Posts Tagged ‘Kay Bell’

Tax Roundup, 4/1/16: No fooling. Taxpayer litigates $3.48. “At least!”

Friday, April 1st, 2016 by Joe Kristan

Accounting Today Visitors: Click here for the laundry appraisal discussion.

 

Worth litigating!

Worth litigating!

It’s the principle of the thing. Well, technically, it’s the interest. Texas is known for big things. A taxpayer from Texas made a big thing in Tax Court out of a very small thing in a decision released yesterday. Judge Goeke explains (my emphasis):

The parties have largely settled the disputed interest, but, as we interpret her position, petitioner continues to assert that she is entitled to interest on $87.08 for at least one year.

That’s not even “she is entitled to 87.08.” It’s “interest on $87.08 for at least one year.” Let’s do the math.

At the current IRS overpayment rate of 4%, the taxpayer insisted the Tax Court resolve a dispute over $3.48. At least.

It didn’t go well:

One might find a dispute of such a small amount trivial, but petitioner is very earnest. Nevertheless, for various reasons petitioner’s claim is not properly remedied by abatement of interest, as we will explain.

No word on whether an appeal is in the works.

The Moral? Sometimes a molehill is just a molehill. Even in Texas.

Cite: Kappos, T.C. Memo. 2016-59

 

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Russ Fox begins the Bozo Tax Tip countdown with Bozo Tax Tip #10: Email Your Social Security Number! “Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.”

Paul Nieffer, When to Take “Extra” Investment Interest? “I see many more farmers now with investment brokerage accounts.  Some of these farmers have borrowed against these accounts and the margin interest paid is considered investment interest and the tax deduction may be limited.”

William Perez, IRS Launches Contest to Design Futuristic Online Service. “‘The goal of this challenge,’ according to details found at the Tax Design Challenge page at Challenge.gov, ‘is to reimagine the taxpayer experience and design the taxpayer experience of the future.'”

Kristine Tidgren, What’s Been Happening at the Iowa Legislature? (AgDocket). Turtles are involved.

Annette Nellen,2015 Tax Legislation Changes – Lots of Them! “In 2015, over 15 federal laws were enacted, making over 150 changes to the federal tax laws!”

Keith Fogg, When is the Statutory Notice of Deficiency Issued by an Authorized Delegate of the Treasury Secretary (Procedurally Taxing). “What is somewhat remarkable about the remand is that it appears Mr. Muncy made tax protestor type arguments yet convinced the 8thCircuit to issue the remand.”

Jason Dinesen, Taxation of Incentives Received from a Bank. “You open a savings account at a bank and they give you a toaster or a cooler or a coffee cup as a gift. Is this taxable?”

TaxGrrrl, Man Found Guilty Of Selling Stolen Patient Info Used To File False Tax Returns.

No, that about covers it. Win Powerball Lottery, Get Sued, Go Bankrupt, Any Questions?  (Robert Wood)

 

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Kyle Pomerleau, How Would the Presidential Candidates’ Tax Plans Impact Capital Gains? (Tax Policy Blog):

For those taxpayers over $250,000, capital gains would be treated as ordinary income. Since ordinary income tax rate go up under the Sanders plan, the tax rate on capital gains for those earning over $250,000 would go up by a lot. The top marginal tax rate on capital gains would go up from 23.8 percent to 54.2 percent. This is a much higher rate than what we have seen in the United States on capital gains in the past and combined with state and local taxes on capital gains, would make our rate the highest in the developed world.

But think of all the oool free stuff!

 

Howard Gleckman, Note to Federal Tax Reformers: Don’t Forget the States (TaxVox). “Eliminating tax preferences would also wipe out the federal deduction for state and local taxes, a step that could increase voter pressure on states to lower their taxes.”

TaxProf, The IRS Scandal, Day 1058. More on Lois Lerner’s links with the Kafka-esque “John Doe” proceedings in Wisconsin.

 

Kay Bell, Letter from Trump lawyers confirms IRS audits. “Also provides GOP presidential front-runner a legal excuse for not releasing tax returns.” I think Kay misspelled “lame.”

A correspondent suggests that the taxpayer confidentiality rules be amended to allow anyone to access presidential candidate tax returns. I agree. I would further require that all candidates — and all elected federal officials — be required to prepare their returns in a live (and then archived) webcast, with a running comment bar to enable us all to “help.” Ideally, they would have to do it by hand, Robert D. Flach style.
News from the Profession. Texas Accountant Emerges as Early Contender for 2016’s Worst Person (Caleb Newquist, Going Concern). “Specifically, Harris allegedly instructed nurses to give hospice patients overdoses of medications like morphine to hasten their deaths.”

 

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Tax Roundup, 3/31/16: IRS says S corps can still reimbuse 2% owner health premiums. And: partner basis!

Thursday, March 31st, 2016 by Joe Kristan

S-SidewalkS corporation owner reimbursement still good. When the ugly alliance of government agencies overseeing Obamacare blew up small employer health reimbursement arrangements, they spared some S corporation plans.

Because 2% shareholders of S corporations have to deduct their health insurance on line 29 of the 1040s, rather than getting them as a tax-free fringe benefit, many S corporations reimburse their employee shareholders for their health insurance costs. While “The Departments” impose a $100 per employee, per day penalty for anybody else doing that, Notice 2015-17 said such arrangements for S corporation 2% shareholder-employees were OK until further notice.

Yesterday the IRS, in an information letter to Rep. Justin Amash, affirmed that there has been no further notice:

To date, the IRS has not issued any other guidance, so, as stated in Question and Answer 5, taxpayers may continue to rely on Notice 2008-1, 2008-2 IRB 1, for the tax treatment of the health coverage provided to a 2-percent shareholder-employee.

I thought that was still the case, but when you’re talking $100 per-day, per-employee, it’s always nice to get confirmation.

Related: IF IT’S NOT ON THE W-2, S CORP SHAREHOLDERS CAN’T DEDUCT HEALTH INSURANCE

 

How partnership basis is different. As with S corporation shareholders, partners don’t have a shot at deducting their partnership K-1 losses if they don’t have basis in their partnership interests. They still might not be able to deduct the losses because of the at-risk and passive loss rules, but without basis, they don’t have any chance at all.

It’s much easier for partners to get basis than it is for shareholders. While S corporation shareholders can only get basis based on their stock ownership and loans they make themselves to their S corporation, partners get basis from debt inside the partnership. 

Example. Joe and Bob set up a 50-50 partnership to buy a food truck. They each invest $5,000, and the partnership borrows $20,000 to buy the food truck.

Not only do Joe and Bob get basis for their $5,000 investment, they also get $10,000 in basis for their share of partnership debt.

The exact workings of the debt allocations can get unbelievably complex, and they have spawned most of the world’s tax shelters, but your partnership K-1 should tell you what your share of partnership debt is that you can use for your 1040. It’s right there in Part II, item K:

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In our upcoming “at-risk” installment, we will talk about what those three categories of liabilities mean.

Other than the use of partnership debt, partnership basis is pretty much determined the same as S corporation basis. You start with your investment, increase it for income and further investments, and reduce it for losses and distributions.

