Posts Tagged ‘Joseph Thorndike’

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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Tax Roundup, 12/4/2013: Justice Scalia doesn’t believe in the Tax Fairy. And sure, the IRS can run another tax credit!

Wednesday, December 4th, 2013 by Joe Kristan

 

tax fairyThe Supreme Court wrapped a bow around the IRS victories in the turn-of-the-century tax shelter wars by unanimously ruling that the 40% “gross valuation misstatement” penalty applied to a tax understatement caused by the “COBRA” tax shelter.

COBRA relied on contributing long and short currency options to a partnership, but claiming basis for the long position, and ignoring the liability caused by the short position.  The shelter was cooked up in Paul Daugerdas’ tax shelter lab at now-defunct Jenkens & Gilchrist and marketed by Ernst & Young.  The shelter was designed to generate $43.7 million in tax losses for a cash investment of $3.2 million.

COBRA, like so many other shelters of the era,  was ruled a sham and the losses disallowed, but the Fifth Circuit Court of Appeals ruled that the 40% penalty did not apply.  Other circuits ruled that it did, so the Supreme Court took the case to settle the issue.

Writing for a unanimous court, Justice Scalia disposed of the Fifth Circuit’s position (citations omitted, my emphasis):

     In the alternative, Woods argues that any underpayment of tax in this case would be “attributable,” not to the misstatements of outside basis, but rather to the determination that the partnerships were shams — which he describes as an “independent legal ground.”  That is the rationale that the Fifth and Ninth Circuits have adopted for refusing to apply the valuation-misstatement penalty in cases like this, although both courts have voiced doubts about it.

We reject the argument’s premise: The economic substance determination and the basis misstatement are not “independent” of one another. This is not a case where a valuation misstatement is a mere side effect of a sham transaction. Rather, the overstatement of outside basis was the linchpin of the COBRA tax shelter and the mechanism by which Woods and McCombs sought to reduce their taxable income. As Judge Prado observed, in this type of tax shelter, “the basis misstatement and the transaction’s lack of economic substance are inextricably inter twined,” so “attributing the tax underpayment only to the artificiality of the transaction and not to the basis over valuation is making a false distinction.”  In short, the partners underpaid their taxes because they overstated their outside basis, and they overstated their outside basis because the partnerships were shams. We therefore have no difficulty concluding that any underpayment resulting from the COBRA tax shelter is attributable to the partners’ misrepresentation of outside basis (a valuation misstatement). 

tack shelterI see the basis-shifting shelters of the 1990s as elaborate incantations designed to to get the Tax Fairy to magically wish away tax liabilities.  Like any good witch doctor, the shelter designers relied on lots of elaborate hand-waving and dark magic to do their work, and they collected a lot of cash for their work.  But there is no Tax Fairy.  Justice Scalia has let Tax Fairy believers know that pursuing her is not just futile, but potentially very expensive.

 

Cite: United States v. Woods, Sup. Ct. No. 12-562.

The TaxProf has a roundup and an update.  Stephen Olsen weighs in at Procedurally Taxing.

 

 

Blue Book Blues.   One digression by Justice Scalia in Woods is worth a little extra attention.   From the opinion (citations omitted, my emphasis):

Woods contends, however, that a document known as the “Blue Book” compels a different result…Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” While we have relied on similar documents in the past, …our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive.

Back in the early national firm days of my career, one of my bosses was a former national firm lobbyist who was exiled to The Field when a merger with another firm left room in Washington for only one lobbyist in the combined firm.  I remember him telling clients that he could get around unpleasantness in the tax code by arranging for helpful language in the Blue Book.  From what Justice Scalia says, he would have done as well by writing a law review article.

Jack Townsend also noticed this.

 

A new tax credit for the IRS to administer.  What could possibly go wrong?  A lot, as the IRS’s experience with the fraud-ridden refundable credits and ID-theft fraud has shown.  Now a new Treasury Inspector General’s report warns that IRS systems aren’t yet prepared to stop premium tax credit fraud under Obamacare, reports Tax Analysts ($link):

EITC error chart     While the IRS has existing practices to address ACA-related fraud, the agency’s approach is not part of an established fraud mitigation strategy for ACA systems, the report says. The IRS has two systems under development to lessen ACA tax refund fraud risk, but until those systems are completed and tested, “TIGTA remains concerned that the IRS’s existing fraud detection system may not be capable of identifying ACA refund fraud or schemes prior to the issuance of tax return refunds,” it says.

IRS Chief Technology Officer Terence Milholland said in a response included in the report that fraud prevention plans will be put in place as ACA systems are released.

The IRS loses $10 billion annually to Earned Income Tax Credit Fraud alone.  This isn’t reassuring.

 

Paul Neiffer, Losses Can Offset Investment Income:

  1. If you have a net capital loss for the year, the regular tax laws limit this loss to $3,000.  The final regulations allow this up to $3,000 loss to offset other investment income.
  2. If you have a passive loss such as Section 1231 losses, as long as that loss is allowed for regular income tax purposes, you will be allowed to offset that against other investment income.
  3. Finally, if you have a net operating loss carry forward that contains some amount of net investment losses, you will be allowed to use that portion of the NOL to offset other investment income.

