Posts Tagged ‘maule’

Tax Roundup, 2/10/16: Tax Court rules out super-duper bureaucrat deduction. And: Don’t rob the preparer!

Wednesday, February 10th, 2016 by Joe Kristan

20120801-2You are fined $50 court costs. My accountant prefers it that way.  A good lawyer can make you seriously consider a position that seems absurd at first glance. An Arizona judge whose case showed up in Tax Court yesterday must be a good lawyer.

The case is based on the difference between the tax treatment of business expenses and employee expenses. Business expenses are normally fully deductible. In contrast, expenses incurred by an employee, and not reimbursed by the employer, are only deductible as itemized deductions, and then only to the extent they — when added to other “miscellaneous” deductions — exceed 2% of adjusted gross income. Worse, even if you have enough employee expenses to show up on Schedule A, they are non-deductible in computing alternative minimum tax. That often makes them useless.

Arizona state judge Michael Jones had a clever accountant who saw a potential way around this problem. According to the Tax Court, Judge Jones incurred some out-of-pocket expenses to run his chambers when state budget cuts began to pinch. His tax preparer, a CPA, said that Section 62(a)(2)(C) made these “above the line” business expenses:

(C)Certain expenses of officials

The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.

So how did that affect Judge Jones? From Tax Court Judge Holmes (my emphasis, citations omitted):

Maricopa County Superior Court is funded in part by the collection of fees. Individuals must pay the superior court clerk fees for various case filings, petitions, writs, the filing of any documents, and the issuance of any licenses or certificates. The county does not, however, receive fees paid for wedding ceremonies — judges are allowed to collect those directly (although Judge Jones himself did not charge for weddings during the years at issue).

Judge Jones argues that “in a position compensated in whole or in part on a fee basis” means something like “a position funded in whole or in part by fees paid by members of the public for services rendered by judges.” Neither the Code nor the regulations define what “fee basis” means, and the case law is similarly stubborn in its silence.

Judge Holmes ponders the arguments and reaches his decision:

We also have to conclude that the Commissioner’s position is the more reasonable one. An enormous number of government agencies, courts, departments, and boards receive fee income. If Judge Jones’s construction of section 62(a)(2)(C) were correct, all the positions in all these government bodies would be “position[s] compensated in whole or in part on a fee basis.” This would create a caste of employees — those employed as government “officials” — who would be exempt from the rule Congress chose to enact that limits the deductibility of unreimbursed employee expenses. Maybe Congress could do that, but it didn’t do so plainly. Business expenses are also usually thought deductible because they are an ordinary and necessary requirement for producing income. But Judge Jones’s reading of section 62 would uncouple the deductibility of an expense from the income it produces — once a position was funded in part by fees, any employee holding that position would be entitled to unlimited deduction of his unreimbursed business expenses regardless of whether those expenses had anything to do with those fees.

I think Judge Holmes comes to the right conclusion dealing with this obscure provision. If he concluded differently, every public official would be running to their preparers to amend all the open years. Though when it comes to a privileged “caste” of public employees, we’re further down that road than we should be already.

The moral? It’s important to handle business expenses properly. Many taxpayers who own S corporations, for example, pay some business expenses themselves without being reimbursed by the S corporation. Such expenses become “employee” expenses and are routinely lost. By submitting the costs to the employer — their own S corporation — for reimbursement, they become corporation expenses and fully deductible.

Cite: Jones, 146 T.C. No. 3

 

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Accounting Today, Obama Budget Includes Tax Increases and Tax Preparer Regulation. Of course it does.

We need IRS employees to oversee preparers to prevent fraud. IRS Employee Pleads Guilty to $1 Million ID Theft Tax Fraud Scheme (Department of Justice).

Kay Bell, Obama’s final budget is full of big, but unlikely to be fulfilled, tax and spending ideas. It will go over well as his prior budgets.

 

Paul Neiffer, We Knew It Was Coming!:

In doing various tax classes over the last few years, I almost always stated that it would only be a matter of time before the President would ask for this net investment income tax to be applied to S corporation and partnership income whether passive or material.  In the new budget proposal issued by the President, that time has come.

His budget proposes that all income of S corporations and partnerships be subject to the net investment income tax of 3.8%.  This would include any gains from selling any assets inside of these entities or selling the stock or partnership interest.  This will affect farmers who have large gains in the future.