This is another of our irregular series of 2016 filing season tips, running through the April 18 filing deadline.

 

Lower than Minnesota, much higher than Missouri. How High Are Cigarette Taxes in Your State? (Scott Drenkard, Tax Policy Blog):

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Robert Wood, IRS Allows Some Personal Items Deducted As ‘Business Expenses’ On Your Taxes. “Not everything must be 100% business to be tax deductible, but be careful what you claim and how you claim it.”

TaxGrrrl, Taxes From A To Z (2016): P Is For Paying Your Taxes In Pennies (and Dollars)

Kay Bell, Tax help in finding new work, or what to do differently from Jimmy McGill if you don’t like your job

Hank Stern, O’Care at 6: Fewer, Sicker, Costlier. (Insureblog). “That’s right, not only are the newly-insured sicker, there are even fewer less-sickly folks signing up at all.”

Peter Reilly, IRS Turns To Crowdsourcing To Improve Systems. That seems logical, considering that the hacking is crowdsourced.

Leslie Book, Series of Errors With Installment Agreement and Collection Actions Leads to Taxpayer Victory on Collection Statute of Limitation (Procedurally Taxing).

Paul Neiffer, Where’s Roger. ” Many of you know my now (since we have posted on it already) that Roger McEowen has joined CLA as a half-time tax director for our firm.”

Jim Maule, Tax Fears. Well, they tax everything else… Oh, that’s not what he’s talking about. “If a one in two hundred chance of being audited explains an audit fear rate of 11 percent, then why do 8.5 percent of Americans fear zombies?”

 

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David Brunori, Tampons, Viagra, and Other Important Tax Issues (Tax Analysts Blog) “Nothing should be exempt from sales tax. Good tax policy dictates a broad tax base — tax everything — and low rates.”

TaxProf, The IRS Scandal, Day 1057

 

News from the Profession. Survey: Accountants Far Less Deserving of a Knuckle Sandwich Than Donald Trump (Caleb Newquist, Going Concern).

 

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Tax Roundup, 3/29/16: How you figure S corporation stock basis. And: Cronyism!

Tuesday, March 29th, 2016 by Joe Kristan

capitol burning 10904Cronyism 95, Taxpayers 1. The bill to provide a refundable tax credit — that is, a subsidy run through tax returns — for “bio-renewable chemical production” flew through the Iowa House of Representatives yesterday. Only Bruce Hunter (D-Des Moines) voted against SF 2300 in the house. He joins three Senate Democrats (Bolkcom, Quirmbach and Dearden) as the only opposition in the General Assembly to a classic bit of central planning through the tax law.

Iowa already has 24 economic development credits, budgeted to cost taxpayers $277 million in the coming fiscal year. Apparently we needed one more.

Rep. Hunter and Sen. Quirmbach cast two of the three votes against the disastrous Film Tax Credit Program. With a $10 million cap, at least this mistake will cost less than the film fiasco.

Other coverage:

O. Kay Henderson, Biochemical tax credit gains legislative approval, headed to governor

Erin Murphy, Renewable chemical tax credit in Iowa advances closer to final approval

 

S-SidewalkBasis: the first hurdle for determining your deductible S corporation lossYesterday we outlined the unholy trinity of rules restricting losses from pass-through activities: Basis, the at-risk rules, and the passive loss rules. Today we’ll talk a little bit more about S corporation stock basis. Tomorrow will talk about how you can use loans to your S corporation to get basis for deductions, and Thursday we will talk about how the rules are a little different for partnerships.

S corporation basis changes every year.

–It starts with your initial investment in your S corporation stock.

-It is increased by your share of taxable income and deductible expenses, as reported in lines 1-12 of the 1120-S K-1.

-It is increased by tax-exempt income (like municipal bond income) and reduced bypermanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1.  If you have a business that generates depletion deductions, factor your “excess depletion” from 1120S K-1 line 15c.

– It is increased by capital contributions, which appear nowhere on the 1120S K-1.

– It is reduced by distributions, which are on line 16 of the 1120-S K-1.

If your losses exceed your basis, your losses are limited to your basis.   If you have multiple deduction items, you have to prorate them to fit your basis.

For example, Assume you started 2015 with $3,000 in basis in your S corporation shares.  You have a K-1 line 1 loss of 9,000, line 4 interest income of $2,000, and a charitable contribution passing through on line 12 (code A) of $1,000.

You have $5,000 in basis to deduct your $10,000 in in expenses – the opening $3,000 in basis plus the positive $2,000 interest income.  You pro-rate the $10,000 expenses — you can (potentially) deduct $4,500 of line 1 loss and $500 of charitable contributions.  The remaining deductions carry forward until you increase your basis via contributions, loans, or future income. I say “potentially” because you still have to clear the “at-risk” and “passive loss” hurdles.

Many S corporation tax prep programs generate helpful basis and deductible loss schedules. Not all preparers do this, though, and even when they do, they are only as good as their starting information.  If the preparer doesn’t know what you paid for your stock, the schedules can’t be correct. Ultimately, it’s up to taxpayers to track their own S corporation stock basis.

This is another of our irregular series of 2016 filing season tips, running through the April 18 filing deadline.

For more information on loss limitations from pass-throughs, check out Peter Reilly’s 2014 post Through The Hoops.

 

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TaxGrrrl, Walmart Gets Big Win Over Puerto Rico: No More ‘Walmart Tax’. Puerto Rico’s desperate revenue grabs are a preview of what states like California and Illinois will soon face.

Robert Wood, IRS Admits Audit Chance Is Small — And Dropping Like A Rock. They’re busy with other things.

Stuart Bassin, Sixth Circuit Requires IRS to Disclose Return Information of Non-Parties in Tea Party Exempt Organization Litigation (Procedurally Taxing). “The Government can continue fighting, but that seems to be an uphill battle and a battle which may produce further precedent that the Service will not like.”

Peter Reilly, Estate Denied Discounts For Marketable Security Family Limited Partnership. “This decision makes me nervous about getting discounts for any family limited partnership that consists solely of marketable securities.”

 

Jack TownsendGuest Blog: IRS FOIA Request Unveils Previously Undisclosed Estate Tax National Policy for Offshore Disclosures

Kay Bell, Which 2016 presidential candidate will cut your tax bill?

 

Scott Drenkard, A Very Short Primer on Tax Nexus, Apportionment, and Throwback Rule (Tax Policy Blog). “The best run down of these concepts can be found in our 2015 edition of Location Matters: The State Tax Costs of Doing Business.”

Stuart Gibson, Information Exchange: Bonanza for Tax Administrators, Temptation for Hackers (Tax Analysts Blog). “While many countries outside the U.S. first reacted negatively to this massive information grab, some soon began to realize the value of coordinated information exchange. They realized, as the old saying goes, ‘if you can’t beat ‘em, join ‘em.'”

Renu Zaretsky, Tax Day is around the corner, and the IRS can take your call! Today’s TaxVox headline roundup covers the eternal IRS complaints of underfunding, the DOA Obama budget tax proposals, and the subsidies Michigan paid for “Batman v. Superman,” because Michigan has solved all of its problems.

