Posts Tagged ‘Jason Dinesen’

Tax Roundup, 8/25/14: Tax Credits for not killing a puppy. Well, another puppy. And: mind your spelling!

Monday, August 25th, 2014 by Joe Kristan
Flickr Image courtisy Llima under Creative Commons license

Flickr Image courtesy Llima under Creative Commons license

Wisconsin finds a new frontier in incentive tax credits.  From madison.com:

The board overseeing the state’s flagship job-creation agency has quietly approved a $6 million tax credit for Ashley Furniture Industries with a condition allowing the company to eliminate half of its state workforce.

As approved by the Wisconsin Economic Development Corp. board, the award would allow the Arcadia-based global furniture maker to move ahead with a $35 million expansion of its headquarters and keep 1,924 jobs in the state.

Stop me with tax incentives, or I’ll fire some more people!

Of course, all of these tax credits are paid for by people who, by definition, aren’t getting their taxes wiped out with special tax breaks that allow politicians to show up for a ribbon cutting.  Politicians know that they’ll get attaboys for “creating jobs,” and nobody will call then out for the jobs they cost by taxing people to give money to their special friends.

Thanks to an alert reader for the tip.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

 

Peter Reilly reports on tax pro who thinks a case we discussed last week may have been wrongly decided.  I think the court probably got it right, but it’s a good read.  If the taxpayer wins on appeal, it will be very helpful for tax planning.

 

Does that make this a tax shelter?

Does that make this a tax shelter?

Audit the Pope, then?  New Tax Head Says She Knows Why Italians Don’t Pay Taxes: They’re Catholic (TaxGrrrl)

Kay Bell, Coverdell Education Savings Account’s pre-college options.

Jason Dinesen, Bridging the Gap Between What Clients Want … And What They’ll Pay For. “Sure, people “want” a proactive approach. But it seems to me like few are actually willing to PAY for the service.”

Russ Fox, Tax Preparers Behaving Badly, “There’s a common thread among these tax professionals: You’ll be getting a refund. That sounds good until you realize that you really shouldn’t have, and that you will likely get in trouble later.”

Robert D. Flach,  OOPS! THEY DID IT AGAIN.  “The State wants taxpayers, and preparers, to submit income tax returns electronically – but when they do the returns and payments therefor are not properly processed.”

Jack Townsend, Criminal Justice Article of U.S. Global Tax Enforcement

Tony Nitti, Your Complete Guide To Every Tax Reference In ‘The Simpsons’ Marathon 

 

TaxProf, The IRS Scandal, Day 473

Ajay Gupta, Carbon Taxes and the White Man’s Burden (Tax Analysts  Blog):

 China, which surpassed the United States as the world’s largest emitter of CO2 in 2006, has made it clear that it has no intention of agreeing to any reduction quotas “because this country is still at an early stage of development.” India, which now ranks third, behind China and the United States in total CO2 emissions, has similarly rejected the notion of subjecting itself to binding reductions.

Yet the carbon tax lobby in the West remains unfazed in the face of this repudiation of responsibility by the developing world. Among the grounds advanced for pressing ahead with unilateral action is one that relies on the residence time of CO2. For several decades, the West pumped much more CO2 into the earth’s atmosphere than China, India, or any other developing county. Unilateralists argue that those historical emissions and their persisting warming effects ensure that the West will remain the largest contributor to climate change for years to come.

That argument has more than a whiff of reparations.

Frack away.

 

2140731-3Matt Gardiner, Kinder Morgan Doesn’t Want to Be a Limited Partnership Anymore–But They’re One of the Few (Tax Justice Blog).  Paying one tax is better than paying two, other things being equal.

William McBride, More Jobs versus More Children:

I, like most humans, think that children are blessing. I am also one to think we as a society should have more kids. I also think that in the very long run, say decades, demographics are destiny, i.e. we cannot expect to be a large, flourishing economy a generation from now if our birth rate continues to be at or below the replacement rate.

However, boosting the birth rate is not as simple as boosting the child credit. 

Not every problem can be solved with a tax credit.

 

Howard Gleckman, How Much Would An Individual Tax Rate Cut Add to the Deficit, and Who Would Benefit? (TaxVox).  “A one percentage point across-the-board reduction in tax rates would add $662 billion to the budget deficit over 10 years—about $40 billion in 2015 rising to more than $85 billion by 2024.”

 

Donald Boudreax is not a happy taxpayer:

 I pay what I “owe” in taxes not because I have a “responsibility” to do so but, instead, only because government threatens to use violence against me if I don’t pay what it demands.  I stand in the same relation to the tax-gatherer as I stand in relation to any common thug who points a gun, knife, or fist at me demanding my money.  [I actually prefer the common thug, for he neither insults my intelligence by telling me that his predation is for my own good nor spends the money he takes from me to fund schemes to further interfere in my life.] 

I suppose that illusion-free approach probably applies to most of us, if you think about it.

 

Career Corner.  Use All Your Vacation Days, Even If It Means Making Less Money (Caleb Newquist, Going Concern)

 

dictionarySpelling is important.  Even for identity theives.  From Dispatch.com:

A $3.5 million bogus tax-refund scheme that unraveled because the conspirators couldn’t spell the names of well-known cities has resulted in a federal-prison sentence of more than eight years for the scam’s mastermind.

Sims and Towns misspelled the names of several cities when they listed return addresses, including “Louieville” and “Pittsburg.” That caught the attention of Internal Revenue Service investigators.

I love how they call somebody who committed a stupid crime in a stupid way — and showed up for a sentencing hearing drunk, apparently —  a “mastermind.”

 

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Tax Roundup, 8/20/14: Keeping time reports isn’t just for CPAs anymore.

Wednesday, August 20th, 2014 by Joe Kristan

20120511-2Track your hours now, not when you get audited.  Doing time reports is no fun.  If I had a nickel for every CPA who left public accounting and told me how fun it is to not do time reports, I’d have multiple nickels.

Unfortunately, the tax law might make time sheets necessary for people who don’t charge by the hour.  The passive loss rules disallow losses if you don’t spend enough time on a loss activity to “materially participate.”  Obamacare uses the same rules to impose a 3.8% “Net Investment Income Tax” on “passive” income.

It’s up to the taxpayer to prove they spent enough time to “materially participate,” as a Mr. Graham from Arkansas learned yesterday in Tax Court.

The taxpayer wanted to convince Judge Nega that he met the tax law’s stiff tests to be a “real estate professional,” enabling him to deduct real estate rental losses.  If you are not a “professional,” these losses are automatically passive, and therefore deferred until there is passive income.  To be a real estate professional, the taxpayer has to both:

– Work at least 750 hours in real estate trades or businesses, and

– performs more than one-half of all personal services during the year in real property trades or businesses in which the taxpayer materially participates.

That’s a high bar to clear for a taxpayer with a day job.  Mr. Graham gave it a good try, providing a judge with spreadsheets to show that he did that work.  The judge remained unconvinced:

Mr. Graham did not keep a contemporaneous log or appointment calendar tracking his real estate services. His spreadsheets were created later, apparently in connection with the IRS audit. 

There were other problems:

Furthermore, the entries on the spreadsheets were improbable in that they were excessive, unusually duplicative, and counterfactual in some instances. As all petitioners’ rental properties were single-family homes, reporting 7 hours to install locks or 30 hours to place mulch on a single property (amongst other suspect entries) are overstatements at best. Performing maintenance for a tenant that did not pay rent for an entire year with no record of “past due rent” or any attempt to collect rent (as Mr. Graham would note on entries for other rental properties) seems dubious.

The judge ruled that the taxpayer failed to meet the tests.  Worse, the court upheld a 20% penalty: “We conclude that the exaggerated entries in petitioners’ spreadsheets negate their good faith in claiming deductions for rental real estate losses against their earned income.”

The Moral?  Maintain your time records now.  When the IRS comes calling, it’s too late.  And play it straight; the Tax Court didn’t just fall off the turnip truck.

Cite: Graham, T.C. Summ. Op. 2014-79. 

 

20130426-1Russ Fox, FBAR Filing Follies:

Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.

Mild is right.

 

Peter Reilly, Robert Redford’s New York Tax Trouble Provides Lessons For Planners.  “You dodge non-resident state taxes, either on purpose or by accident, at the peril of missing out on a credit against the tax of your home state.”

Jason Dinesen, S-Corporation Compensation Revisited.  “But what should the salary be? And what if the year has ended and the W-2 deadlines have passed, but the corporate tax return still needs filed?”

Keith Fogg, Postponing Assessment and Collection of the IRC 6672 Liability (Procedurally Taxing).  Issues on the “trust fund” penalty imposed for not remitting withholding.

TaxGrrrl, Flipping Through History: Online Retailers Owe Popularity And Tax Treatment To Mail Order Catalogs:

Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state.

And just like in the old days, states want to extend their reach no matter how flimsy the nexus.

20140729-1Lyman Stone, New Upshot Tool Provides Historical Look at Migration (Tax Policy Blog):

Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.

I will be seeing Mr. Stone speak at the Iowa Association of Business and Industry Tax Committee this morning.  I’m geeking out already.

 

Jim Maule, “Give Us a Tax Break and We’ll Do Nice Things.” Not.  It seems the subsidized Yankees parking garages don’t stop with picking taxpayer pockets.

Kay Bell, Is it time for territorial taxation of businesses and individuals?  “Territorial taxation advocates hope that long local journey has at least now started.”

 

Howard Gleckman, Is Treasury About to Curb Tax Inversions on Its Own? (TaxVox).  If the law is whatever the current administration says it is, I look forward to the $20 million estate tax exclusion next time the GOP takes power.

Daniel Shaviro, The Obama Administration’s move towards greater unilateral executive action.  “And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to ‘secur[ing] our republic.'”

20130422-2The best and the brightest in action.  TIGTA: ObamaCare Medical Device Tax Is Raising 25% Less Revenue Than Expected, IRS Administration of Tax Is Rife With Errors (TaxProf)

 

TaxProf, The IRS Scandal, Day 468

 

News from the Profession.  AICPA Celebrates 400,000th Member Just Because (Caleb Newquist, Going Concern)

I can verify that a Kindle absorbs less coffee than paper.  Do readers absorb less from a Kindle than from paper? (Tyler Cowen)

 

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Tax Roundup, 8/14/14: Department of Revenue says: no SE Tax, no Iowa gain exclusion on CRP ground. Cash rents also fail.

Thursday, August 14th, 2014 by Joe Kristan

20140814-1Cash Rent, failure to pay self-employment tax ruled fatal to Iowa capital gain exclusion.  Iowa has an unusual capital gain exemption on sales of farm and business property for taxpayers meeting both a 10-year holding-period requirement and a ten year “material participation” test.  The Iowa Department of Revenue yesterday released three rulings holding that taxpayers failed to meet the second requirement on sales of farm ground.  The material participation rules are for the most part the same as in the federal “passive loss” rules.

Cash rent.  Document 14201019  holds that you don’t “materially participate” if all you do is rent farm ground:

The issue raised in the protest involves whether a capital gain deduction from the sale of farmland was properly disallowed on the Iowa individual income tax return for the 2009 tax year.  The farmland, which was held in the name of two partnerships, West Side Acres and East Side Acres, was involved in a cash rent arrangement.  There is no dispute that the farmland was held for more than ten years, but the Department contended that the ten year material participation test was not met.

The taxpayers claimed they spent more than 100 hours managing their farm rentals, but the Department said that activity didn’t count (my emphasis):

The Department notes that most of the hours spend by protester in the farming operation that was provided in the January 29, 2014 letter related to maintenance of business financial records, including review of property tax estimates and assessments and payment of expenses.  The Stoos decision stated that actions of paying the mortgage, preparing taxes and other financial work is not materially related to the farming operation, and these hours were considered “investor-type” activities which were not part of the day-to-day operation of the farm.  Therefore, those hours do not count toward material participation, and the 100 hour test has not been met by protester.  

This is the result I would have predicted.  Cash rent of farm land is not normally considered  “farming” under the passive loss rules.

binConservation Reserve and Self-employment Tax.  Documents 14201020 and 14201017 deny the capital gain exclusion to two taxpayers because they failed to pay self-employment tax on CRP payments.  The liability of CRP recipients for self-employment tax is controversial; a pending Eighth Circuit case seems likely to hold that the tax doesn’t apply to CRP recipients who do not otherwise farm.

The rulings say that the Department goes by the treatment of the payments reported on the taxpayers returns: if they taxpayer paid SE tax on CRP payments, they are considered to have materially-participated in those years, but not otherwise.  From Document 14201017 (my emphasis)

The Department first notes that the Federal Court of Appeals for the Sixth Circuit in Weubker v. Commissioner, 205 F.3d 897 (2000) held that CRP payments were net income from self-employment because they were received in exchange for performing tasks “that are intrinsic to the farming trade or business” such as tilling, seeding, fertilizing and weed control. Subsequently, the Internal Revenue Service issued Notice 2006-108 which states that CRP payments either to a farmer who either personally fulfills the CRP obligations or who isn’t an active farmer and fulfills this obligation through a third party are both includible in self-employment income and are not excludible as rentals from real estate.

Therefore, the Department contends that self-employment tax was clearly due on these CRP payments.

Since protester did not pay self-employment tax on this CRP income, the Department contends that the material participation test was not met. In addition, protester does not meet the retired farmer exception regarding material participation for 5 of the 8 years prior to retirement since self-employment tax was not paid on the CRP acres prior to you receiving social security benefits in 2003. Therefore, the Department contends that you do not meet the qualifications for the capital gain exclusion since you did not materially participate in the CRP activity for ten years.

The liability for SE tax on CRP payments was never as open-and-shut as the Department says. Some commentators have argued that Weubker is wrong, and that CRP, by itself, doesn’t constitute farming (see here and here).  Even so, it is also a stretch to say that the minimal maintenance required on CRP ground rises to the level of “material participation.”

The Department here is saying in effect that they will take your word for it — as shown on your tax filings.  If you paid SE tax on your CRP income, you’re a farmer as far as they are concerned, and you qualify for the exclusion.  Given the stratospheric cost of farm ground nowadays, taxpayers may find it worth paying a little SE tax to qualify for the Iowa gain exclusion.