Somehow I don’t think the momentum is there to expand Obamacare taxes.

 

Russ Fox, Can a Resident of a Non-Tax Treaty Country (With Respect to Gambling) Get His Withheld Funds Back? “Canadians are allowed to file a Form 1040NR and claim gambling losses up to the amount of wins, and get a refund. New Zealanders are not.”

Peter Reilly, Is Tax Foundation Unfair To Bernie Sanders? Only if it’s unfair to focus on the destruction that would result from his confiscatory taxes, rather than the magical results he promises when he gives you some of your money back through those wonderful and always efficient government programs.

Lany Villalobos, Patrick Tohomas, The Struggle to Obtain Individual Taxpayer Identification Numbers (Procedurally Taxing). The government is doing its best to increase tax burdens on offshore investors, while at the same time making it hard for them to even start complying.

TaxGrrrl, Ask The Taxgirl: The Child Tax Credit

Robert Wood, New Excuse: ‘Fear Of IRS Audit Made Me Cheat On My Taxes’ Huh?

 

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TaxProf, The IRS Scandal, Day 1007. After five years, one of the prominent 501(c)(4) applications slow-walked through the IRS process is finally approved. Nope, no politics here.

Tax Policy Blog, 2015 Outstanding Achievement in State Tax Reform Awards. None awarded to Iowans, unsurprisingly.

Ajay Gupta, Hillary Clinton’s Wall on the Border (Tax Analysts Blog):

Turns out the inevitable Democratic nominee, Hillary Clinton, would also build a great, great wall. Unlike Trump’s wall, hers would not deter foreign individuals lacking proper documentation from coming into the country. Instead, it would dissuade U.S. corporations stuck with domestic charters from leaving. And she would have U.S. investors and workers pay for that wall.

Something about grasping politicians loves a wall.

 

Career Corner. Which Popular Accounting Hashtag Should You Use? An Explainer (Caleb Newquist, Going Concern).

 

Jim Maule, Stupid Criminals, Tax Version. “According to several reports, including this one, a woman and her son walked into a Liberty Tax Services office in Toledo, Ohio, pointed what appeared to be a gun over which a towel was draped, demanded money, and made off with $280… It turned out that the “gun” was a curling iron. And it also turned out that the staff recognized the two as customers who had used Liberty’s services a few days earlier.”

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Tax Roundup, 2/8/16: When your password is a key for thieves. And: More Tax Credits!

Monday, February 8th, 2016 by Joe Kristan

20150910-2You need more than one password. Another home tax software company reports that its customers may have had their data stolen. Marketwatch.com reports:

In its letter to affected customers, TaxSlayer said it became aware Jan. 13 that hackers had accessed some of its customers’ accounts. The illegal access took place between Oct.10, 2015, and Dec. 21, 2015.

The letter said an “unauthorized third party may have obtained access to any information you included in a tax return or draft tax return saved on TaxSlayer, including your name and address, your Social Security number, the Social Security numbers of your dependents, and other data contained on your 2014 tax return.”

In its statement, TaxSlayer said it doesn’t believe its own systems were breached. Instead, “user credentials, stolen from other sources, were then used to misrepresent our customers and therefore access our program.”

They’re saying that they got passwords from another site and tried them on TaxSlayer, and they worked. That kind of breach is on the user, not the software company.

Reusing passwords is poor data security hygiene. McAfee Software offers some great tips for good passwords. The tips include a list of things people do that make them vulnerable to data theft, including:

Reuse of passwords across multiple sites: Reusing passwords for email, banking, and social media accounts can lead to identity theft. Two recent breaches revealed a password reuse rate of 31% among victims.

If you use different passwords for your different important accounts, one data breach won’t expose your entire financial life.

Related: TaxSlayer data breach is the 3rd tax software-related security issue so far this filing season (Kay Bell)

 

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Brent Willett, Iowa’s next economic frontier (IowaBiz.com). An unintended but useful followup to my IowaBiz post on Friday on the unwisdom of targeted tax credits, the post boosts a proposed new tax credit that I criticized by name. The post touts a new report promising “Fifty thousand jobs” to Iowa if we just enact a new “Bio-Based Chemicals” tax credit.

