Former IRS Commissioner Shulman, showing how bad he feels about politcal harassment under his watch.
The Worst Commissioner Ever returned to Washington yesterday to testify before a Senate committee on the IRS scandal. He bravely took responsibility for the targeting of disfavored political groups and apologized to the victims.
I certainly am not personally responsible for creating a list that had inappropriate criteria on it. And what I know, with the full facts that are out, is from the inspector general’s report, which doesn’t say that I’m responsible for that. With that said, this happened on my watch. And I very much regret that it happened on my watch.
In other words, I was just the boss, and you can’t blame me for what those crazy kids in Cincinnati do.
Lois Lerner, the head of the Internal Revenue Service office that targeted conservative groups, intends to invoke her constitutional right against self-incrimination and decline to answer questions about the matter when questioned by a congressional committee Wednesday.
Ms. Lerner, director of the tax-exempt-organizations division at the IRS, notified the House Committee on Oversight and Government Reform through her attorney that she wouldn’t answer questions on the matter, according to a committee spokesman.
When it comes to the Bill of Rights, better late than never.
On Friday, May 17, 2013, the Maryland Court of Appeals denied the comptroller’s motion for reconsideration in Comptroller v. Wynne, which struck down the state’s application of credits against pass through income from S corporations; however, the court stayed implementation of the ruling to allow the comptroller to petition the U.S. Supreme Court for certiorari.
If the IRS hoped Friday’s “apology” for giving extra special attention to tax-exemption applications of right-side groups would settle things, they’re very disappointed this weekend. The Washington Post reports that the Treasury Inspector General for Tax Administration will soon issue a report saying Friday’s apologizer, IRS Director, Exempt Organizations, knew this was going on in 2011. Meanwhile, in 2012 IRS Commissioner Doug Shulman was still testifying that IRS was not picking on the Tea Party.
So not only was the Shulman era at IRS grasping, incompetent and casually cruel, it was dishonest.
The documents, obtained by The Washington Post from a congressional aide with knowledge of the findings, show that the IRS field office in charge of evaluating applications for tax-exempt status decided to focus on groups making statements that “criticize how the country is being run” and those that were involved in educating Americans “on the Constitution and Bill of Rights.”
Yes, we sure need to keep an eye on those wingnuts who want to educate people on the Constitution and Bill of Rights. Dangerous lunatics, they are!
There is so much blog coverage of this that I won’t even try to round it all up. A few links from our blogroll:
The report doesn’t shay whether or not Shulman was informed about the Tea Party questioning, but it does show the IRS’s chief counsel was. It’s standard procedure for the counsel and commissioner to discuss this sort of thing before a Congressional hearing.
If so, The Worst Commissioner Ever can only plead incompetence instead of lying to Congress.
Nina Olson, IRS Taxpayer Advocate, has an article in Tax Analysts (via the TaxProf) affirming her support for taxpayer regulation. Ms. Olson has done much good work as Taxpayer Advocate, but her support for increased preparer regulation is economically uninformed and hopelessly wrongheaded.
I’d like to report a hijacking. It looks like somebody at Tax Analysts forgot to renew their ownership of the tax.com domain name. Going there this morning gets this:
Tax.com is (has been?) home to the great group blog featuring, among others, David Brunori, Christopher Bergin, David Cay Johnston, Martin Sullivan, Cara Griffith and Clint Stretch. I hope this is only a temporary hijacking.
Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
Search for the Tax Fairy leads to federal prison. The Tax Fairy, in the imagination of believers, appears in the form of magical legal maneuvers that make your taxes all go away. Your drinking buddies may even claim to have seen it, or that their tax guy knows her.
It can hurt when you find that there is no Tax Fairy. It must hurt for one South Dakota surgeon. From RapidCityJournal.com:
Friends and family described Dr. Edward Picardi as a compassionate, highly skilled surgeon, but the accolades failed to spare the doctor a five-year prison sentence for income tax evasion on Tuesday.
Despite the good the Sturgis man was proclaimed to have done in his life, Picardi, 56, is the same man a federal jury convicted of 13 felonies last October, U.S. Chief District Judge Jeffrey Viken said when he sentenced the doctor.
Picardi was charged with income tax evasion after an exhaustive federal investigation of his financial practices spanning 10 years from 1999 through 2009. He used an elaborate network of dummy corporations and several foreign banks to divert thousands of dollars in income.
The indictment says the scheme was hatched with the aid of a Maryland attorney who set up a phony employee leasing scheme to suck taxable income to shell companies, which the surgeon tapped for cash as needed. This worked fine, until one day it didn’t, and now it’s a five-year unpaid vacation, plus tax, interest and penalties.
There is no Tax Fairy.
Jana Luttenegger, Disclaiming an Inheritance (Davis Brown Tax Law Blog). Sometimes it’s better estate planning to turn down an inheritance and let it go to your kids or some other beneficiary. But you have to do it right:
Most importantly, the disclaimer must be made before you accept any benefit in the gift, and it must be an unqualified disclaimer. (No, you can’t have a party at the house and then decide you don’t want it.) Once the disclaimer is made, it is irrevocable — you can’t change your mind. If you properly disclaim, the property will pass as if you predeceased (you do not get to direct where the property goes).