 

TaxProf, The IRS Scandal, Day 1055.

News from the Profession. AICPA and CIMA Putting This New Thing to Members for a Vote (Caleb Newquist, Going Concern).

 

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Tax Roundup, 3/28/16: Can I deduct that K-1 loss now, later, or never?

Monday, March 28th, 2016 by Joe Kristan

20161120s k-1 cornerBasis, At-Risk, Passive. The Schedule K-1 forms issued to owners of S corporations and partnerships might be the most confusing of the information returns we use to compute our 1040s. That’s because they can embody a lot of obscure tax law that goes into determining how partnership and S corporation income is taxed.

Partnerships and S corporations are “pass-through entities.” That means they normally don’t pay tax on their income. I instead “passes through” to the tax returns of their owners, the partners and shareholders. The owners report the income — and they also deduct the losses. But when they deduct the losses can be very confusing.

Search engine queries related to K-1 losses are one of the Tax Update’s biggest traffic sources, so it seems wise to give the Googlers what they want. Today we will give an overview of the three hurdles taxpayers must clear before they can deduct a K-1 loss. In the coming days we will spend a little more time on each hurdle, and I will update this post with links to those posts, but today we’ll stick to the big picture.

Start with your basis. The tax law first requires you to have enough “basis” in your partnership interest or S corporation stock (or debt, sometimes) to deduct the loss. If you start the year with $1,000 in basis, you have the potential to deduct $1,000 of losses — if you clear the next two hurdles. But if you don’t have basis, you go no further with your loss.

“Basis” can be complicated, but in most cases, it starts with your investment in the pass-through entity. It is increased by income and further investments, and decreased by losses and distributions.

Is your basis “at-risk”? The at-risk rules sometimes seem like a historical curiosity, like gas lines or 8-track tapes. They were enacted in the Ford Administration to attack that era’s mass-marketed tax shelters. But while obscure, they still count.

They add an additional requirement to the rules that require you to have basis to take a loss. They add a rule requiring that basis to be “at-risk.” While some of the rules can be obscure and arbitrary, the basic idea is that if you can’t really lose your own money on the deal, you shouldn’t be allowed a loss, except to the extent the deal generates income in the future. It also treats loans from some related parties or others with interests in the deal as not “at-risk.”

Is your loss “passive?” If you clear the first two hurdles, you still have to contend with the “passive loss” rules. These were enacted to fight the tax shelters of the 1980s by deferring “passive” losses until the taxpayer has “passive” income, or until the “passive activity” (still my favorite tax oxymoron) is sold. Whether an activity is “passive” is usually determined based on how much time you spend during the year working in it. Rental activities are automatically passive for taxpayers other than “real estate” professionals.

Updates in the series:

3/29/16: How you figure S corporation stock basis

How loans to your S corporation can give you basis.

This is another of our irregular series of 2016 filing season tips. We’ll be doing these right up through the April 18 deadline. 

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Andrew Mitchel, Section 911 Housing Cost Amounts Updated for 2016:

Code §911(a) allows a qualified individual to elect to exclude from gross income an “Exclusion Amount” related to foreign earned income and a “Housing Cost Amount.” The Exclusion Amount for 2016 is $101,300.

Mr. Mitchel goes on to explain the more complicated housing cost amount.

Kay Bell, Problems with prepaid card tax refunds. “But there’s one big problem with these cards. Tax crooks absolutely love them”

Jason Dinesen, Glossary: Iowa Tuition & Textbook Credit. “Almost any expense counts toward the credit.”

Kyle Pomerleau, Why We Should Care About More Than Just Distributional Tables. “Growth, distribution, and revenue are all important aspects of tax policy. If we only focus on one, we miss important policy nuances.”

TaxGrrrl, IRS Commissioner Admits IRS Isn’t A Favorite, Talks Tax Refunds, Budget & Taxpayer Services:

Noting that “the IRS is not anyone’s favorite government institution, and we will not win any popularity contests, especially in an election year,” the Commissioner went on to share that a recent poll indicated that 12% of taxpayers liked Russia’s Vladimir Putin better than the IRS.

A Tax Notes story ($link) about Koskinen’s speech quotes him as saying, “But don’t look for a shot of me on CNN, without a shirt, riding a horse.” I don’t think anyone would actually look for such a thing.

 

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David Henderson, To Address the Top One Percent, Allow Competition (Econlog, quoting Jonathan Rockwell):

For lawyers, doctors, and dentists– three of the most over-represented occupations in the top 1 percent–state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay.

The IRS and its friends in the national tax prep franchise firms want to do the same thing with the tax prep business via their push for preparer regulation.

 

TaxProf, The IRS Scandal, Day 1052Day 1053Day 1054. The Day 1053 link is to It’s Been 513 Days Since Any Big 3 Network Has Touched the IRS Scandal. It’s been longer than that since I’ve watched a Big 3 network news show.

Peter Reilly, Sixth Circuit Looking To Protect Taxpayers From IRS Not IRS From Taxpayers. Peter still thinks the IRS is being picked on.

 

What are these “results” of which you speak? Results Only Work Environments (Caleb Newquist, Going Concern).

 

 

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Tax Roundup, 3/25/16: Who is qualified to appraise your old laundry? And: Dept. of Revenue explains coupling.

Friday, March 25th, 2016 by Joe Kristan
Flickr image courtesy Jen Waller under Creative Commons license.

Flickr image courtesy Jen Waller under Creative Commons license.

Why you really don’t want a $10,000 deduction for that trip to Goodwill. Some taxpayers view the deduction for donations of stuff you can’t sell at a rummage sale as a standard deduction by other means. How likely is it that the IRS is going to look at the $250 deduction I’m claiming for dropping those bags at Salvation Army, anyway?

The poison is in the dose. Just yesterday we discussed the magic words you need to get from any charity for gifts of $250 or more. If your gift of property exceeds $500, you have to notify the IRS by filing Form 8283. And if your donation goes over $5,000, you have to get a “qualified appraisal.”

How does that affect your trip to the thrift store? One taxpayer who cleaned out his late mother’s possessions found out the hard way. The Tax Court describes the donations:

These items allegedly included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet, and three rugs. For charitable contribution purposes, petitioner placed a value of $11,730 on these items.

Petitioner testified that he also donated to AMVETS during 2009 numerous items of clothing belonging to him and his children. These items allegedly included 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats, and seven suits. For charitable contribution purposes, petitioner placed a value of $14,487 on these items.

You have to group “similar items” to see whether you exceed $5,000 and trigger the need for an appraisal. IRS Publication 561 describes what “similar items” means (my emphasis):

The phrase “similar items” means property of the same generic category or type (whether or not donated to the same donee), such as stamp collections, coin collections, lithographs, paintings, photographs, books, nonpublicly traded stock, nonpublicly traded securities other than nonpublicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver. For example, if you give books to three schools and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. You must get a qualified appraisal of the books and for each school you must attach a fully completed Form 8283, Section B, to your tax return.

