Posts Tagged ‘Joseph Thorndike’

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, 7/10/14: The sordid history of temporary tax provisions. And: NOLA mayor wins 10-year term!

Thursday, July 10th, 2014 by Joe Kristan

taxanalystslogoLindsey McPherson of Tax Analysts has a great, but unfortunately gated, article today, “Things to Know About the Tax Extenders’ History” ($link) Update: Tax Analysts has ungated the article, so read it all here for free! ( It details four points:

1. Two-Year Retroactive Extensions Are Often Passed Late in Election Years

2. Extenders Are Often Attached to Larger Bills

3. Congress Has Never Fully Offset Extenders Legislation

4. Most Extenders Have Been Renewed at Least 3 Times

What does “most” mean? “Of the 55 expired provisions that are the focus of the current debate, 39 have been around since 2008 or longer and thus have been extended at least three times…”

This implies that Congress has no intention of letting the extenders expire.  It only passes them temporarily to hide their real cost, because Congressional funky accounting doesn’t treat them as permanent.  It also requires lobbyists to come to fund-raising golf outings every year to ensure that they get their pet provisions extended.  Honest accounting would at least treat any provision extended twice as permanent, but accounting you and I would do time for is business as usual on the Hill.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 427.  It has this interesting bit, from the New York Times, Republicans Say Ex-I.R.S. Official May Have Circumvented Email:

Lois Lerner, the former Internal Revenue Service official at the center of an investigation into the agency’s treatment of conservative political groups, may have used an internal instant-messaging system instead of email so that her communications could not be retrieved by investigators, Republican lawmakers said Wednesday.

But the crashed hard drive epidemic is perfectly normal, isn’t it, Commissioner Koskinen?

 

Tony Nitti, Tax Geek Tuesday(?): The IRS Finally Figures Out The Real Estate Professional Rules.  Tony covers the IRS walk-back from its untenable position on the amount of participation required to be a “real estate professional.”  My coverage is here.

Paul Neiffer, Watch Out for Spousal Inherited IRAs.  “Spouses who inherited IRAs have a couple of elections available to them that non-spouses do not have.  However, care must be taken to make sure that the 10% early withdrawal penalty does not apply when distributions are finally taken.”

Kay Bell, Home sales provide most owners a major tax break

 

 

Accounting Today, IRS Loses Billions on Erroneous Amended Tax Returns.  A report from the Treasury Inspector General for Tax Administration faults IRS procedures to review amended returns.

 

Cara Griffith, The Criminal Side of Sales Tax Compliance (Tax Analysts Blog):

Imagine this scenario: In the middle of an acquisition deal, the due diligence review of a company being acquired reveals that the company has underremitted its sales tax liability. The deal is never finalized because of the problem. The company approaches its tax adviser with the news that it failed to remit some of the sales tax it collected and asks for advice. On hearing that, most state and local tax practitioners would cringe. It doesn’t matter why the company failed to remit the sales tax it collected from customers — the company is in serious trouble and could face both civil collection penalties and criminal prosecution.

You have to be special to legally keep sales tax you collect.

 

20140505-1Len Burman, “Pension Smoothing” is a Sham (TaxVox):

In a nutshell, here’s what it does: Companies can postpone contributions to their pension funds. This means that their tax deductions for pension contributions are lower now, but the actual pension obligations don’t change, so contributions later will have to be higher—by the same amount plus interest. In present value terms (that is, accounting for interest costs), this raises exactly zero revenue over the long run. 

More of that Congressional accounting.

 

Jack Townsend, Interesting Article from the Swiss Bankers Side.

Leslie Book, Recent Tax Court Case Shows Challenges Administering Civil Penalties and the EITC Ban (Procedurally Taxing)

Overnight, if you leave the cap off.  When Will the Soda Tax Go Flat? (Joseph Thorndike, Tax Analysts Blog)

Scott Eastman, $21,000 Tax Bill Just for Some Potato Salad (Tax Policy Bl0g).  I’ve had potato salad that should have been charged more than that.

Adrienne Gonzalez, Tax Superhero and George Michael Among Those Caught Using Tax Shelter in the UK.  This is a different type of shelter than the one that caused Mr. Michael’s prior legal troubles.

 

When they say it’s not about the money, it’s about the money.  From the Washington Post,  Former New Orleans mayor Ray Nagin sentenced to 10 years in prison:

“I’m not in it for the money,” Nagin said after he was elected to the first of two terms in 2002.

Mayor Nagin was convicted on 20 charges, including four charges of filing false tax returns.  Mayor Nagin’s indictment tells a story of pervasive fraud involving kickbacks and bribes for city business, and third-party payment of limo rides and private jet services.  But he did a heck of a job with Hurricane Katrina.

20140710-1

One interesting thing about the Post piece: it never mentions that Mayor Nagin is a member of a political party.  Unusual, for a politician.  Someone should look into that.

 

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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, 6/4/14: IRS to ease up on FBAR foot-faulters? And: nanny-state taxes!

Wednesday, June 4th, 2014 by Joe Kristan

Programming note: The Tax Update will take Thursday and Friday off this week to tend to a family wedding.  We’ll be back as usual Monday.

Former IRS Commissioner Shulman, showing how much he cares for innocent victims of his FBAR war.

Former IRS Commissioner Shulman, showing how much he cares for innocent victims of his FBAR war.

Maybe we shouldn’t be shooting jaywalkers?  The IRS may be declaring a cease-fire in its long war on inadvertent foreign account violators.  Tax Analysts reports ($link) that IRS Commissioner Koskinen told a tax conference that it will be modifying its Offshore Voluntary Compliance Initiative:

“We are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives,” Koskinen told a luncheon audience at the 2014 OECD International Tax Conference in Washington. “We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas.”

Gee, you think so?  You really think 25%-300% penalties might not be appropriate for the crime of committing personal finance while living abroad?  What could possibly have given him that idea?

     Koskinen also pointed to taxpayers residing in the United States with offshore accounts “whose prior noncompliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.”

“We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA,” Koskinen said. 

One of the things that made Doug Shulman the Worst Commissioner Ever was his brutal treatment of trivial inadvertent offshore paperwork filing violators.  Hopefully his successor will make coming into compliance voluntarily a transparent, predictable process designed primarily to ensure future compliance.  Something like state programs for non-resident non-filers, where taxpayers pay back taxes, if any, and interest for a limited number of open years would make sense  People are understandably reluctant to come into compliance when it can mean financial ruin.

The IRS has not released any details of this kinder, gentler approach, so curb your enthusiasm for now.

Related: IRS Commissioner Koskinen Announces that Changes — Liberalizations — Are In the Offing for OVDP 2012  (Jack Townsend)  “All in all, this is good news, at least from a hope perspective.”

 

20140409-1Robert D Flach offers YET ANOTHER POST CALLING FOR A VOLUNTARY TAX PREPARER DESIGNATION.  Robert makes his case for a “voluntary” designation for preparers who meet some standard.

Robert says something I agree with:

  Having the IRS oversee the designation is not the best idea.  I have suggested that the voluntary RTRP-like designation be administered by an independent industry-based organization like an American Institute of Registered Tax Return Preparers (see “It’s Time for Independent Certification for Tax Preparers“).

If the IRS has nothing to do with it, fine.  If it does, it will inevitably do special favors for its “voluntary” friends and make like difficult for others.

Robert is a little like the Scarecrow in the Wizard of Oz, looking for a brain.  The movie quickly makes clear that the Scarecrow already has a perfectly good brain; all he lacks is a diploma.  Robert, a perfectly good (if old-fashioned) preparer, doesn’t need a diploma to save his clients from the Wicked Witch.

 

TaxGrrrl, After TIGTA Report, Expect More Tax Refund Delays,  The IRS is encouraged to expand its refund offset programs.

Paul Neiffer, Portability Revisited. “With the “permanent” changes in the estate tax laws from about 2 years ago, we now have a permanent provision called portability.  This allows for the unused portion of someone’s estate to be “ported” over to the surviving spouse to be used on their final estate tax return.”

 

TaxProf, The IRS Scandal, Day 391

 

 

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.

Joseph Thorndike, Democrats Just Love Their Nanny-State Taxes (Tax Analysts Blog):

The Tax Foundation recently spotlighted a Democratic tax proposal that gives substance to the name-calling: the Stop Subsidizing Childhood Obesity Act, introduced last month by Sens. Tom Harkin, and Richard Blumenthal.

According to its champions, the act would protect children from the predations of junk food purveyors. In particular, it would deny manufacturers any sort of tax deduction “for advertising and marketing directed at children to promote the consumption of food of poor nutritional quality.” It would use the resulting revenue to help fund the Department of Agriculture’s Fresh Fruit and Vegetable Program.

That all sounds great. Except for the fact that it’s arbitrary, capricious, and an egregious misuse of tax policy.

The tax law – is there anything it can’t do?

Joseph adds, wisely:

Reasonable people can disagree about what qualifies as a loophole. But by almost any definition, the deduction for advertising junk food is not one.

Once you decide the tax law is a public policy Swiss Army Knife, there’s no logical place to stop.

 

20140411-1Kay Bell, Calories or volume: Which is the better tax on sugary drinks?  Neither.  Some problems just aren’t tax problems.

David Brunori’s righteous anger at taxes on e-cigarettes is now freely available at Tax Analysts Blog: Taxing E-Cigarettes Seems Crazy.  “Yet politicians routinely say that e-cigarettes will lead people to start smoking, or worse — use drugs! Are they daft?”  No, just greedy.

 

Renu Zaretsky, In the Midwest, Across the Pacific, and Down Under.  Tax Custs in Ohio and a rejected tax boost in Missouri are part of the TaxVox headline roundup today.

 

Tax Justice Blog, Will Anti-Tax Yogis Sink Tax-Reform in D.C.?.  If that’s what it takes to get the pic-i-nic basket.

 

This will make the homecoming in 2042 a little less awkward.  WMUR.com reports:

The woman who, along with her husband, held police at bay during a nine-month standoff in 2007 over tax evasion has apologized to the community.

Elaine Brown’s apology appeared in Plain Facts, a monthly publication written by Plainfield residents.

She said she and her husband Ed were trying to advance the “cause of justice.” She went on to say they “failed to take into account the impact we were having on others in the town. We failed to realize the fear, anxiety and impact we were causing these good people.

She was unable to apologize in person because she has been detained — until November 2042, according to the Bureau of Prisons inmate locator.  She should be home in time to invite her neighbors to her 102nd birthday party.

 

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Tax Roundup, 6/2/14: Tax moralism and moral panics. And: IRS, abetter of theives, scourge of victims!

Monday, June 2nd, 2014 by Joe Kristan

taxanalystslogoTax Analysts’ Tax Notes and State Tax Notes are part of my healthy breakfast, and today they are especially delicious.  The only bad part, for me, is that they are subscription publications, making them hard to share in full.  I can give you morsels, though.

Joseph Thorndike has an excellent discussion of the hollow moralism of tax debates, though he ends up defending it.  In the course of discussing an article by Allison Christians on the role of moralism in tax debates, he comes up with gem after gem.  He quotes Learned Hand’s discussion of the issue, which I find conclusive:

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

That never stops politicians, as Joseph points out:

     More recently, President Obama’s proposal for a “Buffett rule” clearly falls within that tradition of tax moralism (although in this version of the morality play, the billionaire plays the hero rather than the villain). Like the AMT, the Buffett rule is a rear-guard action to defend the fisc against the predations of aggressive avoiders.

But those sorts of Rube Goldberg tax contraptions are an admission of failure. They take for granted that the existing tax base and its statutory rate structure cannot be defended. But the efficacy of those second-best tax systems — at least when measured in terms of fairness — is anything but self-evident. And their costs in terms of complexity and opacity are substantial. 

If you move away from the law, to a system of “morality” in paying taxes, you lose your way.  Who decides what is moral?  Politicians?  Don’t make me laugh.  It’s hard enough to follow the law, given its ridiculous complexity.  If you then require taxpayers to meet subjective standards of whatever pressure group feels like calling a press conference that day, you make taxes pretty much impossible.

One point not mentioned is the conflicting moral obligations of taxpayers.  A rich individual has moral responsibilities to his children, his business and his own community.  The IRS can’t be the supreme moral agent.  And a corporation has moral and legal obligations to its shareholders, customers and employees that conflict with any “moral” obligation to the fisc.  Given that pensions are mostly invested in corporation stock and bonds, their “moral” obligation to give politicians more money for buying votes is hard to take seriously.

 

e-cigFor dessert, David Brunori chimes in on e-cigarettes and politicians

 I get the rationale for tobacco taxes. You smoke, you get sick, society has to pay for your medical care. That’s consistent with the classic rationale for excise taxes. Those taxes are legitimate only if used to pay for externalities — that is, the societal costs that aren’t borne by the market.