The looming debate over the federal debt limit is a depressing reminder that we’re living in the Age of the Manufactured Crisis. And it encourages a sort of political nostalgia – a yearning for that bygone era when tough lawmakers made the tough decisions that kept federal debt at manageable levels. Well, sorry to tell you, but there were never any fiscal heroes.
Just politicians who show by their actions that they are happy to spend us to Greece.
Jason Dinesen, Same-Sex Marriage, Community Property, And Multi-State Income — Part 1. ”Indeed, some of the most complicated tax returns I’ve ever prepared have been for same-sex couples that moved from California (a community property state) to Iowa (not a community property state) during the middle of the year.”
Think of it as the ballpark program you pick up before a baseball game. You can watch the game without it, but it is much more fun if you can keep score and know a little something about who plays for the visiting team.
Except much less interesting than baseball, and the players are uglier and less skilled.
David Brunori doesn’t think much of the tax wisdom of the Iowa House of Representatives ($link):
The Iowa House of Representatives recently passed the Iowa Reinvestment Act, which would allow companies to keep sales tax revenue they collect rather than turning it over to the general fund as the citizens think will happen. Basically, the act is designed to allow businesses to recoup the cost of development. The state has done that before to allow the public to help finance a speedway and other projects that apparently can’t be justified in the free market. The vote for that abomination of tax policy was 87 to 9. That’s what we call bipartisan bad tax policy.
Just more of using your money to subsidize the well-lobbied and well-connected.
The idea of the IRS preparing individuals’ returns is a classic example of a theory that cannot survive in a practical world. Like most theories, it deserved an experiment. It had that chance, in California, and it failed, with only a tiny portion of the eligible population deciding to participate.
Making taxpayers’ lives easier is a matter of simplifying the tax law, not enabling the complexities by turning tax preparation over to the IRS.
This strikes me as wise. I just can’t imagine IRS data processing ever making this possible, considering the complexity of the income tax and the way Congress changes it all the time.
On one hand, $3.4 million is a lot of money — nobody should doubt that. But we’re also nearly completely blind in America to how much is “enough” for retirement. Many people would say the word “millionaire” and imagine Uncle Pennybags or Uncle Scrooge. But consider this: If you wanted to get $40,000 a year in retirement income and do it just on interest payments alone (in other words, if you were trying to avoid taking anything out of your nest egg and just live on the interest), then if you had your money in “safe” 10-year Treasuries earning 1.78%, then you’d have to have more than $2.2 million in the bank. Under those conditions, “rich” doesn’t really look so rich anymore.
I don’t think the nation’s biggest problem is people saving too much.
Holding your breath for tax reform? Exhale. Martin Sullivan says tax reform is on the Fast Track to Nowhere. (Tax.com)
We have written several times about the dangers of nontraded or thinly traded REITs. They are a popular way of investing in real estate but they can be difficult to sell or liquidate if an investor suddenly needs cash.
I saw an elderly, ill client with severe cash problems while holding a private REIT investment that he couldn’t cash out. This really does happen. This is not a problem with widely-traded REITs, which are as liquid as any stock.
Jim Maule, Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad. I never throw away tax returns, and you need to keep records to support the cost of shares and big assets. If you have loss carryforwards, you need to keep the records that support the losses as long as you are using the carryforwards.
Potassium forever? An accused embezzler apparently was in no hurry to stand trial. From StarTribune.com:
A Texas man faces more than 16 years in federal prison for his role in a scheme to bilk nearly $400,000 from his former Eagan employer, Advantage Transportation.
Clayton “Craig” Hogeland, 43, also obstructed justice by faking a life-threatening medical condition, U.S. District Judge Patrick Schiltz found. That caused delays for both his trial and sentencing hearing.
How did he delay his trial?
Further health-related delays stretched out the trial before his conviction on Dec. 6, 2011. He was placed in custody Jan. 8, 2013, and the erratic blood potassium readings stopped. Six days later, his wife reported to federal authorities that she found in his belongings four zip-top bags of what turned out to be potassium chloride.
Despite his continuing complaints about symptoms after being jailed, tests revealed no abnormal blood potassium levels, the prosecution said.
I’m not sure this was well thought-out. What’s the next move? More potassium? Maybe when you are looking at 16 years in federal prison, delay is its own reward.
A reporter for a nationally prominent publication has contacted me to help him get in touch with people who have gone through one of the OVDI/P programs to discuss their experiences and thoughts about the programs. If you are interested and/or willing to do that, please contact me at jack@tjtaxlaw.com and I will put you in touch with the reporter.
So maybe it’s a chance for those of you who’ve been put through the ringer for a foot-fault violation to get a little justice.
The opposite of a sales tax holiday: Retailer Target Jumps The Gun On Sales Tax (TaxGrrrl). A South Carolina Target store probably made few friends when it started charging a higher sales tax rate a month early.
Are you irritable? Sleeping less? Impatient with your friends? Putting on weight? Thinking about divorce? Yes? Sorry to hear, you must be going through a stressful time.