So splitting up your donations between Goodwill and Salvation Army doesn’t help. But carefully identifying your donation and keeping each category (eg, books, china, silver) under $5,000 can work. Be sure to carefully document what you are donating; pictures are a good idea.

The taxpayer who went to Tax Court with his AMVETS donation ended up getting a zero deduction for his trouble. You don’t get a “partial” deduction when you claim a >$5,000 property charitable deduction and fail to get a proper appraisal. You get nothing.

Now if you can even find an appraiser for your old laundry, be sure you get one that counts. A qualified appraiser has to meet certain requirements for independence and expertise. For example, neither the donee nor the person who sold you the property qualifies.

You can’t wait for the IRS examination to find the appraiser. The appraisal also has to be timely, made not more than 60 days before the donation and not later than the extended due date of the return claiming the deduction. So if you don’t have that appraisal yet for your 2015 donation, it may not be too late — if you extend your return.

This is another of our irregular series of 2016 filing season tips. Collect them all!

 

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The Iowa Department of Revenue, Immediate income tax changes for Iowa taxpayers:

Effective with the enactment of House File 2433 on March 21, 2016, Iowa tax provisions are coupled with federal provisions retroactive to January 1, 2015 for tax year 2015 only.  The most common federal provisions with which Iowa is now coupled are listed below.

 NOTE: Iowa did not couple with the bonus depreciation provisions allowed for federal tax purposes for the 2015 tax year

 For Tax Year 2015 Only:

For Individual Income Tax Filers Only:

-Deduction of educator expenses
-Tuition and fees deduction for higher education
-Election to deduct state sales/use tax as an itemized deduction in lieu of state income tax
-Treatment of mortgage insurance premiums as qualified residence interest
-Tax free distribution from an IRA to certain charities for individuals 70½ and older

For Individual Income Tax Filers as well as Corporate Income Tax (including S Corporations), Partnership, Fiduciary and Franchise Tax:

-Section 179 limit for Iowa for the 2015 tax year is $500,000, which is the same as the federal section 179 limit. The phase-out threshold is $2 million.

The Department will update online forms, instructions, and web pages accordingly. Taxpayers impacted by these provisions who have already filed tax year 2015 returns should review information provided on the Department’s website at https://tax.iowa.gov about how to file an amended return.

These aren’t the only provisions coupled, of course.

 

TaxGrrrl, Worried You Might Run Out Of Time To File Your Taxes? Get An Extension. It’s always better to extend than to file late. It’s always better to extend than amend.

Annette Nellen, ACA Complexity Evident in IRS Incomplete Tax Tip. “For the past few weeks, the IRS has been publishing Health Care Tax Tips.  The one I received by email today was troubling because it includes an error or at least not enough detail to be entirely useful.”

Jack Townsend, TRAC Offerings on IRS and DOJ Criminal Tax Enforcement. “The data reported shows that referrals by the IRS to DOJ Tax peaked in the early 90s at 20 per million of population and are about 9 per million in fy 2015.”

Carl Smith, CDP Notice of Determination Sentence Causing Late Pro Se Petitions. “At the very least, it is time for the IRS to redraft the CDP notice of determination sentence so that it does not anymore trick pro se taxpayers into filing late.”

Kay Bell, Attention White House wannabes: the IRS audits presidential tax returns every single year.

 

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Joseph Thorndike, Face It: Americans Just Don’t Like the Estate Tax (Tax Analysts Blog) “At what point do liberals need to consider the possibility that something besides ignorance and stupidity is necessary to explain the popular distaste for the estate tax?”

TaxProf, The IRS Scandal, Day 1051

Howard Gleckman, The Gulf Between the Presidential Candidate Tax Plans Is Historic (TaxVox). “Calling it a gap hardly does it justice. It is an ocean of difference.”

News from the Profession. However the Presidential Election Goes, CPAs Probably Not Moving to Canada (Caleb Newquist, Going Concern)

 

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Tax Roundup, 3/24/16: Executors get until June to file basis reports. And: Don’t foot-fault that charitable deduction!

Thursday, March 24th, 2016 by Joe Kristan

20160122-3Now it’s June. The IRS has again delayed (Notice 2016-27) the new requirement for executors of taxable estates to notify beneficiaries of their basis. The rule is meant to keep the IRS from being whipsawed by having taxpayers use lower values for estate tax filings than for income tax filings.

The rule, which would require the executor to provide Form 8971 to the IRS, has been delayed several times now. The form includes a schedule for each beneficiary of the assets they are inheriting, along with the asset basis reported on the Form 706 filed for estate tax purposes. Each beneficiary is to receive a copy of their own schedule.

The filing is mandatory for estates required to file an estate tax return when the return is filed after July 31, 2015. It had been due March 31. The deadline is now June 30, 2016.

 

Charitable contributions: paperwork or bust. The law isn’t willing to take your word for charitable contributions any more. If you make a charitable contribution of $250 or more, the tax law now says no deduction is allowed unless you have magic words in writing from the charity. From IRS.gov:

The written acknowledgment required to substantiate a charitable contribution of $250 or more must contain the following information:

-Name of the organization;

-Amount of cash contribution;
-Description (but not value) of non-cash contribution;
-Statement that no goods or services were provided by the organization, if that is the case;
-Description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution; and
-Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

In addition, a donor may claim a deduction for contributions of cash, check, or other monetary gifts only if the donor maintains certain written records.

Even if you have a cancelled check for your $250+ gift, if you lack the magic words, your deduction is zero. 

A taxpayer learned this lesson the hard way in a Tax Court opinion released yesterday. The taxpayer’s gift in this case was a conservation easement valued at $350,971. While there are complex additional requirements for deducting such property gifts, those weren’t the problem. The taxpayer never got past the magic words:

Although the conservation deed includes provisions stating that the intent of the parties is to preserve the property, those provisions do not confirm that the preservation of the property was the only consideration because the deed did not include a provision stating that it is the entire agreement of the parties. Without  such a provision, the IRS could not have determined by reviewing the conservation deed whether petitioners received consideration in exchange for the contribution of the conservation easement. We conclude, therefore, that the conservation deed taken as a whole is insufficient to satisfy section 170(f)(8)(B)(ii). Because petitioners’ contemporaneous written acknowledgment does not comply with section 170(f)(8)(B)(ii), petitioners are not entitled to any claimed carryover charitable contribution deductions,

Lacking the magic words, the deduction suddenly went from $350,971 to nothing. 

While this was a six-figure problem in this case, the rule is just as effective for a $250 gift to your church or your favorite charity.

I’ll just get the acknowledgment if I get audited. That doesn’t work. The acknowledgement has to be “contemporaneous.” Tax Court explains:

A written acknowledgment is contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of the date the return was filed or the due date (including extensions) for filing the return for the year in which the charitable contribution was made.

Many smaller charities, and even a few bigger ones, have been slow to realize the importance of these acknowledgements. If you don’t have one yet, it is wise to get it. If you want the charitable deduction, it’s worth extending your return for.

Cite: French, T.C. Memo 2016-53.