Of course, cigarette taxes in particular have never really been about externalities. If they were, every penny of revenue would go to smoking-related healthcare. Instead, dozens of states earmark some cigarette tax revenue for education (I still can’t believe teachers who rely on cigarette tax revenue for their raises aren’t leaving cartons of Lucky Strikes on their kids’ desks). 

Ah, but giving away cartons of cigarettes on a teacher’s salary?  Of course, my mom was a teacher, and I remember as a kid buying her cigarettes at the store.  But she never shared them, and I never picked up the habit.

David adds:

Taxing e-cigarettes is a money grab. If people use e-cigarettes instead of real cigarettes, the state loses money. The vested interests like the public employee unions and the myriad government contractors can’t have that. But proponents won’t admit the money-grabbing motive.

Iowa, like many other states, is a partner in the tobacco industry as a result of a shakedown settlement agreement with the big tobacco companies.  The industry continues to operate, with the politicians getting a cut of the revenue (nice vice racket you got there, hate to see something bad happen to it).  The moral panic over e-cigarettes is really about protecting this franchise.

 

20130419-1We’ll let them steal your money, and then we’ll punish you for it.  IRS freezes tax ID theft victims’ return – then hits them with late penalties. (Cleveland.com)

Pat Pekarek and her husband, Roger, discovered someone filed taxes using Roger’s Social Security number last year, after the IRS rejected their e-filed joint return.

The Pekareks, who live in Parma Heights, dutifully followed the IRS’ instructions to send their return by mail with documentation proving they were the real Pekareks. The IRS immediately froze their account, along with a credit that Pat Pekarek expected to use toward this year’s taxes.

A year later, the account remains in the IRS deep freeze – along with the credit. And now, even though it was the IRS freeze that kept the credit on ice, the agency is demanding the Pekareks cough up back taxes and pay late penalties.

The IRS has let identity theft get completely out of control, while spending its time and energy trying to regulate law-abiding preparers and harassing uncongenial political groups.  And they’ve managed to neglect and abuse the victims while doing so.  Good thing they are responsible for our health insurance system too.

 

William Perez, Foreign Bank Accounts due June 30th.  New form, and now you have to e-file.

TaxGrrrl, Las Vegas Man Cheated IRS, Taxpayers Using False Home Buyer Credits:  “Refundable credits are traditionally a magnet for fraudulent claims and this one was no different: initial reports indicated that nearly 100,000 refunds were perhaps inappropriately distributed, with $600 million of taxpayer credits labelled “suspicious” in 2009 (despite those numbers, Congress kept extending the credit).”

Jack Townsend, Accountant Sentenced For Tax Crimes; Conduct Included FBAR violations .  “The gravamen of Duban’s conduct is that he assisted the persons related to the automobile dealership in running nondeductible personal expenses through the corporation.”

Scott Schumacher, Winning the He-Said-She-Said Case (Procedurally Taxing)

Tony Nitti, S Corporation Shareholder Must Reduce Basis For Non-Deductible Corporate Loss 

 

20140401-1Lyman Stone, Response to Politico: Taxes and the Texas Miracle (Tax Policy Blog):

But long-term tax policies do matter. Stable, neutral, non-distortionary tax policies, offering low tax rates on broad tax bases, can support economic growth. Firm site selection is one channel, through which taxes affect economic decisions on the margin. There is robust evidence that taxes (while certainly not the only or even the largest factor) do matter for site selection. And, as one of the few site selection variables policymakers can directly control, it makes sense for them to be concerned about the role of taxes.

But not in the form of paying people to be your friends via tax credits.

 

Annette Nellen, Is tax reform on or off? Odd activities in the House last week

Kay Bell, Debate continues about tax havens and punishment fairness

 

Renu Zaretsky, Holes, Holidays, Hurricanes, and Tax Bills (TaxVox).  “The Illinois legislature passed a budget with revenue holes and no spending cuts.”

 

TaxProf, The IRS Scandal, Day 388

Me, 2 million served.  An arbitrary milestone, achieved!

 

Russ Fox, No, Fido & Lulu Can’t Own Your Business:

All corporations have to have a Board of Directors. That board handles various business items of the corporation. Now, in a tightly controlled corporation you might just have one board member–yourself. But Mr. Zuckerman elected a strategy that I haven’t seen before (and I doubt I’ll see again): He named his pets as board members.

They were probably as independent as any number of human board members.

 

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Tax Roundup, 5/28/14: Tax Fairy isn’t handicap-accessible. And: Why you should let your tax guy do the talking.

Wednesday, May 28th, 2014 by Joe Kristan


tax fairy
Audit defenders can’t defend themselves.  
There is something deep in our DNA that enables us to believe in the supernatural, at least when it comes to taxes. Otherwise sensible people act as if they believe in a Tax Fairy who can wave a magic wand to make taxes go away.  Operators offer themselves as intermediaries to the tax spirit world, taking real money to generate pretend tax breaks.

It had to take a real leap of faith to pay good money to the National Audit Defense Network.  Members of this Nevada group were convicted in Las Vegas yesterday of tax charges that included an implausible tax credit scheme.  They set up a “shopping” web site called Tax Break 2000 that was inaccessible to handicapped users.  They would then sell Tax Fairy adherents a “modification kit” to make the web site handicap-accessible for $10,475 — 20% down, and the rest payable on a promissory note “when they had no expectation that the customers would make payments on the promissory notes.”  They then told their clients that this generated a $5,000 tax credit.

How many Taxafarieans paid the $10,475 tithe?  According to the indictment, they sold 21,610 kits.  Assuming they collected 20% of the sales price, that grossed them $45,272,950.

Any attempt to commune with the Tax Fairy runs into snags.  The first big snag here was a letter from their own internal “dream team” of tax advisors telling them this wouldn’t work.  The indictment says the NADNers went opinion shopping and found accommodating attorneys who said it might work.  Good enough!

They had more difficulty clearing the next obstacle: a permanent injunction against selling Tax Fairy access.  But that’s the least of their problems now.

This case has attracted a little extra attention because of the involvement of a former NFL punter, who apparently decided to ignore his professional training and go for it.  When trick plays fail, they fail badly, and the participants now may face long prison terms.

And there is no tax fairy.

 

Wind turbineTony Nitti, Tax Geek Tuesday: Hot Assets And The Sale Of Partnership Interests

Kay Bell, Federal workers, including members of Congress and Treasury employees, owe Uncle Sam $3.3 billion in back taxes

No.  Does Warren Buffett Practice What He Preaches? (Paul Neiffer)  “The cost to Warren individually of raising his individual income tax bracket by 10% annually may cost him personally a couple of million or less, while his company saves over $400 million in tax by using energy tax credits.  I would make the trade-off any time.”

 

 

TaxProf, The IRS Scandal, Day 384

Joseph Thorndike, Bad Ideas Are Like Bad Pennies (Tax Analysts Blog).  He’s talking about private collection of IRS debts.  Considering that the IRS isn’t exactly blemish-free in its debt collection practices, I don’t share the objections to private collection of undisputed tax debts.

Joseph also raises this point: “But it’s also expensive to pander, since every dollar invested in IRS collection can return up to $20 in new revenue.”  I think that’s hugely unlikely as a marginal return, based on what I see in the field and the way the IRS misdeploys resources (preparer regulation, anyone?).

 

Not Senator Wyden

If there is something wrong with our tax exemption, then there is something wrong with America.  I won’t stand here while you badmouth our country!

David Brunori, Taxing Togas and Keggers (Tax Analysts Blog).  “States should consider ending the absurd practice of granting property tax exemptions to charitable organizations.”

Andrew Lundeen, The Economic Effects of Bonus Depreciation (Tax Policy Blog). “Permanently extending bonus depreciation would spur investment, lift wages, grow the economy, and increase federal revenue.”

Howard Gleckman, Turning Carbon Tax Theory Into Reality (TaxVox).  Don’t hold your breath for this to be enacted, even if it would keep that carbon in your lungs.

 

Do you ever wonder why practitioners like to do the talking when the IRS gets involved? Yes, by all means stand up for your rights when dealing with the IRS.  But there’s a line where you should stop.  Going Concern tells us of a Mr. Calcione who went way over the line:

Three days after the agent left the voicemail, Calcione left a couple voicemails of his own. One of the messages contained a threat made by Andrew Calcione that if the agent called him again he would show up at the agent’s home and torture the agent, then rape and kill his wife and injure his daughter while the agent watched, before killing the agent. A second message left by Calcione requested that Calcione disregard the first message, which Calcione said was left in error.

Oh, you didn’ t mean my wife and daughter?  Well, OK, then!

Mr. Calcione was convicted of threatening an IRS agent.  Whatever tax problems he had before, that voice mail made things much, much worse.

Related: Man Convicted Of Threatening To Assault & Kill IRS Agent, Family Over Audit Proceedings  (TaxGrrrl)

 

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Tax Roundup, 5/7/14: How to keep from beating up the poor with high marginal rates? And: priorities!

Wednesday, May 7th, 2014 by Joe Kristan
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Arnold Kling ponders solutions to the hidden high tax rates on the poor in SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance.  The problem arises because many welfare benefits phase out as income rises.  For example, the phase-out of the Earned Income Tax Credit means Iowans who qualify can face a combined federal and state tax rate of over 50% on additional income.  The problem is finding a way to means-test benefits without turning the inevitable reduction of benefits as income rises into a poverty trap.  Some Kling thoughts:

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

This would give recipients some power over their benefits, and the ability to choose which ones are more important to them — like normal people do with their earnings.  Unused  flexdollars would go into a savings account, which “could be used for medical emergencies, down payments when buying a home, or to save for retirement.”  This would reduce the incentive for “use it or lose it” spending binges.

Implicit marginal ratesImplicit marginal ratesThis seems like a much more promising approach than the current system with its overlapping benefits and multiple phase-outs that sometimes result in effective marginal rates over 100% for the working poor.   Modifying the income tax to provide a standard deduction up to the amount at which the phase-outs end would complement this system, keeping the income tax from adding a layer of explicit marginal tax rates to the rate implicit in the phase out.

Mr. Kling is a brilliant and underappreciated thinker.  I’m re-reading his Unchecked and Unbalanced, which among other things ponders ways to move decision-making on government services to the household and neighborhood level.

 

O. Kay Henderson, About 91 percent of Iowans e-filed their state income taxes:

A dwindling number of Iowa taxpayers submit paper income tax returns to the State of Iowa. Victoria Daniels of the Iowa Department of Revenue has preliminary results for all but the last three days of the tax season, which ended April 30 for Iowa income taxpayers.

“E-filing is up about 4.1 percent and approximately 91 percent of Iowans, to date, have filed electronically,” Daniels says.

I’ve been a fan of e-filing, but the IRS is doing its best to change my mind.

 

 

20140507-1Paul Neiffer, Payments to Veterinarians Require 1099 (Even If Incorporated)!

Peter Reilly, IRS Cannot Levy Tribal Payments

TaxProf, The IRS Scandal, Day 363.  This Washington Post Op-ed linked in today’s scandal roundup gets it right: “The very idea that the administration would protect someone who is hiding behind the fifth when there is not only smoke, but there is actually a clear glow of flames, is insulting.”

Annette Nellen, Taxes and Deficits in the Highway Trust Fund.  “Certainly, if we have more electric cars on the road, which don’t generate anything for the HTF, but still use the roads, a funding mechanism tied only to gasoline purchases is outdated.”

Kay Bell, Home prices, construction outlook up. So are property tax bills

 

Alan Cole, US International Tax System is Fundamentally Unserious (Tax Policy Blog):

The United States is one of the last six remaining countries in the OECD – along with Chile, Ireland, Israel, South Korea, and Mexico – to use a “worldwide” system of corporate taxation. The other twenty-eight countries in the OECD use the much sounder territorial system.

A territorial tax system ends at its country’s borders. In contrast, the United States tries to levy taxes on profits earned in countries other than the United States. The tax system sees an auto assembly plant in Craiova, Romania, built using international funding, staffed by Romanian workers, building a vehicle – the Ford B-Max – that isn’t even sold in the United States – and says “Aha! This is economic activity the United States should be able to tax!”

While it may seem unserious, worldwide taxation is deadly serious to Americans abroad and to U.S. Green Card holders.  Serious, and sometimes catastrophically costly.

 

taxanalystslogoTax Analysts Blog is on an equality kick:

Martin Sullivan, Piketty, Zuckerberg, and a Plan to Tax Wealth That Conservatives Can Support.  “David Miller, a tax attorney at Cadwalader,Wickersham & Taft in New York, has proposed that the federal government tax stock gains of the wealthy whether or not those stocks are sold.”   So they get to deduct losses, too?