Oh, wait, are you an American? Yes?! Whew, you’re behaving normally then. If you were to read this AICPA press release, you might be inclined to believe that your take home pay being 2% lower than last year would have been the cause of all those things…
Our politicians have tried to do too much through the tax law. And that has created a complicated mess of winners and losers that makes the task of trying to reform it, even to some level of sensible, a daunting one.The poster child for this mess is the Earned Income Tax Credit. Like it or not, the EITC is welfare administered through the tax system. Do we really want our tax system to do that?
The tax law works best if it is seen solely as a tool to finance the government. Much of its hideous complexity comes from using it is the Swiss Army Knife of public policy. As you add more gadgets it becomes less useful at being a knife.
Mr. Bergin isn’t afraid to mention the elephant in the room:
And there is another huge problem. The EITC program leaks like a sieve. More bluntly and honestly stated, well-intentioned as it may be, the EITC has been corrupted. Don’t take my word for it. Recently, the Treasury Inspector General for Tax Administration released a report stating that up to one-quarter of EITC payments made in fiscal 2012 were improper. How much does that represent? Try $13.6 billion. In one year. Using a ten-year budget window, that’s $136 billion, and that’s just thetainted stuff.
Supporters say the EITC is a program that “works.” Can you say that something “works” when it sprays billions to thieves every year?
Read the whole thing.
Fairness:
But the compliance costs imposed by the Marketplace Fairness Act would place smaller upstarts at a distinct disadvantage, which is, I suspect, one reason that market incumbents such as Amazon support the tax. The real cost of taxes is not the revenue out the door to the taxman; it’s the revenue out to the door to the taxman plus all of the costs involved in complying with the tax code.
Winston Churchill said that Americans can be counted on to do the right thing, after we have exhausted all other possibilities. He might have added that we usually start with the least direct and most complex approach. So it is with the energy tax policy expressed in President Obama’s FY 2014 budget.
I like this sentence: “By their nature, tax credits add complexity to the law and often reward behavior that would occur even without the credits.”
So far two clients have contacted me to report an issue – one with a 2011 refund andone with a 2012 refund. In both cases the refund was not directly deposited to the requested account. Instead it was applied to the subsequent year’s estimated tax. It was as if the taxpayer, or I, had entered the full amount of the refund on Line 75, although we clearly did not.
This isn’t a problem I have seen. Robert famously doesn’t e-file his returns. I wonder if it’s a simple keypunch error at the service center.
Just because an LLC is taxed like a partnership doesn’t mean that every LLC owner can act like a general partner, as Colleen MacRaeexplains:
Last week the Iowa Court of Appeals in Three Minnows, LLC v. Cream LLC, held that a non-managing member did not have the authority to bind an LLC to a contract the member signed on behalf of the limited liability company.
24 current and former employees of the Internal Revenue Service have been charged for crimes relating to fraudulently obtaining more than $250,000 in government benefits. Thirteen of the current and former IRS employees have been charged federally with making false statements to obtain unemployment insurance payments, food stamps, welfare, and housing vouchers. All thirteen, individually charged in separate indictments, are alleged to have falsely stated that they were unemployed while applying for or recertifying those government benefits.
They may have been right about being unemployed, just wrong about the timing.
The headline producing data in the report was that revenue loss – about $181 billion – from corporate tax expenditures in 2011 was “approximately the same size as the amount of corporate income tax revenue the federal government collected that year.” That makes a headline grabber; here would be my version: “Corporations Got More in Tax Breaks Than They Paid in Taxes, Government Says.”
It’s almost like the tax exists only so the politicians can carve loopholes for their friends.
Flickr image by Samat Jain under Creative Commons license
Should we just get a bill from the IRS, instead of filing returns? That’s something Janet Novack seems to be thinking about. She has two guest posts on the issue:
Some people fear return-free filing will separate citizens further from the costs of government. I think that is caused by an income tax that now is effectively only on high-income earners. When 51% can send the bill to the other 49%, bad policy seems inevitable.
It makes me wonder: if there are “Errors to avoid,” are there errors we should seek out, or at least not sweat? I can’t think of errors I’d want to make on a tax return, but I can think of some that I wouldn’t lose sleep over:
1. Forgetting to check the “presidential election campaign fund” box. After all, your entire tax bill is basically the federal election campaign fund.
2. Misspelling the name of a stock on Schedule D.
3. Writing a “smiley face” next to the tax refund line.
4. Forgetting to update your “occupation” on the signature line when you change jobs.
The core problem is that the IRS cannot look into the hearts of companies and see which of them really needs to provide free lunch to their employees in order to have a healthy, vibrant company, and which of them is doing this in order to provide a tax-free boon to their workers.
In case anyone asks, donuts are critical to a healthy, vibrant tax practice.
So a Blonde and a lawyer walk into Tax Court. She loses.
No, the Tax Court has not started to report petitioner hair color in its decisions, along with the names of the attorneys and the resident state (“petitioner resided in Iowa and was brunette during the tax years at issue but gray at trial”). This taxpayer’s first name is actually Blonde. And she was an attorney, at least until 2006, when she pleaded guilty to failure to file tax returns. From the Tax Court:
Since the only issue currently before the Court is whether Blonde Grayson Hall signed the Form 4549 under duress we will refer to Blonde Grayson Hall as petitioner.
