partnerships, and
Their position for pre-2006 capital gains that “held” has a special meaning in Iowa that applies nowhere else in federal or state tax law.
The only question is: are these positions merely shameless revenue grabs? Or is the Department just that bullheaded?
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