David Brunori, Tax Follies in Pursuit of Equality.  “The fact that rich people are rich bugs the heck out of folks on the left.” David points out the folly of a California tax scheme that would try to control CEO compensation by hitting CEOs with punitive California tax rates.  That would make sure no corporate headquarters stay in California.

Joseph Thorndike, Piketty Is Wrong: Americans Don’t Have a ‘Passion for Equality’.  This strikes me as correct.  Patrick Henry said “give me liberty or give me death,” not “Give me liberty or give me equality.”  That contrasts with the “Liberté, égalité, fraternité” of Picketty’s France.

Renu Zaretsky, Retirement, Driving, Greenhouse Gases and Tax Burdens.  The TaxVox tax headline roundup covers a disturbing increase in retirement plan early withdrawal penalties and the Missouri override of its governor’s tax cut veto.

 

Sadly, this may compare favorably with all adults.  According to This FINRA Foundation Quiz, 76% of Millennials Have Absolutely No Clue (Going Concern)

 

Priorities.  From the Milwaukee Journal Sentinel:

George W. Curtis, 77, of Pickett, who practices law in Oshkosh, was charged with willfullly failing to pay taxes he owed for 2007, 2008 and 2009, a period when his law practice generated profits of more than $1 million. Curtis has been designated a “Super Lawyer” several times and has practiced for more than 50 years.

77?  Some people just love the law.  Except maybe not the tax law:

Assistant U.S. Attorney Matthew Jacobs, the prosecutor, said Curtis testified that his income wasn’t steady, that he had to front many expenses, and that he had higher financial priorities at times than paying taxes. In fact, Curtis did file returns that showed his income, but just didn’t pay.

But the government argued Curtis could have paid. During the period he wasn’t, he was paying his wife’s children’s college tuitions and a wedding, a new Lincoln SUV and buying $17,000 on wine.

You need a nice SUV to transport high-class wine.  Have you ever tried to get your wine home in a tax payment?

 

 

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Tax Roundup: April 30, 2014: Force of nature edition. And: Extenders move in U.S. House.

Wednesday, April 30th, 2014 by Joe Kristan

Iowa 1040s are due today!  If you are 90% paid in, they extend automatically with no filing.  If you need more time and need to pay in something, use IA 1040-V.

 

20130113-3House votes to make permanent six “expiring” provisions.  The House Ways and Means Committee voted to permanently extend six of the perpetually-expiring tax breaks that Congress renews every year or two.  They include:

  • A simplified version of the research credit
  • The five-year built-in gain tax recognition period for S corporations
  • The $500,000 Section 179 deduction limit
  • A provision reducing the net basis reduction for S corporation donations of appreciated property to the basis of the property.

The committee also voted for two international extenders.

The votes were mostly along party lines, which means they are unlikely to be passed in this form by the Democratic-controlled Senate. The Senate Finance Committee has already approved its own temporary extender package, and my guess is the final extenders package will look like the Finance Committee bill.

Tax Analysts reports ($link) that the committee isn’t done with extenders, but it isn’t clear when it will look at Bonus Depreciation.

The “no” votes for the House package objected to the lack of offsets to the revenue “lost” by the package.   I’m less upset.  While I oppose the research credit on principle, these provisions are permanent anyway; the whole “extender” process is a sham, conducted only to pretend that the tax breaks aren’t permanent so they “cost” less under Congressional accounting rules.  It’s the sort of thing that would be a felony in the private sector, but just another day for our leaders.  At least the House bill drops the pretense that these things won’t get passed every time they expire.

 

Additional coverage available at Accounting Today.

Related:

Tax Justice Blog, Rep. Dave Camp’s Latest Tax Gambit Is “Fiscally Irresponsible and Fundamentally Hypocritical”

Clint Stretch, Dreams of Tax Reform (Tax Analysts Blog)

 

 

20130117-1No gas tax boost this year.  Sioux City Journal reports that a last-gasp attempt to boost Iowa gasoline taxes died last night as the General Assembly continues its pre-adjournment frenzy.

 

David Brunori, Sad Pragmatism and Tax Incentives (Tax Analysts Blog).  “If tax incentives are an unavoidable reality, we should make them as transparent and accountable as possible.”  True, but that doesn’t excuse the politicians who take your money and give it to their special friends.

 

The Iowa State University Center for Agricultural Law and Taxation has released its 2014 summer seminar schedule.  It includes a slate of webinars on topics from Ethics to ACA mandates.  There will also be two big out-of-town events, in West Baden Springs, Indiana, and West Yellowstone, Montana.  I’m not able to participate this year, but they are a hoot and a great learning experience.

 

TaxGrrl, Widow Loses House Over $6.30 Tax Bill.  “A Pennsylvania woman has lost her home for little more than the cost of a Starbucks Frappuccino.”  The law in all its majesty.

Kay Bell, File IRS Form 1040X to correct old tax mistakes

Peter Reilly, Graduation Contingency Kills Alimony Deduction.  It’s very easy to screw up an alimony deduction with bells and whistles, as Peter explains.

 

20120531-1Jason Dinesen, Preparer Regulation and Judging Preparers Based on Size of Refund.  “Anyone who’s worked in this business has experienced the irate client who thinks the preparer screwed up because their refund was less than their friend/co-worker/hair dresser, etc.”

 

TaxProf, The IRS Scandal, Day 356

Jack Townsend, U.S. Congressman Indicted for Tax Related Crime

Joseph Thorndike, Airlines Say Ticket Taxes Would Be More Visible if They Were Better Hidden (Tax Analysts Blog)

Alan Cole, What Gift Cards Can Teach Us About Tax Policy (Tax Policy Blog)

Renu Zaretsky, Funding Tax Breaks, the IRS, and Public Pensions, Safety, and Schools.  The TaxVox headline roundup.

 

News from the Profession.  EY Is Tackling the Important Issue of Dudes’ Need for Flexibility (Going Concern)

 

Clear error is a standard used by appellate courts to review some lower court decisions.  A Tax Court case decided by Judge Paris dealing with horse losses yesterday involved purported destruction of records by an old girlfriend.  Here’s where the clear error comes in:

The wrath of a former girlfriend may be a formidable force, but it is not analogous to a hurricane-like natural disaster, and it does not constitute a reasonable cause outside petitioner’s control.

I’ve met Judge Paris, and I strongly suspect she’s never dealt with a bitter former girlfriend. Anyone who has would never have written such a thing.  But as she pointed out that the petitioner provided no evidence that such destruction occurred, so you oughta know that the case probably still is on solid ground.

 

Cite: Roberts, T.C. Memo 2014-74.  Additional coverage from Paul Neiffer, Partial Taxpayer Victory on Horse Farm Case

 

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Tax Roundup, 4/23/14: The Tax Fairy isn’t named “VEBA.” And: frivolous IRS notices!

Wednesday, April 23rd, 2014 by Joe Kristan

tax fairyThe Tax Fairy, that fickle goddess of painless massive tax reduction, is often sought in the misty fens of the welfare benefit sections of the tax law.  A U.S. District Court in California has deprived the Tax Fairy’s believers of one guide for their hunt.

CPA Ramesh Sarva and Kenneth Elliot led Tax Fairy seekers to Section 419, which provides for VEBAs — “Voluntary Employee Beneficiary Association” plans.  Properly operated, VEBAs enable employers to make deductible contributions to a plan that buys insurance for employees.

A company associated with Mr. Sarva and Mr. Elliot, Sea Nine, told employers that they could use VEBAs to get around the tax law rules against deducting most life insurance premiums.  Their customers deducted contributions to VEBAs and used them to buy whole-life insurance policies with high cash value accumulation on the business owners’ lives.  The owners then borrowed the cash values.  The purported result was a deduction, followed by tax-free access to the deducted cash via borrowing cash values.

Tax Fairy guides can always find willing customers: “…small business owners with high net worth (often doctors with small but lucrative medical practices),” according to the IRS complaint. It has not gone well for the Tax Fairy adherents:

Sarva has successfully marketed at least 33 separate VEBAs plans to a variety of small business owners.  All of these participants have been or are currently being audited by the IRS.  13 of these participant audits have been completed and have resulted in total tax adjustments of $3,500,519.

In other words, it doesn’t work.  The IRS warned people off of such plans as early as 1995, and the scheme was firmly shot down by a U.S. Court of Appeals in 2002 in the Neonatology Assoc. P.A. case.  In fact, Neonatology  was a Sea Nine client.  Undaunted, Sea Nine kept selling the idea, selling the plans through “a network of affiliated third parties” including “independent certified publica accountants (“CPA”) and financial planners.”   At least they did until yesterday, when they consented to a permanent injunction yesterday against further Tax Fairy hunts.

Sea Nine had clients all over the place; the complaint lists clients in California, Florida, Alabama, and Hawaii, all with big IRS exam adjustments.

A side note: This is another example of why preparer regulation will be little use in keeping practitioners on the straight and narrow.  The defendant was a CPA and as such faced much stricter credentialing than anything contemplated by the IRS.  Yet he continued to sell these plans for years after it should have been obvious that they didn’t work.

The Moral?  There is no Tax Fairy, and just because somebody has gotten away with something for a long time doesn’t mean they’ve found her.  Also: you can make somebody take a test.  You can make them somebody take CPE.  But you can’t make a bumbler competent or a scammer honest.

 

20130419-1Russ FoxIRS Prematurely Asking for Money:

A few years ago, the IRS routinely sent notices to taxpayers who filed tax returns prior to April 15th but didn’t pay their taxes until April 15th. After complaints from taxpayers and tax professionals, the IRS supposedly stopped this practice. Unfortunately, they’ve started it up again.

Another illustration of why we need a “sauce for the gander” rule that would require the IRS to pay a penalty to taxpayers when it takes such frivolous positions, same as a frivolous taxpayer would pay to IRS.

 

TaxProf, TIGTA: IRS Gave $1 Million in Cash Bonuses to 1,100 Employees Who Owe Back Taxes.  Trust me, they won’t do that for you.

Lyman Stone, More Film Tax Incentives Not a Solution for California (Tax Policy Bl0g).  No, not for California, but certainly for its filmmakers, fixers and middlemen.

Howard Gleckman, Should Congress Curb Donor Advised Funds?  They are a much more convenient and cost-effective than their alternative, private foundations, so Congress can be expected to put a stop to that.

 

Jim Maule, When It’s Too Late to Change One’s (Tax) Story

Kay Bell, Rough roads ahead as Highway Trust Fund runs out of money

TaxProf, The IRS Scandal, Day 349

Joseph Thorndike, It’s Good to Be the (Ex) President. But It Wasn’t Always. (Tax Analysts Blog).  “Until 1959, retiring chief executives got precisely nothing in the way of retirement benefits: no Secret Service protection, no administrative support, and certainly no money.”

News from the Profession.  McGladrey’s Latest PCAOB Inspection Reveals McGladrey Is Not Grant Thornton (Going Concern)

 

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Tax Roundup, 4/11/14. Why we extend. And: Tax Doctor, Tax Fairy?

Friday, April 11th, 2014 by Joe Kristan

4868Some folks just don’t like extensions.  Maybe they want their refund NOW.  Maybe they have never extended their return before, and they think it is somehow against the rules.  Some people believe an extension invites the IRS to come in and audit them.  And some people think they are just so special that they can bring in a complex return missing K-1s on April 10th and the preparers should just drop everything and get them filed somehow.

There isn’t much to do for the last category, except perhaps medication, or a thrashing by a crazed sleep-deprived preparer, but for more sensible folks, a basic understanding of extensions might help.

Extensions aren’t against the rules; the rules specifically provide for them.  Even in simpler times, tax administrators knew that it isn’t always possible for a busy person to put together all of the pieces of a tax return by April 15.

You still should pay up.  While extensions give you more time to file your tax return, they don’t give you extra time to pay.  The tax law asks you to estimate your tax liability and penalizes you  if you don’t have at least 90% of your taxes paid in by the April 15 deadline; the penalty is 1/2 percent per month.

Why bother with an extension if I can’t delay payment?    Probably the most important one is that if you are short of cash, the penalty for late payment on a return that you didn’t bother to extend is 5% per month — ten times the penalty for late payment on an extended return.  It forces you to at least take a stab at guessing your liability, helping you identify what pieces you have to gather to complete your extended return.  It also keeps you in compliance, and once you stop filing on time, it can be a hard habit to break.

But won’t it get me audited?  There’s no evidence that an accurate extended return filed during the extension period is any more likely to be audited than it would be filed on April 15.  The IRS selects returns based on what’s on them, now on whether they are extended.

There’s plenty of evidence that returns with errors are more likely to get extra IRS attention.  A return thrown together at the last minute is more likely to have errors than an extended return done during normal working hours by somebody who’s had some sleep.    For what it’s worth, I have extended my own return every year since 1991 with no IRS examination (knock wood).