Petitioner attended the University of Michigan Law School and was admitted to practice law in 1982. Petitioner was the chief executive officer of Hall & Associates, LLC, a law firm in Philadelphia, Pennsylvania, from 1995 to 2006.
As part of her plea deal, the taxpayer filed Form 4549 agreeing to assessment of additional tax liabilities for several tax years. She apparently had second thoughts:
Thus, the issue before us is whether Blonde Grayson Hall should be relieved of her agreement in the Form 4549 because it was signed under duress.
Of course, duress is what a plea deal is all about. You accept a bitter pill because you think it could get a lot worse if you go to trial. While this is a fearsome and sometimes abused weapon in the hands of prosecutors, the Tax Court said it wasn’t the kind of duress that makes the Form 4549 go away (my emphasis):
The requirement that petitioner sign the Form 4549 stems from the Government’s efforts to prosecute her for admittedly criminal conduct and to collect taxes and penalties. No doubt, given the circumstances, these efforts were zealous and disadvantageous to petitioner. However, every criminal defendant who is offered a plea agreement faces an equally unpalatable decision — accept a legally authorized plea agreement that will include terms disadvantageous to the criminal defendant or go to trial which may result in significantly worse consequences for the criminal defendant. This unpalatable decision does not constitute duress or involuntariness.
The taxpayer is stuck with the Form 4549 that she signed.
The moral: If you plead guilty to criminal tax charges, it is very hard to fight the assessment for the years covered by the plea. Even if you are a lawyer, and even if you are Blonde.
Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.
Not, hard, not inefficient, not socially wasteful, not immoral: Impossible.
Yet the effort to do so never ends. Nor the harm it causes.
The Internal Revenue Service is currently without a Commissioner. Douglas Shulman, the 47th IRS Commissioner stepped down last November.And from what I’m starting to hear, the IRS may not have a new Commissioner for as long as close to two years. That is not a good thing.
David Cay Johnston, Unkind to Charity(Tax.com) “The tax rules on charities, both the many good and the few bad, are about to get much more anti-giving.”
According to this report, dozens of people supporting a bill to repeal a state sales tax on amounts charged by dance establishments decided to dance in protest. According to the report, the protestors demonstrated the salsa, the flamenco, the tango, and even a conga line. Considering the speed with which legislatures get things done, perhaps they engaged in some slow dancing, though the report does not mention it.
Ceremonial cross of John Frum cargo cult, Tanna island, New Hebrides (now Vanuatu), 1967 (via Wikipedia)
Heresies of the Cargo Cult. When some remote societies encountered the industrial world in World War II, they had trouble grasping what they were seeing. Wikipedia explains:
Cargo cult activity in the Pacific region increased significantly during and immediately after World War II, when the residents of these regions observed the Japanese and American combatants bringing in large amounts of matériel. When the war ended, the military bases closed and the flow of goods and materials ceased. In an attempt to attract further deliveries of goods, followers of the cults engaged in ritualistic practices such as building crude imitation landing strips, aircraft and faux radio equipment out of bamboo or whatever materials they had at hand, and mimicking the behavior that they had observed of the military personnel operating there.
While it’s easy to mock an islander for building a refrigerator-like box in hopes of conjuring up an icy six-pack, cargo cult behavior also occurs in modern societies. Without describing it as such, tax historian Joseph Thorndike writes about the cargo cult of the 1950s, where modern policy wonks try to conjure up 1950s-style growth through a ritualistic process of duplicating tailfin-era totems. For example, Timothy Noah thinks the crushing stated top marginal rates of that era might help generate those Happy Days results. Mr. Thorndike sees problems with that approach:
We still don’t know if high statutory rates and (relatively) high average rates were a drag on growth. And we can’t know, because we also can’t know what growth might have been in a different tax climate.
Moreover, a range of nontax factors were probably more important in shaping growth patterns in the 1950s. In particular, the economic disruptions of World War II had left the United States in a uniquely dominant position; by one estimate, U.S. manufacturing output constituted 60 percent of the world’s total in 1950.
In other words, it takes more than a bamboo box to conjure up that beer.
After all, the tax system of the Eisenhower era was not a very good one: It paired notionally sky-high rates with a deeply flawed tax base and created distortions both coming and going.
I understand that progressives like Noah are fighting a different battle: They are trying to beat back the rate-cutting mania that often serves as a definition of tax reform these days. But I think we might take a lesson from the tax experts of the 1950s, who understood the problems bedeviling their own tax system. As economist Harold Groves said at the time, “The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that makes these rates specious.”
Mr. Thorndike is more sympathetic to high rates than I ever will be. Doing taxes for a living, I see first-hand how high rates affect behavior, and I have no patience for academics who say otherwise. But he wisely notes that simply trying to recreate the totems of the 1950s, like high tax rates, misses all of the other things that put cold beer in the refrigerator. Same thing goes for other 1950s fetishes like tail fins, industrial unionism and defined benefit pension plans.
Former Pittsburgh Police Chief Nathan E. Harper has been indicted by a federal grand jury in Pittsburgh on charges of conspiracy and willful failure to file income tax returns, U.S. Attorney David J. Hickton announced today.
The five-count indictment named Harper, 60, of Pittsburgh.