The post neatly checks off several items I note in my post:

Might these special favors be better for the economy than some farmer or small business who buys a new tractor or machine? You could make that case, but it would be plausible only if these favors were enacted by a process where the state looked at the vast menu of possible industries to support and carefully evaluated which ones were more persuasive. That never happens. Instead, the credits follow the path of the notorious Iowa film industry credits, where an industry gets some legislators and business boosters excited and builds support — sometimes with “studies” funded by booster groups. There is no evaluation of the opportunity costs, of whether the funds would be better used elsewhere.

No comparison to other industry opportunities? Check. Studies funded by booster groups? Check. Ignoring opportunity costs? Check.

I encourage your to read the Willett post and ponder why a government subsidy is needed if the industry is such a slam-dunk.  Also, consider whether you would get the same article by substituting other industries for bio-chemicals in the post.

 

 

Andrew Mitchel: New Expatriate Record for 2015 – Nearly 4,300 Expatriations:

2015 expatriations

“The escalation of offshore penalties over the last 20 years is likely contributing to the increased incidence of expatriation.”

Related: Record Numbers Renounce Their U.S. Citizenship (Robert Wood)

 

Jason Dinesen, Lots and Lots of Scam E-mails this Year. Jason posts many helpful examples. Be very skeptical of emails you don’t expect, and delete any purporting to come from IRS.

Annette Nellen, Ideas for Retirement Savings Reform. “One overall reform Irecommend is to change the focus of retirement plans from the employer to the employee, making them truly portable from job to job and if in employee or contractor status or both.”

Jim Maule, The Biggest Tax Refund?. Overwithholding will do the trick.

Leslie Book, The Limits of the “One Inspection” of Taxpayers’ Books and Records Rule (Procedurally Taxing). “One limitation on IRS powers is the Code itself, as Section 7605(b) provides that ‘only one inspection of a taxpayer’s books of account shall be made for each taxable year unless ․ the [Treasury] Secretary ․ notifies the taxpayer in writing that an additional inspection is necessary.'”

Robert D. Flach, TAX GUIDE FOR NEW HOMEOWNERS

Russ Fox, It Was Only a 13.33% Kickback. A police chief breaks the tax law.

TaxGrrrl, So About Those Cam Newton ‘Sunday Giveaway’ Game Balls…

 

Only the form of your destructor. What Would Be At Stake In A Trump v. Sanders Election? How About $24 Trillion in Tax Revenue (Tony Nitti).

 

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TaxProf, The IRS Scandal, Day 1003Day 1004Day 1005

Scott Greenberg, White House Calls for Targeting the Cadillac Tax by Location:

Why would the White House propose changes that would weaken the Cadillac Tax – a central part of the administration’s most significant policy achievement? In fact, these changes might be necessary to secure the continued existence of the tax. The White House has been fighting a losing battle to defend the Cadillac Tax, and these proposed changes may placate some of the tax’s opponents, particularly employers in states with high healthcare costs.

We must destroy the Cadillac Tax to save the Cadillac Tax!

Renu Zaretsky, Budget Hearings, Saving, and Entertaining (TaxVox). “There is almost always something perfunctory about the last budget of an outgoing president, but this year’s will generate even less interest than usual. In the ultimate insult, the GOP-run congressional budget committees won’t even invite White House officials to describe their fiscal plan.” And lots more in today’s TaxVox headline roundup.

I reject this false choice. Kentucky Can Attract Tourists Who Like Bible More Than Bourbon Without Violating First Amendment  (Peter Reilly)

 

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Tax Roundup, 2/4/16. Confirmed: Governor opposes coupling to ALL 2015 changes. And: Are hipsters really flocking downtown?

Thursday, February 4th, 2016 by Joe Kristan

coupling20160129Worst Iowa tax policy decision ever. Governor Branstad doesn’t want to conform Iowa’s tax law to any of the extender provisions passed in December for 2015. A reliable source has confirmed our earlier report that the Governor wants to skip coupling entirely for 2015, and then conform to everything except Section 179 and bonus depreciation in 2016 and beyond.