Related:

Material Participation Basics.

Iowa Capital Gain Deduction: an illustration

 

Canadians born in U.S. sue Ottawa over tax fraud law (TheStar.com):

Canada has violated the charter rights of nearly a million Canadians by agreeing to share their financial details with authorities in the United States, two Ontario women allege in a new lawsuit.

FATCA sponsor Charlie Rangel, D-NY

FATCA sponsor Charlie Rangel, D-NY

They are talking about “FATCA,” the outrageous Congressional overreach into the operations of banks around the world.

Gwen Deegan of Toronto and Ginny Hillis of Windsor, Ont., have launched a claim against the Attorney General of Canada.

In it, they accuse Ottawa of breaching the Constitution by complying with a sweeping new American tax fraud law, known as the Foreign Account Tax Compliance Act.

Under the terms of the legislation that took effect last month, banks must share all personal and joint account details of anyone deemed to be a “U.S. person.” This includes American citizens and people born in the U.S., even those with no existing ties to the country.

I wonder what the reaction in the U.S. would be if, say, Russia demanded the bank account information of every American it said was a “Russian person.”  I don’t think it would be popular. Yet our Congress thinks it is entitled to demand that non-U.S. banks cough up whatever information it feels like asking for.

The response has been to make financial life difficult for Americans overseas, as dealing with U.S. persons becomes more of a hassle than their business is worth.  It also restricts employment opportunities abroad for Americans by making their employment inconvenient.

Charlie Rangel was one of the main sponsors of FATCA.  He would know a little about not paying taxes.

 

20140814-2Paul Neiffer, Sale of Gifted Grain Can Be Tax Free:

When the donee sells this grain, it will be reported as a capital gain.  If time after harvest of the grain and the time of sale is less than a year, it is short-term.  If this time is greater than a year, then it is long-term. 

If the donee is in a low-enough bracket, long-term capital gains are taxed at zero.  But watch out for the “Kiddie Tax.”

 

Jason Dinesen, Proper Documentation of Business Expenses:

In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.

Absolutely.  Jason has some tips for keeping track of them.

 

Kay Bell, School’s back. So are some, but not all, education tax breaks

 

Andrew Lundeen, Alan Cole, The Inequality Debate Ignores How Incomes Change Over the Life Cycle (Tax Policy Blog):  “Income data from the IRS and the Census Bureau have their uses, but measuring equality isn’t one of them.”

 

Joseph Thorndike, How ISIS Is Using Taxes to Build a Terrorist State (Tax Analysts Blog)

TaxGrrrl, Tax Revenues Still On Pace To Break Records In 2014   

 

TaxProf, The IRS Scandal, Day 462

Career Corner.  Study: Working in a Windowless Cube is Ruining Your Life (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 8/8/14: Get a Room Edition. And: Koskinen, cronyist.

Friday, August 8th, 2014 by Joe Kristan

Flickr image by Ellenm1 under Creative Commons licenseTax Court: Get a room!  If you spend a lot of time on the road, you may have wondered whether it might make sense to buy a Winnebago instead of hopping between motels.  The Tax Court yesterday weighed in on the side of motels.

A California insurance man with an RV found a market for his wares among his fellow tin-can nomads, as the Judge Wherry explains:

Starting in 2004, petitioners began attending RV rallies not just for pleasure but also for business purposes. At or around the same time, they purchased a 2004 Winnebago RV. We reject petitioners’ contentions that they attended RV rallies solely for business purposes from 2004 but instead find that they had mixed purposes. Petitioners would gather sales leads at every rally. To that end, petitioners had a banner that they attached to their RV advertising Dell Jackson Insurance. Petitioners would set up an information table outside of their RV or outside the clubhouse, if the site had one. If they set up a table by a clubhouse, petitioners moved the banner from the RV to the table. Otherwise, the sign remained on the RV from the time they arrived until the time they left. Petitioners would invite potential customers to come to their RV, and they would sit either outside or inside the RV and discuss the prospective client’s insurance needs. It would often take months, if not years, for a relationship with a potential customer, which could begin with a lead, to develop into an actual sale.

Naturally the salesman deducted expenses of his RV in preparing the Schedule C for his insurance business.  The IRS limited his deductions using Section 280A, which limits business deductions for personal residences.  The Court said that the RV was a house, as far as the tax law is concerned (citations and footnotes omitted, emphasis added):

Generally, “a taxpayer uses the dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of — (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.” “Dwelling unit” is also a defined term and “includes a house, apartment, condominium, mobile home, boat, or similar property”. Sec. 280A(f)(1)(A). This Court has previously held that a motor home qualifies as a dwelling unit within the meaning of section 280A(f)(1)(A).  Although we use the more modern term throughout this opinion, an RV and a motor home are one and the same thing. Petitioners and counsel used the two terms interchangeably at trial. Accordingly, petitioners’ RV is a dwelling unit for purposes of section 280A. 

The Tax Court said that while the expenses were otherwise legitimate, the Section 280A disallowance of business expenses when a residence, or part of one, isn’t used “exclusively” for business overrides the deductions:

This result may seem harsh, but it is the operation of the statute, which reflects Congress’ desire to prevent taxpayers from deducting personal expenses as business expenses.

While the court admitted the result was harsh to begin with, that didn’t stop it from piling on, adding over $8,000 in “accuracy-related” penalties to the $42,000 in additional taxes assessed by the IRS — another example of the unfortunate tendency of the IRS — with the blessing of the Tax Court — to penalize everything, even when the taxpayer used an apparently reputable preparer.

The moral: RVs may be great for retirement travel, but they aren’t the best thing for business deductions.  If they had rented hotel rooms, the deductions apparently would have been just fine.

Cite: Jackson, T.C. Memo 2014-160

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

So the IRS Commissioner is just fine with cronyism in tax administration.  John Koskinen Indicates IRS Revolving Door Is A Feature Not A Bug (Peter Reilly).  It will be hard to unseat Doug Shulman as the Worst Commissioner Ever, but John Koskinen is giving it the old college try.

 

Jason Dinesen, From the Archives: Iowa Tuition and Textbook Credit and Back-to-School Shopping

Jack Townsend, It’s So Easy to Say No — The IRS Often Gets to No for Streamlined Transition Relief in OVDP. “The bottom-line is that the IRS is denying the nonwillful certification in far more cases than practitioners thought would be the case.  And, the process of denial is a bit of a black box.”

Leslie Book, Summary Opinions for 7/25/14 (Procedurally Taxing).  A roundup of recent tax procedure happenings.

 

tax fairyKay Bell, FTC sending $16 million to former American Tax Relief clients. Don’t fall for tax relief scams in the first place:

Federal prosecutors first filed charges against ATR in 2010. In August 2012, a federal court entered a partial summary judgment in favor of the FTC, finding that the defendants falsely claimed they already had significantly reduced the tax debts of thousands of people and falsely told individual consumers they qualified for tax relief programs that would significantly reduce their tax debts.

The court issued a $103.3 million judgment against the company.

Outfits like ATR, J.K. Harris, TaxMasters and Roni Deutsch pulled in lots of revenue from taxpayers desperate to believe in the Tax Fairy.  There is no tax fairy.

 

 

It’s Friday, the Iowa State Fair is underway, and Robert D. Flach is buzzing!  So it’s a good day three ways.

20140808-1

 

TaxGrrrl, normally the soul of restraint, lets loose on the inversion diversion in Obama Joins Blame Game As Companies Flee U.S. For Lower Tax Rates:

But to point fingers at lawyers and accountants as if they are holding all the cards is plain wrong. If we want to talk about responsibility, let’s talk about responsibility.

Let’s talk about a bloated Tax Code that just keeps getting bigger. Let’s talk about a global tax system that encourages companies (and people) to flee. Let’s talk about stalled tax reform efforts.

The tax code is the instruction manual for taxpayers, and their lawyers and accountants, for tax compliance.  And now the politicians don’t like what happens when we read and follow instructions.

 

20120702-2Andrew Lundeen, To Stop Inversions, Fix the Tax Code (Tax Policy Blog).  “But the lack of competitiveness created by the corporate tax isn’t the only issue: at its core, the corporate tax is inherently not neutral. It is highly distortive, opaque, and economically damaging tax.”

Christopher Bergin, Beware the Individual Income Tax Inversion (Tax Analysts Blog)  “The truth is that our tax system is in trouble – all of it: the corporate side, the administration side, and the individual side. And that means the country is in trouble.”

Kelly Davis, Tax Policy and the Race for the Governor’s Mansion: Illinois Edition (Tax Justice Bl0g).  Political wrangling in a doomed state.

TaxProf, The IRS Scandal, Day 456.  The scandal has been Voxplained. Keep calm, all is well.

 

Art appreciation tip: “Like the folks who believe that the limits on maritime jurisdiction, explained by a talking salamander, holds the key to beating a federal criminal charge, the full tapestry of wacko tax fraud theories is a lovely thing to behold….” (Matt Kaiser, Above The Law).  He covers a “sovereign citizen” from Omaha who learned that filing a phony $19 million lien on a judge is perhaps not the optimal way to handle a tax controversy.

Related: TaxProf, Nebraska ‘Sovereign Citizen’ Convicted of Filing False Liens Against Federal Officials and Federal Tax Crimes

 

Adrienne Gonzalez, California Might Ditch the Attest Requirement for CPA Licensure.  I’m sure I would have been a better person if I had to waste two years observing inventories and otherwise bothering real auditors.

 

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Tax Roundup, 8/4/14: Will 401(k) deferred annuities catch on? And: about those oil industry “subsidies…”

Monday, August 4th, 2014 by Joe Kristan

I survived the firm golf day and the Iowa sales tax holiday.  Now back to work.

 

20131206-1Howard Gleckman, A New Way to Invest for Old Age, But How Many Will Buy? (TaxVox).

A few weeks ago, with absolutely no fanfare, the Treasury Department announced what could be a major change in the way we save for retirement. It will now permit people to shift a portion of their 401(k)s or IRAs into a deferred annuity that provides a guaranteed stream of income once you reach old age.

The idea has the potential to fix several flaws in today’s defined contribution retirement plans and it could make it easier for many older Americans to pay for long-term care. But it raises two huge questions: Will consumers understand these complex products, and will insurance companies bother to sell them to a mass market?

It’s an interesting experiment.  There seems to be a belief that taxpayers are dying for a return to the 1950s style defined benefit pension plan, and this provides a way to sort of get there.  Insurance companies can certainly find a way to profit from such products, as deferred annuities are a big business.

But the same arguments that financial advisors often make against commercial deferred annuities likely apply here — you get more security, but only at the cost of cutting your insurance company in on your retirement income.  It remains to be seen whether many people will accept that trade-off.

 

Wind turbineWilliam McBride, Oil and Gas Subsidies or Sensible Cost Recovery? (Tax Policy Blog). Supporters of the mandates and massive subsidies or mandates for ethanol, wind and solar power sometimes say they would give up their subsidies happily if the oil industry gives up its own subsidies.  They rarely identify any actual subsidies.  Mr. McBride exposes the weakness of the renewable fans’ arguments (my emphasis):

However, a new report from Taxpayers for Common Sense seems to suggest it’s all the result of “tax subsidies” that allow oil and gas companies to immediately deduct their investment costs. Titled “Effective Tax Rates of Oil and Gas Companies: Cashing in on Special Treatment”, the report finds that the effective federal corporate tax rate for oil and gas companies is 24 percent on average, “considerably less than the statutory rate of 35 percent, thanks to the convoluted system of tax provisions allowing them to avoid and defer federal income taxes.”

First, there is nothing special about a 24 percent effective tax rate. The average for all corporations is about 22 percent, according to the IRS, so if anything oil and gas companies pay an above average tax rate.

Second, the particular “tax subsidy” the report refers to is intangible drilling costs, which as they explain merely allows companies to immediately deduct, i.e. expense, the costs of drilling. That is not a subsidy, it is the proper treatment of a real and legitimate business cost. The corporate tax is a profit tax, and profit equals revenue minus costs. Labor costs are fully and immediately deductible, so why not other costs?

Taxpayers for Common Sense would prefer these companies delay drilling cost deductions for years and years, because otherwise “these companies are financing significant parts of their business with interest-free loans from U.S. taxpayers.” No, in fact it is the government that is getting interest-free loans from businesses by requiring them to delay deductions for legitimate business costs. 

This “subsidy” — a deduction for a business expense, like every other business gets (and rightly so) — pales compared to the requirement that oil companies sell ethanol,  regardless of whether their customers demand it.  It sure doesn’t compare to the actual government checks that are issued to producers of biofuels and wind power.  The renewables industry would be much smaller if it had to play on the “level playing field” it claims to want.

 

Jason Dinesen, Taxpayer Advocate Says IRS Issues Too Many FAQs.  “But the overall point is, things like FAQs and news releases are  no substitute for coherent, authoritative guidance.”

Kay Bell, States see electronic cigarettes as a new tax source.  Surprise, surprise.

Peter Reilly, State Fails To Force Electronic Payments On Taxpayer With Hacking Concerns  “Taxpayer refused to pay electronically because if the Pentagon can be hacked, so can Revenue Department. Court voided penalty.”

Keith Fogg, IRS Treatment of Penalties Following a Substitute for Return (Procedurally Taxing)

Robert D. Flach has some QUESTIONS ABOUT TAX REFORM

 

taxanalystslogoDavid Brunori, Tax Analysts ($link)

Companies invert because the stupid tax laws provide an incentive to do so. A company’s decision to invert is no different from an individual’s decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break. Yet there are people who actually make the moral and patriotic arguments against inversions. The “it may be legal but that doesn’t make it right” argument is laughable. The patriotic argument — usually made by people who had better things to do than serve their country — is even more laughable. People and companies engage in tax planning because they want to keep more of their money. Invoking the Good Book or channeling Nathan Hale won’t change that.

When they play the “patriotism” card first, they don’t have a good hand.