A big improvement over the propsed regulations.

 

20120920-3Jason Dinesen,  Same-Sex Marriage, IRAs and After-Tax Basis:

It’s clear that for 2013 and going forward, couples in same-sex marriage will only need to apply “married person” rules to IRAs (and to everything else relating to their taxes).

What’s less clear is what happens with differences between federal and state basis for prior years.

 

Robert D. Flach,  A YEAR END TIP FOR MUTUAL FUND INVESTMENTS.  “If you want to purchase shares in a mutual fund during the fourth quarter of the year, wait until after the capital gain dividend has been issued, and the NAV has dropped, before purchasing the shares.”

 

Janet Novack,  Insurance Agent To Forbes 400 Concedes Understating Taxable Income By $50 Million

David Brunori, Indexing the State Income Tax Brackets Makes Sense (Tax Analysts Blog)

Missouri Rep Paul Curtman (R) wants to index his state’s income tax brackets to inflation. Of all the tax ideas presented this year, this is among the best. Missouri imposes its top rate of 6 percent on all incomes over $9,000. Nine grand was a lot of money in 1931 – and the top tax rate was aimed at the very wealthiest Missourians. But that threshold hasn’t changed since Herbert Hoover was president. 

Or they could just go with one flat rate.

 

TaxProf, The IRS Scandal, Day 209

William McBride, Summary of Baucus Discussion Draft to Reform International Business Taxation (Tax Policy Blog)

Kay Bell, Where do your residential property taxes rank nationally? 

Howard Gleckman,  The Supreme Court Opens The Door to Sales Tax Collections by Online Sellers (TaxVox)

They were too busy fighting the shelter wars to notice.  The Cold War Is Over, but No One Told the IRS  (Joseph Thorndike, Tax Analysts Blog)

Career Corner: A Friendly Reminder to Slobbering Drunks: Be Less Slobbery and Drunk at Your Company Holiday Party (Going Concern)

 

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Tax Roundup, 11/13/13: Is more IRS money what we need? And why I’m hoping against hope!

Wednesday, November 13th, 2013 by Joe Kristan
Taxpayer Advocate Nina Olsen

Taxpayer Advocate Nina Olsen

Is more money the answer to “pitiful” IRS service?   That’s what Taxpayer Advocate Nina Olson believes, based on a story by Tax Analysts ($link):

National Taxpayer Advocate Nina Olson in a November 9 speech decried as pitiful the level of IRS customer service given to taxpayers, which she attributed to inadequate funding that has forced the Service to automate many of the most important tax administration functions and skimp on training employees on taxpayer rights.

Everything else being equal, you can do more with more money.  Yet we all face limits to our resources, so we prioritize.  The IRS — at the urging of Nina Olson — has directed resources unwisely to its misguided attempt to boss the tax prep industry.  It has been a debacle so far, and it appears headed to oblivion in the courts.

The IRS has another administrative problem that the Taxpayer Advocate has pointed out.  The tax law is too complicated to effectively administer even with a much larger budget.  The tax law is seen as the Swiss Army Knife of public policy, and like a knife with too many gadgets, it becomes hard to work as a knife.  This chart from Chris Edwards at the Cato Institute illustrates the problem:

irs budget cato 20131113

 

Chris Edwards explains:

The chart shows that the IRS has become a huge social welfare agency in recent decades. Handouts have soared from $4.4 billion in 1990 to an estimated $91.1 billion in 2013 (red line). Handouts are down a bit in recent years because some of the refundable credits from “stimulus” legislation have expired. IRS administration costs have grown from $7.7 billion in 1990 to an estimated $15.3 billion in 2013 (blue line). 

How should we reform the IRS budget? First, we should terminate the handout programs. That would save taxpayers more than $90 billion annually and cut the IRS budget by 86 percent. 

The largest IRS handout is the refundable part of the EITC, which is expected to cost $55 billion in 2013.

So true.  Considering that over $10 billion of the $55 billion is stolen or otherwise issued improperly, the EITC is a nightmare.  There would be plenty of funding available for tax administration if EITC could go away.

But the chart also shows something else: if the tax law was no more complicated than it was in 1990 — and believe me, it was plenty complicated — the IRS administrative budget would be adequate.  But with the IRS transformed into a monster multi-portfolio agency charged with healthcare administration, welfare, industrial policy, environmental enforcement, etc., etc., its budget is hopeless.

 

This will work out well:

This article examines the tax collection process to see how the IRS might enforce the individual mandate under the healthcare reform law. It concludes that resistant taxpayers can generally be forced to pay the tax penalty only if they are entitled to receive refundable tax credits that exceed their net federal tax liability. 

From Jordan BerryThe Not-So-Mandatory Individual Mandate, via the TaxProf.