It’s bad enough that he doesn’t want to conform with the $500,000 federal Section 179 for the first time in years — imposing a big tax increase on small businesses and farmers in every county. But conforming to nothing means a whole host of separate Iowa computations for 2015 returns — and 2015 only. Without spending a lot of time, I come up with these:

Exclusion for IRA contributions 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
Educator expense deduction
Exclusion of home mortgage debt forgiveness
Qualified tuition deduction
Conservation easement deductions
Deduction for food inventory contributions

I have asked the Department of Revenue for a complete list of affected provisions, and I will provide it if they send one.

These will have effects on thousands of taxpayers ranging from minor annoyance and more expensive tax compliance to major unexpected Iowa tax expense. To take a common example, the exclusion fo IRA contributions to charity allows taxpayers aged 70 1/2 or older to have their IRAs make contributions to charity directly. This means the contributions bypass their federal 1040s altogether. But for Iowa, the Governor would have the IRA holder include the contribution in taxable income and then, presumably, add it to their itemized deductions — if the taxpayer itemizes in the first place.

Some of these can be very costly. For example, the exclusion of gain for qualifying C corporation stock sales can apply to up to $10 million of capital gain. The exclusion benefits start-up businesses, which Iowa allegedly supports with at least four separate tax credits. Failure to couple would clobber a $10 million 2015 gain with an unexpected $898,000 tax bill.

There is bipartisan support for coupling with all federal provisions other than bonus depreciation for 2015. The Iowa House of Representatives has already passed such a bill on a bipartisan 82-14 vote. But Governor Branstad and Senate Majority Leader Gronstal have apparently reached a little bipartisan deal of their own to keep the Senate from ever voting on 2015 conformity. The Senate tax committee meeting yesterday was cancelled, which I hope means the Senate leadership is getting pressure to back off this stupid policy.

If you are affected, or if your clients are (they are), I encourage you to let your Iowa Senator know how you feel.

Related Coverage:

Iowa House passes $500,000 Section 179, but prospects bleak in Senate.

Iowa Governor reportedly opposes 2015 coupling for anything.

Branstad budget omits $500,000 Section 179 deduction for Iowa; no 2015 conformity.

 

20130218-1What do you mean, IBM doesn’t stock the vacuum tubes anymore? IRS Systems Outage Shuts Down Tax Processing (Accounting Today):

The Internal Revenue Service said Wednesday evening its tax-processing systems have suffered a hardware failure and that tax processing could be affected into Thursday.

“The IRS experienced a hardware failure this afternoon affecting a number of tax processing systems, which are currently unavailable,” said the IRS. “Several of our systems are not currently operating, including our modernized e-file system and a number of other related systems. The IRS is currently in the process of making repairs and working to restore normal operations as soon as possible. We anticipate some of the systems will remain unavailable until tomorrow.”

The IRS says it’s confident that it will have the system restored by the weekend and that any refund delays will be minor.

Related: IRS Having One of Those Days (Caleb Newquist, Going Concern); TaxGrrrl, IRS Website Hit With Hardware Failure, Some Refund & Payment Tools Unavailable.

 

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Jason Dinesen, The Iowa Trust Fund Tax Credit is $0 for 2015

Robert Wood, Perfectly Legal Tax Write-off? Lawyer Fees — Even $1,200 An Hour

Russ Fox, A Tale of Three States. “Hawaii, Indiana, and Mississippi are three states where daily fantasy sports (DFS) is being debated. The three states are representative of what is likely to occur in every state.”

Keith Fogg, Verification of Bankruptcy Action in a Collection Due Process Case (Procedurally Taxing). “Because Appeals employees often have very little knowledge of bankruptcy, this case points out the need to pay careful attention in CDP cases that follow bankruptcy actions and challenge verifications where the Appeals employee fails to acknowledge the impact of the bankruptcy case.”

Bob Vineyard, Aetna Not Pulling Plug on Obamacare …. Yet (InsureBlog). Many Iowans get coverage through Aetna’s Coventry unit. But as the company expects to lose $1 billion over two years on Exchange policies, their willingness to continue to provide ACA – compliant policies on the exchange will be sorely tried.

Jack Townsend, Another Taxpayer Guilty Plea for Offshore Account Misbehavior

Peter Reilly, Tax Dependency Exemptions For Noncustodial Parents – It Is All About Form 8332. It really is. Form 8332 provides a way for couples to continue fighting long after the divorce is final.