 

Ajay Gupta, Closed Mind on Open Borders (Tax Analysts Blog):

There is, however, one unquestionable benefit that is properly attributable to an inversion—liberation of cash trapped offshore in controlled foreign corporations. Post-inversion, that money can be moved from a CFC to the new foreign parent, which can then put it to virtually any use, including buying back stock or making other investments in the U.S., without U.S. tax consequences. But for the inversion, any such onshore expenditures would have constituted taxable repatriations.

If you think it’s somehow unpatriotic to use legal means to reduce taxes, I hope you don’t take a $500 charitable deduction for all those clothes you thew away, I mean gave to Goodwill.

 

20140506-1 TaxProf, The IRS Scandal, Day 452

Jack Townsend, Article on British Deal with Swiss to Flush Out Evades and Lost Revenue — Not So Good 

 

You say that like it’s a bad thing.  On Highway Bill, Congress Moves to the Right of Grover Norquist  (Steve Warnhoff, Tax Justice Blog)

Government spending has been cut to the bone.

 

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Tax Roundup, 7/31/14: Tax Holiday Weekend! And: how defined benefit plans hurt Iowa municipal services.

Thursday, July 31st, 2014 by Joe Kristan

20140731-1You’ve had your calendar’s marked for a long time, and here it is: Iowa’s annual sales tax holiday is tomorrow and Saturday.  From the Iowa Department of Revenue:

If you sell clothing or footwear in the State of Iowa, this law may impact your business.

  • Exemption period: from 12:01 a.m., August 1, 2014, through midnight, August 2, 2014.
  • No sales tax, including local option sales tax, will be collected on sales of an article of clothing or footwear having a selling price less than $100.00.
  • The exemption does not apply in any way to the price of an item selling for $100.00 or more
  • The exemption applies to each article priced under $100.00 regardless of how many items are sold on the same invoice to a customer

“Clothing” means…

  • any article of wearing apparel and typical footwear intended to be worn on or about the human body.

“Clothing” does not include…

  • watches, watchbands, jewelry, umbrellas, handkerchiefs, sporting equipment, skis, swim fins, roller blades, skates, and any special clothing or footwear designed primarily for athletic activity or protective use and not usually considered appropriate for everyday wear.

Stylish tax-savvy shoppers can combine holidays across states.  For example, you can pick up a cute new outfit in Iowa this weekend and wear it to Louisiana for their September firearms tax holiday.

Related:  

Kay Bell, 12 states kick off August 2014 with sales tax holidays

Joseph Henchman, Sales Tax Holidays: Politically Expedient but Poor Tax Policy

 

Robert D. Flach has some sound ADVICE FOR A NEW GRADUATE STARTING OUT IN HIS/HER FIRST FULL-TIME JOB.  One nice bit: “If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.”

Jason Dinesen makes it easy to follow his excellent series on one client’s ID theft saga: Find All of My Identity Theft Blog Posts in One Location.

 

 

taxpayers assn logoGretchen TegelerFallout from Iowa public pension shortfalls (IowaBiz.com):

The increase in public spending for pensions has impacted the ability of our state and local governments in Iowa to pay for other services.  The result is a decline in the quality of public services and an increase in property taxes.  For example, all Des Moines libraries have closed an additional day each week just to help cover the cost of police and fire pensions.  Urbandale is raising property taxes.  Some have questioned whether it’s worth the substantial public cost to pay such a generous benefit to so few individuals.  Police and firefighters in our largest 49 cities can retire at age 55, and receive 82 percent of their highest salary each year for the remainder of their lives.  Almost all of the retirees in this system will have a higher standard of living post-retirement than they did during their highest earning years.

This is true even though Iowa’s public-sector pensions are better-funded than those in many other states.  The problem won’t be fixed until public employees go on the same defined contribution model as the rest of us — you get paid the amount that has been funded.  Defined benefit plans are a lie – to the taxpayers about what current public services cost, or to the employees about what they can expect as pension income, or to both.

 

20140731-2Paul Neiffer, Another Cattle Tax Shelter Bites the Dust:

Essentially, Mr. Gardner would issue a promissory note to these entities for the purchase of cattle and/or operating expenses and equipment.  The promissory notes totaled more than a $1 million, however, it appears that Mr. Gardner effectively paid less than $100,000 on any of these promissory notes.  Also, in almost all cases, Mr. Gardner defaulted on all notes and no collection efforts were made to collect.

This is almost quaint.  When I first started working in the 1980s, I saw a few shelters like this.  A cow worth, say, $2,000 would be sold for $50,000, $2,000 down and the rest on a “note” that would never be collected — but the “farmer” would depreciate $50,000, rather than $2,000.  I’m a little surprised it still going on, considering the at-risk rules, passive loss rules, and hobby loss rules against this sort of thing.

 

 

Jim Maule’s “Tax Myths” series includes “Children Do Not Pay Tax.”  He notes “A child of any age, with gross income exceeding whatever standard deduction is available, has federal income tax liability.”

TaxProf, The IRS Scandal, Day 448.  Read this and tell me again how the Tea Party targeting was just a non-partisan, unbiased attempt to clear a backlog of application that was driven by low-level functionaries in Cincinnati.

Jack Townsend notes UBS Continuing Woes, Including Settlement with Germany

 

2140731-3Cara Griffith, Access to Public Records Isn’t a Fundamental Right – But It Should Be (Tax Analysts Blog).  But bureaucrats everywhere prefer to work without witnesses.

Leslie Book, The Tax Law, EITC and Modern Families: A Bad Mix (Procedurally Taxing).  “I read a summary Tax Court case from a few weeks ago that reminds me that the tax laws in general– and the EITC and Child Tax Credit rules in particular– can sometimes lead to unfair results, especially in light of the complicated and at times messy modern family lives.”

Len Burman, What Ronald Reagan Didn’t Say About the EITC (TaxVox).  I bet he didn’t say it was a floor wax or a dessert topping, either.

Peter Reilly, Obamacare Upheld Against Another Challenge – Court Rules Against Sissel.  The origination clause argument was never more than a forlorn hope.

 

Lyman Stone, Kentucky Considers Tax Rebate for Creationist Theme Park (Tax Policy Blog).  Considering how many legislators think they can play God with state economies by means of tax credits, this has a sort of perverse logic going for it.

Adrienne Gonzalez, PwC Report Declares a Future Free From Nine-to-Five Work (Going Concern).  When I worked at PriceWaterhouse, a PwC predecessor, they were already free from nine-to-five work.  Nine-to-five would have been wimp work for a Sunday.

 

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Tax Roundup, 7/29/14: Whither Halbig and the ACA. And lots more!

Tuesday, July 29th, 2014 by Joe Kristan

20121120-2The Big Tax News while I was on vacation was the Halbig decision by the U.S. Court of Appeals for the D.C. Circuit.  The decision holds invalid the IRS decision allowing tax credit subsidies for policies purchased on federal insurance exchanges.  The impact of the decision was offset by a Fourth Circuit decision the same day coming to the opposite conclusion, but it is still a big deal, especially in light of some subsequent events.

The D.C. circuit has national implications because every taxpayer can come under its jurisdiction by litigating through the Court of Federal Claims.  An alert reader corrects me:

Your post today contains an error.  The  D.C. circuit is not the same as the federal circuit.  The court of federal claims is appealable to the federal circuit. The district court for the D.C. circuit is appealable to the D.C. circuit.  Halbig is a big deal in any event because the dc circuit instructed the district court to vacate the rule.  Vacated means that there is no rule anywhere.  In any event, SCOTUS will make the final call here.

As long as that decision stands — and the IRS will certainly ask the 15-member court to reconsider Halbig, decided by a three-member panel — it threatens not only the tax credits for the 37 states without their own exchanges, but it also invalidates the employer mandate tax in those states and takes much of the bite out of the individual mandate.  The South Carolina Policy Council explains why (my emphasis):

The subsidies are also important for their function as triggers of both the individual and employer mandate portions of the ACA. The ACA imposes a $2,000 per employee penalty for companies with more than 50 employees who do not offer “adequate health insurance” to their workers. This penalty is triggered when an employee accepts an IRS subsidy on a plan purchased through an exchange. If individuals in the 36 states without a state-run exchange are ineligible for subsidies, there will be no trigger to set off the employer mandate.

An absence of subsidies would also allow many people to avoid the ACA’s individual mandate, which requires citizens to maintain health insurance covering certain minimum benefits or pay a fine. This is because the ACA exempts citizens from the individual mandate whose out-of-pocket costs for health insurance exceed 8 percent of their household income. If IRS subsidies are removed, insurance plans offered on exchanges would exceed this cost threshold for many people – thereby providing them an exemption from the mandate.

Flickr image courtesy Tim under Creative Commons license

Flickr image courtesy Tim under Creative Commons license

This would devastate the already shaky economics of Obamacare.

The key ruling in Halbig is its finding that statutory language allowing tax credits through exchanges “established by a State” doesn’t cover the federal exchanges that are used in the 36 states without exchanges.   Critics of Halbig say that Congress couldn’t have been that stupid.  For example, Jonathan Gruber, an architect of the ACA, says“Literally every single person involved in the crafting of this law has said that it`s a typo, that they had no intention of excluding the federal states.”

That assertion has been challenged by a number of observers, notes Megan McArdle.  She cites a January 2012 speech by one Jonathan Gruber, an architect of the ACA:

Only about 10 states have really moved forward aggressively on setting up their exchanges. A number of states have even turned down millions of dollars in federal government grants as a statement of some sort — they don’t support health care reform.

Now, I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of a state are costing state residents hundreds and millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat, is, will people understand that, gee, if your governor doesn’t set up an exchange, you’re losing hundreds of millions of dollars of tax credits to be delivered to your citizens. [emphasis added] 

The 2012 Jonathan Gruber repeated the story that only state-established exchanges qualify for credits in other forums.   It’s remarkable that two ACA architects named Jonathan Gruber have such divergent views of what the bill does.  It’s even more remarkable that they are the same guy.  This seems like strong support for the D.C. Circuit’s approach.

supreme courtIf the ACA were just another tax bill, it would be pretty easy to predict that the Supreme Court would go with the D.C. Circuit’s approach, based on prior rulings involving statutes that reached results the IRS didn’t care for.  In the Gitlitz case, which arguably provided an unintended windfall for S corporation shareholders when the S corporation incurred non-taxable debt forgiveness income, the Supreme Court said in an 8-1 decision (footnotes and citations omitted, emphasis added):

Second, courts have discussed the policy concern that, if shareholders were permitted to pass through the discharge of indebtedness before reducing any tax attributes, the shareholders would wrongly experience a “double windfall”: They would be exempted from paying taxes on the full amount of the discharge of indebtedness, and they would be able to increase basis and deduct their previously suspended losses.  Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.

In other words, if Congress doesn’t like what it has done, it’s up to Congress to fix it, not the IRS.  Congress did just that with the Gitlitz result within a year of the decision.

Of course, the ACA isn’t typical tax legislation.  Chief Justice Roberts tied himself in knots to find a way to uphold Obamacare in 2012.  Politics makes it unlikely that the Gitlitz approach will be followed by the left side of the Supreme Court, and who knows how Justice Roberts will rule.  But it does appear at least possible that Halbig will be upheld.

What should taxpayers do?  My thought is to assume the mandates remain in effect and pay tax (or reduce your withholding) accordingly.  Then be prepared to file a refund claim if Halbig is upheld by the Supreme Court.  Plan for the worst and hope for the best.

At least one thoughtful commentator says that ultimately if Halbig is upheld, holdout states will fall into line and establish exchanges.  For the reasons laid out here, I don’t think that will happen, and Congress will be forced to clean up its mess.

 

Paul Neiffer, ACA Subsidies: One Court Strikes Down, Another Upholds

Kristy Maitre, IRS Releases Additional ACA Revenue Procedures and Draft Forms  (ISU-CALT)

 

20140729-2Jason Dinesen, Don’t Be “That” Business Owner.  “I see too many with preconceived notions of what they can “get by with.” I’ve seen and read about too many people whose life got turned upside-down when they ended up NOT “getting by with it” after all.”

Russ Fox,  2:42.  “That’s how long I spent on hold on the IRS Practitioner Priority Service (PPS) yesterday–two hours, forty-two minutes.”   It’s a good thing Practitioners are a “Priority,” or who knows how long he’d have been on hold.

Phil Hodgen, Green card holders, treaty elections, and exit tax

Stephen Olsen, Ct. of Fed. Claims Holds Merger Results in “Same Taxpayer” for Net Zero Interest Rate (Procedurally Taxing)

Peter Reilly wonders if it is Time To Let Kent Hovind Go Home?  Peter thinks the former owner of a theme park based on the idea that hominids and dinosaurs co-existed may have suffered enough for his tax misdeeds.

Robert D. Flach brings the fresh Tuesday Buzz!

Well, these things are never tidi.  Spanish Court Moving Forward With Messi Tax Evasion Case  (TaxGrrrl)

 

taxanalystslogoDavid Brunori, Who Wants to Tax a Millionaire? Lots of People (Tax Analysts Blog).  This is full fo good observations about the unwisdom of states soaking the “rich.”  Highlights include:

States do not (and should not) do a lot of redistributing to the very poor.

When states jack up taxes on the “rich,” the money doesn’t exactly go to people sleeping under bridges, as David explains (my emphasis):

I have written about this before.  I noted that “the real beneficiaries of most government spending, certainly at the state level, never come up. No one ever says that we need higher taxes because my friends in the construction business want new contracts. No one ever says that they want new taxes to expand bloated public employee union bureaucracies. Yes, crony capitalism and union bosses drive most calls for higher taxes.” My right-wing friends often criticize liberals calling for higher marginal taxes as delusional. But they know exactly what they’re doing. Often they want higher taxes just so they can give money to their friends.

The money taken from “the rich” goes to the well-connected.  Iowa’s highest-in-the-nation system fleeces those without pull to pay rich subsidies to well-connected politicians and corporations.  Better to throw out the crony subsidies and lower rates for the rest of us — like The Tax Update’s Quick and Dirty Tax Reform Plan would do.