 

Don’t trust the Tax Foundation?  Maybe you’ll trust the Congressional Budget Office.  A commenter yesterday took issue with a chart I reproduced showing not only the tax burden at different income levels, but the amount of government spending benefiting different income levels:

It’s not “the first chart for any tax policy debate,” it’s the last chart you should want to find on your side of the debate if you want to have any credibility.

If that doesn’t work for you, maybe this one from the CBO will be less objectionable:

cbo table

This chart is more focused on direct transfers, but it says pretty much the same thing.  It also covers 2006, and the tax law has hit the high end harder since then. (Via Greg Mankiw).

 

Scott Hodge, Andrew Lundeen,  54 Million Federal Tax Returns Had No Income Tax Liability in 2011 (Tax Policy Blog)

 

Paul Neiffer,  Sale of CRP Land – Is it Subject to the 3.8% Tax?  It depends a lot on whether an appeals court upholds the Tax Court Morehouse decision imposing self-employment tax on CRP income.  “And if the Morehouse case is overturned on appeal and the CRP is treated as rents, the land sale will also be subject to the 3.8% tax.”

 

Kay Bell, Tax tips for newlyweds saying “I do” on 11-12-13 or any day

Jack Townsend,  U.S. Banks File Long-Shot Litigation to Block FATCA Reciprocal Requirements

Leslie Book,  Disclosure and the 6-Year Statute of Limitation: S Corp Issues (Procedurally Taxing)

Jason Dinesen,  EAs are Partly to Blame for Our Obscurity  “Yes, we are treated as the red-headed stepchild of the tax world. But a big reason for this is that we ALLOW people to treat us this way.”

Russ Fox, Dan Walters with Another Example of California Dreamin’

 

TaxProf, The IRS Scandal, Day 188

 

Hope lives! 

It’s Time to Give Up on Tax Reform” – Joseph Thorndike, October 29, 2013

When Tax Reform Rises From the Dead, What Will It Look Like?Joseph Thorndike, November 12, 2013.

I should note that his vision of resurrected tax reform is hideous.  If that’s what hope for tax reform comes to, I’ll hope against his hope.

 

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Tax Roundup, 11/6/13: Relief for the road warrior? And the futile state corporation income tax

Wednesday, November 6th, 2013 by Joe Kristan
Flickr image courtesy Tom Hilton under Creative Commons license

Flickr image courtesy Tom Hilton under Creative Commons license

Relief for the traveling employee?  Tax Analysts reports ($link) that the “Mobile Workforce State Income Tax Simplification Act of 2013″ (S. 1645) was introduced yesterday.  The bill would make the tax lives of employers and employees who cross state lines much easier by preventing states from taxing folks, other than athletes and entertainers, who are in a state for less than 30 days.  From the Tax Analysts:

The bill is “a modernization of everything,” Maureen Riehl, vice president of government affairs for the Council On State Taxation, told Tax Analysts. It is “about supporting the mobility of an economy that has people moving around a lot more often than when the income tax laws went into effect in the states back in the ’30s and ’40s,” she said.

Who would oppose such sensible simplification?

The Federation of Tax Administrators does not share Riehl’s enthusiasm. Deputy Director Verenda Smith said the bill “does not strike an appropriate balance between administrative simplification and necessary tax policies.”

Smith took issue with the safe harbor provision, saying the 30-day threshold “is beyond a level necessary to deal with the vast majority of individuals who would be temporarily in a jurisdiction.”

The states want to tax you on their whim if you sneeze in their jurisdiction.

Still, they should have one more threshold: no state tax if you earn less than some threshold amount in a state, maybe $5,000.  That way they can still pick LeBron’s pocket when he comes to town from his tax-free home in Florida, but a carload of struggling musicians couch-surfing from town to town would be saved the hassle of filing a tax return in every state where they have a gig  – or more likely, saved the need to ignore the filing requirement.

 

Peter Reilly,  Mobile Workforce Act Good Idea But May Need More Limits  “Over the years I have studied the rules for what invokes state income tax withholding requirement.  It varies substantially from state to state.”

 

Elizabeth Malm, Richard Borean, Map: Share of State Tax Revenues from Corporate Income Tax (Tax Policy Blog)

 20131106-1

Notice that it’s a relatively paltry part of Iowa tax receipts, even in a good year, and even with the highest rate in the nation.  Better to repeal it as part of the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

David Brunori, Feckless Legislators and Corporate Welfare (Tax Analysts Blog)

If I ran a big corporation in Illinois, I would have my lobbyists asking for tax breaks daily. Why not? The tax incentive racket is a profit center for most corporations in Illinois. Is it blackmail? Sure. But it is cold, calculated, rational blackmail.

…if once you have paid him the Dane-geld

You never get rid of the Dane.

 

Tax Justice Blog,  Let’s Face It: Delaware and Other U.S. States Are Tax Havens

 

Paul Neiffer, Crop Insurance Deferral Options.  “When a crop insurance claim relates directly to a drop in price, those claims cannot be deferred to the next year.”  Paul explains what the choices are if the recovery relates to a yield loss.