According to the indictment, Harper was the chief of the city of Pittsburgh Police Department. From 2009 to 2012, he caused at least $70,628.92 in checks and cash received by the special events office of the department to be diverted to two accounts at the Greater Pittsburgh Police Federal Credit Union. Using Visa debit cards, Harper obtained more than $31,000 in ATM withdrawals and debit purchases, all for his personal benefit. Harper also failed to file federal tax returns for the years 2008 through 2011.
If he’s convicted, maybe the special events office can throw a little party for the occasion.
What could possibly go wrong? James Timothy Turner was convicted last week of masterminding a cunning plan. DothanEagle.com reports:
According to a U.S. Department of Justice press release, Turner was convicted of conspiracy to defraud the U.S., attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the Internal Revenue Service, failing to file a 2009 federal income tax return and falsely testifying under oath in a bankruptcy proceeding.
The FBI began investigating Turner in 2010 after he and three other people sent packages to all 50 governors demanding they leave office.
Turner is the president of a group of what prosecutors called “sovereign citizens” known as the “Republic for the united States of America.”
Send “packages” to all of the governors telling them to resign? Well, at least they weren’t trying to hide what they were doing.
Turner toured the country in 2008 and 2009 teaching seminars that instructed attendees how to submit bonds to pay off tax debt.
According to prosecutors, these bonds were completely fictitious and often written for amounts in excess of $1 billion.
Silly man. Only the Federal Reserve can do that. Unless we’re talking about the $1 trillion magic coin…
So, for those tax professionals engaging in such transactions that they know violated a known legal duty, their conduct is illegal and unethical. For those transactions engaging in such transactions where they don’t know (perhaps are willfully ignorant) that the conduct is illegal (ultimately most of the b—-t tax shelters are found to be illegal), then at least the ethical issues arise. These are smart professionals, paid (supposedly) to predict what a court will do with the b—–t tax shelter. Yet, in the prominent civil cases that swat down b—–t tax shelters, they fail miserably in their predictions.
IRS waives late payment penalties for returns containing delayed forms. If you can’t file or pay taxes on time, it’s always better to extend your return while you round up the information or the cash. The penalty for filing a late unextended return is 5%, plus an additional 5% for every additional month of late filing. The penalty for paying late on a timely extended return, in contrast, is only 1/2%, plus 1/2% per additional month.
While penalties will be waived, the IRS will charge interest on amounts paid after the deadline.
The notice has a complete list of forms that allow taxpayers to qualify for the late payment exception. The most commonly-seen ones are probably Form 4562, for depreciable assets and the section 179 deduction, and Form 8582 for passive activities.
By issuing this notice early, the IRS has also given taxpayers a planning opportunity. If you have a big balance due on April 15, and you have one of the qualifying forms, you now are eligible for what amounts to a low-interest loan for up to six months, until the October 15 extension deadline. Many taxpayers accelerated income into 2012 to beat the 2013 tax hikes, and they loan might come in handy. The current IRS interest rates:
three (3) percent for underpayments;
five (5) percent for large corporate underpayments
But if you have the cash, you probably want to pay up on April 15. There aren’t many places left where you can get a 3% after-tax return on your money for six months.
David Cay Johnston, Level Playing Fields Under Attack. (Tax.com). Because we don’t want Wal-Mart to be at the mercy of some guy selling stuff from his basement.
The road not taken. I left a national accounting firm to start a new firm. A (purported) alumna of the same firm took a somewhat different path. (Going Concern)
Iowa cracking down on RV tax scofflows? Southwestiowanews.com reports:
Iowa lawmakers are putting the brakes on those who avoid paying registration fees when buying expensive vehicles.
Under a bill recently approved by the Senate, tax evaders using so-called out-of-state shell corporations to avoid paying registration fees on RVs or other luxury vehicles will face criminal charges and penalties.
Going to jail to save a few bucks on your vehicle registration seems like a bad bet.
The (Decatur) Herald & Review reports that, according to Illinois officials, Iowa is offering Cronus Chemical LLC an estimated $35 million in taxpayer subsidies to build a plant in Mitchell County near the Minnesota border.
Illinois lawmakers are considering tax breaks in a proposal by state Rep. Adam Brown, a Republican from Champaign. The plant would be built near Tuscola in the east central part of the state.
Hey, Iowa Economic Development people: Illinois is broke. Busted. Played out. They’re not bidding. We don’t need to be bribing fertilizer plants to come here. Instead give us a tax system that’s not so awful that we have to pay people to like us.
It baffles me that the National Association of Enrolled Agents is so in love with the RTRP program.
In their weekly newsletter to EAs last week, NAEA bizarrely referred to the unlicensed preparers who brought suit against the IRS over the RTRP program as people who want “the right to remain incompetent.”
NAEA also kissed the government’s butt by praising the “serious and vigorous” IRS attorneys who are appealing the court ruling that struck down the RTRP program. The flowery kissing-up continued as NAEA went on to opine that the government “delivered its A-game” in the appeal.
I have never seen anything good for enrolled agents in the IRS preparer regulations. Enrolled Agents have been around a long time, and they have to meet much higher standards than the RTRPs would. Yet the EA designation is not well understood by the public, and having the IRS officially sanction a lesser credential will probably make it even harder for EAs to get their story out.