 

Elaine Maag, The “Helping Working Families Afford Child Care Act” Would Help, but Doesn’t Solve the Timing Mismatch (TaxVox).  “Making the CDCTC refundable and increasing allowable expenses is a huge step in improving child care assistance for low-income families.”

 

20140729-1Joseph Thorndike, The Corporate Income Tax Will Never Be ‘Fixed.’ And That’s OK. (Tax Analysts Blog):

Again, I think the corporate income tax is on the way out. But that’s a long-term problem. It doesn’t mean we should throw in the towel right away. The corporate tax may, as McArdle suggests, be an “insane, unwinnable chess game” pitting lawyers against tax collectors. But for the time being, the game is still worth the candle.

I think Megan McArdle has the better case, that the corporation income tax needs to go away, one way or the other.   I like the idea of doing so via a corporation dividends-paid deduction, combined with an excise tax on dividends for otherwise-exempt stockholders, as a way to get there.

Scott Hodge, More on Inversions and the Effective Tax Rates of Foreign-Owned Firms.   “The administration may want to think twice about taking unilateral action without considering the consequences.”

Clint Stretch, Dreams of Tax Reform (Tax Analysts Blog).  Patsy Cline is invoked.

 

TaxProf, The IRS Scandal, Day 446

 

Greg Kyte, Clarifying Sex and Auditor Independence After the EY and Ventas Affair (Going Concern).  Can an auditor be “independent” while sleeping with a CFO?  Well, auditors are supposed to have hearts of stone…

 

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Tax Roundup, 7/11/14: Wilderness edition. And: the hazards of doing it yourself.

Friday, July 11th, 2014 by Joe Kristan
Photo courtesy Philmontscoutranch.org

Photo courtesy Philmontscoutranch.org

Programming note.  The Tax Update goes untended for the next two weeks, as I head to Philmont Scout Ranch with my younger son and others for a 10-day backpacking odyssey.  It’s my first visit to New Mexico and my first extended backpacking trip.  Horses, carabiners, and black powder rifles will be encountered.  Whatever remains of me will be back here July 28.  The lovely and talented folks in the blogroll to the right will keep the tax world under control in the meantime.

 

Accounting Today visitors: if you followed the newsletter link here, you probably are looking for this: July 5, 1944.

 

Does the tax law cause people to do work on rental properties that they really should hire out?   That’s one conclusion you could draw from a Tax Court case yesterday, where a landlord says she chose do herself work that, based on the time she says she spent, should have gone to a contractor.

The tax law says real estate losses are normally “passive,” and when adjusted gross income exceeds $150,000, they are only deductible to the extent of other passive income.  A special rule lets “materially participating real estate professionals” out of the “per-se passive” rules; these taxpayers test whether their real estate activity is passive under the rules that apply to other business activities, based on time spent.

There’s a serious catch.  To qualify as a real estate pro, you have to work at least 750 hours in real estate, and more hours than in anything else you do.  If you have a full-time day job, this doesn’t work.

20140325-1But taxpayers attempting to get to 750 hours might be tempted to do work they would otherwise outsource.  That would be the generous interpretation of these facts in the Tax Court (my emphasis):

Petitioner claimed to have spent a total of 772 hours working on her rental properties in 2009. In support of her assertion, petitioner provided activity logs purporting to document the time she spent on her rental activities. Some of the activities included painting, cleaning apartments, shoveling snow, communicating with tenants on various issues, placing rental ads in the local newspaper, picking up mail, and paying bills. Although some log entries reference a specific apartment or property, many log activities do not specifically identify a particular rental unit. In addition, the number of hours noted on petitioner’s logs appears to be significantly inflated. For example, in one instance petitioner claims to have spent 8 to 12 hours per day for 10 days staining the “deck and siding” of what appears to be one apartment at the Pulaski property.

Some people just are perfectionists.

The log also indicates that [petitioner's husband] helped stain the deck and siding on those dates. In that instance, petitioners together spent between 160 to 240 hours staining the deck and siding of one apartment. There are several other instances in 2009 where petitioner claims to have spent many hours staining and painting decks and front porches of the rental properties. Petitioner’s log for July 2009 indicates that she spent approximately 77 hours over an eight-day period to paint a back porch. Petitioner’s log for November 2009 indicates that she spent more than 105 hours over a 12-day period on the flooring for one apartment and that on one specific day she worked 16 hours.

While a misguided attempt to reach 750 hourse might have motivated this sort of effort, the judge decided that something else was going on:

 Although petitioner claims she acted reasonably and in good faith with respect to her position that she was a real estate professional in the years in issue, we have concluded that petitioner’s records are not accurate or reliable and likely inflated the hours she spent in real estate activities. We have also concluded that the logs relating to her activity as an employee and her self-employment were not accurate.

If you want to document time for showing an activity is non-passive, it is wise to track it in a daily contemporaneous calendar.  It is also wise to not push the limits of believability.

Cite: Materano, T.C. Summ. Op. 2014-64

Material participation hours tests can be found here.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 428.  It features  from the Wall Street Journal U.S. Judge Orders IRS to Explain How it Lost Lerner’s Emails:

A federal judge on Thursday ordered the Internal Revenue Service to explain how it lost two years’ worth of a former official’s emails, and tapped a magistrate judge to find out whether the documents can be obtained from other sources.

At a hearing in a conservative group’s lawsuit, U.S. District Judge Emmet Sullivan gave the IRS until Aug. 10 to provide a sworn declaration explaining how the email loss occurred. The IRS previously has said that the emails were lost because the top agency official’s computer crashed in 2011, and backup tapes were routinely reused after six months.

These practices violated federal recordkeeping procedures and, likely, federal law.  In spite of Ms. Lerner’s evident concern about the possibility of  her emails being found, Commissioner Koskinen says it’s silly to think anything more suspicious than a remarkable rash of hard-drive failures is to blame.

 

A new study by the Mercatus Institute says state taxes matter.  A summary says “The study finds that higher state taxes correlate with lower economic performance, even when controlling for various factors.”  It says that higher taxes lower economic growth, affect migration patterns, and reduce business startups. (hat tip: Maria Koklanaris, State Tax Notes ($link‘))

 

Carl O’Donnell, How The $1 Billion Kennedy Family Fortune Defies Death And Taxes.  Most politicians who vote for higher taxes do so assuming they won’t have to pay them. (via the TaxProf)

 

Kyle Pomerleau, Bill to be Introduced that Seeks to Reduce EITC Payment Error (Tax Policy Blog).  Unfortunately, fraud and error are baked into this cake.  You might as well try to take the chocolate out of toll house cookies.

 

20140513-1Jim Maule continues his Tax Myth series with Tips Aren’t Taxed Because They Are Gifts.  “Most people who collect tips are paid very little, rely on the tips to make a living, and are unhappy to learn that tips are included in gross income.”

Jason Dinesen, Glossary of Tax Terms: Head of Household   

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

Keith Fogg, Revoking the Release of the Federal Tax Lien and Appointing a Receiver (Procedurally Taxing)

 

TaxGrrrl, Who Should Pay For Schools? Answer Remains Unclear As Cigarette Tax Boost On Hold   Smoke ‘em if you got ‘em.  For the children!

Renu Zaretsky,  Games, Spins, Ignorance and Patience.  Today’s TaxVox headline roundup covers, among other things,  Highway Trust Fund games, corporate inversions.

Steve Warnhoff, House Poised to Throw $276 Billion “Bonus” at Businesses.  (Tax Justice Blog).  He’d rather throw it at the government.

Kay Bell, LeBron ‘King’ James’ return to Cleveland could be a win-win for fans and the so-called Win Tax

 

20140711-2

 

A new Cavalcade of Risk is up!  R.J. Weiss hosts this edition of the blog world’s venerable roundup of insurance and risk management posts, including Hank Stern on Kidnap & Ransom Insurance.

I’ll bet he does.  Beanie Babies creator defends sentence of probation, no prison time, for tax evasion (Brandon Sun)

News from the Profession.  Just How Many CPA Roommates Can You Fit In a Single Apartment? (Leona May, Going Concern)

 

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Tax Roundup, 7/9/14: It’s an outrage! Oh, we did it? That’s fine. And: Economic development cyanide!

Wednesday, July 9th, 2014 by Joe Kristan
Via Wikipedia

Via Wikipedia

So the taxpayer wants a tax refund.  He calls an IRS agent, who says she will look into it and call back.  Impatient taxpayer calls the agent back five times and tells her she is being uncooperative, finally telling her to “put her money where her mouth is.”  Taxpayer several days later sends the agent a letter telling her that she could issue the tax refund, but chooses not to, and demands the IRS submit some documents.  The IRS schedules a meeting, and the taxpayer insists on the refund now.  The taxpayer attempts to put a lien on the agent’s property for the balance due.

Naturally the taxpayer finds this doesn’t work, and gets hit with all sorts of penalties for this, right?  No, the taxpayer gets off scot-free.  Can you believe it?

Oops, I misspoke.  I got the names backwards.  The IRS was doing this to the taxpayer, and the courts this week refused to impose penalties on the agency for hounding a 71-year-old lady for back taxes on a failed like-kind exchange.

Sauce for the goose really ought to be sauce for the gander.  The IRS has a lot more resources and a lot more ability to follow the law than the average taxpayer.  Yet while the IRS and the courts routinely slap penalties on inadvertent or naive violations of a complex tax law, the courts rarely hold the powerful IRS to the same standards, and it almost never penalizes the agents for misbehavior towards taxpayers.

Cite: Antioco v. United States; USDC CA-ND, No. 3:13-cv-00924

Stephen Olsen, IRS Not Liftin the Penalties — Fed Circuit Denies Taxpayer’s Reasonable Cause Argument (Procedurally Taxing) The courts stack the deck against the taxpayer a little more.

 

20120906-1Don Boudreaux“Damn! My Neighbor Swallowed Cyanide. I Guess I Gotta Swallow Cyanide, Too.”  He’s talking about the crony subsidy Export-Import Bank, but his apt argument applies just as well to state “economic development” tax credits:

Subsidies and other economic privileges weaken the domestic economy.  They do so because, in order to artificially bolster industries that excel at satisfying politicians, such privileges necessarily transfer resources away from industries that excel at satisfying consumers.  Because Mr Summers (like nearly all economists) apparently accepts this sound argument, he especially should see that subsidies are not the economic equivalent of armaments: an armaments build-up does indeed strengthen the country militarily; subsidies, in contrast, weaken the country economically.

So when foreign governments subsidize industries (for example, through export credits of the sort doled out by the Ex-Im Bank), they themselves weaken their own countries’ economies relative to economies whose governments dispense no subsidies or other special privileges.

Taxing your existing taxpayers to lure and fund their competitors is a bad idea, even if Illinois is doing it too.

 

IRAJason Dinesen, ROBS Transactions – Be Very Careful of Using Retirement Funds to Start a Business.  Jason discusses the unwisdom of having your IRA invest in your business.  It can be a catastrophically expensive source of capital.

William Perez, Wage and Salary Income.   How it’s taxed.

Kay Bell, Pot shop seeks Tax Court relief from cash tax payment penalty.  You have to remit your taxes electronically.  We won’t let you have a bank account to transmit it from.  Understand?

Jim Maule’s Tax Myth series continues with “The IRS Gave Me a Refund.”  ” I suppose that those who are concerned that the federal government or a state government might run out of money before the refund is paid are overjoyed when the refund arrives, but as a realistic, practical matter, simply getting one’s money back isn’t a joyous occasion.”

Peter Reilly, Should You Follow The Clintons And Do Your QPRT Sooner Rather Than Later?

Robert W. Wood, Five Stages Of Grief, IRS Version.  I see clients go through all five stages every April.

 

20140508-1Kyle Pomerleau, Bonus Depreciation is a Bonus, but Full Expensing is Ideal (Tax Policy Blog)  “An Ideal tax code would allow the full $100 cost of the oven to be deducted in the year in which it was purchased.”

Howard Gleckman, New TPC Analysis: What Dave Camp’s Tax Reform Plan Would Really Mean (TaxVox)

Kelly Davis, Tax Policy and the Race for the Governor’s Mansion: Kansas Edition (Tax Justice Blog).  “This Kansas gubernatorial election is shaping up to be a referendum on Governor Sam Brownback’s tax cuts and supply-side economics generally.”

Jeremy Scott, Could EU Probe Signal the End of Sweetheart Tax Deals? (Tax Analysts Blog)  “U.S. tax rules are clearly complicit in multinationals’ ability to lower their tax burden, but the European Union is now examining whether its member states are inappropriately aiding some companies through so-called sweetheart transfer pricing arrangements.”

Accounting Today has your Tax Fraud Blotter.

TaxProf, The IRS Scandal, Day 426

News from the Profession:  Consultant Shares Secrets For Milking the Most Out of CPA Firm Staff (Adrienne Gonzalez, Going Concern).

 

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Tax Roundup, 7/7/14: IRS stands down on imaginary 750-hour rule for real estate pros. And: the real IRS budget problem.

Monday, July 7th, 2014 by Joe Kristan

No Walnut STA newly-released memo indicates that the IRS will no longer hold real estate professionals to an illegal standard in determining passive losses.  

ILM 201427016 addresses how the “750-hour test” of Section 469 applies when you have multiple real estate activities.  Under the passive loss rules of Section 469, rental real estate losses are normally passive; that means the losses are normally deductible only to the extent of other passive income, until the activity is sold.

A special rule allows real estate professionals to apply the normal passive loss rules, which are based on time spent in the activity, to rental real estate losses.  To qualify as a real estate pro, you have to meet two tests:

You have to spend more than 750 hours in the taxable year working in real estate trades or business in which you materially participate, and

You have to spend more time in your real estate activity than in any other kind of activity (this test means that few people with non-real estate day jobs qualify as real estate pros).

In some cases the IRS has applied the 750 test to each activity — making it almost impossible for many taxpayers to qualify, absent an election to treat all rental real estate activities as a single activity under Reg. Sec. 1.469-9(g).  The Tax Court issues a couple opinions that seemed to agree — opinions that I insisted were wrong.