Tony Nitti, Shareholder Computes Basis In S Corporation Stock Incorrectly, $1.5 Million Loss Becomes $2 Million Gain

 

Jana Luttenegger, Interactive Form to Assist in Applying for 501(c)(3) Status (Davis Brown Tax Law Blog) 

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.

William Perez, CBO: Marginal Tax Rates Faced by Low- and Moderate-Income Individuals.  Helping the poor stay that way.

Andrew Mitchel, 2014 Inflation Adjustments for Individuals in the International Tax Arena

Roger McEowen, Inflation Adjusted Amounts for 2014

TaxProf,  The IRS Scandal, Day 181

TaxGrrrl, Bayern Munich Keeps Winning Even As Their Chief Faces Trial For Tax Evasion.

 

Brian Mahany,  More Guidance on Taxation of Same Sex Marriages

Jack Townsend,  Should You Opt Out of OVDI/P?.  He examines Robert Wood’s discussion of opting out of the IRS “amnesty”

Phil Hodgen’s Exit Tax Book: Chapter 7 – Taxation of Deferred Compensation 

 

Joseph Thorndike, Forget Carried Interest–It’s All About Taxing Capital Gains (Tax Analysts Blog).   He’s right when he says “The only issue that really matters is how we tax capital gains.”  Then he goes off the rails in so many ways.  Read Joseph, and then read Steve Landsberg.

 

A Wednesday Buzz from Robert D. Flach!

May you have this problem.  The Tax Treatment of Olympic Gold Medals (TaxProf)

News from the Profession.  Recruiting Season: Salaries and Offers for the Public Accounting Class of 2014 (Going Concern)

 

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Tax Roundup, 10/30/2013: Beggars night day edition! And why IRAs are scary as start-up investors.

Wednesday, October 30th, 2013 by Joe Kristan
MST3K-2 lantern

Stop by for treats tonight. You can find us by Son’s MST3K-themed pumpkin.

The Des Moines area has an unusual tradition for trick-or-treating on October 30, rather than October 31.   On our “Beggars Night,” it’s customary for the little monsters to tell a joke.  A perennial favorite:

What’s a pirate’s favorite restaurant?

Aaaarghh-bys!

So drive carefully tonight!

 

Speaking of scary, think of having your IRA disqualified and taxed currently, with penalties, for engaging in a prohibited transaction.  That’s what happened to a Missouri man in Tax Court yesterday.

The taxpayer, a Mr. Ellis, rolled $320,000 out of his 401(k) and put it into a self-directed IRA.  The IRA than bought 98% of a corporation (an LLC that elected to be taxed as a corporation) to open a used-car lot, where he began working as the general manager.  It went badly.  From the Tax Court opinion:

In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business. Mr. Ellis would operate this business and use it as his primary source of income by paying himself compensation for his role in its day-to-day operation. Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that section 4975 was enacted to prevent.

The result? $163,000 of taxes and penalties on the $320,000 invested in the used car lot — which, of course, may well not be very liquid, seeing that it’s all invested in a closely-held corporation.

This case has an interesting twist to those of us who follow tax cases too closely.  The IRA plan was apparently the work of  a Kansas City law firm whose attempt to make their practice income largely tax-exempt by funneling it through an ESOP-owned S corporation was shot down in Tax Court in 2011.  I’m just guessing here, but the IRS may have taken a look at that firm’s clients after seeing how aggressive the firm was in using retirement plans to shelter business income.

It’s tempting to have your IRA invest directly to avoid the current tax and 10% penalty that can apply to an early withdrawal.  The results, though, can be a lot scarier than any trick-or-treater.

Cite: Ellis, T.C. Memo 2013-245.

 

59pdhyefMore scary.  Econoblogger Arnold Kling has thoughts on whether Healthcare.gov might be saved:

My opinion of the distribution of likely outcomes is that it is bimodal. There is a high probability that the exchanges will be working at the end of November. I think that there is an even higher probability that they will be working never.

The public pledge where the new savior of the site impresses Mr. Kling, but he thinks the design issues might be intractable.

Andrew Lundeen, Scott Hodge,  The Income Tax Burden Is Very Progressive (Tax Policy Blog):

About half of the nation’s income is reported by taxpayers who make less than $100,000, and half is reported by taxpayers who make more. However, taxpayers who make less than $100,000 collectively pay just 18 percent of all income taxes while those who make more pay over 80 percent of all income taxes.

They have a chart, of course:

20131030-2

 

Howard Gleckman, Who Benefits from Muni Bonds? It’s More Complicated Than You Think (TaxVox) “…while most of the benefit of the tax-exemption goes to high-income investors, lower-income households who hold taxable bonds in their 401(k)s also receive some advantage.”

 

But they’re ready to regulate preparers! TIGTA: IRS Cannot Account for 23% of its IT Assets (TaxProf).

 

Jason Dinesen asks Is There a Way to Protect Yourself from Tax Return Identity Theft?   Use common sense — but if someone in your family dies, ID thieves may be able to get government-published information enabling them to steal the deceased’s identity no matter what you do.