Jim Maule, “Can a Clone Qualify as a Qualifying Child or Qualifying Relative?”

 

Scott Greenberg, The Tax Benefits of Having an Additional Child (Tax Policy Blog). In case your decision hinges on this.

Renu Zaretsky, Debates, Energy, Credits and PrepToday’s TaxVox roundup covers tonight’s Democratic Debate, energy tax policy, and a shutdown of 26 Liberty Tax franchise operations in Maryland.

TaxProf, The IRS Scandal, Day 1,001

 

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Is Hip, Cool Des Moines Really Attracting Migrants? (Lyman Stone). I haven’t seen any local media pick this up, but this is a fascinating look at migration and population patterns Downtown and across Polk County. It is inspired by the recent Politico piece on how hip and all we are (emphasis in original):

In fact, throughout the article, there’s an interesting claim made that the population of downtown Des Moines has risen from 1,000 at some unspecified time in the 1990s, to at least over 10,000 as of 2016. In fact, throughout the article, there’s an interesting claim made that the population of downtown Des Moines has risen from 1,000 at some unspecified time in the 1990s, to at least over 10,000 as of 2016.

The claim turns out to be exaggerated, but only a little:

Downtown Des Moines probably did not gain 10,000 residents from the late 1990s to 2016, nor does it seem likely that it had just 1,000 residents at any time in the last few decades. However, that doesn’t mean the essential claims of Woodard’s story are wrong. Au contraire, Des Moines has gained about 10,000 people since 2000, and has about 9,000 more people than we would expect had 1987 growth rates continued. That’s a meaningful acceleration in urban growth, and a significant number have been headed to the very center of the city.

It’s a great read with some surprising observations about how suburban and downtown growth complement each other.

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Tax Roundup, 1/27/16: Sign right here, friend, it’s just paperwork! And: Tax Foundation vs. U of I prof.

Wednesday, January 27th, 2016 by Joe Kristan

20151124-1What you’re signing isn’t necessarily what the nice salesman says you’re signing. A sad tax story in the Des Moines Register today shows how easy it is for a taxpayer to commit to a bad deal. The story, Misclassified: Iowa won’t refund veteran’s $5K payment, tells how a maintenance worker who was erroneously paid as an independent contractor by a Cedar Rapids furniture store ended up conceding a $5,000 sales tax liability he didn’t owe.

Iowa imposes a sales tax on “Janitorial and building maintenance or cleaning” for non-residential buildings. Because he was paid as an independent contractor, Iowa asserted sales tax on maintenance man James Robertson. He argued that he should have been classified as an employee, which would make the sales tax go away.

According to the story, Iowa was hounding him for unpaid taxes and preventing him from renewing his driver’s license. So he settled with Iowa for a $5,000 payment. From the story:

But he did so believing that the money he borrowed from a friend would be returned once a federal review process he was pursuing verified his claim he was not a contract worker.

The Internal Revenue Service on Oct. 14 determined that Robertson was indeed wrongly classified, documents he provided to The Des Moines Register show.

But that doesn’t mean he gets his $5,000 back, according to the Department of Revenue:

Victoria Daniels, a spokeswoman for the Department of Revenue, said it’s unlikely Robertson can win an appeal because he participated in what her agency calls its “offer in compromise” program.

Robertson signed a document during the settlement negotiations saying he accepts that “all administrative and judicial protests and actions filed in relation to these taxes and tax periods be dismissed.”

“When a person signs an offer in compromise, one of the things that they are signing their names to is the fact that they are giving up their appeal rights and the rights to get any of that money back,” Daniels said. “When you sign an offer in compromise with the Department of Revenue you are signing away any appeal rights you may or may not have had.”

IMG_1287Mr. Robertson didn’t think that’s what he had signed, according to the story (my emphasis):

Robertson said the documents he signed pertained to unpaid tax liabilities, not to his rights to a refund for taxes he never owed. And he said the department collectors led him to believe a refund would be made in the event it was shown he’d been unjustly classified as a contract employee.