Now the IRS seems to have come around.  From the new IRS memo (my emphasis):

Therefore, whether a taxpayer is a qualifying taxpayer within the meaning of section 469(c)(7)(B) and Treas. Reg. § 1.469-9(b)(6) depends upon the rules for determining a taxpayer’s real property trades or businesses under Treas. Reg. § 1.469-9(d), and is not affected by an election under Treas. Reg. § 1.469-9(g). Instead, the election under Treas. Reg. § 1.469-9(g) is relevant only after the determination of whether the taxpayer is a qualifying taxpayer. However, some court opinions, while reaching the correct result, contain language which may be read to suggest that the election under Treas. Reg. § 1.469-9(g) affects the determination of whether a taxpayer is a qualifying taxpayer. See, for example, Jafarpour v. Comm’r, T.C. Memo. 2012-165, and Hassanipour v. Comm’r, T.C. Memo 2013-88. However, other court opinions recognize that the election under Treas. Reg. § 1.469-9(g) is not relevant to the determination of whether a taxpayer is a qualifying taxpayer. See, for example, Trask v. Comm’r, T.C. Memo 2010-78. 

One hopes the IRS will no longer raise this false issue on examination.

Related: Did the Tax Court just abandon the ‘750 hours for every rental activity’ test?

 

20130426-1Paul Neiffer, IRS Modifies Offshore Voluntary Disclosure Program (OVDP).  “I have personally worked with clients that were involved in the old voluntary disclosure program and I can tell you it is not a pleasant experience.”

Jack Townsend, Rumors on the Workings of Streamlined Programs (Including Transitioning in OVDP).  Reading this, it sounds more like a diabolical bureaucratic torture than a serious attempt to bring the non-compliant into the system.

 

Robert D. Flach, A RANDOM THOUGHT ABOUT THE NEW VOLUNTARY AFSC PROGRAM.  A pithy lesson on the difference between qualifications and credentials.

 

Jason Dinesen, Life After DOMA: A History of Marriage in the Tax Code 

Keith Fogg, When and Where to Make Your Arguments (Procedurally Taxing).  In tax controversies, making the right argument does no good unless you make it at the right time.

 

 

TaxProf, The IRS Scandal, Day 424.   The New York Times thinks the real scandal is that GOP appropriators won’t give the IRS more money to use against them.

The income tax, the Ultimate Swiss Army Knife of public policy.  Flickr Image courtesy redjar under Creative Commons license.

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Scott Hodge, The IRS Needs Tax Reform Not a Bigger Budget:

The relentless growth of credits and deduction in the code over the past 20 years had made the IRS a super-agency, engaged in policies ranging from delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators.

I would argue that were we starting from scratch, these are not the functions we would want a tax collection agency to perform. Tax reform would return the IRS to its core function—simply collecting revenues to fund the basic operations of government.

Amen.  I’ve said much the same thing: “Every year Congress gives the IRS more to do.  It has become a sprawling superagency administering programs from industrial policy (R&D credits, export subsidies, manufacturing subsidies) to historic preservation, housing policy to healthcare.”

If Congress stopped using the tax law as the Swiss Army Knife of public policy, the current IRS budget would be plenty.

 

20120503-1Christopher Bergin, What’s Behind the Brain Drain at the IRS?  (Tax Analsyts Blog):

So what’s going on? Is this an internal war at the tax agency, specifically in LB&I – a power struggle, if you will? Or is it the more predictable result of competent IRS leaders, who could easily make more money in the private sector, deciding to escape an agency that is being treated like a political piñata? Or is this the new IRS commissioner cleaning house? For me, the latter is the least likely.

Yeah, the new Commissioner is more into closing the blinds to the house so we don’t see the mess, rather than cleaning it up.

 

TaxGrrrl, European Commission Broadens Tax Inquiries To Include Amazon: Google, Microsoft & McDonald’s May Follow   

Renu Zaretsky, Congress Is Back with Much To Do and Consider (TaxVox).  Today’s tax headline roundup covers this week’s Congressional agenda, inadequate retirement savings, and the EU’s efforts to crack down on multinationals.

 

Russ Fox, Pop Goes the Tax Fraud  A rapper, a Canadian, and a football player walk into before the bar…

The 70th anniversary of a red letter day for my Dad.  July 5, 1944.

 

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Tax Roundup, 7/3/2014: Interested generosity edition. And: cheap smokes!

Thursday, July 3rd, 2014 by Joe Kristan

20140703-2If you wouldn’t have gotten the cash if you had kept your clothes on, it may not be a gift.  A “professional adult entertainer” was convicted on tax charges in Sioux Falls last week.  She apparently treated cash thrust upon her in performance as nontaxable gifts, according to the Associated Press writeup. Gifts are good to receive for many reasons, not least because they are not taxable income.  Of course the tax law is pretty strict about what it takes to be a gift, or we would all be working for nontaxable holiday bonuses.   The jury instructions in the case explain what it takes for something to be a gift:

The practical test of whether income is a gift is whether it was received gratuitously and in exchange for nothing.  Where the person transferring the money did not act from any sense of generosity, but rather to secure goods, services, or some other such benefit for himself or for another, there is no gift.

I wonder if it ever struck the professional adult entertainer that while men eagerly stuffed dollars into her garter on stage, they seldom stuffed cash into the elastic of her sweats at the local Hy-Vee.  It must have occurred to her that there was some connection with what she was wearing, or not, on stage and the generosity of her admirers.  If it didn’t before, it probably has now.  Sentencing is set for September.

Liz Emmanuel, Richard Borean, State Cigarette Tax Rates in 2014. (Tax Policy Blog):

20140703-1   Life is good for Missouri cigarette dealers on the Iowa border.   20120531-2

Robert D. Flach brings your Friday Buzz on Thursday in honor of Independence Day.

Jana Luttenegger, New Simplified Application Form for Small Nonprofits and UPDATE: Form 1023 EZ Released for Small Nonprofits (Davis Brown Tax Law Blog)

Tax Trials, IRS Offers New Streamlined Procedures & Reduced Penalties for Foreign Accounts

Trish McIntire, Why E-file a Tax Return…

TaxGrrrl, Money Literally Flying At World Cup: Is It A Clever Attempt At Tax Avoidance?  Strange soccer doings in Ghana.

Jim Maule gets his Tax Myth series underway with The IRS Enacted the Internal Revenue Code and If It’s Not Cash, It’s Not Income.  It always bugs me when congresscritters talk about the “IRS Code.”  It strikes me as sneaky blame-shifting by the perpetrators.

Jason Dinesen, From the Archives: Patient-Centered Outcomes Trust Fund Fee – An Exercise in Bureaucratic Futility

Kay Bell, Fitness enthusiasts exercised over D.C.’s new yoga sales tax

 

 

Cara Griffith, Censorship in New Hampshire? (Tax Analysts Blog):

The DRA can be opposed to the website all it wants. That does not give it the right to monitor it or demand modifications to its content. Yet the DRA is going one step further. It is attempting not only to prohibit the use and publication of information about its general policies, but to impose criminal penalties on the publication of truthful information about a matter of public concern.

It sounds like The New Hampshire Department of Revenue Administration badly needs some exemplary firings.

 

20130912-1Lyman Stone, Happy July 2! 14 States Exempt Flags from Their Sales Taxes (Tax Policy Blog).

Roberton Williams, President Obama’s FY 2015 Budget (TaxVox). “Most of the president’s tax proposals have appeared in previous budgets, but he added four new ones this year. TPC delves into those additions in a separate analysis that accompanies the distributional estimates.” None of them will be enacted during the remainder of the Obama presidency.

 

That would be “zero.”  41 Million July 4th Travelers Would Have a Nicer Trip if Corporations Paid Their Fair Share (Steve Wamhoff, Tax Justice Blog).  Why zero? Scott Sumner explains that “There should be no corporate income taxes, which represent triple taxation of wage income.”

TaxProf, The IRS Scandal, Day 420

Has the NHL lost its focus?  Hockey aiming to tighten tax loophole

Have a great Independence Day!

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Tax Roundup, 7/2/14: How to make the least of that office manager job. And: IRS gets around to the obvious!

Wednesday, July 2nd, 2014 by Joe Kristan


20140508-2No office manager is paid enough for this.  
The tax law doesn’t like it at all when an employer withholds payroll taxes from paychecks and fails to pass it on to the IRS.  One tool the IRS uses to encourage compliance is the “responsible person” penalty.  If a person with responsibility for remitting payroll taxes knowingly fails to do so, the IRS can assess that person with a 100% penalty — even if that person didn’t get any of the money.

A Virginia federal district court recently drove that lesson home to a Ms. Horne, an office manager for a medical practice:

A. Responsible Person

Horne was a responsible person for the Company for each quarter of 2006 through 2010. First, Horne was the Company’s Officer Manager throughout that time period. Second, Horne had substantial authority over payroll because she prepared and signed the Company’s payroll checks. Third, because Horne was charged with preparing checks to creditors, she necessarily determined which creditors to pay. Fourth, Horne participated in day-to-day management of the Company, including making decisions about employee compensation, maintaining the Company’s books and records, and preparing financial information to be presented at shareholder meetings. Fifth, at all relevant times, Horne had authority to, and did, sign checks drawn on the Company’s bank account. Sixth, Horne participated in decisions regarding the hiring and firing of employees.

B. Willful Action

From 2006 to 2010, Horne was aware of the Company’s unpaid employment tax liabilities as they accrued. However, she continued to prepare and sign checks to pay other creditors in preference over the United States. Accordingly, the Court finds that Horne acted willfully in failing to pay over to the Service the taxes withheld from the wages of the Company’s employees.

IV. CONCLUSION

For the aforementioned reasons, the Court will GRANT the Motion. Horne is, thus, liable to the United States in the amount of $2,926,809.51, plus statutory interest accruing from December 23, 2013. 

 

It’s hard to save $2.9 million even on the best office manager salary.

Update:  An excellent point made in the comments:  “I feel for anyone placed in the tough position of losing a job to avoid liability for an employer’s inability to pay its tax liability to the IRS, but the 100% penalty imposed by Section 6672 on responsible persons makes it clear that the job is not worth the tax problem arising from a company’s failure to pay its trust fund taxes.”

 

Cite: Miller v. United States et al.; No. 3:13-cv-00728

 

 

20130723-3IRS takes obvious measures to fight refund fraud five years late.  From Tax Analysts ($link)

     Starting in January 2015, the IRS will no longer make direct deposits of more than three tax refunds into one financial account, Commissioner John Koskinen told tax return preparers at the IRS Nationwide Tax Forum in Chicago July 1.

The move is meant to enhance the IRS’s efforts to combat stolen identity refund fraud, Koskinen explained in prepared remarks for his address to the forum.

Any refund after the third will automatically be converted to a paper check and mailed to the address on the tax return, Koskinen told preparers. “We will send out notices to those taxpayers that their refunds are being mailed and they should expect to receive them in about four weeks from the time of mailing,” he said.

That’s a good start.  Perhaps next the IRS can flag multiple refunds being sent to the same address – like the 655 refunds to a single apartment in Lithuania.  Baby steps.  Like this:

The IRS also plans to end the practice of a small number of preparers who serve as banker to their clients or who take fees from the refunds, Koskinen said. “We’ve identified about 4,400 personal accounts held by tax preparers where multiple refunds were deposited,” the commissioner said. “We’re putting a stop to that, too.”

No doubt some of these are full service firms that do your taxes, collect your refund — and spend it for you.

 

William Perez, Divorce and Taxes.  “We take a look at tax planning principles for property settlements, alimony and child support.”

Howard Gleckman, A Payroll Tax Math Error Adds $5 Billion To The Deficit (TaxVox).  “But the current law for the self-employed allows the full deduction of 7.65 percent—not only for earnings below the Social Security cap but, remarkably, even for earnings subject only to the 1.45 percent Medicare tax.”

Kay Bell, State tax law changes — from gas to sales to businesses and even soccer — take effect July 1

 

taxanalystslogoDavid Brunori, A Revenue Department Behaving Badly (Tax Analysts Blog).  “Documents (except for taxpayer information of course) produced by the “government” belong to the citizens.”

Kelly Davis, Kansas: Repercussions of a Failing Experiment (Tax Justice Blog).  “But the Governor’s experiment now appears to be in meltdown mode: revenues for the last two months have come in way under projections and may leave the state short of the cash needed to pay its bills.”

Lyman Stone, Scott Eastman, Liz Emanuel, Tyler Dennis, Courtney Michaluk, Independence Day Brings Fireworks Taxes to Light (Tax Policy Bl0g).  Hey, Iowa, if they aren’t legal, it’s harder to tax them.

Janet Novack, U.S. Taxpayers With Secret Offshore Money Face New Risks And Options 

Jason Dinesen, From the Archives: Iowa Deduction Finder — Insurance Premium Tax Deduction

Peter Reilly, Military Housing Allowance Much More Limited Than Clergy’s

TaxGrrrl, IRS Announces Shorter, Faster Application For Some Tax Exempt Organizations

Robert D. Flach, MORE INFO ON THE NEW IRS ANNUAL FILING SEASON PROGRAM.  “I still think in its current form it is stupid, and that very few tax preparers will actually ‘volunteer’.”

Robert is right.

 

Megan McArdle ponders the version of the email erasure story from Lois Lerner’s attorney:

This weekend, William Taylor III, Lerner’s lawyer, went on television and described Lerner’s experience. Lerner came in one morning in 2011, he said, turned on her computer and got a blue screen.

That interested me, because the description is quite specific. What he seems to be describing is the famed Microsoft Windows “blue screen of death.”

Well, because as I mentioned above, the Blue Screen of Death is an operating system error. The operating system lives on the hard drive. Which raises a question: If Lerner’s hard drive was so thoroughly malfunctioning that no one could even get the data off of it, how was it booting up far enough for the operating system to malfunction?

She comes up with some potential explanations — which mostly assume it didn’t quite happen the way the lawyer describes.