TaxGrrrl, Somebody’s Watching Me: IRS Criminal Investigations Ramp Up Efforts To Thwart Tax ID Thefts   

 

David Brunori offers Tax Advice for State Legislators of All Parties (Tax Analysts Blog).  There’s a lot there, including this:

Both parties should also give serious thought to greater reliance on the property tax. Yes, I know people hate that tax. I also know that politicians find it advantageous to attack it. But the property tax revolts of the late 1970s and the 1980s have badly damaged the fiscal structure of state and local governments.

Don’t expect either party to heed the advice.

 

William Perez,  47% of Individual Taxpayers Earn Under $30,000

TaxProf, The IRS Scandal, Day 174

High-fiber diet.  Tax identity thief who ate debit card evidence is convicted (Kay Bell)

From Phil Hodgen’s series on expat taxes: Chapter 2 – Are You An Expatriate?

Carlton Smith, Byers v Comm’r – CDP Venue In Courts Of Appeals May Be Upended (Procedurally Taxing)

 

Joseph Thorndike, It’s Time to Give Up on Tax Reform (Tax Analysts Blog):

Tax reform? Don’t bet on it. Not this year, and probably not next year either. Tax reform, like everything else in Washington, is on hold pending the resolution of a broader, highly polarized debate about the role of government in American society.

 

Robert D. Flach has his Tuesday Buzz on Wednesday this week.

 

 

20131025-237-yard month penalty for former Eagle Mitchell.  The sentence was handed down yesterday in a Florida federal courtroom, reports the Orlando Sentinel.

The former NFL wide-receiver blamed brain injuries suffered on the field after pleading guilty to a plot where he helped convince Milwaukee Bucks player to use a Florida preparer to file a refund claim, which would be split between the NBA player, Mr. Mitchell, and the preparer.  The claim was fraudulent, and the NBA player wasn’t charged.  Mr. Mitchell also allegedly used an LLC to conceal other fraudulent tax claims.  Brain injuries are funny things.

 

News from the Profession: Dancing Accountant Nearly Thrown Out of a Bank For Dancing To “Money, Money, Money”  (Going Concern)

 

 

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Tax Roundup, 10/23/2013: The Earned income tax credit thief subsidy feature. And: tax season delayed!

Wednesday, October 23rd, 2013 by Joe Kristan

Some smart people are big fans of the Earned Income Tax Credit. Some see it as a way to help the working poor, and some see it as a less destructive way to achieve the goals of minimum wages.

Yesterday the Treasury Inspector General for Tax Administration reported that from 21% to 25% of the earned income credit was paid improperly for the most recent fiscal year, and that $110 to $130 billion has been “paid improperly” over the past decade. That’s a nice way of saying “stolen.”

 

EITC error chart

Just because there is a lot of theft doesn’t by itself make a program bad — though that kind of loss rate would bankrupt anybody in the private sector.   Most people would send food to starving people in a war zone knowing that local warlords will be plundering some of it. But a program that comes at the cost of sending $11 billion annually to thieves needs to otherwise be a very good thing.   That’s not so clear with the EITC.

The credit does help the working poor — as long as they stay poor. As they work their way out of poverty, it becomes a trap. The phase-out of the credit imposes a punishing unstated, but very real, marginal tax rate.

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.

The EITC is only one program that does this; all “means-tested” welfare programs do this to some degree. It’s not uncommon for this implicit tax rate to exceed 100% at some income levels.

I don’t know what the right answer is (Arnold Kling has some ideas), but increasing the EITC, like Iowa did this year, isn’t it.

 

Oh, Goody. 2014 Tax Season to Start Later Following Government Closure; IRS Sees Heavy Demand As Operations Resume (IRS Press Release)

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4. 

20131023-1It’s funny how programming IRS computers isn’t “essential,” but barricading open-air monuments is.

Other coverage:

William Perez, IRS Expects to Delay the Start of the 2014 Filing Season

Kay Bell, IRS won’t accept 2013 tax returns until Jan. 28, 2014

Russ Fox, Sigh: 2014 Tax Season to be Delayed up to Two Weeks

TaxGrrrl, IRS Announces Delayed Start To 2014 Tax Season   

 

Robert D. Flach, HOW TO DEAL WITH THE IRS AND LIVE TO FIGHT ANOTHER DAY

Paul Neiffer,  Taxpayers Want Their Cake, Frosting and Candles! Live by the low estate-tax value, die by the low estate-tax value.

Jack Townsend, Has the U.S. Aided International Tax Evasion?

Russ Fox,  Coming Attractions: When the IRS Writes New Law When They’re Not Allowed To.  A federal judge has allowed a suit challenging the IRS unilaterally extending the tax credit for insurance purchased on state-sponsored exchanges to policies sold on federally-run exchanges.

TaxProf, The IRS Scandal, Day 167

 

President Reagan signs PL 99-514, the Tax Reform Act of 1986.The Tax Policy Blog takes us on a nostalgia tour in  8 Technological Changes Since the 1986 Tax Reform.  Take a trip back to the days of “car phones.”