Efile logoEfile logoe-file logoHow do I extend?  You file Form 4868 either on paper or electronically, along with any necessary payment, by April 15.  The IRS has more details here. It’s common to pay in enough to also cover your first quarter estimated tax payment with the extension.  It gives you some cushion in case you find more 2013 income while completing your return, and you can apply your return overpayment to your  2014 estimated tax when you do file your 2013 1040.

States have their own rules.  Iowa automatically extends your return without the need to file an extension form if you are at least 90% paid-in by the April 30 due date.  If you need to send them some money to get to 90%, you send it with Form IA 1040-V.

Our series of 2014 Filing Season Tips goes right through April 15.  Check back tomorrow for another one!

Russ Fox, Bozo Tax Tip #3: Be Suspicious!

 

tax fairyBelief in the Tax Fairy peaks at tax time.  The Tax Fairy is that magical sprite who will make all of your taxes go away painlessly while your sucker friends still send checks to the tax man.  It’s amazing what Tax Fairy adherents will believe.  Consider a Californian who worked as a software consultant.  He was put in touch with a “Tax Doctor” (my emphasis):

Early in 2006 petitioner’s friends recommended that he talk to the “Tax Doctor Corporation” (Tax Doctor) operated by a person representing himself to be Dr. Lawrence Murray (Murray). Petitioner spoke with Murray and members of Murray’s staff. Petitioner’s discussions with Murray and his staff consisted mostly of “a bit of a sales pitch”. They explained how they would handle his tax return preparation, what the tax savings would be, and the “structure” they would use.

Murray proposed setting up two corporations and preparing petitioner’s individual and corporate Federal income tax returns. Murray explained to petitioner that one corporation would be “operational” and the other would focus on “management”. Petitioner was unsure at trial which corporation was the operations entity and which was the management entity. Under the agreement with Murray petitioner would pay the Tax Doctor, as a fee for setting up the structure, the amount of the tax savings generated by the use of the structure. 

What could go wrong?

His C.P.A. told him that she was willing to incorporate his business activity but she would not do what the Tax Doctor had proposed because it was very aggressive. Petitioner, despite the advice of his C.P.A., decided to accept the proposal of the Tax Doctor.

I don’t need a CPA, I have a Tax Doctor!

Petitioner filed his 2006 Form 1040, U.S. Individual Income Tax Return, showing taxable income of zero. Nev Edel, one of the corporations the Tax Doctor formed for petitioner, filed a Form 1120, U.S. Corporation Income Tax Return, for the fiscal year ending (FYE) November 30, 2007. Nev Edel reported gross receipts of $285,785, total income of $291,669, and total deductions of $295,214. The largest single deduction was $237,600 for “contracted services”. Smoge Corp., the other corporation the Tax Doctor formed for petitioner, filed a 2006 Form 1120S, U.S. Income Tax Return for an S Corporation. Smoge Corp. reported total income of $186,640 and total deductions of $188,644. The largest single deduction was $172,166 for “contracted services”.

Somehow things went awry.

Murray was prosecuted and convicted in 2010 of Federal crimes associated with the preparation of his own returns and the returns of others.

This presumably led to IRS attention to our consultant’s returns, and a big assessment.  The taxpayer tried to avoid penalties because he relied on the Tax Doctor in good faith.  The Tax Court thought otherwise:

The advice of the C.P.A., who had no financial stake in the outcome of petitioner’s return positions, should have put petitioner on notice that additional scrutiny of Murray’s advice was required.

The moral?  If your tax professional, who does this for a living, says something is bogus, they just might be right.  And there is no Tax Fairy.

Cite: Somogyi, T.C. Summ. Op. 2014-33.

 

20140411-1William Perez, Six Things to Do Before April 15th

Kay Bell, What are ordinary & necessary business expenses? It depends

TaxProf, The IRS Scandal, Day 337.  More a boatload than a smidgen today.

That’s OK, you can just send me a gift card. Christopher Bergin, The Gift That Is Lois Lerner (Tax Analysts Blog):

Something bad happened here. And however bad her behavior, the problem isn’t Lerner. The problem is a culture that allows what she did to continue and that probably allows behavior that’s much, much worse.

Andrew Lundeen, What Could Americans Buy with the $4.5 Trillion They Pay in Taxes? (Tax Policy Blog).  A nice gift card, perhaps.

TaxGrrrl, House Committee Votes To Hold Lerner In Contempt, Others Push For Criminal Prosecution

Joseph Thorndike, How Dave Camp’s Failure Might Be Michael Graetz’s Victory (Tax Analysts Blog)

Peter Reilly, Clergy Out In Force To Defend Their Housing Tax Break   

Sports Corner: David Cay Johnston vs. Tax Girl on Twitter: PLACE YOUR BETS (Going Concern)

 

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Tax Roundup, 3/26/14: Using Bitcoins regularly will get you a really long Form 8949. And: underpants!

Wednesday, March 26th, 2014 by Joe Kristan


Bitcoin
Bitcoins may act like money, but IRS says they aren’t.  
The IRS yesterday announced how that it will treat Bitcoin “virtual currency” as property, rather than currency, for tax purposes.  Notice 2014-21 lays out the IRS treatment of Bitcoin and similar virtual money.  Some key points:

- As property, gains and losses on Bitcoin are normally capital gains and losses, unless the taxpayer is a dealer in Bitcoins.  That means losses are limited to capital gains plus $3,000 for individuals.  This contrasts with currency transactions, which normally generate ordinary income and loss under Section 988.

Transactions in virtual currency will normally generate gains and losses:

If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

That makes using Bitcoins a hassle for taxpayers who try to follow the law.  Everytime you buy something with Bitcoin, you will have a capital gain or loss, depending on fluctuations in the Bitcoin market.  Imagine if you had to record a little capital gain or loss based on the currency markets anytime you bought anything with cash.  If you use Bitcoins every day you’ll have a horrifying Form 8949 to report all of your gains and losses.

The basis in virtual currency is its value on date of receipt, if you acquire it in a transaction.  That same value is the amount you use to compute income if you are paid in virtual currency

- They point out the obvious:  “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Also, payments in virtual currency are subject to information reporting, same as cash.

Virtual currency “miners” generate ordinary income.  If they do it as a trade or business, it’s subject to self-employment tax.

The TaxProf has more; Accounting Today also has coverage.  Peter Reilly has Bitcoins Not Tax Fairy Dust – Second Life Still A Tax Haven?, wisely noting that the virtual currency isn’t generated by the Tax Fairy.  And TaxGrrrl weighs in with IRS Says Bitcoin, Other Convertible Virtual Currency To Be Taxed Like Stock .

 

Ashlea Ebeling, Supreme Court Says FICA Tax Due On Severance Pay:

What the Supreme Court decision means for employers is that what had long been the case –severance pay is subject to FICA tax—remains the case. And for employees who are laid off, it means that they will continue to get a little less in “take-home” severance because it’s dinged for their share of FICA tax.

It seemed like a reach to say otherwise, but now it’s not even that.

 

 

A hard-working fictional student.

A hard-working fictional student.

O. Kay Henderson, Legislators ponder tax credit for student loan payments.  A truly awful idea.  This credit doesn’t encourage getting higher education; it encourages borrowing to pay for higher education.  As an unintended but obvious consequence, it discourages saving to pay for college — there’s no tax credit for foregoing current consumption to pay for college later.  It’s stunning that lawmakers actually want to encourage more student debt when many students already are entering a brutal job market with crushing loan obligations.

Joseph Henchman has two posts at Tax Policy Blog that should be read together: Wisconsin Approves Income Tax Reduction, Business Tax Reforms and Who Would Pay a Higher Illinois Income Tax?  Not the folks that move to Wisconsin, for sure.

 

Jason Dinesen, More on the 0.9% Medicare Tax and Iowa Tax Returns

Paul Neiffer, Schedule F Reporting Update:

I got some feedback on my previous post on Tax Reform and low Schedule F reporting of income. Several sources of farm income does not show up on a Schedule F. This includes many common sales of farm assets such as breeding stock and equipment. Most of the expenses associated with this income is deducted on Schedule F, however when these assets are sold, none of the gains appears on Schedule F.  Rather, this income is usually reported on Form 4797.

That still doesn’t change the fact that these simple farmers play the cash method like a violin to achieve tax results other businesses can only dream of.

Tony Nitti, Tax Geek Tuesday: Demystifying The Deduction Rules For Accrued Liabilities   

William Perez, Identity Theft and Your Income Taxes

Kay Bell, IRS gives Colorado flood victims until Oct. 15 to file 2012 or 2013 tax returns claiming disaster losses

Janet Novack, Gotcha! Tax Court Penalizes IRA Rollover That IRS Publication Says Is Allowed   

 

David Brunori, Hang On to Your Wallets (Tax Analysts Blog)

Howard Gleckman, Dave Camp’s Plan for the Expired Tax Provisions: An Almost-Good Idea (TaxVox)

TaxProf, The IRS Scandal, Day 321

Tax Justice Blog, State News Quick Hits: To Cut or Not to Cut?

 

Joseph ThorndikeRaising Taxes on the Rich Won’t Balance the Budget — But It’s Still Important (Tax Analysts Blog):

 The modern American fiscal state is predicated on a bargain. During World War II, lawmakers were forced to expand the personal income tax to help pay for the fighting. Over the course of just a few years, they added millions of middle-class Americans to the tax rolls for the first time, transforming the income tax from a rich man’s burden to a middle-class millstone. In return, however, these same lawmakers offered the middle class an implicit (and sometimes nearly explicit) guarantee — rich people would be asked to pony up, too.

Cool story.  Let’s see how that works nowadays:

Top 1 pays more than bottom 90

Chart by Tax Foundation

So now the “rich” aren’t paying their “fair share,” they’re picking up most of the tab.  How does it work if you break it down further?

20131030-2

So not only do “the rich” pay their share of the freight, they pay a lot more than their share of earnings.  And when you take government benefits into account, the whole “fair share” argument is tough to support:

givers and takers

Chart by Tax Foundation

I don’t buy Joseph’s “social contract” thinking.  The whole emphasis on inequality being peddled by the administration is a diversion, an attempt to change the subject from the manifest failures of Obamacare and foreign policy blundering.  No matter how hard they hit “the rich,” or how bad doing so is for the overall economy, there is never a point where the politicians will say the rich are being hit enough.

To the extent “inequality” persists, it’s clearly not a direct function of the tax code or government spending.  Politicians, though, find it useful to encourage the belief that they can spend on whatever pleases the crowd by just by making the rich pay their “fair share” — as if they weren’t already.  It’s the flip side of the widespread belief that the government can just balance the budget by cutting foreign aid.   It’s just an attempt to fool the gullible long enough to win another election.

 

Going Concern, Thrift Shops Issue Specific Guidance on Deduction Amounts for Used Underpants.  I didn’t know there was a deduction for toxic waste.

 

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Tax Roundup, 3/12/14: Hundreds of Panthers fear ID-theft. And: more smidgens!

Wednesday, March 12th, 2014 by Joe Kristan

uni-logoID Theft may affect 200 University of Northern Iowa employees.  KWWL.com reports:

In February, when the issue was first discovered, about 50 people had reported issues filing their federal income taxes. Now, University officials say 200 employees have come forward, and but not all of those are fraud. Still, that has psychology department secretary Jan Cornelius concerned. She said her social security number was stolen.

The problem was identified by taxpayers whose returns were rejected because somebody else had already filed under their numbers.  You need to be careful with your Social Security Number, and you should never transmit tax documents as unencrypted email attachments.  Use a secure file transfer portal, like Roth & Company’s Filedrop, to send tax files electronically.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

More Smidgens.  The House Oversight Committee investigating the Tea Party Scandal issued a report yesterday blasting the idea that the IRS stall on right-side 501(c)(4) groups was just a non-political coincidence involving bumblers in Cincinnati.  Using IRS documents and e-mails, the report paints a picture of an effort driven by a highly-political bureaucrat to “do something” through IRS regulation to administratively reverse the Supreme Court’s Citizens United decision.  From the report’s conclusion:

Evidence indicates Lerner and her Exempt Organizations unit took a three pronged approach to “do something about it” to “fix the problem”of nonprofit political speech:

1) Scrutiny of new applicants for tax – exempt status (which began as Tea Party targeting);

2) Plans to scrutinize organizations, like those supported by the “Koch Brothers,” that were already acting as 501(c)(4) organizations; and

3)“[O]ff plan” efforts to write new rules cracking down on political activity to replace those that had been in place since 1959. Even without her full testimony, and despite the fact that the IRS has still not turned over many of her e-mails, a political agenda to crack down on tax-exempt organizations comes into focus. Lerner believed the political participation of tax-exempt organizations harmed Democratic candidates, she believed something needed to be done, and she directed action from her unit at the IRS. Compounding the egregiousness of the inappropriate actions, Lerner’s own e-mails showed recognition that she would need to be “cautious” so it would not be a “per se political project.”