This is why any battle between an unrepresented taxpayer and a tax agency is an unfair fight. The taxpayer drew a distinction between tax liabilities and tax refunds that doesn’t matter here. It’s all just taxes. While the nature of the document he signed may have been obvious to the people at the Department of Revenue who work with these things every day, it was all new and unclear to a taxpayer who had never encountered an offer in compromise. I hope he can find a way to get back his $5,000.

The Moral: In any tax controversy, be very careful what you sign. There are a number of ways you can forfeit important rights. If the dollars are big enough to matter to you, hire a tax pro. It doesn’t appear that Mr. Robertson did. Having a guide to the bureaucracy can be a big equalizer in an unfair fight. It’s not right to have to pay someone to help you avoid a tax you don’t owe in the first place, but it might be necessary to avoid something much worse.

 

 

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Joseph Henchman, Open Letter: Errors on Peter Fisher’s Grading the States Website. The brilliant Mr. Henchman takes on U of Iowa prof and tax complexity advocate Peter Fisher’s attack on the Tax Foundation’s State Business Tax Climate Index.

Like most people who dislike the Tax Foundation’s ratings, Mr. Fisher doesn’t like the Index because it doesn’t measure things he wants to measure. But the Index only tries to measure business tax climate. It doesn’t measure regulatory climate, or quality of education, quality of life, weather, or income inequality. And because it makes states with certain tax policy sets look bad, people with an affinity for high taxes or crony capitalism try to change the subject.

 

Paul Neiffer, What Gets a Step-Up. “I continue to get questions regarding how much of a step-up in cost basis farmland gets when someone passes away.  Again, as with most tax questions, it depends.”

Kristine Tidgren, Iowa Supreme Court Says Ag Lease Violates Iowa Constitution (Ag Docket). “Article I, section 24 of the Iowa Constitution states that no lease of agricultural lands ‘shall be valid for a longer period than twenty years.'”

William Perez, Should Married Couples File Taxes Separately? “The Married Filing Separately filing status provides fewer tax benefits than filing joint returns, but it does protect each spouse from any tax mistakes the other spouse makes.”

Kay Bell, 3 marriage-related tax tips to celebrate Spouse’s Day

Jim Maule, “Who Knows the Tax Code Better Than Me?”. “No, it’s not ME asking that question. Who asked it? According to this story, Donald Trump did.” I suspect Mr. Trump knows just enough to hire someone who really does understand the tax law.

G. Brint Ryan, Fee Arrangements are a Matter between Taxpayers and their Advisors. “In an important win for business against government encroachment, a California Superior Court recently invalidated a rule restricting taxpayers from paying performance-based fees for professional services.”

Robert Wood, Missing An IRS Form 1099 For Your Taxes? Keep Quiet, Don’t Ask!

TaxGrrrl, Executors Seek $100 Million For Work On Estate Of ‘Queen Of Mean’ Leona Helmsley

Robert D. Flach, WHAT IS GOFUNDME?

The circus is in town. A media center takes shape at Capital Square, downtown Des Moines.

The circus is in town. A media center takes shape at Capital Square, downtown Des Moines.

 

TaxProf, The IRS Scandal, Day 993. “Citizens Against Government Waste, CAGW Names IRS Commissioner John Koskinen 2015 Porker of the Year

Jacob Sullum, Corny Crony Capitalism in Iowa (Reason.com). “The RFS raises food prices and imposes a hidden tax on motorists because ethanol is more expensive than gasoline and produces less energy per gallon. Between 1982 and 2014, Manhattan Institute Senior Fellow Robert Bryce found, ethanol cost an average of 2.4 times as much as an energy-equivalent amount of gasoline.”

Howard Gleckman, Tyco, Tax Inversions, Income Shifting, and Lost Revenue (TaxVox)

Stuart Gibson, The Dissonance of European Tax Harmonization (Tax Analysts Blog). “The question: Why do so many Americans, even those new to the country or born to immigrant parents, find it so easy to self-identify as American, while so few Europeans identify primarily as European?”

Meg Wiehe, What to Watch for in 2016 State Tax Policy: Part 1 (Tax Justice Blog)

 

Career Corner. How Will Your Team Air Its Grievances This Busy Season? (Caleb Newquist, Going Concern).

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Tax Roundup, 1/25/16: Four steps to a quicker, cheaper 1040. And: ID theft – prevention vs. punishment.