This is another of our irregular series of 2016 filing season tips. They’ll keep coming through the April 18 deadline!

 

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Paul Neiffer, Are You 70 1/2?. “If you have retirement or IRA accounts and you are approaching age 70 1/2, you must be careful to make sure to take your required minimum distributions (RMD) and April 1 can be a key deadline.”

Jason Dinesen, If I Turn 65 in August, Am I 65 on My Tax Return?

TaxGrrrl, Taxes From A To Z (2016): I Is For Inheritance

Robert Wood, Payroll Tax Violators Get Penalties Or Jail, And IRS Is Watching. “The IRS is especially vigorous in going after payroll taxes.”

Nicolas Xanthopoulos, Investigating Assets Prior to Submission of Collection Remedies (Procedurally Taxing). Important work from a practioner dealing with the hard end of the tax law, collections.

Jack Townsend, Interview of Acting Assistant Attorney General Ciraolo on Tax Enforcement. It sounds like they still want to shoot jaywalkers.

Kay Bell, $10,000 crowdsourcing prize available to designer of Future IRS taxpayer accounts website

 

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Howard Gleckman, Paul Ryan and The “Ridiculous Notion” of Tax Distribution (TaxVox):

Last week, House Speaker Paul Ryan said in a CNBC interview that the distributional analysis of tax plans done by the Tax Policy Center, the Joint Committee on Taxation, and others is based on the “ridiculous notion” that the effect of tax changes on different income groups  is important.

Mr. Gleckman thinks Speaker Ryan is wrong, that it is very important to show how much tax changes benefit “the rich.” While that is interesting information, Speaker Ryan is right in that notions of distributional fairness have an outsized impact on tax policy deductions. I get the impression from some people that they would be fine with executing people, seizing their property, and selling their families into slavery, so long as it only affected the top 1% of earners.

David Brunori, How to Save the Corporate Tax (Tax Analysts Blog). “First, get all the states in a big room and have them agree to end all targeted tax incentives.”

TaxProf, The IRS Scandal, Day 1050. Today’s link: Chipping Away at the IRS Stonewall: A Federal Court Scores the Agency For its ‘Continuous Resistance’

 

Humor impairment is a lifestyle, not a crime! White-Collar Crime Watch: Polygamists, Fixed Tennis Matches, An Unfunny Accountant (Leona May, Going Concern).

 

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Tax Roundup, 3/23/16: “Section 6103 was enacted to protect taxpayers from the IRS, not the IRS from taxpayers.” And more!

Wednesday, March 23rd, 2016 by Joe Kristan

norcal logoNo Scandal here. The IRS has long history of hiding behind taxpayer confidentiality rules to avoid accountability. The Sixth Circuit Court of Appeals called the IRS on this yesterday in a harshly-worded opinion.

The case arose from the Tea Party scandal. NorCal Tea Party Patriots sued the IRS after the scandal emerged. The IRS has used every trick in the book to drag out the case, citing the “confidentiality” of the very taxpayers it abused. From the Sixth Circuit opinion (my emphasis):

The IRS argues that the “names and other identifying information of” organizations that apply for tax-exempt status — along with the applications themselves — are confidential “return information” under 26 U.S.C. § 6103. IRS Petition at 2, 16. The IRS argues further that the district court lacked authority to order disclosure of those names under a statutory provision for disclosure in judicial proceedings where “the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding[.]” 26 U.S.C. § 6103(h)(4)(B). The IRS contends that the district court’s discovery orders threaten to undermine statutory protections for taxpayer privacy, and that a writ of mandamus is therefore appropriate.

A “writ of mandamus” is “an extraordinary remedy reserved to correct only the clearest abuses of power by a district court.” The Sixth Circuit wasn’t buying. They reviewed the IRS foot-dragging:

To that end, the plaintiffs sought discovery in the form of basic information relevant to class certification, including the names of IRS employees who reviewed the groups’ applications for tax-exempt status and the number of applications from similar groups that had been granted, denied, withdrawn, or were still pending. On the record before us here, the IRS’s response has been one of continuous resistance. For example, the IRS asserted that the names of IRS employees who worked on the groups’ applications were taxpayer “return information” protected from disclosure by § 6103. The IRS eventually abandoned that position, but argued instead that § 6103 barred the Department of Justice’s attorneys from even reviewing the groups’ application files to find the names of the IRS employees who worked on them. That was true, the IRS asserted, even though § 6103(h)(2) — entitled “Department of Justice” — expressly allows the Department’s attorneys to review a taxpayer’s return information to the extent the taxpayer “is or may be a party to” a judicial proceeding. See 26 U.S.C. § 6103(h)(2)(A). The IRS further objected — this, in a case where the IRS forced the lead plaintiff to produce 3,000 pages of what the Inspector General called “unnecessary information” — that “it would be unduly burdensome” for the IRS to collect the names of the employees who worked on the groups’ applications. The district court eventually intervened and declared the IRS’s objections meritless. Yet the IRS objected to still other document requests on grounds of “the deliberative process privilege[.]” That privilege, the IRS acknowledged, can be waived in cases involving “government misconduct”; but in the IRS’s reading, the IG’s report “does not include any allegation or finding of misconduct.”

Many taxpayers and preparers wish the IRS would use such a generous definition of “misconduct” when the criminal agents come calling.

The Sixth Circuit rejected all of the IRS arguments:

Section 6103 was enacted to protect taxpayers from the IRS, not the IRS from taxpayers.

Words that should be chiseled over the entrance to IRS headquarters.

Cite: United States v. NorCal Tea Party Patriots et al.; CA-6, No. 15-3793.

More coverage:

TaxProf, IRS Scandal, Day 1049:  6th Circuit Slams IRS Treatment Of Tea Party Group

Russ Fox, A Bad Day for the IRS in Court

 

Scott Drenkard,New Study on Electronic Cigarettes Released Today (Tax Policy Blog):

To some, vapor products are an exciting innovation that offers a new, less harmful alternative to traditional incinerated cigarette use. By contrast, tobacco control groups are concerned about youth use of the products.

Meanwhile, politicians are concerned about losing their sweet tobacco revenues if people stop gassing themselves with the real thing. Hence the moral panic.

This map is in the study:

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“Vapor products are generally found to have a much lower risk profile than traditional incinerated cigarettes.”

 

Paul Neiffer, Expanded Cost Basis Reporting is Here! Are you Ready? “The Surface Transportation and Veterans Health Care Improvement Act of 2015 (those two don’t really go together) added new tax laws that require executors to file cost basis information with the IRS.  This is required only when there is a taxable estate.”

Kay Bell, IRS releases Top 10 identity theft, tax fraud cases. 2015 only. 

Jack Townsend, IRS Publicizes Success in Prosecuting Identity Theft Refund Fraud

The IRS’s message from the selected 10 examples is that identify theft is serious and draws serious sentencings, with the principals involved receiving over 70 months (some well in excess of 100 months) incarceration (persons with lesser roles receive lesser, but still significant sentences).