 

20140516-1John Hinderaker,  More on the IRS’s Illegal Destruction of Evidence

True the Vote’s brief points out that the first lawsuit alleging discriminatory targeting of conservative groups was filed by a pro-Israel group called Z Street, Inc., on August 25, 2010. On that date, at the very latest, the IRS had a legal duty to take measures to ensure that no emails, correspondence, memoranda, notes, or other evidence of any sort that could be relevant to the case was lost or destroyed…

But, according to IRS representatives who have testified before Congressional committees, the IRS ignored the law. Instead of making sure that relevant information was preserved, the IRS blithely continued erasing back-up email tapes every 90 days. Further, the IRS continued its policy of assigning each employee a ridiculously small space on an email server, and then authorizing employees (like Lois Lerner) to delete at will to keep space open. And, finally, when Lerner’s hard drive crashed ten months after the Z Street case was commenced, the IRS made no effort to preserve it, but rather, by its own account, recycled the hard drive in a business-as-usual manner.

Don’t try this at home, kids.

 

TaxProf, The IRS Scandal, Day 419

 

You should never be to busy to file correct tax returns.  Appeals court upholds Beavers’ tax conviction.

 

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Tax Roundup, 6/26/14: Misdirected e-mail edition. And: 15 years for tax fairy medium Daugerdas.

Thursday, June 26th, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

The IRS scandal finally found a way to get the Des Moines Register’s attention.  Lois Lerner of IRS sought audit of Grassley, emails say:

The emails show Lerner mistakenly received an invitation to an event that was meant to go to Grassley, a Republican.

The event organizer apparently offered to pay for Grassley’s wife to attend the event.

Instead of forwarding the invitation to Grassley’s office, Lerner emailed another IRS official to suggest referring the matter for an audit, saying it might be inappropriate for the group to pay for his wife.

“Perhaps we should refer to exam?” Lerner wrote.

It was unclear from the emails whether Lerner was suggesting that Grassley or the group be audited — or both.

Grassley-090507-18363- 0032A reader who relies on the Des Moines Register for news might be puzzled over who Lois Lerner is.  A search of the word “Lerner” on the Register’s website only uncovers two other stories related to her role in the scandal: “Steve King calls for abolishing the IRS on Tax Day” (4/15/14) and “Critics: Progress scant after IRS scandal” (3/27/13).  It appears that today’s article would have been the first time Register readers would have learned anything about the mysterious mass deletion of emails relating to the Tea Party scandal.  A devoted Register fan might have been puzzled as to why this seemingly important news hadn’t been mentioned before.

I think there’s a hint down in the article (my emphasis):

Lerner headed the IRS division that processes applications for tax-exempt status. The IRS has acknowledged that agents improperly scrutinized applications by tea party and other conservative groups before the 2010 and 2012 elections. Documents show that some liberal groups were singled out, too.

Nobody buys that last sentence.  While a few “liberal” words were on the list of buzzwords to identify political organizations, no liberal outfits had their donor lists illegally released, or had their exemption applications held up indefinitely with demands for ridiculous detail of the organizations — including the content of their prayers.   Here are the stats:

targetingstats

Now maybe the Register will begin to get its readers up to speed.  If not, the Tax Update is available to Register subscribers at no extra charge!

Meanwhile, the IRS will have to explain to senior Senate taxwriter Grassley just why it needs more resources.  That may be slightly awkward.

TaxProf, The IRS Scandal, Day 413

Russ Fox, Lerner Appears to Have Targeted Iowa Senator Grassley  “Of course, President Obama said earlier this year just that–that there is not even a smidgen of corruption…”

 

tax fairyThe Tax Fairy fails a true believer.  Paul Daugerdas, the Jenkens & Gilchrist attorney who generated over $90 million in fees selling tax shelters, was sentenced to 15 years in federal prison yesterday for his troubles.  Bloomberg reports:

The tax shelters at the center of the case were sold from 1994 to 2004 to almost 1,000 people, creating $7 billion in fraudulent tax deductions and more than $1 billion in phony losses for customers, the U.S. said.

It appears unlikely that Mr. Daugerdas will come out ahead on his tax shelter efforts:

Daugerdas was ordered to forfeit $164.7 million and help pay restitution, with other conspirators, of $371 million. 

While he wasn’t the only Tax Fairy guide during the great turn-of-the-century Tax Shelter frenzy, he was perhaps the most prominent, inventing tax shelters with names like HOMER and COBRA.  The shelters found eager customers among businesses and individuals looking for the Tax Fairy, the legendary sprite believers insist will wave her magic wand and make taxes go away, for a very reasonable fee.    Now Jenkens & Gilchrist is dead, the believers are out their money, plus penalties, and there still is no Tax Fairy.

The Tax Analysts story on the sentencing ($link) had one item that I hadn’t seen before:  “The jurors said that Daugerdas was convicted solely on counts for which the government presented evidence of backdating, when Daugerdas agreed to prepare false tax returns that reported as 2001 losses transactions that occurred in 2002, the defense memo says.”  Way back in 2009, I said this could be his biggest problem at trial: Is backdating the fatal flaw for Daugerdas?:

If the government can prove backdating, it might be much easier for a juror to vote for conviction. Tax is hard, and a good defense lawyer has a lot of opportunities to give jurors a reasonable doubt in a case involving short sales, derivatives and currency options. But anybody can understand backdating.

This sort of thing separates “aggressive tax planning” from plain fraud.

Related: 

Department of Justice Press Release

Jack Townsend, Daugerdas Gets 15 Year Sentence

TaxGrrrl, Daugerdas Sentenced To Prison, Ending Biggest Tax Prosecution Ever

This one is probably coincidental, but Jason Dinesen, 138 Years Ago Today: Custer’s Last Stand

 

IMG_0216Robert D. Flach, A SUMMER TAX TIP FOR SCHEDULE C FILERS

William Perez, Single Filing Status.  “A person is considered unmarried for tax related purposes if on the last day of the year the person is not married to any other person or is legally separated from a spouse under a divorce or separate maintenance decree.”

Kay Bell, Kids, summer camp tax breaks and our personal X Games site

Peter Reilly, Facade Easement Valuation Cannot Be Percentage Rule Of Thumb 

Cara Griffith, Ohio Enacts Legislation Allowing Creation of Captive Insurance Companies (Tax Analysts Blog).

The answer is clearly more tax credits.  The New Jersey Casino That Tax Credits Could Not Save  (Adam Michel, Tyler Dennis, Joseph Henchman, Tax Policy Blog)

Renu Zaretsky, Expanding a Credit, Simplifying a Break, and Cutting Off a Nose to Spite a Face.  Today’s TaxVox headline roundup covers  IRS funding, student debt, and same-sex marriage complications.

 

 

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Tax Roundup, 6/23/14: Making no friends edition.

Monday, June 23rd, 2014 by Joe Kristan
Rose Mary Woods checks her e-mail in the Nixon administration.

Rose Mary Woods checks her e-mail in the Nixon administration.

New IRS Commissioner Koskinen isn’t exactly making new friends for the agency in Congress.  His testimony Friday on the implausible rash of hard-drive failures that hit the IRS just as Congress began looking at Tea Party harassment amounted to an insistence that Congress take the IRS at its word, and give it more money.  From Tax Analysts ($link):

     “I don’t think an apology is owed,” Koskinen answered. “Not a single e-mail has been lost since the start of this investigation.”

Regarding the six other IRS employees who have experienced computer failures since the investigation began, Koskinen said technology experts told him that 3 to 5 percent of hard drives can be expected to fail during their warrantied lifetimes. 

It just happened to all the hard drives of the people most involved in beating up on the Tea Party.

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Commissioner Koskinen (correctly) points out that the IRS is underfunded for all of the chores (unwisely) given it by Congress.  With Congressional Republicans understandably reluctant to fund an agency it percieves, with justification, as its opposition, Mr. Koskinen ought to be going out of his way to assure them that he is making sure to eliminate political bias in the agency and to fully cooperate with the investigation.  He is doing nothing of the sort, and he may have already irretreivably lost his opportunity to convince GOP appropriators that he can be trusted.

IRS stonewalling isn’t a new thing.  As the many lawsuits filed by Tax Analysts to get the IRS to release its internal documents show, covering up is a way of life in the agency.  Christopher Bergin, in The Coverup Is Usually Worse Than the Crime (Tax Analysts Blog), gives some background:

Maybe it’s just sloppy record-keeping, which would be bad enough. Most of the government’s business is now conducted digitally, and those records need to be properly handled. Or is it worse? Is the IRS deliberately keeping things from the public? Excuse my cynicism, but the IRS’s penchant for secrecy is what led Tax Analysts, using the new Freedom of Information Act, to sue the agency in the 1970s to force it to release private letter rulings. There have been several subsequent lawsuits to pry records that should have been public out of the agency’s hands.

The idea that IRS emails are public records requiring preservation is nothing new, and was well-established at the time Ms. Lerner was busy.  It’s either negligent and outrageous incompetence or criminal destruction of public records, and to say that the IRS owes no apologies is to say that at least one of these unpleasant choices is just fine with him.

 

 

20140623-1TaxProf, The IRS Scandal, Day 410

Megan McArdle, An IRS Conspiracy? Not Likely … Yet.  “To be clear, of course six tragic hard drive failures in a relatively short period of time would make it very hard to believe in a benign explanation.”

Brian Gongol, Backing up your email isn’t hard to do.  “Someone should tell the IRS, which is making excuses for losing administrative emails — excuses that wouldn’t pass muster in an IRS audit

Russ Fox, We Don’t Need No Stinkin’ Backups

 

TaxGrrrl, Raking It In At Summer Yard Sales: Does Uncle Sam Get A Cut?   

Roger McEowen, U.S. Supreme Court Says Inherited IRA’s Not Exempt in Bankruptcy

Jason Dinesen, Bedside Manner is Important for Tax Pros, Too

Peter Reilly, Does Sixth Circuit ABC Decision Give Tenants Incentive To Buy?  “ABC Beverage Corporation is entitled to deduct the premium portion of the price it paid for the real estate as a cost of terminating the lease.”

 

Keith Fogg, D.C. Circuit Upholds the Constitutionality of Presidential Removal Powers of Tax Court Judges (Procedurally Taxing)

I think it’s only half-baked.  Stick a Fork in It: Is the Corporate Income Tax Done? (Joseph Thorndike, Tax Analysts Blog)

It’s not just a problem in Florida.  Seven indicted in Minnesota identity theft ring (TwinCities.com).

 

Wind turbineQuad City Times, Tax credits boost solar power in Iowa

David Henderson, Low-Carbon Alternatives: Solar and Wind Suck (Econlog).  “[A]ssuming reductions in carbon emissions are valued at $50 per metric ton and the price of natural gas is $16 per million Btu or less–nuclear, hydro, and natural gas combined cycle have far more net benefits than either wind or solar.”

 

Roberton Williams, U.S. Taxes Have Changed A Lot Since 1929 (TaxVox)

Steve Wamhoff,  Good and Bad Proposals to Address the Highway Trust Fund Shortfall (Tax Justice Blog).  The TJB has started putting individual author names on their posts, so I’ll do so too.

David Brunori, Tax Policy Is Not the Way to Deal With an Ass (Tax Analsyts Blog).  Not every problem is a tax problem.

Going Concern, IRS Can’t Afford to Upgrade to Windows 7 But Can Afford to Pay Microsoft to Use XP

 

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Tax Roundup, 6/17/14: Hiring witnesses to your tax crimes. And: some folks just aren’t into Valentines Day.

Tuesday, June 17th, 2014 by Joe Kristan

Programming note:  The Tax Update will be on the road the rest of this week, so this is probably the last tax roundup this week.  Unless I change my mind.

 

Via Wikipedia

Via Wikipedia

Sure, the more witnesses to my crime the merrier.  What could go wrong?  Every time I see a case in which an employer gets in trouble for evading payroll taxes by paying employees in cash, I have to wonder how much they thought things through.  Every employee becomes a potential informant, and it’s hard to imaging not having either a disgruntled employee turn you in or a careless one reveal the secret in the wrong place.

The Department of Justice yesterday announced a guilty plea yesterday:

   Sonny Pilcher of Casper, Wyoming, pleaded guilty to tax fraud today in the U.S. District Court for the District of Wyoming, the Justice Department and Internal Revenue Service (IRS) announced.  The sentencing hearing was set for Oct. 28, 2014 before U.S District Judge Alan B. Johnson.

 According to the charging document, Pilcher attempted to obstruct and impede the IRS.  Pilcher did this by claiming a false bad debt expense of $258,000 on his 2008 Form 1040 tax return, and by paying his employees in cash to evade paying employment taxes.  Pilcher faces a statutory maximum sentence of 36 months in prison, a $250,000 fine and may be ordered to pay restitution to the IRS. 

The inclusion of the “bad debt” in the charge is interesting.  You frequently see cases where people claim a non-business bad debt — which is a capital loss — as an ordinary fully-deductible business bad debt.  While you might see a civil penalty in such a case, I have never seen that called a criminal matter.  This presumably was something more serious than an argument over what kind of bad debt it was.

 

20120801-2If you have a full-time job, you probably aren’t a “real estate professional” who can deduct rental losses.  And if that’s so, don’t embarrass yourself in front of a Tax Court judge.  A taxpayer from California made that mistake in a Tax Court case issued yesterday.

Real estate rental losses are normally passive, meaning that they only are deductible to the extent of passive income (there is a special allowance for taxpayers with adjusted gross income under $150,000).  If you are a “real estate professional,” the losses are not automatically passive, but you have to meet two difficult tests to be one:

– You have to work at least 750 hours in the year in a real estate trade or business which you own, and

– your real estate business has to consume more of your time than anything else you do.

If you have a full-time day job, it is nearly impossible to rise to that standard (unless you have a pretty undemanding day job).  That didn’t keep the intrepid Californian who had three rental properties — all single-family houses — from giving it a try, as the Tax Court judge explains (my emphasis):

Even if we assume that petitioner worked 1,760 hours and 1,752 hours in 2009 and 2010, respectively, for Northrop Grumman, we do not accept his activity log coupled with this testimony relating to the rental activities as reliable or credible. A review of the activity log and testimony relating to the rental activities leads us to the conclusion the petitioner did not spend more hours at the real estate activity than at his full-time employment at Northrop Grumman. According to petitioner’s logs he spent almost every spare hour in those years working on the rental properties, including 10 hours on July 4 of each year, 12 and 10 hours on February 14, 2009 and 2010, respectively, and 9 and 10 hours, respectively, on December 25 of each year.