Committee Democrats continue to insist that there is no “political motivation,” and no evidence of White House involvement.  To deny that targeting “Tea Party” and “Koch-funded” organizations is political is to insult our intelligence.  As far as White House involvement, the Chicago Way isn’t for the Boss to pick up the phone and call the Cincinnati service center.  The President’s public in-your-face criticism of the Supreme Court for Citizens United at a State-of-the-Union address gave his supporters in the bureaucracy all the guidance they needed.

The TaxProf has a roundup.

 

roses in the snowWilliam Perez, Deductions for Self-Employed Persons.  “Deductions that go on Schedule C reduce both the self-employment tax and the federal income tax.”

TaxGrrrl, Taxes From A To Z (2014): E Is For EE Bonds   

Russ Fox, The Moral Climate may have Changed but the Law Hasn’t. “Thus, until Congress changes the law a professional gambler cannot deduct gambling losses in excess of wins.”

Kay Bell, Beware tax break bait and switch.  “Yes, gifts to your favorite charity can be deducted, but only if you itemize on Schedule A.”

Paul Neiffer, Permanent Means Permanent:

North Dakota law regarding easements is unique.  It appears to be the only state in the country that limits easements to 99 years by law.  Since the Tax Code requires that the conservation easement be of a permanent nature, the Tax Court ruled in favor of the IRS and disallowed all of the easement charitable donations.

Oops.  Still, I think anything “permanent” should be looked at skeptically.  Nobody knows whether it will seem wise to lock up a parcel 100 years from now.

Tony Nitti, Tax Geek Tuesday: Tackling The Dreaded Section 754 Adjustment   

 

20120906-1David Brunori, Where Is the Outrage? (Tax Analysts Blog):

According to Good Jobs First, there are 514 economic development programs in the 50 states and the District of Columbia. More than 245,000 awards have been granted under those programs. I ask again, where is the outrage? The system is antithetical to the idea of free markets. A quarter of a million times, state governments decided what is best for producers and consumers. That should make us cringe. First, the government is inefficient at providing public goods, and it is terrible at manipulating the markets for private goods. But more importantly, those 514 economic development programs are almost all the result of insidious cronyism. Narrow business interests manipulate government policymakers, and those interests prosper to the detriment of everyone else. Free markets be damned.

And while I’m looking for outrage, where are the liberals? The 965 companies in the report received over $110 billion of public money. Berkshire Hathaway, a company with $485 billion in assets and $20 billion in profits, received over $1 billion of that money. Its chair, William Buffett, is worth about $58 billion. Buffet, by the way, is still a darling of the left. He has some nerve to call for higher taxes. The billion dollars his companies took would pay for a lot of teachers, healthcare, and other public goods. 

They take just a little bit at a time from all of us so we don’t notice, and they give it in big chunks to their well-connected friends, who certainly do notice.   The report David refers to is here.

 

Joseph Henchman, State Sales Tax Jurisdictions Approach 10,000 (Tax Policy Blog).  Small wonder online sellers don’t want to collect everyone’s sales tax.

Elaine Maag, The Many Moving Parts of Camp’s Tax Reform for Low-Income Families (TaxVox)

 

Joseph Thorndike, The Last Time Everyone Gave Up on Tax Reform, It Actually Happened (Tax Analysts Blog).  But not this time:

Ultimately, Reagan agreed to make tax reform a priority. And his support was crucial. No lawmaker, no matter how exalted, well intentioned, or energetic, can move the ball like a president.

Which is one very important reason why 2014 is different from 1984. President Obama has no discernible interest in fundamental tax reform. So conventional wisdom is right: The Camp tax plan is going nowhere fast.

I think that’s right.

 

All it needs is a little pasta and fresh lemon.  Argentina: Authorities investigate tax evasion via garlic exports through shell companies

Career Corner.  It Is Almost Certain You Will One Day Be Replaced by Machines (Going Concern).  

 

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Tax Roundup, 1/5/14: President proposes $1 million Sec. 1031 cap. And: other doomed stuff!

Wednesday, March 5th, 2014 by Joe Kristan
Economic supergenius

0-99, 0-414

The President trotted out his old petty tax increases in his 2015 budget yesterday, and a few new ones.  The  new taxes would go towards, among other spending increases, an increase in the Earned Income Tax Credit welfare program for childless taxpayers.

If history is a guide, the Obama budget isn’t going to do well in Congress.  His own party leadership in the Senate has already pledged to pass no budget at all.  When his 2013 budget plan came up for a vote in Congress, it was rejected 99 -0 in the Senate and 414-0 in the House.

Still, it is worth mentioning some of the tax proposals, just so you are aware of them and their low likelihood of passage anytime soon.  Also, in light of the recent Camp “tax reform” proposal, apparently no tax provision is too dumb to get bipartisan consideration, so some of these might even pass someday.

S corporations: the bill would tax as self-employment income 100% of K-1 income from professional S corporations and partnerships of materially-participating owners.  Businesses covered would include health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, brokerage services, and lobbying.  For some reason, regular compensation would no longer be wages, but would instead be self-employment income.  That would wreak havoc on everybody’s 401(k) and profit-sharing plans.

- Like-kind exchange benefits would be capped at $1 million per taxpayer per year.  That won’t be popular with the real estate industry.

The bill also drags out dozens of the old proposals from his prior budgets, including LIFO repeal, ordinary income treatment for carried interests, capping the value of deductions at 28%, and capping build-ups in retirement plans.  Nothing at all is likely to happen before the next election on these proposals, but as many Obama proposals are also included in some form in the GOP Camp plan, they all have to be considered viable next time a major tax bill shows signs of moving.

The TaxProf has a good link-filled roundup.  The official explanation of the revenue-raisers is here.

Other coverage:

Kay Bell, Obama budget proposes more child care help for younger kids

Leslie Book, President’s Budget Proposes Major Procedural and Administrative Changes (Procedurally Taxing).  “The popular media has generally described the plan overall the way Reuters did in reporting that it ‘stands little or no chance of being approved as is by Congress, where Republicans, who control the House of Representatives, disagree with the president’s policy priorities.’”

 

Des Moines Register, Voters OK increasing franchise fee in Des Moines.  The vote is the result of the city being ordered to repay an illegally-collected utility tax:

The money raised by increasing the franchise fee to 7.5 percent from 5 percent for seven years will be used to pay off about $40 million in bonds issued by the city to pay for the refund and administrative costs.

Among the “administrative costs” is $7 million in legal fees Des Moines was ordered to pay to the winning taxpayer attorneys after a scorched-earth court battle by the city to avoid repaying the illegal tax.  Next time, don’t collect an illegal tax, and pay up if you’re called on it.

 

Alan Cole, True Marginal Tax Rates under Chairman Camp’s Proposal (Tax Policy Blog).  Full of high-income phase-outs, it creates all sorts of goofy marginal rate anomalies:

Marginal Tax Rates Camp Tax Reform

Note the spike in rates at the low-end as a result of the earned-income tax credit phase-out.  That doesn’t even include the effect of the state EITCs that piggyback on the federal credit.  All of this is the opposite of tax reform.  Apparently neither party is ready for reform.

William Gale and Donald Marron, The Macro Effects of Camp’s Tax Reform (TaxVox): “How would Camp’s plan increase growth, and why is the range of estimates so wide?”

 

Paul Neiffer, Additional Tax Reform Items.  “Remember, this is just a proposal and nothing will happen this year.”

Gene Steurle, A Camp-ground for Tax Reformers (TaxVox).

 

20130419-1Russ Fox, Deadlines for Us, but Not for Them:

For practitioners, the current state of the IRS is such that you can expect a lot of delays in responding to notices. Think months instead of weeks. Expect to have to call the IRS to verify that your response was received, and make sure clients are aware that the IRS is moving like molasses rolling uphill. Make sure anything you send is documented: certified mail with proof of receipt if by mail; if faxing, make sure you have the proof of receipt. Given the lengthy delays our clients are going to be in fear for far longer…

For taxpayers, you need to be aware that expediency is not part of today’s IRS. You have to be expedient in responding to notices but don’t expect the IRS to be expedient in getting back to you. Do not worry if it takes a long, long time to resolve something with the IRS. That’s just par for the course today.

Unfortunately, clients generally assume that if the IRS has sent a letter, that means the practitioner screwed up.  Many people, especially old folks, just pay up when they get an IRS notice.

 

William Perez, Tax-Deductible Relocation Expenses

TaxGrrrl, Taxes From A To Z (2014): B Is For Basis   

David Brunori, Taxing Coca Cola while Exempting Broccoli is Bad Policy Even for Native Americans (Tax Analysts Blog):

 In any event, several newspapers reported that one of the sponsors of the proposal was himself obese. He decided to change his life and lost 100 pounds. And he did it without any tax increases or help from the government.

Like so many reformed smokers/overeaters/drinkers, he has become annoying about it.

Tax Justice Blog, State News Quick Hits: State Policy Makers Need a Tax History Lesson

 

TaxProf, The IRS Scandal, Day 300.

 

Cheer up!  Filing Your Tax Return Is Terrible — But It Was Worse 100 Years Ago (Joseph Thorndike, Tax Analysts Blog).

News from the Profession.  The Real Loser at the Oscars This Year Was PwC.  (Going Concern)

20140305-1Jason Dinesen shares his Tax Season Tunes:

Here’s a sampling of other tunes I listen to while working when not getting my Gordon Lightfoot fix:

  • Neil Diamond. Generally not his “famous” songs. I detest — and I mean absolutely revile — “Sweet Caroline,” for example. The original recording is okay, but he’s turned it into a hokey, over-the-top, karaoke show-tune over the last few decades. Blech. I like the more introspective songs like “Shilo,” “If You Know What I Mean,” “Stones,” pretty much anything from his relatively new “12 Songs” and “Home Before Dark” albums,  and a host of other Neil Diamond songs that most people have probably never heard of.

  • An mix of songs that include Billy Joel, pop rock from the 60s and early 70s, Elvis, Willie Nelson, Conway Twitty, AC/DC, Juanes, Bon Jovi, CCR, Johnny Cash and Jimmy Buffett.

In case you were wondering, I believe Jason works alone.

 

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Tax Roundup, 2/27/14: Doomed Tax Reform Frenzy Edition.

Thursday, February 27th, 2014 by Joe Kristan

President Reagan signs PL 99-514, the Tax Reform Act of 1986.
When I think of income tax reform, I think big.  I think of massive elimination of tax deductionPresident Reagan signs PL 99-514, the Tax Reform Act of 1986.s, with great big rate reductions as consolation for taxpayers that lose their breaks.  I look for elimination of alternative ways of tracking income and deductions, with the idea that one way that everyone can understand is better than special breaks for different industries.  I look to eliminate double taxation of income everywhere, including elimination of capital gain taxes and integration of the corporate and individual systems.

By these standards, the tax reform plan put forth by Dave Camp, the chairman of the House Ways and Means Committee, is a disappointment.  While it would make many simplifying changes to the tax law while rates, it would leave behind a system that would still be very recognizable to a Rip Van Taxman who fell asleep in 1993.  It prunes tax complexity, but it doesn’t begin to clear the forest.

Still, politics being what it is, trimming the weed sanctuary is probably the best we can expect.  Maybe better than we can expect.

 

Tony Nitti has already posted detailed walk-throughs of the individual and business parts of the proposal, so there’s no point in me repeating his work.  Instead I will list some of the bigger changes proposed, with my commentary.  I don’t expect anything like the Camp plan to be enacted during the current administration, but I think it gives us an idea of the kinds of changes that could happen after 2016, if the stars align.

Individual Rates.  The bill would have a three-bracket tax system: 10%, 25%, and 35%.  The 35% bracket would replace the current 39.6% bracket, and would only apply to income other than “qualifying domestic manufacturing income.”  Lowering rates is fine, but this would retain the stupid difference between manufacturing income and other income embodied in the current Section 199 deduction.  It’s a complex and economically illiterate break for a favored class of income paid for by higher rates on all other income.

Capital gains and dividends would be taxed as ordinary income, but only after a 40% exclusion.  That would be a 21% net rate on 35% taxable income. (Initially I said 14%, math is hard).

Against the forces that have risen on K Street, there is no victory.

Against the power that has risen on K Street, there is no victory.

Deductions would be trimmed back.  The maximum home mortgage interest debt allowed for deductions would be $500,000, instead of the current $1.1 million.  Medical deductions would go away.  Standard deductions would increase to $11,000 for individuals and $22,000 for joint filers.  Many itemized deductions would reduce taxes only at the 25% rate, rather than the 35% top rate.  Charitable deductions would be simplified, but only deductible to the extent they exceed 2% of AGI.  The deduction for state and local taxes would be eliminated.