That’s appropriate, but it’s not enough. Even though the thieves highlighted by the IRS report will rot for a long time, the millions they have stolen aren’t coming back. The petty grifters hightlighted in the report are probably not the type of folks who carefully weigh consequences when they can get free money right now. Nor will long sentences aren’t going to bother Russian organized crime networks, who have no intention, and little prospect, of facing U.S. justice.

Improved IRS processes that stop the crimes before they happen are what’s needed.

 

William Perez, How Much Can You Deduct by Contributing to a Traditional IRA? “Updated for 2016 contribution limits.”

Leslie Book, Filing a Day Late Can Be Timely Under Tax Court E-Filing Rules and So is Filing an Income Tax Return Ten Days Later After E-File Rejection. Good to know.

Robert Wood, Does Extending April 15 Deadline Increase Odds Of IRS Audit?. “It is worth saying it again: there is no increased audit risk to going on extension.” But there is definitely an increased risk if you mess up a return by doing it hastily, or by leaving off a late-arriving K-1.

Tony Nitti, Tax Geek Tuesday: Death Or Retirement Of A Partner In A Partnership. “Importantly, when a partner’s interest is to be liquidated by a series of distributions, the interest will not be considered liquidated until the final distribution has been made.”

 

TaxGrrrl, How To Survive Tax Season (Or Any Busy Work Day) In 10 Easy Steps.

Peter Reilly, IRS Bounty Hunters Should Not Waste Time On FBAR Penalties. In too many cases, that’s true of the IRS too.

 

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Donald Marron, Britain Builds a Better Soda Tax (TaxVox). Better at stupid is still stupid.

Annette Nellen, Taxing Candy and Snacks – That’s a Good Start. At meddling in places where the government has no business.

 

Career CornerAccounting Talent Demanding Everything Shy of the Moon, Your First Born (Caleb Newquist, Going Concern). “If I may speak for myself and many, many other people, I’d be “history” after a few days of being treated like family. The nagging questions, the guilt, the constant phone calls, the passive aggressive suggestions about marriage/kids/life direction/bad habits.”

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Tax Roundup, 3/22/16: Iowa couples to 2015 federal Sec. 179 and other changes, except bonus depreciation.

Tuesday, March 22nd, 2016 by Joe Kristan

CouplingcrescoSee you next year. 81 days after 2015 ended, Iowa finally has its 2015 tax law. Governor Branstad yesterday signed HF 2433, adopting federal tax law changes for 2015, including the $500,000 Section 179 limit, but not including bonus depreciation.

While Congress enacted the $500,000 limit permanently last year — and indexed it for inflation — Iowa’s coupling is for one year only. That sets up a fight in the 2017 General Assembly not only over bonus depreciation, but over all of the other “expiring provisions” that Congress re-enacted in December.

How we got here. While Iowa’s income tax is based on federal income tax rules, it doesn’t automatically adopt federal tax law changes. Every spring the General Assembly passes a “coupling” bill where they choose whether to adopt federal tax changes made in the prior year. The Congressional habit of enacting important tax provisions for one or two-year periods — to pretend they cost less — has made the annual coupling bill an important part of the legislature’s work.

Since 2010, Iowa has adopted all federal tax law changes except for bonus depreciation. These have included the $500,000 Section 179 deduction for new asset purchases that would otherwise have to be capitalized and depreciated over a period of years — usually three to seven years. In recent years the coupling bill has been one of the first bills to go to the Governor.

This year is different. Governor Branstad surprised the Iowa tax world when he announced on January 13 that there would be no coupling for Section 179 for 2015, on the grounds that the state budget required the revenue. It soon came out that he opposed coupling for anything but the federal research credit. That would have made a major mess out of Iowa tax filing season, affecting a broad range of deductions, including:

Exclusion for IRA distributions to charity
Exclusion of gain from qualified small business stock
Basis adjustment for S corporation charitable contributions
Built-in gain tax five-year recognition period
$250 above-the-line educator expense deduction
Exclusion of home mortgage debt forgiveness
Qualified tuition deduction
Optional sales tax deduction
Conservation easement deductions
Deduction for food inventory contributions

His Republican partisans in the Iowa House of Representatives rebelled. A coupling bill that included Section 179 passed the Iowa house by month-end, 82-14. Notably, not only did all voting Republicans support the bill, but so did a large majority of Democratic representatives.

Yet the prospects for coupling at the time looked grim. Citing the Governor’s opposition, Senate Majority Leader Gronstal (D-Council Bluffs) was set to keep the House-passed bill from ever coming to a Senate vote.

coupling20160213But the natives were restless. The legislators heard from a lot of their constituents that they were unhappy to lose the deduction, which could be worth around $40,000 for many taxpayers. The Des Moines Register reported that “only” 25,000 taxpayers would have lost deductions under that, but that comes out to 250 grumpy business constituents and farmers for every Representative, and 500 per senator. It seems most of them got on the phone and called their legislator. Business groups such as the Iowa Association of Business and Industry pushed for coupling, as did Iowans for Tax Relief.

The message got through. By February 22, Governor Branstad reversed himself and decided Iowa could afford Section 179 coupling for one more year. That left Senator Gronstal as the remaining roadblock to coupling. He extracted a face-saving reduction in the sales tax exemption for manufacturing supplies that the Department of Revenue put into place last year — by accepting a version of the break that he blocked in 2014.

Now it’s time to catch up. The software vendors will scramble to update their tax prep programs to include the coupling, and we can finally start to move all of the Iowa tax returns that have been on hold awaiting the coupling.

Unfortunately, this coupling bill is only for one year — even though $500,000 Section 179 is now a permanent federal tax provision. We can expect both the Governor and Senator Gronstal to oppose Section 179 coupling in the next General Assembly. They have other priorities.

Other coverage:

Gazette.com, Branstad signs tax-policy compromise

Des Moines Register, Branstad signs tax policy compromise

Maria Koklanaris, Iowa Governor Signs Exemption, Federal Conformity Bill

Paul Neiffer, Iowa Governor Branstad Finally Signs Coupling Bill.

 

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Kay Bell, Figuring the tax value of goods you give to charity

TaxGrrrl, The 9 Most Common Tax Filing Mistakes – And How To Avoid Them. “Rushing tends to result in mistakes – and those errors can slow processing of your tax return, resulting in delayed tax refunds or worse, a second glance from Internal Revenue Service (IRS).”

Jason Dinesen, Success Comes Too Easily for a Side Business. “In my experience, most of us who try taking a side business full time end up overwhelmed. A few of us make it through.”

Peter Reilly, AICPA Versus Block Advisors In Spat I Hope They Both Lose. “The reason that the H&R Block ‘Who actually prepares your return?’ question is the money shot is that at many national and large CPA regional firms, the answer will be ‘Somebody in India‘”  All Roth & Company returns are 100% U.S. content, by the way.

Leslie Book, Clarke Case Finally Comes to End: Eleventh Circuit Orders Enforcement But Also Leaves Door Open For Allegations of Improper Purpose (Procedurally Taxing).

Jack Townsend, Ruminations on Inconsistent Verdicts. “The issue of inconsistent verdicts is a big issue.”