The preponderance of evidence points to corporate taxes being the most harmful to economic growth, followed by personal income taxes, consumption taxes, and property taxes. Notice a pattern? The corporate tax is the largest tax on capital income in most countries, while the personal income tax is the largest tax on labor although it also taxes capital.
Jeremy Scott, Paul Ryan Borrows a Page From Obama’s Playbook(Tax.com): “ Much like Obama, Ryan keeps releasing the same budget every year, knowing full well that it has no chance of becoming law.”
Calendar-year corporation returns are due today! They are easy to extend on Form 7004 if you can’t finish them today. If you don’t extend an S corporation return and you file late, the penalty starts at $195 for each late K-1, and $195 each for every additional month the return is late.
If Iowa’s tax law were a car, it would look like this.
I’ve never filled out an Iowa income tax form but it looks like one of the harder state tax returns. Iowa allows you to deduct what you pay in federal income tax, which is nice but is that much more calculation work (and probably drives up tax rates). There are lines for the lump-sum tax, the minimum tax, the K-12 textbook credit, the school district surtax, the motor fuel tax credit, and the earned income tax credit. I’m sure each one of these has their explanations of necessity but together it sounds like a lot of paperwork, record-keeping, and Tax Filing Day frustration.
…
Hence, I’m impressed by a bill passed yesterday (House File 478) by the Iowa House which would offer an alternative to all Iowa taxpayers: a 4.5 percent tax on all income above about $15,000, which no further deductions or exemptions. It’s not perfect: our friend Joe Kristan pointed out that a credit for taxes paid to another state and a deduction for federal interest are probably constitutionally required, and offsetting deductions to certain kinds of income (allowing gambling losses if you tax gambling winnings) is good policy. But as Joe said, the bill “is a welcome step towards improving Iowa’s income tax.”
Far be it from me to let either the Internal Revenue Service or tax prep giant H&R Block off the hook for the current mess which has delayed refunds for more than 600,000 taxpayers claiming college tax credits by up to eight weeks. In addition to their operational missteps, both did a poor job (at least initially) of communicating with taxpayers who desperately need those refunds to pay tuition or other bills.
But let’s put some of the blame where it rightly belongs: on the Washington politicians. For more than two decades, Congress has been expanding “tax expenditures” with little regard for how complicated such provisions might be for taxpayers to use and for the IRS to administer, let alone for whether they do enough good to justify their cost and the economic distortions they create. A new 1065-page Congressional Research Service compendium lists 250 different tax expenditures. Happy reading.
Every little break like this diverts IRS resources from actually collecting income taxes and makes the income tax a little less effective and useful. Yet Congress still sees the tax law as the Swiss Army Knife of public policy.
No matter how well a student in the basic tax course masters the depreciation deduction to the extent it is studied, that student knows that the total depreciation with respect to a property cannot exceed its cost. All of the students would find themselves bewildered by the proposition that depreciation deductions on a property that cost $34,799 would total $56,000.
Argo pay your taxes. It turns out Iowa isn’t the only government whose film tax credits attract scammers. From London comes this via Boston.com:
In some ways ‘‘A Landscape of Lies’’ was a typical indie film, with a tiny budget, a B-list cast and an award from an American film festival.
What made it special is that it was created solely to cover up a huge tax fraud.
…
In fact, officials say, the project was a sham, set up to claim almost 1.5 million pounds in goods and services tax for work that had not been done, as well as 1.3 million pounds under a government program that allows filmmakers to claim back up to 25 percent of their expenditure as tax relief.
No word on whether Leo Bloom prepared the fraudulent returns.
Will there be tax reform? I think there has to be. But I don’t think it will look like theTax Reform Act of 1986 because, in short, it’s not 1986, and we don’t have the same problems or even the same tax system. That doesn’t mean there aren’t a lot of lessons to be learned from the ’86 experience. But I don’t think tax reform will happen soon. And a few of the reasons I think that come right out of “Gucci Gulch.”
I have a copy of Showdown at Gucci Gulch, the book about how the 1986 tax reforms were enacted. I haven’t brought myself to open it; it seems too much like reading about my job.
The 1040 filing deadline is five weeks from today. The 1120 and 1120S deadline is this Friday. The penalty for filing an 1120-S late is $195 per shareholder, with the penalty repeated each additional month the return is late. Proceed accordingly.
Fred’s federal taxes have increased by 9% with no change in his earnings. If Fred does not increase his distributions from his business to pay these increased taxes, his disposable income will decrease by 19%. Might these increased taxes have no substantial impact on the prospects of his small business and its employees? Not a chance.
David Cay Johnston pushes for harsher accumulated earnings tax. As I predicted, we’re starting to see people pushing for enforcement of the Accumulated Earnings Tax to deal with the pretend problem of corporations “hoarding” cash. Mr Johnston takes the podium in an (unfortunately gated) article in Tax Notes:
American nonfinancial corporations held more than $2.2 trillion of cash and near cash offshore at the end of 2010 in current dollars, IRS and Federal Reserve data shows. And that is on top of the almost $1.7 trillion of liquid assets owned by firms and subsidiaries with U.S. addresses that we will see when the 2012 corporate income tax data becomes available in a few years. That global cash and near cash pile of almost $4 trillion came to $12,600 per American — well more than triple the $3,500 in per capita federal income tax revenues that year.