 

Clint Stretch, Whom Do Tax Reformers Want to Help? (Tax Analysts Blog):

When congressional leaders start talking about tax reform as if it will benefit everyone, someone should be asking: Whom are you trying to help? The answer may be Americans earning more than around $75,000 who have fewer itemized deductions, fewer kids, fewer healthcare benefits, and lower retirement savings than most.

I’m not convinced that’s the right way to look at it.  Getting rid of complexity and lowering rates helps everybody by eliminating dead weight loss and redirecting resources from tax planning and compliance to more useful pursuits.

Andrew Lundeen, A Lot Has Changed in the 27 Years Since the Last Major Tax Reform (Tax Policy Blog).  “The amount of credits, loopholes, and deductions has increase by 44 percent, from $844 billion (2013 dollars), to over $1.2 trillion (2013 dollars), with much of that growth coming from the expansion of refundable tax credits.”

 

Howard Gleckman, Congress Shouldn’t Forget About Tax Entitlements In Its Search for Deficit Reduction (TaxVox)

 

Tax Justice Blog,  Governor Scott Walker Appropriates State Budget Surplus for Campaign Season Tax Cut.  In Tax Justice World, returning money taken by force of law to the taxpayers is “appropriating” it.

 

David Brunori, Eliminating the Sales Tax Is a Very Good Idea (Tax Analysts Blog) “But ending a tax that preys on the poor and is increasingly difficult to collect may provide the economic boost Rhode Island needs.”

Brian Strahle, BLAMING THE PLAYERS FOR THE RULES.  “Regardless, most taxpayers are simply trying to comply with the maze and complexity of non-uniform multistate tax laws”

Joseph Thorndike, The Gas Tax Doesn’t Work Because Politicians Broke It (Tax Analysts Blog).  By not raising it, apparently.

 

The Critical Question:  JD Salinger – Was January 27 2010 A Good Day To Die ?  (Peter Reilly)

Career Corner.  First Round Interview Tips for This Fall’s Accounting Recruits (Going Concern)

 

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Tax Roundup, 10/16/2013: Extension season is over, now what? And the joy of infinite marginal tax rates.

Wednesday, October 16th, 2013 by Joe Kristan

20111040logoI hope you don’t have to.  Filing Tax Returns after the October 15th Deadline (William Perez):

You’ll need to mail in your return to the IRS, whether you prepare the return yourself or hire an accountant. That’s because the IRS’s electronic filing servers start going offline after October 15th to prepare for the next filing season.

If you are filing after October 15 this year, my first advice is to file quickly, as you are likely to never file if you don’t get it done now.  My next advice is to make sure it doesn’t happen next year.

Most people who file late make it harder than it needs to be.  90% of the stuff that could possibly go on their returns comes from third parties — things like W-2s, 1099s, mortgage interest and property tax statements, and thank-you notes from charities.  People who can’t seem to file on time should get a big envelope.  They should put these items in the envelope as they come in starting in early January.  They should seal the envelope on February 28 and give it to their preparer.  For most taxpayers, that is all you need to get a reasonably accurate return.

The procrastinators want to go through their checkbooks and find every last $10 charitable gift, and then they never get around to it.  When they finally do, it’s almost certainly a poor use of their time, and when it causes them to file late, it costs them a lot more than that last $10 deduction will save.

Related:  2012 Tax Season Officially Bites the Dust (Paul Neiffer)

 

 

Implicit marginal ratesAlan Cole, Obamacare Puts Infinite Marginal Tax Rates in Action (Tax Policy Blog):

The moment your modified AGI reaches 400% of the poverty line, you instantly lose a subsidy that could easily be worth $15,000. This is a discontinuity in public policy with respect to income. It is a place where an infinitesimal change can result in disastrous consequence for a taxpayer. At 400% of the poverty line, the marginal tax rate is infinite.

It’s an extreme example of the way means-tested welfare benefits can impose high hidden tax rates on poor and middle class taxpayers — punishment ignored by advocates of higher benefits in the name of “compassion.”  More from Arnold Kling.

 

Tony Nitti,  A Quick Look At Expiring 2013 Tax Provisions: What To Do Before Year-End

TaxProf, The IRS Scandal, Day 160

 

Kyle Pomerleau, What is the Debt Ceiling and Why Does it Matter? (Tax Policy Blog) ‘

Howard Gleckman, The U.S.May Not Default on Friday But Washington Is Still Playing A Dangerous Game

Joseph Thorndike, Debt Limit Fights Are All the Same – Except for This One (Tax Analysts Blog)

But in fact, the nation’s fiscal shortfall can’t be permanently finessed with any sort of measures, be they ordinary, extraordinary, or even superhuman. Default will happen — the only question is when.

Have a nice day.

 

 Jason Dinesen,  If EAs are Liechtenstein and CPAs are the U.S., What are the Unenrolled?   That’s not fair to CPAs; I don’t know any who’ve been shut down for the last two weeks.