 

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Joseph Henchman, U.S. Supreme Court Declines to Hear Case Challenging Colorado Marijuana Law (Tax Policy Blog). “The U.S. Supreme Court today turned down an attempt by Nebraska and Oklahoma to challenge Colorado’s legalization of marijuana, without explanation.”

Renu Zaretsky, Are Presidential Candidates’ Tax Plans Getting Closer Looks? Today’s TaxVox headline roundup covers the millionaires who want to pull up the ladder behind themselves in New York, polling on the Bernie plan, and more.

TaxProf, The IRS Scandal, Day 1048

Jeremy Scott, Scotland Makes the Case That Taxes Pay for Things People Want (Tax Analysts Blog) “The Conservatives were quick to point out that she was essentially putting a ‘higher taxes here’ sign on the border that would encourage migration and tax planning.”

Ajay Gupta, Trump Only Threatens a Trade War, But Obama Might Actually Start a Tax War (Tax Analysts Blog)

 

News from the Profession. This 8-K From Valeant Is Something to Behold (Caleb Newquist, Going Concern).

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Tax Roundup, 3/18/16: The income tax difference between gifts and compensation, illustrated. And: twins!

Friday, March 18th, 2016 by Joe Kristan

Twins! I’m delighted to report that Abby Croll, a Roth & Company Tax Manager, delivered twins yesterday, a boy and a girl. All are well.

 

20160215-1Too darn busy to file? There are many good reasons to stay current on your tax filings. One compelling reason is that failure to file can draw unwanted attention from the IRS. Returns that aren’t there can stand out.

That seems to be how it worked for an entrepreneur in Northwest Iowa, a Ms. Fairchild. An Eighth Circuit panel yesterday upheld her 33-month sentence on tax charges. The court takes us back to the beginning of the investigation (any emphasis is mine):

In 2009, Internal Revenue Service (IRS) Special Agent Daniel Wright opened an investigation on Fairchild and her husband. Agent Wright discovered that Fairchild and her husband had not filed income tax returns since 2004.

With no returns with which to start, Agent Wright did a little digging:

Agent Wright obtained records from Fairchild’s two primary bank accounts dating back to January 1, 2005. These bank records showed that a number of large cashier’s checks had been deposited into her accounts. Specifically, there were 37 deposits of checks from David Karlen totaling $1,103,647.84. Fairchild’s accounts reflected another six checks totaling $50,000 from Paul Pietz deposited into two main accounts in 2008. The bank records also showed $210,348.39 in total cash deposits from 2005 to 2008.

That was enough to pique Agent Wright’s interest. Meanwhile, Ms. Fairchild wasn’t exactly ignoring her tax issues:

In July 2010, Fairchild and her husband filed joint income tax returns for 2005, 2006, 2007, and 2008, apparently unaware of the ongoing IRS investigation. Fairchild, a professional adult entertainer, reported income in each of the respective years as $122,345; $120,000; $120,000; and $151,325. The total income reported of $513,670 was far less than the $1,153,647.84 that Fairchild received from Karlen and Pietz during that same time span. Additionally, the returns did not identify any of Fairchild’s cash deposits during those years as income.

Perhaps a false move, considering that Agent Wright already knew about the deposits. Before long the IRS got copies of these returns to him, and he arranged a chat with Ms. Fairchild:

Agent Wright interviewed Fairchild about her tax returns on July 13, 2011. During that interview, Fairchild explained “that she actually thought all of the money, that every single cashier’s check she received from Mr. Karlen was a gift, but that she had reported some of it to take some of the tax burden off of him.

Very thoughtful.

To determine how much income to claim, Fairchild told Agent Wright that she “ballparked” the amount. In the same interview, Fairchild also claimed that the money from Pietz was a gift and that he had told her that he reported the gift on his income tax return. Even though $30,000 of the money from Pietz was included as income on her 2008 income tax return, Fairchild maintained that it was really a gift that her accountant had mistakenly included as income.

I suppose most people don’t know that gifts don’t show up on income tax returns. Still, one may doubt that gift tax returns were filed for any of these amounts under the circumstances.

In order for a payment to be considered a “gift,” and therefore exempt from income tax, it has to be paid out of “disinterested generosity.” It appears that the benefactors had, um, interests:

According to Karlen, he met Fairchild in 2003 or 2004 while she was dancing. He tipped her money when she danced on stage and paid for private dances inside the club in a private room. Fairchild gave her phone number to Karlen and would call him to tell him when and where she would be dancing. In 2005, Karlen went to watch Fairchild dance at a club; while there, Fairchild asked Karlen if he was interested in paying for sex with her outside of the club. Karlen testified concerning the first time that he met with Fairchild for a “private meeting outside the club.”

You can read the opinion if you care for more details, but they can be condensed into this:

When asked how he “treat[ed] the money that [he] gave to [Fairchild],” Karlen replied, “[f]or her service. . . . For sex.” When asked whether the 37 payments were all for sexual services, Karlen replied, “[e]very one of those.” He later confirmed that “[t]he whole $1.1 million was for sex” and that “[e]verything was for sex.”

Generous, maybe, but not disinterested. It appears that her other benefactor had similar interests.

Ms. Fairchild had an explanation for her late filing:

Fairchild admitted that she did not file income tax returns for 2005 through 2008 until 2010, but she claimed that the delay was due to problems that she experienced during the construction of her new home.

Probably not “reasonable cause,” to IRS thinking. In fairness, it seems she was busy on other things.

20150813-1Now let’s move on to her visit with her tax preparer:

In May 2006, after filing requests with the IRS to file the income tax returns late, [preparer] Anderson met with Fairchild to determine her income. Because Fairchild had no other documentation of her income, she reviewed her bank statements with Anderson to determine which deposits were income. Anderson testified, “I went through and had Veronica [Fairchild] read off the deposits to me, and I ran a tape on my calculator of the number of deposits that she would tell me.

He ran a tape! There’s no school like the old school.

But old school or new, it was all income as far as the IRS was concerned, and it wasn’t reported. Indictment and conviction followed in due course, and yesterday the appeals court upheld a 33-month prison sentence for the underreporting. It perhaps didn’t help that while she didn’t report all of the deposits as income on her 1040, she did report it all to several banks when she applied for loans.

The moral? There are several lessons we can draw. First, file timely. She might have never attracted Agent Wright’s attentions had she filed, unless he was a strip club patron.

Next, beware the tendency to believe what you want to believe about taxable income. Just because the nice man gives you money doesn’t mean he’s doing it because he’s a nice man.

Finally, level with your preparer. The court seems to have held it against her that she didn’t.

Cite: Fairchild, CA-8, No. 14-3517

Prior coverage here.

 

KCRG.com, Iowa Businesses Spend Billions In Tax Coupling

Specifically, agriculture businesses and farms use it for high cost equipment. In 2012 through 2014, agriculture applied that tax law to around 38 percent of their investments. More than twice of any other industry.

In terms of dollars, across all small businesses in Iowa, that’s about $2.7 billion in 2012, $2.7 billion in 2013, and $2.2 billion in 2014. Of that, farm returns claimed between 54 and 66 percent over those three years.