There is no possible business justification for that much cash. As Tax Court Judge David Laro wrote in Haffner’s Service Stations Inc. v. Commissioner, T.C. Memo. 2002-38 “a need to retain earnings must be directly connected with the needs of the corporation itself and must be for bona fide business purposes.”
No “possible” business justification for that much cash? It’s pretty easy to come up with potential justifications. If you are a corporation sitting on a lot of cash, you have a lot to think about. You have unusual opportunities, which you need to evaluate carefully. The imposition of the shareholder-level tax on earnings is certainly a factor. Does that mean I trust corporate management and boards? No. But I trust them a lot more than second-guessers at the IRS.
The Judge Laro cite that Mr. Johnston uses only restates the legal background of the accumulated earnings tax — not the economics of it.
If you want to really encourage corporations to free up their cash, end the double-taxation of corporate income by allowing full deductibility of dividend payments — with an excise withholding tax on non-profit and non-U.S. distributees to ensure the income is taxed once. That will give corporations a powerful incentive to distribute cash they aren’t using – one that will work a lot better than beefing up the IRS Second-Guess Division.
Update: Mr. Johnston e-mails:
I have written in favoring of restoring tax-free dividends for modest sums or encourage savings, partly because most Americans have little saved in the tax system and even though only one in four gets dividends directly: [$link Ed.]
And I called for a two-year test of dividend deductions in this column a few months later, arguing that dividends have the virtue of separating actual value-added managers from those who play accounting games since you need need cash to make dividend payouts. [gated links here and here. Ed.].
Unfortunately I don’t have links to free versions of the original articles.
No more paper Internal Revenue Bulletins. The IRS has discontinued its old paper Internal Revenue Bulletin, where it published tax guidance. From Announcement 2013-12:
The IRB is available on IRS.gov before printed copies are available. Also, the majority of items (about two-thirds) that appear in the IRB are released with a News Release about a month ahead of when the item appears in the IRB. Since all items in the IRB are available electronically, almost a month in advance of being available in the printed IRB, we are eliminating the printing of paper copies of the IRB, which are distributed directly from the IRS. The cost savings to printing and postage would be $148,000 annually.
It makes sense. Another bit of my accumulated tax training goes the way of the Dodo.
Going Concern, No, We Can’t Help You Pass the Ethics Exam. When I took it, it was mailed to successful CPA candidates to do at home and mail in. No wonder there are no ethical problems with our generation. Oh, wait…
Illegal procedure. Former Chicago Bear Chris Zorich has been flagged. CBS Chicago reports:
Zorich, 43, was charged Thursday with four misdemeanor counts of failing to file federal income tax returns, for the years 2006 through 2009, according to the U.S. Attorney’s office. During that time, he allegedly had an income of more than $1 million.
Federal prosecutors said Zorich was cooperating with the investigation and has agreed to plead guilty.
His lawyer says that he owes no more than $70,000 after withholding on the non-filed years is applied.
I wonder why he was charged. While it’s a bad idea, it’s not extremely rare for people to just get behind on filing their returns. It doesn’t usually lead to criminal charges. Much of his income for the years at issue was W-2 income, so it wasn’t as though the IRS would miss him.
Perhaps he did something to annoy an examiner enough to call in the Criminal Division. Maybe it’s because he is an attorney [update: he apparently never passed the bar exam]. Or maybe he’s just unlucky to be famous-enough for the IRS to use his celebrity to frighten the rest of us into getting our returns done. (Via Reason 24/7)
Update: This Chicago Tribune report suggests that self-dealing with his charitable foundation may have been a factor.
These wages cannot include wages paid to your children under age 18 (if a sole proprietor farmer) and commodity wages. However, wages paid in cash to spouses and children over age 17 are allowed as part of these wages.
If you are a schedule F farmer with no employees, the W-2 requirement makes the Section 199 deduction worthless.
Seventh, ask the tax professional about data security. Where and how is paper data stored while in the hands of the preparer? Where is the digital data stored? What precautions are in place to minimize the chances of a third party breaking into the office or the digital servers and obtaining information? If the individual hands over paper records without keeping copies, which is an unwise move, what happens if the tax professional’s office burns down?
Berkeley City Councilman Gordon Wozniak has tossed out the idea of an email tax to help save snail mail.
The financial straits of the U.S. Postal Service became an issue for Berkeley lawmakers when the paper mail delivery system proposed closing that northern California city’s downtown post office and selling the building.
It won’t happen, but a state where somebody who thinks it could happen can be elected to public office is pretty much doomed.
They said we wouldn’t get snow. It hasn’t really stopped since 7 am yesterday.
Kyle Pomerleau, Is Tax Migration a Myth? (Tax Foundation). Short answer: no. He comments on a much-noted article by James B. Stewart claiming otherwise:
Mr. Stewart is off the mark if he believes he has uncovered a myth. Besides the posturing of celebrities, no one claims that at the very moment someone whispers “tax increase” one thousand millionaires head to the border. What really happens is that these higher tax burdens cause wealth and income to flee to states and countries with lower burdens and higher economic growth over time. High-tax states such as Vermont, Michigan and Missouri have not been magnets for jobs over the long run. Look over at Europe, which is once again scaring investors. It is a continent with excellent climate, culture and an educated workforce, but its high taxes and spending have stalled population and economic growth for a decade or more. America will go that way if we continue down the same path, driving out investment, businesses, and jobs.