The increase in the standard deduction is an excellent idea.  I’m fine with reducing the mortgage interest deduction.   The limiting of deductions to the 25% rate is pointless revenue-raising complexity.  The elimination of the medical deduction will be a real burden on people in skilled nursing care; they are the people who generally can take this deduction.  Taxing them while they burn through their assets paying nursing home costs  will only put them into title 19 that much sooner.

While I am sympathetic with the policy reasons for not allowing a deduction for state and local taxes, those reasons don’t apply to taxes arising from pass-through business income.  State taxes are a cost of doing business for those folks, and should be deductible accordingly.

Alternative Minimum Tax would go away.  About time.

Corporate rates.  The proposal replaces the current multi-rate corporate tax with a flat 25% rate.  Excellent idea, as far as it goes, but it is flawed by the 35% individual top rate; it provides a motivation to game income between the individual and corporate system.

The proposal eliminates a number of energy credits while retaining the research credit.  I think that it would be better to get rid of the research credit and lower rates.  I think the IRS is no more capable of identifying and rewarding research than it is of fairly administering political distinctions.  Unfortunately, the credit seems to be a sacred cow among taxwriters.

Incredibly, the Camp corporate system gets rid of the Section 199 deduction while retaining a similar concept for individual rates.  Here it doesn’t get rid of pointless and economically foolish complexity; it just moves it around in the code.

LIFO inventories go away under the proposal.  As this comes up every proposal, it’s going to happen sometime.

Carried interests become taxable as ordinary income.  This is more complexity, apparently a sop to populist rhetoric.

Pass-throughs would be tweaked.  S corporation elections would be easier to make, and could be delayed until return time.  Built-in gains would only be taxable in the first five years after an S corporation election, instead of ten years.  Basis adjustments on partnership interest transactions would be mandatory, instead of elective.

Fixed assets would have mixed treatment.  While the Secti0n 179 deduction would permanently go to $250,000, depreciation would go to a system more like the pre-1986 ACRS system than the current MACRS system.

20120702-2Cash basis accounting would be more widely available, and fully available to Farmers and sole proprietors.  This is a step in the wrong direction.  Advocates of cash accounting say that it provides “simplicity,” implying that poor farmers just can’t handle inventory accounting.  Meanwhile these “poor” bumpkins play this system like a fiddle, manipulating cash method accounting to achieve results that are only available through fraud to the rest of us.  Modern farm operations with GPS, custom planting and nutrient plans, and multi-million dollar asset bases are as able to handle accrual accounting as any other business of similar size.

There’s plenty more to the plan, but you get the idea.  I find it disappointing that they don’t replace the current system of C and S corporations with a single system with full dividend deductibility.  I find the treatment of preferences and tax credit subsidies half-hearted.  I think there should be fewer deductions, fewer credits, and a much bigger standard deduction.  That’s why I’d never get elected to anything, I suppose.

The TaxProf rounds up coverage of the proposal.  Other coverage:

Peter Reilly, The Only Comment On Camp Tax Proposal You Need To Read – And Some Others

Paul Neiffer, Tax Reform – Part ?????!!!!!  “Since this is a mid-term election year, it has little chance of passing this year, but it is important to note possible changes that Congress is pondering.”

Annette Nellen, Congressman Camp’s Tax Reform Act of 2014 Discussion Draft

Leslie Book, Quick Thoughts on Procedural Aspects of Camp’s Tax Code Overhaul Proposal and the Spate of Important Interest Cases (Procedurally Taxing)

Joseph Thorndike, Democrats and Tax Reform: Can’t Do It With ‘Em, Can’t Do It Without ‘Em (Tax Analysts Blog).  “If you’re a left-leaning populist, what’s not to like?  Well, at least one big thing: The bill doesn’t raise taxes.”

TaxGrrrl, Camp’s Tax Proposal: The First Thing We Do, Let’s Kill All The Lawyers 

Kyle Pomerleau, Andrew Lundeen, The Basics of Chairman Camp’s Tax Reform Plan (Tax Policy Blog).  “We’ll have more analysis on the plan soon – it will take us days to get through the 979 pages of legislative text – but in the meantime, here are the basics.”  They note that the plan uses tax benefit phase-outs based on income — a bad idea that creates hidden tax brackets.

Renu Zaretsky, Tax Reform: one foot in front of the other (TaxVox)

 

Other Things:

William Perez, Last Year’s State Tax Refund Might Be Taxable

Jason Dinesen, Glossary of Tax Terms: Depreciation 

Trish McIntire, Brokerage Statements.  “Actually, my problem is clients who don’t bring in the whole statement.”

 

Jack Townsend, Wow! Ty Warner Is Ty Warner is Not Quite the Innocent Abroad 

Janet Novack, Senate Offshore Tax Cheating Report Skewers Credit Suisse And U.S. Justice Department 

TaxProf, The IRS Scandal, Day 294.  I note that Lois Lerner won’t testify without being immunized from prosecution.  “Not a smidgeon” of wrongdoing, indeed.

 

Finally, Seven People Who Have a Worse Busy Season Than You, from Going Concern.  That’ll cheer you right up.

 

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Tax Roundup, 2/19/14: Irish Democracy on Independence Day Edition.

Wednesday, February 19th, 2014 by Joe Kristan
Via Wikipedia

Via Wikipedia

My Poli-sci professors didn’t teach “Irish Democracy“:

More regimes have been brought, piecemeal, to their knees by what was once called ‘Irish Democracy,’ the silent, dogged resistance, withdrawal, and truculence of millions of ordinary people, than by revolutionary vanguards or rioting mobs.

One regime with buckling knees is Iowa’s 76-year ban on fireworks.  From the Des Moines Register:

On Monday, a subcommittee passed Senate Study Bill 3182, which would allow Iowans to shoot off firecrackers, bottle rockets, Roman candles and similar devices. The measure, which won approval despite objections from medical groups worried about public safety, now goes to the Iowa Senate State Government Committee.

Sen. Jeff Danielson, D-Cedar Falls, a professional firefighter who chairs the Senate panel and is sponsoring the legislation, sees the bill as acknowledging reality. Iowa is one of only four states to ban most fireworks but allow sparklers and novelties, including toy snakes and caps used in cap pistols. Selling or firing anything else is a simple misdemeanor that can result in a fine of $250.

Danielson noted that Iowans already have fireworks in their car trunks and in their basements that are purchased in other states, even if they can’t legally explode them.

In other words, Iowans are ignoring the law.  It’s funny that we celebrate U.S. independence via Irish Democracy.  Of course there’s a tax angle:

Collecting tax revenue from legal sales of fireworks has been the crux of the argument in states where laws have recently changed, said Julie Heckman, executive director of the American Pyrotechnics Association. 

Count on legislators to do what constituents want when they finally see that there’s revenue to be had.

 

In other Iowa legislative news:

A bill has been introduced to repeal Iowa’s inheritance tax.  S.F. 2222 is an excellent idea that was consigned to its doom by being assigned to a subcommittee of Bolkcom, Bertrand and Quirmbach.

A state general fund spending limitation, with savings assigned to reserve funds and a “personal income tax rate reduction fund,” would be created by S.F. 2220.  I love the idea, but until Iowa’s long term pension funding problem is addressed, it’s all window dressing.

20120906-1A new form of corporate welfare for developers is contemplated in H.F. 2305.  It would create a “workforce housing tax incentives program” whose requirements imply that some lobbyist has specific projects in mind:

First, the housing project must consist of a certain type and number of dwelling units. The project must include, at a minimum, four or more single-family dwelling units, one or more multiple dwelling unit buildings that each contain three or more individual dwelling units, or two or more dwelling units located in the upper story of an existing multi-use building…

Second, the housing project must involve a certain type of development in a certain geographic location. The project may involve the rehabilitation, repair, or redevelopment of any dwelling unit if it occurs at a brownfield or grayfield site, as those terms are defined in the bill, or in a distressed workforce housing community. The project may involve the rehabilitation, repair, or redevelopment anywhere in the state of a dilapidated dwelling unit or a dwelling unit located in the upper story of an existing multi-use building. The project may involve the new construction of a dwelling unit if it is in a distressed workforce housing community, but shall not include the new construction of a multi-use building…

Third, the average dwelling unit cost of a housing project must not exceed $200,000 per dwelling unit, or $250,000 per dwelling unit if the project involves the rehabilitation, repair, redevelopment, or preservation of “eligible property”, which means the same as defined for purposes of the historic preservation and cultural and entertainment district tax credit in Code chapter 404A…

The median price of a home sold in Iowa was $132,453 in 2013.  This bill would subsidize construction of much more expensive dwellings than we already have for “workforce housing.”   That means builders of unsubsidized units would lose out to whoever is behind this credit.  Owners of houses already built will have their values reduced by the addition of subsidized units to the market.  But the Economic Development bureaucrats will have more money to give to their friends.

 

 

David Henderson, Krugman on Supply-Siders and Incentive Effects of Tax Cuts:

This is an interesting admission on Krugman’s part for two reasons. First, he recognizes, as one must, that the Laffer curve exists. Second, he admits that supply-siders don’t kid themselves that we are in the backward-bending portion, the part where an increase in tax rates reduces government revenues and a decrease in tax rates increases government revenues. I so miss the Paul Krugman of the 1990s.

To be honest, some do kid themselves, just as many of their oppenents deny that taxes have any disincentive effects.

 

Kyle Pomerleau, Andrew Lundeen, Share of U.S. Corporate Income and Taxes by Size (Tax Policy Blog).  “In 2010, U.S. corporations paid about $223 billion in income taxes on slightly more than $1 trillion in taxable income. However, the vast majority of this income and taxes is attributable to the roughly 2,700 corporations with assets above $2.5 billion.”

 

Jason Dinesen, The Iowa Taxpayers Trust Fund Tax Credit   

Joseph Thorndike, Harry Truman Knew the Truth: IRS Budget Cuts Are Very Expensive (Tax Analysts Blog).

TaxProf, The IRS Scandal, Day 286

David Brunori, Blaming Big Corporations Is Not the Answer (Tax Analysts Blog) “Following the law is hardly a corrupt activity.”

 

Tax Justice Blog, Tax Preparers Should Be Regulated.  Nonsense based on the unwarranted assumption that the regulations will actually solve anything.

Kay Bell, Guns & taxes converge again, this time in Connecticut, Florida

 

News from the Profession.  The CPA Exam is Broken Into Parts But These Sentences Not So Much (Going Concern)

 

20130316-1Maybe Irish Democracy is better than voting democracy.  From Arnold Kling:

James Lindgren reports,

in 2012 a majority of Democrats (51.6%) cannot correctly answer both that the earth revolves around the Sun and that this takes a year. Republicans fare a bit better, with only 38.9% failing to get both correct.

I file this under “libertarian thought,” because to me it speaks to the issue of how romantic one should be about democratic voting.

Science!

 

Programming Note: I am airborne much of today.  I am improvising the back end of my travel plans to avoid the blizzard of doom slated for Iowa.  In short, no posting is likely tomorrow.  See you Friday!

 

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Tax Roundup, 1/30/14: Gas tax increase advances. And: IRS starts to accept 1040s, but not issuing refunds yet.

Thursday, January 30th, 2014 by Joe Kristan

 

Via Wikipedia

Via Wikipedia

They’re still trying to increase Iowa’s gas tax, reports William Petroski of the Des Moines Register:

An Iowa House subcommittee voted 5-0 today to approve a 10-cent increase in the state’s gasoline tax, although the proposal still faces steep odds of winning final approval this session.

The bill, managed by Rep. Josh Byrnes, R-Osage, would raise the fuel tax by three cents the first year, an additional three cents and following year, and four cents the third year. When fully implemented, the tax increase would generate $230 million annually for city, county and state roads.

It’s always hard to increase taxes in an election year.  There is a good argument that gas taxes are the way to pay for roads, and that Iowa’s tax needs updating, but so far Iowa’s road spending is in line with most other states, and the talk of a “crisis” isn’t convincing everyone.

 

Iowa Farmer Today, Little action expected on taxes in Legislature.  It quotes my co-presenter at the Farm and Urban Tax Schools, Roger McEowen:

McEowen, head of the Center for Agricultural Law and Taxation (CALT) at Iowa State University, says it is always possible the state might do something to clean up its tax code, but it appears unlikely this year.

“Frankly, I don’t think anything important is going to happen on taxes, not in this legislative session,” he says.

It is a sentiment echoed by many other legislative observers.

Like me.

 

 

20130419-1TaxGrrrl, IRS Accepting Returns As Part Of Test Program, Not Issuing Refunds Early

Trish McIntire, Yes, You Have to Wait.  If you haven’t received your W-2, you can’t file using your last 2013 pay stub.