Hey, not everybody is a romantic.  And I’ll keep Christmas in my own way, thank you very much!

Although he managed three rental properties in each year, throughout 2009 alone petitioner’s records reflect that he repaired or worked on the sprinkler systems on any of the given properties on 64 separate occasions, and throughout 2010 he worked on sprinkler systems on 20 separate occasions. In addition, on March 16 and 17, 2009, the records reflect eight hours to prepare and deliver an eviction notice to be filed in court. Coincidentally, on March 15 and 16 of the next year, petitioner’s records reflect that he performed the very same activity for the same exact amount of time. A review of petitioner’s activity logs leads to the conclusion that the logs are inaccurate and exaggerated.

Maybe he just wasn’t very good at sprinkler systems?  Whatever you might think of Tax Court judges, you can be sure that they didn’t get their jobs by being gullible.

Cite: Bogner, T.C. Summ. Op. 2014-53.

 

 

20130114-1Kristy Maitre, Treasury Issues Changes to Circular 230 (Treasury Decision 9668):

Many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing.  Often the disclaimers are inserted without regard to whether the disclaimer is necessary or appropriate.

Treasury said they anticipate that the removal of the requirement will eliminate the use of a Circular 230 disclaimer in e-mail and other writings because Section 10.37 rules on written opinions don’t include the disclosure provisions in the covered opinion rules.

Good news.  I always thought the routine disclaimers were futile and I never used them.  They seemed like the email equivalent of a rabbit’s foot — it might make you feel better, but it still was mere superstition.  Yet I bet that we’ll still be getting emails from our fellow practitioners with the Circular 230 disclaimer years from now.

Russ Fox, Soon: No More Circular 230 Notices

 

Jason Dinesen, Iowa Taxes: Filing Separately and Allocating Dependents.  “In general, a typical married couple can allocate the dependency exemptions in whatever manner they choose.”

William Perez, Child and Dependent Care Tax Credit

Peter Reilly, Paul Reddam’s KPMG Tax Shelter Stunk In More Ways Than One 

TaxGrrrl, World Cup Mania: Figuring Out FIFA, Soccer & Tax.  So there’s a soccer tournament, I hear.

Robert D. Flach starts Tuesday with a Buzz!

 

20140513-1Martin Sullivan, Big Deal by Low-Tax Medtronic Has Even Bigger Implications (Tax Analysts Blog).  “The main benefit to Medtronic after the inversion will be that the billions of profits it generates outside the United States each year can now be deployed to pay dividends and to buy other U.S. companies without paying U.S. tax.”   Sounds like good corporate stewardship to me.

William McBride, Medtronic Embarks on Self-help Tax Reform (Tax Policy Blog).  “The high U.S. corporate tax rate is causing serious economic distortions, chasing away businesses, investment and jobs. The only way to deal with it effectively is to bring the corporate tax rate down to competitive levels, which is the path chosen by virtually every other country.”

 

Renu Zaretsky,  Tax Freedom, Tax Avoidance.  The TaxVox headline roundup covers the Medtronic inversion and internet taxes.

TaxProf, The IRS Scandal, Day 404

Kay Bell, IRS says possible Tea Party emails lost in computer crash. “Conspiracy or clowns?”

 

News from the Profession.  Here’s Your Authoritative Guide for Likening Game of Thrones to Public Accounting (Going Concern)

 

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Tax Roundup, 6/13/14: Extenders advance, estimates loom.

Friday, June 13th, 2014 by Joe Kristan

Remember, second-quarter estimates are due Monday.  If you are a business paying through EFTPS with a payment due Monday, you need to set your payment up today to have it go through on time.

Kay Bell, Second estimated tax payment of 2014 is due June 16

 

S imageS imageS-SidewalkExtenders for Sec. 179, S corporations advance in House.  

The House of Representatives voted yesterday to make permanent $500,000 Section 179 expensing, a five-year built-in gain tax recognition period for S corporations, and the basis adjustment for S corporation contributions of appreciated property.

The President has said he will veto these permanent items, so this is more symbolic.  The Democrats want to keep pretending these are temporary measures to avoid counting their cost in long-term budget computations.   It is interesting, though, that it appears that these items are expected to be extended indefinitely, whether a year at a time or honestly.  They were initially passed in an anti-recession “temporary” measure.  It just shows that there are few things as permanent as a temporary tax break.

Still, until the Senate and the House agree on a bill, none of these provisions are in effect this year, so don’t spend your savings from these provisions just yet.

 

Jason Dinesen, HRAs and the Affordable Care Act:

An insurance agent recently asked me the following question: can a small business that currently offers insurance to its employees drop the insurance and instead form a Health Reimbursement Arrangement (HRA, sometimes called a “Section 105 plan”) to reimburse employees for medical expenses?

The short answer to the question is: NO.

This is an issue that came up a lot in our Farm and Urban Tax Schools last fall.

 

Jordan Yahiro, The Obamacare Cadillac Tax and its Mixed Bag of Consequences (Tax Policy Blog):

Roberton Williams, Good And Bad News About The ACA Penalty Tax (TaxVox). “So what’s the bad news? Of the 7 million people who will owe tax, CBO says more than 40 percent won’t pay.”  And of those who do pay, about 60 percent won’t qualify for subsidies.

billofrightsChristopher Bergin, Taxpayer Bill of Rights or Mission Statement? (Tax Analysts Blog):

Is the taxpayer bill of rights a “Bill of Rights”? I don’t think so. If it were, Congress would need to provide remedies. The best thing I can say is that the IRS’s statement this week may be a good start at articulating principles the IRS should plan to follow.

Exactly.  My clients have already received notices since it was issued that violate this “bill of rights” by assessing penalties without offering explanation or appeal — and which are erroneous.  If we could turn around and make IRS pay us penalties when they erroneously assess us, or otherwise violate our supposed rights, it might mean something.

Keith Fogg, The Taxpayer Rights the IRS Says We Have (Procedurally Taxing).  “I am ready to be pleasantly surprised by the results of IRS TBOR and see little downside in this administrative effort to set out its view of the rights and expectations citizens should have of their tax administrators.”

 

Joseph Thorndike, Congress Should Abolish All Tax Breaks for Higher Education (Tax Analysts Blog):

There are at least 12 tax preferences targeting higher education, Guzman notes. Many are complex in their own right. When combined, however, they became a hopeless nightmare of complexity.

And it’s probable that the colleges just hoover up the subsidies with higher tuitions.

 

Cara Griffith, Tax Analysts Files Suit to Demand Transparency in California (Tax Analysts Blog).  Sometimes the bureaucracy likes the dark best.

 

TaxGrrrl,  Seattle Area Biz Tacks ‘Living Wage Surcharge’ Onto Receipts In Response To $15/Hour Minimum Wage.  Price controls always fail, and minimum wages are price controls.

Anthony Kim, Curtis Dubay, FATCA Hurts Law-Abiding Americans Living Abroad.  Sometimes you have to sow chaos and despair on the innocent break a few eggs to score some cheap political points make an omelet.

Tax Justice Blog, Senate Democrats, Joined by Three Republicans, Come Up Short on Buffett Rule, Student Loan Bill.  Too bad, so sad.

 

20140613-1

Looking north on 6th Street.

The new Cavalcade of Risk is up!  This edition of the venerable roundup of insurance and risk-management posts comes from France, but is assembled from U.S.-made parts — like Hank Stern’s post on a Ballsy Insurance Carrier Trick.  Global warming is involved.

Peter Reilly, Will National Grid Try Dumping Its Electrons Into Boston Harbor? 

 

TaxProf, The IRS Scandal, Day 400

Robert D. Flach starts your weekend early with a Friday Buzz!

 

Going Concern, Listen to a Fake IRS Agent Try Telling Ex-Crazy Eddie CFO He’s About to Be Arrested.  It’s hard to scam a scammer.

 

 

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Tax Roundup, 6/3/14: The joys of cronyism. And why Warren’s math is off.

Tuesday, June 3rd, 2014 by Joe Kristan

 

20120906-1When states “target” tax breaks, the little guy gets caught in the crossfire.  That’s the conclusion of a terrific new study on why special tax favors to special friends of the government hurt state economies and corrode good government.  The paper, by the free-market think-tank Mercatus Institute, is the best distillation of the case against luring businesses with special tax favors.

The study describes how big companies skillfully play state politicians for subsidies.  It shows how Wal-Mart has received at least 260 special tax breaks worth over $1 billion.  It describes the $370 million in North Carolina subsidies to Apple to create a whopping 50 jobs — $7.4 million each.  These come at the expense of small companies who pay full-ride on their tax bill as they lack the lobbyists and clout to play the system.

It discusses how the only way states can make a case for their special breaks is to ignore opportunity costs.  States assume that money spent to lure a well-connected company would otherwise be buried or something, generating no economic activity.  As the study says, “Labor and capital are scarce resources and they are rarely left idle.”  It’s a point Tax Update readers may be familiar with.

The study notes how the subsidies hurt the companies who don’t get the benefits, even if they are not direct competitors of the corporate welfare recipients: “When new companies receive extra money to invest, they raise the price of capital and drive up wages, which imposes an additional cost on unsubsidized companies in the state.”  This refutes the fallacy that “Smith’s tax credit doesn’t cost Jones a cent.”

microsoft-apple

They also point out how targeted tax breaks create a crony culture in statehouses.  The study cites the example of Texas (citations omitted, emphasis added):

As companies direct more of their resources to securing special benefits, they need more people who can lobby or who have other rent-seeking skills.  There is already a whole industry of “location consultants,” some of whom demand a commission of up to 30 percent on the subsidies that they can negotiate with local governments.  Consultant G. Brint Ryan in Texas is a good representative of this industry.  Texas allocates corporate benefits exceeding $19 billion per year, more than any other state.  Ryan realized the profit opportunity in serving as a consultant to companies seeking to obtain these benefits.  He has since secured benefits for ExxonMobil, Samsung, and Wal-Mart, among others.  Ryan also illustrates the importance of having political networks for securing targeted benefits.  In 2012, the Texas legislature set up a commission to evaluate the impact of state investments in development projects.  Ryan, who donated more than $150,000 to the campaign of the state’s lieutenant governor, was appointed to the commission by the lieutenant governor.

The same dynamic is playing out in Iowa, as the economic development bureaucracy has spawned a cottage industry of attorneys and consultants to tap into taxpayer funds.

What should states do?  The report says:

Four policy implications for state governments follow from our analysis:

- Allow for current targeted benefits to expire, and abolish state programs that grant them on a regular basis.

- Make sure that targeted benefits cannot be granted by individual policymakers on an ad hoc or informal basis

- Broadly lower tax rates to encourage company investments and obtain a more efficient allocation of resources.

- Cooperate with other states to form an agreement about dismantling targeted benefits.

Sounds a lot like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

Other coverage:

Joe Carter, How Enterprise Zones Lead to Cronyism

Kenric Ward, Study: Cronyism Increasingly Lucrative for Politicians and Businesses

Related:  Governor’s press conference praises construction of newest great pyramids.

 

20140603-1Tax Justice Blog, State News Quick Hits: Gas Taxes, NJ Budget Woes, Madison Square Gardens’ Sizable Tax Break

 

Jason Dinesen has Yet Another Post About Regulation of Tax Preparers.  “Preparer regulation is a bad idea. ”

Kay Bell, Tax moves to make in June 2014

Robert D. Flach has your fresh Tuesday Buzz!

 

Andrew Lundeen, The Common Misconception about the Lower Rate on Capital Gains and Dividends (Tax Policy Blog):

What is not easily seen is that the $100 that Mr. Buffett earns in dividends has already been taxed at the corporate level. In fact, Mr. Buffett’s $100 didn’t start at $100, it started as $153.85.

To receive his $100 dividend payment, Mr. Buffett must own shares in a corporation, which we will call Company A. Company A earned $153.85 in profits on Mr. Buffett’s behalf. This $153.85 is then subject to the federal corporate tax of 35 percent, or $53.85.

The corporation pays the $53.85 to the federal government on behalf of Mr. Buffett and then passes the remaining $100 to him in the form of a dividend. This is the $100 we discussed earlier, on which, Mr. Buffett pays $23.80 in dividend taxes.

Warren Buffett knows this.  But raising individual rates helps keep down those small guys whose businesses report their taxes on the owner 1040s — and, incidentally, makes it easier for Warren’s insurance business to sell tax-advantaged products.

 

Jeremy Scott, Camp Waves the White Flag (Tax Analysts Blog). “Camp tried to reform the tax system — and failed.”

Martin Sullivan, Corporate Expatriations: More Deals Are Likely (Tax Analysts Blog).  ” It is unlikely that any known or yet-to-be-made-public deals will be slowed by Democrats’ efforts.”

TaxProf, The IRS Scandal, Day 390

 

TaxGrrrl, John Daly Relied On Tax Records To Figure $90 Million Gambling Losses.  “Despite tens of millions of dollars in gambling losses, Daly doesn’t seem to regret his behavior, saying, ‘I had a lot of fun doing it.'”

 

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Tax Roundup, 5/27/14: IRS not so severe on e-file identification? And driving the extra mile to save on taxes.

Tuesday, May 27th, 2014 by Joe Kristan

e-file logoThe IRS may end up less ridiculous than they appear to be in writing.  We mentioned last week the new IRS Publication 1345 rules for e-file tax firms that by their terms appear to require practitioners to card their in-office clients and run credit checks on clients who mail or upload their tax information.  Our local “stakeholder liaison (the IRS representative who works with practitioners) called me and said she has been told by higher-ups that the requirements will be less severe than they look.  She also called Jason Dinesen, who reports:

This IRS this afternoon confirmed to me and other practitioners who had been making the IRS’s lives miserable the last few days that: the new e-file rules apply only to electronically signed e-file authorizations. And “electronically signed” means signed by some means other than pen-to-paper.