Those numbers come from a white paper by Roger McEowen, a professor of Ag Law at Washburn University and the Midwest Tax Director of CliftonLarsonAllen in West Des Moines.

But what good is it if it never lets a politician issue an economic development press release?

 

The Critical Question: How High Are Beer Taxes in Your State? (Scott Drenkard, Tax Policy Blog). This high:

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Peter Reilly, IRS And Liquor By The Wink. Wherein a glorified bar isn’t a tax-exempt social club.

TaxGrrrl, You Can Thank Excise Taxes For Guinness Stout. That wouldn’t have occurred to me.

Jason Dinesen, Glossary: College Savings Iowa. “It’s a type of529 Plan, where money going into the plan is not tax deductible (for federal taxes) but money coming out not taxed as long as it’s used for qualifying expenses.” And it has an Iowa tax benefit.

Robert Wood, Confusing Personal With Business On Your Taxes Can Mean IRS Penalties Or Jail. Expecially when “confusing” means “pretending.”

Kay Bell, Alexander Hamilton will remain on redesigned $10 bill. Phew.

 

Picture by Dan Kristan

Picture by Dan Kristan

 

William Gale, Taxes on the Rich May Change a Lot in 2017 (TaxVox)

Alex Durante, The U.S. Tax and Transfer System is Very Progressive, New Paper Confirms (Tax Policy Blog). But it is also whimsical: “However, due to the complex system of phase outs of certain tax credits and government transfers, poor households may face marginal tax rates as high as some middle and upper-income households.

All points bulletin! Beware the Slayer of Tax Reform Fantasy (Robert Goulder, Tax Analysts Blog).

TaxProf, The IRS Scandal, Day 1044

Stuart Gibson, Two Steps Forward, Three Steps Back for Europe? (Tax Analysts Blog) “Unfortunately, every time it looks like Europe will unify behind certain tax policies, the member states start circling the wagons and shooting inward.”

News from the Profession. Cyber Extortion: Leprechauns vs. Accountants (Megan Lewczyk, Going Concern)

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Tax Roundup, 3/17/16: Brokering mortgages isn’t “real estate activity,” says Tax Court. And: Irish scenery!

Thursday, March 17th, 2016 by Joe Kristan
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All photos today courtesy Dan Kristan

Sometimes training isn’t enough. A taxpayer whose case was decided this week in Tax Court seems well equipped to fight the IRS:

Petitioner holds a bachelor of science degree in accounting and a master’s degree in tax law. During each year in issue petitioner was licensed in California as a real estate broker and was qualified to represent taxpayers before the Internal Revenue Service (IRS) as an enrolled agent.

A specialized tax degree and an E.A. designation is pretty strong background, but credentials don’t always get the job done.

The taxpayer’s business involved mortgage brokerage, real estate brokerage, and tax preparation. The taxpayer argued that the time he spent as a mortgage broker counts as a “real estate trade or business,” enabling him to treat rental losses as non-passive and therefore deductible.

Some background. The tax law treats rental losses for most taxpayers as automatically passive, and therefore deductible only to the extent of “passive” income or at the time the “passive activity” is sold.

Business activities other than real estate rental are not automatically passive. Taxpayers can avoid the passive loss rules if they “materially participate” in the activity. This is based on the amount of time spent on the activity.

If you qualify as a “real estate professional,” your real estate losses are not automatically passive; they are tested as passive or non-passive based on the tests used for other businesses. But it is hard to be a real estate pro under these rules:

-You have to spend at least 750 hours a year working in a “real estate” trade or business, and

-Your real estate time has to exceed the time you spend doing non-real estate work.

This second test keeps most people from being real estate pros, as its hard to convince the IRS or the courts that you have a 2000-hour full time job but that you spend more time than that managing real estate.

The taxpayer in this case said his mortgage brokerage was a real estate business:

According to petitioners, petitioner’s mortgage brokerage activity is a “real property trade or business” within the meaning of section 469(c)(7)(C). Petitioners go on to argue that because petitioner spent more than 750 hours providing services in connection with his mortgage brokerage business for both years in issue, and because he spent more time in that business than he did in any other trades for business during each of those years, for both years in issue he is a [real estate professional]…

This is the first time I’ve seen mortgage brokering treated as a “real estate” trade or business. The Tax Court ponders the question (my emphasis):

Section 469(c)(7)(C) defines a real property trade or business to mean “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.” Petitioners focus on the word “brokerage” contained in that section and argue that petitioner’s mortgage brokerage business is contemplated by the statute. We disagree. Petitioners’ argument ignores the words “real property” that precede the specific activities listed in the statute; those words modify each of those activities. While petitioner’s mortgage brokerage activity constitutes a “brokerage” trade or business, it does not constitute a “real property brokerage” trade or business. Petitioner was not during either year in issue brokering real estate; he was brokering financial services.

The court was unconvinced that the taxpayer met the 750-hour test without counting the mortgage brokerage time, so the rental losses were passive and disallowed. The issue was novel enough, though, for the taxpayer to avoid penalties.

The Moral? Credentials are helpful to a tax preparer, but they aren’t always enough to convince the Tax Court to see things your way.

Cite: Guarino, T.C. Summ. Op. 2016-12.

 

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Scott Drenkard, Sights and Sounds from Kansas as they Consider Bill to Eliminate Pass-through Carve-out:

Kansas is on the right track by broadening its tax base and lowering its rates, but should be cautious about favoring some businesses over others. A better path to encouraging economic growth is creating a tax environment that is not overly burdensome and treats all businesses well. Further, while tax reductions can have positive economic benefits, they will cost revenue and will ultimately have to be paid for either by cutting spending or increasing taxes elsewhere.

If Iowa ever gets around to much-needed business tax reforms, Kansas will provide a good bad example.

 

TaxGrrrl, 7 Options To Consider When You Can’t Pay Your Tax Bill In Full. With this importand advice: “What if you know that you can’t pay what you owe? File anyway.

Robert Wood, Before Filing Your Taxes With IRS, Consider This. “As you start preparing to file your tax return this year, consider what will happen if you are audited.”

Keith Fogg, A Different Type of Offset Fight – Illegal Exaction (Procedurally Taxing). “In the end, this type of case appears extremely difficult to win which is why so few of these cases make it to published opinions.”

Paul Neiffer, IRS Interest Rates Finally Start to Rise. “It seems like forever that the interest that the IRS will pay or collect on tax refunds/underpayments has been stuck at 3%.  The IRS just announced today that beginning April 1, 2016, the interest rate will rise to 4% for most taxpayers.”

Kay Bell, New tax scam alert: Cons posing as fake IRS agents now calling to ‘verify’ filers’ tax return information

 

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TaxProf, The IRS Scandal, Day 1043

Renu Zaretsky, Caution, Cuts, and a Chunk of Change. Today’s TaxVox headline roundup covers budget battles in Minnesota and proposed corporate tax cuts in the U.K., among other things.

 

Career Corner. Study: Women Even Less Willing to Put Up With Crappy Pay Than Men (Caleb Newquist, Going Concern)

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