Jason Dinesen, Iowa Firefighter/EMS Tax Credit.  A $50 spiff to volunteer firefighters and EMS people. One more feel-good provision that clutters up the tax law but is too small to enforce.

Brian Strahle, SALT PRACTICES: WHAT PEOPLE THINK, BUT DO NOT SAY.  “SALT” is “State And Local Taxes.”

Paul Neiffer looks at the predictably expensive and absurd farm bill: How To Make an Extra $100 Per Acre!  It brings to mind the old joke:  “How did the farmer double his income?  He bought a second mailbox.”

Related: Billionaires Received Millions From Taxpayer Farm Subsidies: Analysis (Huffington Post)

William Perez, Earned Income Credit Recipients by State

 

 

Phil Hodgen, How Many Appointments in Buenos Aires to Expatriate?  The State Department doesn’t always make it easy to shed U.S. citizenship.

Brian Strahle, FATCA and Unintended Consequences.  A story of an American in Switzerland who is losing the ability to commit personal finance because of this anti-”fatcat” legislation.

 

taxanalystslogoDavid Brunori, A Sales Tax Conundrum (Tax Analysts Blog):

The sales tax has been a blessing and a curse. One of its great virtues is that it is collected by the vendor, which then remits it to the state. Neither the taxpayer nor the tax agency has much to do except pay and collect. The vendor does the work. The success of the sales tax for the last 90 years is largely attributable to vendor collection. But if the vendor doesn’t collect and remit the appropriate tax, it is liable for the amounts. The vendor will have to pay the unremitted tax and could face severe penalties and even criminal charges.

So if a vendor is unsure about the status of an item it’s selling, it will collect the tax. Better to collect and remit tax not owed than to face the consequences of a mistake.

David notes that online vendors will have to deal with many states, with very confusing rules, and that over-collection of sales taxes is the inevitable result.  Not that the states mind.

Cara Griffith wonders, Are State Tax Authorities Hiding the Ball? (Tax Analysts Blog).  “I’ve noticed an emerging trend in some state departments of revenue – a move toward secret law. In a time when transparency has become a buzzword, some revenue departments are doing what they can to avoid transparency.”

 

William McBride, State of the Union: Corporations Continue to Flee (Tax Policy Blog)

Tax Justice Blog, Why the Business Tax Reform Proposal in Obama’s SOTU Is Not as Great as It Sounds

Kay Bell, Taxes touched on lightly in State of Union via EITC, MyRA

Joseph Thorndike, The War on Wealth Is Not New.  (Tax Analysts Blog).  True.  And it has always been dishonest, disgraceful, corrupt, and impoverishing.

 

The Critical Question.  What Happens When You Mix a Seedy Strip Club, an Unsophisticated Taxpayer and the Tax Court? (Going Concern).  I’m sure if it was one of those real elegant and distinguished strip clubs, there wouldn’t have been a problem…

 

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Tax Roundup, 1/22/14: Let’s pay it for Hollywood! And: choosing a preparer.

Wednesday, January 22nd, 2014 by Joe Kristan

haroldTaking your money and giving it to Hollywood.  Oscar Nominees Cash In On State Tax Subsidies (Howard Gleckman, TaxVox):

Each of the nine movies nominated for this year’s Oscar for best film may already have taken home a pile of tax subsidies. Seven brought back state goodies from the U.S. and two got cash for their work in the U.K.

And, according to data collected by the Manhattan Institute, the winner is….Wolf of Wall Street. The $100 million black comedy about (irony alert) over-the-top greed among sleazy stockbrokers got a 30 percent tax credit for making the movie in New York State.

The Empire State isn’t even the most generous when it comes to doling out tax incentives to filmmakers. In Louisiana, moviemakers not only get a 30 percent credit against overall in-state production costs but also an additional 5 percent payroll credit. Even better, filmmakers with no state tax liability can monetize the credits by selling them to firms that do owe Louisiana tax or even selling them back to the state at 85 percent of their value.

Iowa used to do this, until its film tax credit program collapsed in scandal and disgrace following revelations that filmmakers were charging fancy cars and personal items to Iowa taxpayers under the guise of “economic development.   Further revelations showed that millions of dollars of pretend expenses were used to claim the credit, taking advantage of credulous administration and almost non-existent oversight.

More from Howard Gleckman:

No doubt these credits are good for filmmakers. And I’m sure residents get a kick out of seeing Leonardo DiCaprio shooting a scene in their neighborhood (assuming they are not steamed over the related traffic jam). But is there an economic payoff in return for these substantial lost tax revenues as supporters claim?

Most studies conclude there is not.

It’s amazing that politicians think Hollywood deserves their taxpayers dollars.  Fortunately, Iowa film subsidies now are limited to housing and meal expenses for filmmakers.

 

Jason Dinesen, Deducting Miles Driven for Charity.  “Taxpayers can take a deduction of 14 cents/mile for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.”

Tony Nitti, Tax Geek Tuesday: The Sneaky Tax Consequences of Real Estate Repossessions 

 

Choosing a preparer?

Kay Bell, Time to pick the proper tax pro.  She gets one thing wrong about the IRS:  “For years, the agency has been trying to set up a system under which it register and test tax preparers to help ensure that they meet a minimum competency level.”

No, the agency simply wants to expand its control over preparers and help powerful friends in the big tax prep franchises.  The “minimum competency level” stuff is a weak pretext.

Robert D. Flach, IT’S THAT TIME OF YEAR AGAIN – CHOOSING A TAX PREPARER:

Contrary to the popular “urban tax myth”, unfortunately perpetuated by uninformed journalists and bloggers, just because a person has the initials “CPA” after his/her name does not mean that he/she knows his arse from a hole in the ground when it comes to preparing 1040s.  

True.  But a lot of the best prepaers are CPAs.  Not everybody needs a CPA.  Many folks just need somebody who knows a little more than they do to help them put the W-2 income in the right place.  But if you are doing a complex business return — even on a 1040 — a CPA may be your best bet.

That’s not to say only CPAs are competent preparers.  Enrolled Agents can be very good, and there are many very competent unregulated preparers, like Robert.  I think the competence curve between CPAs and unenrolled preparers would look something like this:

competence curve

The more complex your return, the more likely it is that you will want to bring in an Enrolled Agent or a CPA, but if you already have a strong unregulated preparer who is taking care of your tax needs, you’d be foolish to switch.

 

Paul Neiffer, Average is Important for 2013 Tax Filing.  Farm income averaging, that is.  Another example of a provision that would result in frivolous return penalties for anyone but farmers.

Fairmark.com: Share Identification Under Attack

 

20121120-2Tea Party: Resolved: Obamacare Is Now Beyond Rescue.  Oh, wait, that wasn’t the Tea Party.   It was a debate audience on New York’s Upper West Side.  

TaxProf, The IRS Scandal, Day 258

William Perez, The Number of Sole Proprietors has been Rising for 30 Years

Tax Justice Blog: CTJ Submits Comments on the Finance Committee Chairman Baucus’ International Tax Reform Proposal.  They have very different, and largely opposite, concerns from the Tax Foundation.

Jack Townsend, Tax Notes Article on IRS 2013 Victories in Offshore Evasion

 

gatsoNext: automated pedestrian jaywalking camera fines, for our own safety:  NYC Cops Allegedly Beat Up Jaywalking Elderly Man, Refused to Tell Son Which Hospital He Was In (Ed Krayewski, Reason.com)

But I thought it was about traffic safety, not money…  Council members: Traffic camera revenue helped keep property taxes down, pay for public safety.

 

The importance of philanthropy: Warren Buffett Offers $1 Billion For Perfect March Madness Bracket  (TaxGrrrl)

 

The Critical Question: A Meat Tax? Seriously?  (Joseph Thorndike, Tax Analysts Blog).

News From the Profession: Guy Who Couldn’t Hack Two Years in Public Accounting Needs Validation He Isn’t a Loser (Going Concern)

It’s Academic!  How Not to Use Your Faculty Laptop (TaxProf)

 

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Tax Roundup, 1/17/14: Envy as a principle of tax policy. And: my maybe webinar!

Friday, January 17th, 2014 by Joe Kristan

taxanalystslogoJoseph Thorndike, the tax historian at Tax Analysts, asks: What if the Income Tax Is All About Envy? Would That Be So Bad?.

The short answer: yes, it would.  The primary purpose of a tax is to fund the operations of the government.  Asking the tax to do anything else makes it worse at its main job, while imposing wealth-destroying distortions on the economy.  Also, as we noted the other day, increasing taxes on “the rich” has coincided with an increase in inequality.  It’s not clear at all that taxes at any non-catastrophic level can “help” inequality.

But its a slow news day, so let’s spend a little time on a longer answer.  Joseph thinks that inequality on its own is bad, even when “the poor” are well-off in real, but not relative, terms:

In other words, even if a rising tide lifts all boats, the relative size of everybody’s boat still matters. If some boats are much bigger than others, then a society is vulnerable to political instability.

Now, you can object that all the people with little boats are just feeling envious. But that doesn’t make the envy disappear; moral indignation may be satisfying, but it’s not a particularly effective means of keeping the peace. What’s needed, if you’re trying to fend off revolution, is some sort of actual policy response to feelings of relative deprivation.

I think Joseph greatly overstates the risk of well-fed people rising up against their neighbors just because they have nicer cars and houses.  People with something to lose tend to be risk-averse, and few things are riskier than revolution.   Still, that’s not something I can empirically demonstrate.

Equality in action in the Soviet Union on the Belomor Canal

Equality in action in the Soviet Union on the Belomor Canal

One thing that is indisputable is that catastrophe happens when a government makes “equality” its driving principle.  It was tried extensively in the 20th century, and tens of millions became equally dead as a result.  Given that history, equality as an end in itself has no moral force.

In our current politics, inequality is the cynical rallying cry of a President who lives in a mansion and plays golf at exclusive resorts pretty much every week.  He presides over a listless economy, enormous deficits,  and a health reform plan that is a debacle.  He’s out of ideas, so he’s reduced to saying it’s the rich guy’s fault.  Given the approval ratings he’s getting out of it, revolution seems a long way off.

 

Scott Hodge and Andrew Lundeen, High Income Taxpayers Earn the Majority of All Pass-Through Business Income (Tax Policy Blog).  They make a point that can’t be repeated too often:

It is often said that raising top tax rates will have little effect on business activity because only 2 percent of taxpayers with business income will be impacted. However, the more economically meaningful statistic is how much overall business income will be taxed at the highest rates. In 2011, the vast majority (70 percent) of pass-through business income was reported by taxpayers earning more than $200,000. Millionaire tax returns earned 34 percent of all private business income while taxpayers with incomes below $100,000 earned just 14 percent.

20140117-3

Indulging in envy-driven rate increases on “the rich” means weakening businesses and their ability to hire and grow — reducing opportunities for their would-be employees in the name of “equality.”

 

Perspective.  The brilliant Arnold Kling quotes Laurence Kotlicoff on the U.S. Budget:

In a podcast with Russ Roberts, he says,

I think we are probably in worse fiscal shape and any developed country. The reason, Russ, is we’ve been piling up debts for over 6 decades; and when I say ‘we’ I’m referring to Republican and Democratic administrations and Congresses. And we’ve been hiding them. We’ve been keeping them off the books and using economic labels, words, to pretend that they are not real liabilities of the government…we have all these obligations to something like 30-40 million current retirees and close to 80 million baby boomers who are about to start collecting Social Security benefits if they haven’t already. All those obligations are not reported as part of the government’s debt, so we are missing those off-the-book obligations.

But the real economic emergency is inequality. Or austerity. Or something.

Of course, that “something” is probably those  Tea Party extremists who actually want the government to live within its means.  How dare they.

 

Kay Bell, Filing patience can prevent a big tax mistake.  Hurrying your refund by taking out a refund anticipation loan can be an expensive mistake.

Russ Fox, We Will Soon be Able to Efile Past Due Individual Tax Returns.  Good news.  While everybody should file on time, not everybody does, and anything that helps non-filers come in from the cold is a good thing.

 

20130114-1Programming Note:  I am scheduled to participate in a Tax Update Webinar Monday sponsored by the Iowa Bar Association from noon to 1:45 pm.  Registration information is here – $40 to get a great start on your 2014 CPE/CLE.  Other speakers are Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation, and Kristy Maitre, Iowa’s IRS Stakeholder Liason.

While I hope to be there, I can’t guarantee it.  I am on federal jury standby this month, and I won’t know until after 5 p.m. tonight whether I will be hanging out in the jury room at the Des Moines Federal Courthouse instead of at the webinar.  They haven’t needed me these first two weeks, but I suppose past performance is no guarantee of future results here.  If I am on jury duty, the Tax Update may go quiet for awhile.