 

Leslie Book, Potential Storm Over Removal Power of Tax Court Judges (Procedurally Taxing):

Kuretski is like one of the many thousands of CDP cases where the parties disagree on some aspect of a collection determination, but also has one very big wrinkle: the taxpayers are using the case as a vehicle challenging the constitutionality of the President’s powers to remove Tax Court judges under Section 7443(f).

I didn’t know the President could do that.

 

2014 State Business Tax Climate IndexTax Justice Blog, State News Quick Hits: Criticism of “Business Climate” Rankings Grows, and More.  Most of the criticism comes from politicians in states with poor business tax climates, and their allies, for some reason.

 

Brian Mahany, High Intrigue in Florida FBAR Trial!

Lush Caribbean islands, secret unreported Swiss accounts, tens of millions of dollars and a husband who disappears into the night. Is this the plot of a new best seller suspense novel? No! It’s some of the events unfolding in a Ft. Myers federal court room where prosecutors say that Patricia Hough conspired to defraud the IRS and filed false tax returns.

I prefer a boring life, at least compared to something like this.

 

Kay Bell, Supreme Court says ‘no’ to NY strip club’s tax relief plea.

The Critical Question: Do Women in Accounting Really Have More Opportunities Than They Did Ten Years Ago? (Going Concern)

 

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Tax Roundup, 10/2/2013: essential government function edition. And… commas!

Wednesday, October 2nd, 2013 by Joe Kristan
Wikipedia image courtesy Tallent Show under Creative Commons license

Wikipedia image courtesy Tallent Show under Creative Commons license

A bunch of federal government workers stayed home yesterday, but enough showed up to try to keep some 90-year olds off the grounds of the World War II memorial in Washington.  They will try to stand up to the guys in wheelchairs again today.  That must be one of those essential government functions.

 

Today’s shutdown roundup:

Kay Bell, Government shuts down. Who, besides citizens, will pay?

Janet Novack,  Federal Government Begins First Shutdown In 17 Years 

TaxGrrrl, Congress Marches Towards Shutdown, Spares Military   

Tax Trials, Tax Court Filing Deadlines during Government Shutdown

Joseph Thorndike, The GOP Is Right About One Thing: Ditch the Medical Device Tax (Tax Analysts Blog):

Narrow excise taxes — even when somehow correlated with special benefits — are not a good way to fund major social programs. Broad programs deserve broad taxes.

True.  But the political magic behind ACA was the idea of a “free” mass welfare benefit  – free to you, anyway, because some rich guy gets the tab.  But as Joseph has pointed out, the rich guy isn’t buying.

Len Burman, Would the Government be Shuttered if Obamacare were Romneycare?

Russ Fox,  The Government Shutdown and Taxes

 

Jason Dinesen,  Life After DOMA: Audits of Prior-Year Returns.  Jason explains how audits work for amended returns of same-sex married couples.

William Perez, How Social Security Benefits are Taxed by State

Jim Maule, Failing to Keep Those Records Can Increase Taxes

It is not implausible that the taxpayers paid more than $2,052 for the support of the wife’s mother. Certainly during the time when she was living with them, a portion of the costs of maintaining the taxpayers’ residence constituted support of the wife’s mother. But apparently the taxpayers did not offer any evidence of those costs.

It’s up to the taxpayer to keep the records needed to support your tax return.

 

TaxProf, Supreme Court Grants Cert. to Decide Whether Severance Pay Is Subject to Payroll Tax.  Is being paid to go away taxed the same way as being paid to work?

Peter Reilly, Court Rules Against Slots Playing As A Business 

Tony Nitti, The Real Winner In The Breaking Bad Finale: The IRS   

 

tax fairyPhil Hodgen, Sooner or later, secrecy fails as a tax planning strategy:

Americans: secrecy is a weak tax planning strategy; stop using it.

What seemed like a good idea 10 years ago has now compounded itself into a seemingly intractable dilemma. I know this because people tell me so every day.

Start looking for what is true, not what you want to be true. When you hear the answer, accept it. Swallow and digest the big chunks of truth.

In other words, there is no Tax Fairy

 

 

Jack Townsend,  Article on DOJ’s Swiss Bank Initiative

Keith Fogg, Representing Clients in Tax Court (Procedurally Taxing)

Robert D. Flach, SOME REMINDERS

 

News from the profession.  BREAKING: Commas To Be Added to the CPA Exam (Going Concern).  “We are adding a comma to the calculator on the CPA Exam. The comma is meant for large numbers such as 1,000 and above to make them easier to read.”  Calculators.  With commas. In my day when we took the exam, we had “fingers.”

 

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Tax Roundup, 9/18/2013: No, the rich guy still isn’t buying. And non-phony scandals.

Wednesday, September 18th, 2013 by Joe Kristan

taxanalystslogoJoseph Thorndike gets a lot wrong in Two Cheers for a Government Shutdown (Tax Analysts Blog), but he gets one important thing exactly right (my emphasis):

 Democrats have been much less willing to defend discretionary government spending — the kind of spending that will grind to a halt during a shutdown. The discretionary portion of the federal budget has been slashed to the bone in recent years, and it’s slated for more slashing in the years ahead.