Over the years I have seen people move out of Iowa for tax reasons. Back in the 1980s, when Illinois was a low-tax state, I saw an S corporation owner pay for a fancy new house in East Dubuque in one year by the simple expedient of moving across the river from Dubuque. Tax isn’t always the decisive factor, but to say it’s not a factor at all ignores the most basic tenet of economics: incentives matter.
Congress took up Johnson’s suggestion and passed what became the Revenue Act of 1964, which the President signed on February 26, 1964. The bill dropped the top marginal tax rate from 91% to 70% (and also reduced the corporate tax rate from 52% to 48%). In the wake of this reduction on high-earner households, federal revenue actually increased, rising from $94 billion in 1961 to $153 billion in 1968, an increase of 33 percent in real terms.
Clearly the old rates were on the far side of the Laffer Curve.
A recent news story in the Des Moines area covered a family looking for assistance to cover legal bills for a family member who is in a coma following a car accident. The family is unable to get access to bank accounts or insurance information, and unable to pay her bills (or even know what bills exist) as they come due. The only way for family members to get access to this information is to go through the court system and have the court appoint someone to take care of those matters.
This sort of planning isn’t just for rich people.
Paul Neiffer, How Step-Up In Basis Works. On the resetting of basis at date-of-death value when a farmer dies.
Jim Maule, Special Low Tax Rates Hurt the Economy and Thus the Nation. He doesn’t like low capital gain and dividend rates. How about this, professor: lower the top rate to 20% for all income, allow a corporation dividends-paid deduction, and I’m good with getting rid of a capital gain break. Otherwise you are double-taxing earnings, and to the extent gains result from inflation, you are collecting a tax on treading water.
The low rates we sometimes see from wealthy individuals is because they derive much of their income from investments, which is double taxed anyway. A capital gain or dividend is first taxed at the corporate level, as a corporate profit, then at the shareholder level. The result is a combined average tax rate of 56.7 percent in the United States – higher than every developed country in the world except, France, Denmark, and Italy. This creates a huge disincentive to invest, ultimately slowing economic growth.
The Hawkeye State gets a black eye for being the second worst state for corporate taxes, with a 12 percent rate. It also ranks 37th in property taxes, 33rd in individual income taxes and 34th in unemployment insurance taxes.
They accompany the article with this photo of the “Field of Dreams” — an unwitting illustration of the problems of Iowa tax policy. The Governor last year signed a proposal giving a special sales tax exemption to a private athletic complex being built around the field, made slightly famous in the Kevin Costner movie. It’s special carve-outs like this that make for high rates and complicated taxes all around.
State leaders ballyhooed the plan as a way of moving from old-style industry to new.
Despite tens of millions of dollars in state investment, the promised 3,000-plus jobs didn’t appear. As the Detroit Free Press reported last year, the studio employed only 15-20 people. That isn’t boffo. That’s a bust. The studio has defaulted on interest payments on state-issued bonds, and the guarantors—the state’s already stressed pension funds—may wind up holding the bag. “In retrospect, it was a mistake,” conceded Robert Kleine, the former state treasurer who signed off on the plans in 2010.
He doesn’t neglect Iowa’s film fiasco:
Iowa ended its motion-picture subsidies in 2010, after officials misused $26 million in state money, leading to criminal charges. According to a 2008 investigation by Iowa Auditor David Vaudt, 80% of tax credits issued under the state’s film-subsidy program had been issued improperly (to production companies that weren’t even spending the money in Iowa, for example).
Two film credit recipients are now serving 10-year sentences on theft charges arising from the program. That’s fine, but I really want to see a groveling public apology from the Governor who signed the program into law, the “economic development officials” who turned the keys to the state treasury over to a former Walgreens photo desk clerk in charge of the program, and to the legislators — all but three out of 150 — who voted the moronic program into existence.
“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.
Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud, or accidentally fill out returns incorrectly.
Good thing the IRS can redirect the employees who had been assigned to the preparer regulation program to do something useful, now that the courts have shut down that futile enterprise. The IRS can’t stand their good fortune, though; Tax Analysts reports ($link) that the IRS is appealing the court decision.
It would be even better if Congress stopped using the IRS as the Swiss Army Knife of public policy. Given the agency’s new mandate to take care of our health insurance, their performance at the job of actually collecting taxes is only going to get worse.
Preparers gone bad. Accounting Today rounds up the week in preparer fraud, including a guy in New Mexico who, while serving time for identity theft-related charges, has been hit with 56 counts of fraud and embezzlement. That would be overachieving in underachieving.
Durango man pleaded guilty to tax evasion this week in federal court in New Mexico.
Hak Ghun, 62, is facing 12 to 18 months in prison after signing a plea agreement with the U.S. Attorney’s Office. He also will be required to pay $249,567 in restitution to the Internal Revenue Service.
The man was accused of embezzling from a company that had received investments from the Navajo Nation. For those who don’t get the old TV show reference, here you go.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