I hope this is true, but I will feel better when the IRS puts it in writing.  After all, you aren’t protected form penalties by oral advice.  But even if it is true, it seems even sillier than the original rule.  The whole idea is to prevent identity theft, but it’s a rare ID thief who hires a practitioner to steal identities.  It would be rarer still for one to go through the trouble of using an e-signature return.  That’s why I’m not fully convinced by the liaison; it just would create a requirement so onerous for a narrow set of returns that few people will file that way.

Related: Tax Roundup, 5/21/14: Practitioner Pitchforks and Torches edition. And: math remains hard!

 

20140527-1TaxGrrrl, On Memorial Day, A Look At Surviving Family Military Benefits   

If you’re a serious poker player, you might want to check out Staking and the 2014 WSOP: Nothing Has Changed.

TaxProf, The IRS Scandal, Day 383

Lyman Stone, New State-Level Price Data Shows Smaller State Real Income Differences (Tax POlicy Blog):

Federal tax progressivity has strange consequences. People who are “poor” in one state could be “rich” in another without changing the dollar amount of their income. So the progressive nature of the federal income tax can lead to poor- or middle-class people in high-price states paying taxes equivalent to what significantly richer (in real, standard-of-living terms) people would pay in low-price states.

It costs more to be rich in New York than Des Moines.

 

Renu Zaretsky, The ACA, Extenders, and More Swiss Banks.  The TaxVox headline roundup includes a link to a NY Times piece on a recent IRS ruling to prevent “dumping” of employees on state exchanges through tax-free reimbursement plans. Just one more hasty patch on a leaky system.

Robert D. Flach comes back from a long weekend with your Tuesday Buzz!

News from the Profession. California Board of Accountancy Says the Early Bird Gets the CPA Exam Worm (Going Concern)

 

20140527-2Going the extra mile to save on taxes.  An Alaska doctor should get points for endurance, anyway, even if it turns out that he is a tax cheat.  The Justice Department accuses Michael Brandner, an Anchorage doctor, of evading taxes through offshore accounts.  According to the Department press release, the physician literally was operating under-the-radar (my emphasis):

According to court documents, Brandner engaged in a scheme to hide and conceal millions of dollars of assets from the Alaska courts and from his wife of 28 years who was divorcing him.  Shortly after the divorce was filed, Brandner left Alaska and drove to Central America after converting assets into five cashier’s checks worth over $3,000,000.

Driving from Alaska to Panama isn’t for the faint-hearted.  Driving their with $3 million in cashiers checks — that’s impressive, in a crazy sort of way.  If he is convicted, his sentence should include time served on the road.

 

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Tax Roundup, 5/22/14: IRS teams up with Bernie Madoff. And: more on the new e-file ID rules.

Thursday, May 22nd, 2014 by Joe Kristan
Bernie Madoff

Bernie Madoff

The IRS wants in on Bernie Madoff’s action.  The Tax Court is going to think about it.

Bernard Kessell died in July 2006.  He might have died content believing he was leaving a healthy investment portfolio for his heirs.  After all, just one part of the portfolio had issued its most recent month-end statement showing a value of $3,221,057.  That statement was issued by Bernie Madoff.

Of course Mr. Madoff was arrested in 2008 and is now residing in federal prison on charges arising from the Ponzi scheme that victimized Mr. Kessell and so many others.  The real value of the securities in Mr. Kessell’s Madoff portfolio was zero.

But the IRS isn’t letting that get in the way.  The agency says Mr. Kessell’s estate should pay estate tax on the value that Mr. Kessell died thinking he owned, rather than the zero actual value.  It wants to piggyback on Mr. Madoff’s fraud to tax an estate value that wasn’t there.

The IRS asked the Tax Court for summary judgment that the asset to be taxed was the account itself, not the vaporous underlying assets, and that because Mr. Madoff hadn’t been unmasked, a willing buyer would pay full sticker for the lying value on the Madoff statements.  The Tax Court court wasn’t willing to go along on summary judgement:

We cannot say on the record before us, however, whether that agreement constituted a property interest includible in Decedent’s gross estate separate from, or exclusive of, any interest Decedent had in what purported to be the assets held in the Madoff account. This question is best answered after the parties have had the opportunity to develop the relevant facts at trial. We will therefore deny respondent’s motion on this point.

As to the issue of the value, Judge Kroupa had this to say (citations omitted).:

     Respondent argues that a Ponzi scheme, by its very nature, is not reasonably knowable or foreseeable until it is discovered or it collapses. Respondent notes Mr. Madoff’s particular skill and that his Ponzi scheme was not disclosed until it collapsed in December 2008. Respondent then reasons that Mr. Madoff’s Ponzi scheme was knowable or foreseeable only at the point when it collapsed — when the amount of money flowing out of Madoff Investments was greater than the amount flowing in. For purposes of this motion, at least, we disagree.

Some people had suspected years before Mr. Madoff’s arrest that Madoff Investments’ record of consistently high returns was simply too good to be true. Whether a hypothetical willing buyer and willing seller would have access to this information and to what degree this information would affect the fair market value of the Madoff account or the assets purportedly held in the Madoff account on the date Decedent died are disputed material facts.  Thus, we will deny respondent’s motion on this point as well.

The rule on how assets are valued is in Reg. Sec. 20.2031-1(b):

 The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

Most folks would consider the fact that the account was invested in a Ponzi scheme to be one of those relevant facts.  I guess that’s why most of us don’t work at IRS.

Cite: Estate of Bernard Kessel, T.C. Memo. 2014-97.

 

20130121-2The AICPA doesn’t care for the “voluntary” IRS preparer regulation proposal.  The Hill.com reports:

That system, the AICPA argues, would create implied government backing for those preparers who comply with the standards, while punishing those who do not.

“The proposed voluntary system would undoubtedly leave the impression among most taxpayers that certain tax return preparers are endorsed by the Internal Revenue Service (IRS),” according letter.

Further, nonbinding standards would fail to root out bad actors, according to the group.

“As a practical matter, any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return preparers,” the group contends.

All excellent points.  The AICPA has figured out that the “voluntary” program would eventually be voluntary like United Way contributions were “voluntary” when I was a green staff accountant at a national accounting firm.  They were voluntary, but amazingly, participation in the drive was always 100%.  Maybe the AICPA leaders still remember their staff accountant days.

I would add one more point.  Commissioner Koskinen and Taxpayer Advocate Olson never tire of telling us how underfunded the IRS is.  If so, why are the diverting some of their already inadequate resources to start a new nonessential program?  The obvious answer is they are trying a back door power grab now that the courts have barred the front door.

Going Concern: The AICPA Voiced “Deep Concerns” About the IRS’ Voluntary Tax Preparer Proposal.  “This means war…”

Larry Gibbs, Recent Developments in the IRS Regulation of Return Preparers (Procedurally Taxing).  A long guest post by a former IRS Commissioner about the power grab he never tried.

 

Russ Fox, New Identification Rules Go Over Like a Lead Balloon:

In this morning’s post, Joe Kristan told his readers to call the IRS. I agree; I urge all tax professionals to speak to or email their IRS Stakeholder Liaison.  

Russ quotes a new post by Jason Dinesen, I Was Wrong: We SHOULD Be Outraged About the New IRS E-File Requirements, which Jason followd up with Questions to Ponder About New IRS E-file Requirements.  I love Question 8: “How many ID thieves use a tax pro?”

Robert D. Flach has a special Thursday Buzz!, which includes Robert’s take on “voluntary” preparer regulation and the new IRS e-file requirements.

 

20140321-3TaxGrrrl, Still Looking For Your Tax Refund? Errors, 4464C Letters And Other Explanations

Peter Reilly,  Tax Court Threatens To Sanction Courtroom Commando Mac MacPherson.

Kay Bell, NYC arena Madison Square Garden pays no property taxes

Me, IRS Releases Applicable Federal Rates (AFR) for June 2014

 

William McBride, High U.S. Corporate Tax Rate Chases Away Companies, Jobs and Tax Revenue (Tax  Policy Blog).  If it didn’t, it would be a fascinating case of economic actors failing to respond to incentives.

TaxProf, The IRS Scandal, Day 378

Renu Zaretsky, Relief, Credits, Cuts, and Roads.  The TaxVox daily headline roundup talks about new tax relief for Minnesotans and the continuing worthlessness of film tax credit programs for everyone but filmmakers.

Cara Griffith, Should Taxpayers Challenge States if They Fail to Enact Rules? (Tax Analysts Blog):

State regulations are often vague or ambiguous, and authorities can use that to their advantage. But states should not be permitted to simply take the position that is in their best interest. They should be required to provide guidance and clarification on the positions they intend to take and, even better, clear-cut examples of how that position will be applied. And if a position will be applied to an entire industry, the state should issue a rule.

States prefer Calvinball rules.

 

Tax Justice Blog, Junk Economics: New Report Spotlights Numerous Problems with Anti-Tax Economic Model.  I suspect the biggest problem is that TJB doesn’t care for any model that doesn’t justify infinitely-high tax rates.

 

Des Moines, sometimes you are just adorable:

adorable des moines

Des Moines has started posting commute travel times, just like a big city.  On a bad day, it could be as much as 2 minutes to downtown from here.

 

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Tax Roundup, 5/21/14: Practitioner Pitchforks and Torches edition. And: math remains hard!

Wednesday, May 21st, 2014 by Joe Kristan

20140521-1The new identification rules for remote signatures aren’t going over well.   (See update below.)  At a CPE event yesterday former IRS Stakeholder Liaison Kristy Maitre outlined the new e-filing identity match requirement we are supposed to meet (now!  for extended 2013 returns!).  These include “third-party verification” of identities of our long-time clients if they don’t visit the office.  The ones that visit, we only need to see their papers.

The 250 or so practitioners present didn’t appreciate the joke at all.  They asked the obvious question: how do we even comply with this?  It’s not at all clear how we get “third-party verification.”  I can pretty much guarantee that nobody is complying with that requirement now, because few are aware of it, and the ones that are don’t know where to start.

While the requirements are supposed to be part of the IRS war against identity theft, this effort is like responding to the attack on Pearl Harbor by bombing Montreal.  Identity thieves don’t waltz into tax prep offices and pay us to prepare fraudulent refund claims.  They prefer TurboTax.

Yet, there may be a method to the madness, suggested by one practitioner.  What if some outfit is gearing up to provide third-party verification services — say, one of the national tax prep franchises?  And the IRS has quietly created their revenue stream with this absurd rule?  You might say this preparer is cynical; I say he’s been paying attention.

So let’s fight.  Kristy is collecting comments and questions to send to her erstwhile IRS colleagues to try to stop this nonsense.  Send your comments to ksmaitre@iastate.edu.  I believe the IRS will back off if we brandish the electronic torches and pitchforks.

Update, 11:30 a.m.  I received a call from an IRS representative this morning saying that they have been getting phone calls as a result of this post (well-done, readers!).  She tried to reassure me by telling me that the third-party verification doesn’t apply to in-person visits.  I knew that.  I told her that as I read the rules, there are either “in-person” or “remote” transactions, with no third category of, say, “I’ve worked with this client for many years and they’re fine.” She didn’t disagree, though she still thinks I’m overreacting.  She did say IRS field personnel are  “elevating” the issue and seeking “clarification” from the authors of these new rules, including what “authentication” means for in-person visits and what a “remote transaction” is that would require third-party verification.  Keep it up, folks!

Related:

Russ Fox, Yes, Mom, I Need to See Your ID

Jana Luttenegger, Updated E-Filing Requirements for Tax Preparers

Jason Dinesen, Hold the Phone on the IRS E-file Outrage Machine 

Me, Welcome back, loyal client. IRS says I have to verify that you aren’t a shape-shifting alien.

 


20140521-2TaxProf, 
The IRS Scandal, Day 377.

News from the Profession.  Crocodile Injured By Falling Circus Accountant in Freak Bus Accident (Going Concern)

Kay Bell, National Taxpayer Advocate joins fight to stop private debt collection of delinquent tax bills.  I’d rather she fight to keep the IRS from implementing its ridiculous e-file verification rules.

TaxGrrrl, Congress, Ignoring History, Considers Turning Over Tax Debts To Private Collection Agencies

Jim Maule, It Seems So Simple, But It’s Tax.  “People are increasingly aware that the chances of getting away with tax fraud are getting better each day.”

Missouri Tax Guy,  NO! The IRS did not call you first.

 

Tax Justice Blog, Legislation Introduced to Stop American Corporations from Pretending to Be Foreign Companies.  How about we just stop taxing them?

Kyle Pomerleau, Tom VanAntwerp, Interactive Map: Where do U.S. Multinational Corporations Report Foreign Taxable Income and Foreign Income Taxes Paid? (TaxPolicy Blog).  Holland does well, as does Canada.

Howard Gleckman, Tax Chauvinism: Who Cares Where a Firm is Incorporated?

So we are left with a sort of financial chauvinism. It is important to some politicians to be able to say that a company is a red-blooded American company. But when it comes to multinational firms in a global economy, why does that matter? 

Because, ‘Merica!

 

Andrew Mitchel now has some online tax quizzes for your amusement.  If they are too tough, the next item might restore your self-esteem.

 

20120905-1If you can’t answer these questions, taxes are the least of your problems.  Tackle these quizzlers (via Alex Taborrok):

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow.

More than $102. Exactly $102,. Less than $102? Do not know. Refuse to answer.

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy.

More than, exactly the same as, or less than today with the money in this account? Do not know. Refuse to answer.

3. Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’

T. F. Do not know. Refuse to answer.

I won’t give away the answers, but I shouldn’t have to.  Sadly, most people find these questions hard.  From Alex Taborrok:

Only about a third of Americans answer all three questions correctly (and that figure is inflated somewhat due to guessing). The Germans and Swiss do significantly better (~50% all 3 correct) on very similar questions but many other countries do much worse. In New Zealand only 24% answer all 3 questions correctly and in Russia it’s less than 5%.

At least that helps explain Vladimir Putin’s popularity.

 

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