Those cuts are bad for the country in any number of ways. But until Democrats make the case against them, they’ll keep coming.

And here’s the most important point: Defending the value of discretionary spending also means defending the taxes that pay for it. Yet Democrats have been unwilling to defend taxation for decades. Ronald Reagan really was a transformative president — he changed not only the way Republicans talked about taxes, but the way Democrats talked about them, too.

Democrats have always liked taxing the rich. But for decades, they understood that you couldn’t tax only the rich. Anyone who thinks seriously about solving our long-term budget problems comes to the inescapable conclusion that taxes are going up for everyone. At least they will be going up if we hope to continue with a federal government that looks anything like the one we have today.

20121226-1Democrats have to embrace that fact. They have to defend the value proposition of progressive government, not just the feel-good politics of progressive taxation. 

I don’t buy for a moment that discretionary spending has been “slashed to the bone.”  Just visit your friendly money-bleeding post office, airport TSA line, high-speed rail boondoggle, solar subsidy disaster…  But he is exactly right when he points out that the rich guy isn’t buying.

 

Chart by the Tax Foundation

 

When the “Rogue Agents in Cincinnati” defense of the IRS in the Tea Party scandal was discredited, those attempting to minimize the scandal fell back to new defensive positions:

There is no evidence of partisan bias, and

Progressive groups were targeted too.

These assertions appear in a USA Today Story (via Instapundit), IRS list reveals concerns over Tea Party ‘propaganda’.

 Newly uncovered IRS documents show the agency flagged political groups based on the content of their literature, raising concerns specifically about “anti-Obama rhetoric,” inflammatory language and “emotional” statements made by non-profits seeking tax-exempt status.

More than 80% of the organizations on the 2011 “political advocacy case” list were conservative, but the effort to police political activity also ensnared at least 11 liberal groups as of November 2011, including Progressives United, Progress Texas and Delawareans for Social and Economic Justice.

Progressive outfits are unlikely to be caught by a screener looking for “anti-Obama” rhetoric. Given that “over 80%” of the groups picked for extra screening are right-side, it’s hard to accept that there is no political bias in the screening process.  Prior revelations have shown that the few left-side groups that were picked for extra scrutiny got very gentle treatment compared to their right-side counterparts:

7-30-13-irs-targeting-statistics-of-files-produced-by-irs-through-july-29-2-

Nothing phony about this scandal, no matter how much some people devoutly wish otherwise.

 

TaxProf, The IRS Scandal, Day 132

Russ Fox,  IRS Scandal: Lerner, Others Re-Enter Spotlight

 

 

Lynnley Browning, Complying With U.S. Tax Evasion Law Is Vexing Foreign Banks (via the TaxProf).   It’s one more reason why foreign banks are closing their doors to U.S. expats, and why Americans abroad are turning in their passports.

 

Paul Neiffer,  IRS Has Two Sets of De Minimis Rules.  He is discussing final regulations issued last week on what purchases need to be capitalized, rather than written off as expenses:

The first set applies to companies with applicable financial statements (i.e. an audit) and allows the company to expense any fixed asset purchase that does not exceed $5,000.  The second set allows any other taxpayer to expense any fixed asset purchase that does not exceed $500.  Personally, I would have hoped this number would be closer to $2,500, but $500 is better than none.

The Regulations also provide for guidance to IRS agents that they can reach an agreement with a taxpayer during audit to use a de minimis number higher than the ceiling in the Regulations.

I think the distinction between audited financial statements is nonsensical, but at least taxpayers know where they stand.

 

Jason Dinesen: Having a Side Business in Multi-Level Marketing Doesn’t Make Personal Expenses Deductible.  It’s amazing how many people believe that it does.

 

Kay Bell,  Tax deadlines extended to Dec. 2 for Colorado flood victims

Tony Nitti, IRS Provides Tax Relief To Victims Of Colorado Storms   

Trish McIntire,  Disasters and Chutes and Ladders

TaxGrrrl,  2014 Tax Brackets, Exemption Amounts Likely To Save Tax Dollars   

William Perez,  Top Tax Rate Paid by Sole Proprietors by State

Brian Mahany,  Do You Have The Right To Rely on IRS Forms? Court Says “Maybe”

David Brunori, The Conundrum of Taxing Lots of Kids (Tax Analysts Blog)

 

20120924-1

Phil Hodgen, Simplicity:

Reaching for $1,000X of tax savings frequently costs you $2,000X in accounting and legal fees to make the IRS all warm and fuzzy on your tax returns. We saw this last week where a prior year tax election was made that saved $5,000 (!) of tax, but so far has cost $40,000 to fix. Not to mention the time distraction for the principal of the venture.

That’s why I don’t care for things like C corporations that try to manipulate their income to use the lower tax rates when income is under $100,000.  You can save maybe a few thousand in taxes if you do it just right, but at the cost of professional fees and management time best spent elsewhere.

 

The Critical Question: Is the Spies Element for Evasion (i) Tax Deficiency or (ii) the Criminal Tax Number? (Jack Townsend)

 

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