Update, 1/18: not called for a jury next week, so I will be on!

 

TaxGrrrl, IRS Free File To Open January 17, Two Weeks Before Tax Season Officially Opens 

TaxProf, The IRS Scandal, Day 253.  He quotes an op-ed by an attorney for the Tea Party outfits, who says: “Let’s all be very clear: The FBI did not conduct an “investigation” into the IRS scandal.”  Of course.  Lookouts don’t investigate.

Robert D. Flach brings the Friday Buzz!

 

News from the Profession.  Life at Deloitte May or May Not Involve Time Spent on Your Knees (Going Concern)

 

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Tax Roundup, 12/18/2013: Have you made your College Savings Iowa gift? And: la loi, c’est IRS!

Wednesday, December 18th, 2013 by Joe Kristan


csi logo
Year-end is sneaking up on us.
 So it doesn’t catch us completely unawares, the Tax Update will provide a year-end idea each day through December 31.  Today we pass on a reminder that Iowans can deduct contributions to College Savings Iowa, the state’s Section 529 college savings plan, on their Iowa 1040s — but only if they fund their contributions before year-end.  From the State Treasurer:

Contributions to College Savings Iowa must be made by the end of the year to qualify for the 2013 Iowa state tax deduction. Account holders can deduct up to $3,045 for each open account and can contribute online at www.collegesavingsiowa.com.* Contributions sent by mail must postmark checks by December 31, 2013.

College Savings Iowa lets anyone – parents, grandparents, friends and relatives – invest for college on behalf of a child.  Investors do not need to be a state resident and can withdraw their investments tax-free to pay for qualified higher education expenses including tuition, books, supplies and room and board at any eligible college, university, community college or accredited technical training school in the United Sates or abroad.

It’s a great way to help your kids start out in life without a big student loan.

William Perez is doing yeoman’s work on year-end planning at his place; today he has Donating Cash to Charity at Year-End.  

Kay Bell offers Donating appreciated assets to your favorite charity

 

45R credit chartLa Loi, C’est IRS.  It’s not surprising that the IRS would disregard mere vendor rules when it believes it can pass out tax credits to taxpayers who clearly don’t qualify.  That’s exactly what they did yesterday when they announced that it will allow the (ridiculously complex) Sec. 45R small employer health insurance credit in Washington and Wisconsin in 2014, even though those states won’t have the required “Small Business Health Options Program” exchange in place.

The Code clearly requires allows the credit only to employers buying through the exchange starting in 2014, but the IRS has granted “transition relief” waiving that requirement.  Heck, why not just grant the credit to anybody who just has “health” next year.  You know, as a transition rule.

 

No.  Is Obamacare Really an Improvement on the Status Quo?  (Megan McArdle).  “Bob Laszewski, an insurance industry expert who has become the go-to guy for the news media on the rollout of the Patient Protection and Affordable Care Act (because the insurance industry is extremely reluctant to talk), tells the Weekly Standard that he thinks come Jan. 1, more people will have lost private insurance than gained it…”

 

William McBride, Economists Find Eliminating the Corporate Tax Would Raise Welfare (Tax Policy Blog).  That’s why the Tax Update’s Quick and Dirty Iowa Tax Reform Plan does just that.

 

 

TIGTALeft hand, meet right hand.   The Treasury Inspector General for Tax Administration reports “IRS Vendors Owe Hundreds Of Millions Of Dollars In Federal Tax Debt“:

Federal law generally prohibits agencies from contracting with businesses that have unpaid Federal tax liabilities.

TIGTA reviewed the IRS’s controls over the integrity and validity of vendors receiving payments from the IRS, including the vendor’s tax compliance and suspension and debarment status. TIGTA also reviewed controls over the IRS’s Vendor Master File (VMF), which contains information about vendors that enables them to do business with the IRS.

The vast majority of vendors that conduct business with the IRS meet their Federal tax obligations. However, TIGTA found that 1,168 IRS vendors (7 percent) had a combined $589 million of Federal tax debt as of July 2012, the most recent data for which information was available at the time TIGTA conducted the review. Few of the vendors had a current tax payment plan.

That means the IRS breaks its own rules in dealing with about one out of 15 of its vendors — another instance where the IRS breaks the rules with no consequence.  A “Sauce for the Gander” rule, one that would penalize IRS personnel who break rules just like they do for taxpayers, might help here.

 

Sometimes the IRS gets it right.  IRS Provided Some Good Tips this Morning (Russ Fox)

 

Tony Nitti, Tax Geek Tuesday: Profits Interests, Capital Interests, And Restricted Property:

 

In Crescent Holdings v. Commissioner 141 T.C. 15 (2013), the Tax Court doled out three lessons every tax advisor con learn from:

 

  1. How to differentiate between a profits interest and a capital interest in a partnership.

  2. Section 83 applies to the grant of a capital interest,

  3. If a capital interested in a partnership has not yet vested under the meaning of Section 83, the recipient should not be allocated any undistributed income from the partnership.

  4. The income allocable to an unvested capital interest granted by a partnership must be allocated to the remaining partners of the partnership.

Good stuff.

 

TaxProf, Billionaires’ Use of Zeroed-Out GRATs Blows $100 Billion Hole in Estate Tax.  Paul Caron quotes a Forbes article.

Jack Townsend, Raoul Weil Has First U.S. Court Appearance

TaxGrrrl, 12 Days Of Charitable Giving 2013: Sow Much Good

 

 

Robert D. FlachWOULDN’T IT BE NICE.  He discusses the new IRS Commissioner nominee and asks,  “Wouldn’t it be great to have a person who had actually prepared tax returns for a living in the position?”  What, and have somebody who actually knows something?

20131211-1Robert has a thing about the Tea Party, but I suspect even he would Follow the Tea Party on Stadium Financing Issues (David Brunori, Tax Analysts Blog):

The Atlanta Braves are planning to move their stadium to the suburbs. The Braves blackmailed, threatened, and coerced the backboneless politicians in Cobb County, Ga., to pay for the stadium… As far as I can tell, the only organization to have put up any fight against this insane corporate welfare is the Atlanta Tea Party.”

When the Tea Party movement sticks to the fight for smaller government, there’s a lot to like there.

 

 

Tax Justice Blog, Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness

Joseph Thorndike, When Is a “Fee” Actually a Tax? When Politicians Say It Isn’t (Tax Analysts Blog)

Peter Reilly,  How To Tax Kody Brown And The Sister Wives And Other Polygamous Families?  He quotes my Twitter feed.  If Peter follows @joebwan, maybe you should too!

 

News From the Profession.  There’s a Hidden Deloitte Auditor in the Airport Cell Phone Crasher Video Making the Rounds (Going Concern)

 

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Tax Roundup, 12/12/13: Take the $20 million edition. And: Grassley says extenders will pass in 2014.

Thursday, December 12th, 2013 by Joe Kristan

 

20131212-1Next time, take the cash.  A corporation decided a tax deduction from walking away from securities it had paid $98.6 million for would be worth more than the $20 million in cash it had been offered for them.  The Tax Court yesterday told them that they made a big mistake.

Gold Kist, Inc. bought the securities issued by Southern States Cooperative, Inc. and Southern States Capital Trust in 1999.  The issuers offered to redeem the securities from Gold Kist in 2004 for $20 million.  (Gold Kist was later acquired by Pilgrims Pride Corp, which inherited Gold Kist’s tax history.)

Gold Kist believed that it would get an ordinary loss deduction if it simply abandoned the securities, vs. a capital loss on the sale.  Ordinary losses are fully deductible, while corporate capital losses are only deductible against capital gains, and they expire after five years.    A $98.6 million ordinary loss would be worth about $34.5 million in tax savings, which would be worth more than $20 million cash and a capital loss, which can only offset capital gains, and only those incurred in the nine-year period beginning in the third tax year before the loss.

Unfortunately, the Tax Court found a flaw in the plan: Sec. 1234A.  It reads:

§ 1234A – Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—

(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,

shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

The taxpayer said that Sec. 1234A didn’t apply, according to the court:

Petitioner’s primary position is that the phrase “right or obligation with respect to property” means a contractual and other derivative right or obligation with respect to property and not the inherent property rights and obligations arising from the ownership of the property. We disagree.

The taxpayer said the legislative history of the section supported their argument.  The Tax Court thought otherwise:

In our view Congress extended the application of section 1234A to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer or would be if acquired by the taxpayer, including not only derivative contract rights but also property rights arising from the ownership of the property. 

The taxpayer also said that if that’s what Congress meant, the IRS would have revised Rev. Rul. 93-80, which allows an ordinary loss on certain abandonments of partnership interests.  The Tax Court responded:

The ruling makes clear that, if a provision of the Code requires the transaction to be treated as a sale or exchange, such as when there is a deemed distribution attributable to the reduction in the partner’s share of partnership liabilities pursuant to section 752(b), the partner’s loss is capital. Rev. Rul. 93-80, supra, was issued four years before section 1234A was amended in 1997 to apply to all property that is (or would be if acquired) a capital asset in the hands of the taxpayer. As we previously stated, the Commissioner is not required to assert a particular position as soon as the statute authorizes such an interpretation, whether that position is taken in a regulation or in a revenue ruling. 

So it’s a capital loss only for the taxpayer.

Presumably the Gold Kist board didn’t decide to go for the ordinary loss on its own.  Somewhere along the way a tax advisor told them that this would work.  That person can’t be very happy today for advising the client to walk away from $20 million in cash.

Cite: Pilgrim’s Pride Corp, 141 TC No. 17.

 

Grassley-090507-18363- 0032Quad City Times reports Grassley predicts tax credits extensions, but not until 2014:

 There won’t be any extension before Christmas, Grassley predicted, but not because of political opposition to the credits. Based on past performance, he said, Congress will return after the New Year and approve four dozen or more tax credits.

“There are a lot of economic interests” represented in the tax credits, he said. Those interest groups collectively “put a lot of pressure on Congress to re-institute the credits.”

The delay, Grassley said, can be attributed to the ongoing discussion about “massive tax reform.”

Senator Grassley has more insight about what will happen than I do, but I can”t share his faith that the lobbyists will overcome Congressional dysfunction.  I had hoped any extenders would be included in the budget deal announced this week, and they weren’t.

Actually, I would prefer that the extenders not be extended at all rather than passed temporarily once again.   The whole process of passing temporary tax breaks is a brazen accounting lie.  Congressional budget rules score temporary provisions as if they will really expire, even when they have been extended every time they expire.  Once again, behavior that would lead to prison in the private sector is just another day in Congress.

 

Roberton Williams, Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More:

The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes. 

 

David Brunori, States Should Just Say No to Boeing (Tax Analysts Blog):

Boeing is acting rationally — politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.

Well, it would be hard to respect them less.

 

 

Source: The Tax Foundation

Source: The Tax Foundation

William McBride, Obama: Cut the Corporate Tax Rate to Help the Poor (Tax Policy Blog):

Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere?

Corporate rate cuts would be a good thing, but don’t forget that most business income nowadays is reported on individual returns.

 

Joseph Thorndike, Congress Is Making a Bad Deal on the Budget, but One Republican Has a Better Idea (Tax Analysts Blog)

It’s amazing what passes for success in Washington these days. Budget negotiators on Capitol Hill have delivered a non-disaster, cobbling together a pathetic half-measure that pleases no one and accomplishes almost nothing.

True, it allows Democrats and Republicans to avoid abject failure, which is no small thing, given recent history. These days, just keeping the wheels from flying off qualifies as statesmanship.

Considering what happens when Congress “accomplishes” something (Obamacare, anyone?), let us praise them for doing as little as possible.

 

Robert D. Flach has wise counsel for clients:  PUT IT IN WRITING.

So if you have a tax question you want to ask your preparer, instead of picking up the phone submit the question in an email, with all the pertinent facts.  And if you receive a notice from the IRS or your state, mail it to your tax pro immediately.

Yes.

 

William Perez, Donating Appreciated Securities to Charity as a Year-End Tax Strategy

Paul Neiffer, Is it Time for an IC-DISC.  If you produce for export, an IC-DISC can turn some ordinary income into dividend income, taxed at a lower rate.

Tony Nitti, IRS The Latest To Send Manny Pacquiao To The Mat: Boxer Reportedly Owes $18 Million

Kyle Pomerleau, Senator Baucus’s Plan for Cost Recovery Heads in the Wrong Direction

TaxProf, The IRS Scandal, Day 217

Cara Griffith, Improving the Transparency of New York’s Tax Collection Process (Tax Analysts Blog)

Jack Townsend, Are Brady Violations Epidemic?  A federal appeals judge says prosecutors routinely withhold evidence that would help defendants.

 

News from the Profession: The PCAOB Is Grateful To The PCAOB For the PCAOB’s Work (Going Concern)

 

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