Monday, January 25th, 2016 by Joe Kristan

1040 corner 2015How to make your tax return cheaper. If you don’t have all of your 1099s, brokerage statements and so on, there’s a good chance you’ll have them by the end of the week (but if you’re waiting on K-1s, forget it). Then you will want to send it all to your tax pro and get it back right away. If you want to get it back quickly, and keep your fee down, the best way is to provide everything your tax pro needs the first time.

Every time we have to ask you a question or track down a document, it slows things down, and the fees start to creep up. Here are a few things taxpayers commonly forget to do or include.

Go through the tax organizer and at least answer the questions. Many taxpayers just return a blank organizer with their 1099s. That’s unwise. The question part is there for a reason. For example, it identifies life events that don’t show up on 1099s or W-2s. Once a client mentioned his wife in a phone conversation. I had improperly prepared returns for him as single for two years. Of course, the “change in marital status” question on the questionnaire had been returned unanswered on his blank organizer both years.

Double-check your estimated tax payments. The standard answer tax pros get from taxpayers who return blank organizers is “I sent in all the payments you said on the dates you said.” And sometimes that’s actually true, but quite often it isn’t. That leads to IRS notices, tax penalties and extra tax pro fees. Go through your check register and bank statements and write down the actual dates and amounts on the organizer — or send copies of the cancelled checks from your statements.

Spend a few minutes culling your information. You don’t want to pay your tax pro to dig through your utility bills, cable provider statements, and junk mail to find your charitable contributions and information returns. Clear out the junk before you bring it in.

Make sure your contact information is current. If we do have to ask you questions, it’s a lot easier if we have your current email address and the right cell phone number.

This is the first of our 2016 filing season tips. Look for these occasionally until April, when they will come thick and fast. 

Related: Robert D. Flach, DON’T BE IN SUCH A HURRY – BUT DON’T WAIT UNTIL THE LAST MINUTE. “I have a strict long-standing rule that all returns that are not literally in my hands, with all the necessary information, by March 19th will be automatically extended!”

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Jim Maule, Will Providing a Driver’s License Number Reduce Tax Return Identity Theft?:

The problem is two-fold. On one side, better systems of identification are necessary, and need to be based on information that is not as easily stolen. Databases need to be secured more carefully than at present. On the other side, identity thieves and those thinking of engaging in that behavior need to be presented with changes in their risk analysis. Not only are better methods required to track them down, they also need to face more severe consequences for their behavior.

I think the penalties in place are already severe enough. The problem is that it is too easy to steal tax refunds. The grifters that go in for identity theft aren’t known for impulse control or careful weighing of benefits and costs. They just know that with the right personal information and a copy of Turbotax, they can make prepaid debit cards rain on their mailboxes. And, of course, the overseas crime syndicates don’t care about the penalties, because they are unlikely to ever face them.

It’s much more important to improve IRS procedures to thwart I.D. theft in the first place. The IRS is finally taking needed steps here, but lots of horses are already out of the barn.

TaxGrrrl, 11 Tips To Protect You From Identity Theft & Related Tax Fraud

 

Russ Fox, An Entity a Day Will Keep the IRS Away, Right? “Here’s a scheme that’s sure to work to avoid remitting payroll taxes to the IRS. Every day (or week or month), I’ll form a new business entity that’s collecting the tax. Once the amount due to the IRS gets large, I’ll just use a new entity. The IRS will never catch on, right?” As Russ explains, wrong.

Kay Bell, Taxpayers want up-front pricing from paid tax preparers.

William Perez, Taxes When Hiring Household Help

Matt McKinney, Anonymous ownership in an Iowa LLC (IowaBiz.com).

Jack Townsend, More on Transparency for Entities Acquiring Valuable Real Estate in Some U.S. Markets

Robert Wood, Trump Is Unapologetically Aggressive On Taxes, Like Buffett And Bono. All the sort of folks who are happy to increase taxes, on other people.

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Kadri Kallas-Zelek, Incorrect Claims for Earned Income Tax Credits Are Likely to Become More Costly (Tax Policy Blog). “The IRS estimates that for the fiscal year 2013, improper payments from EITC amounted to $13.3 to $15.6 billion, or 22 to 26 percent of total EITC payments.”

TaxProf, The IRS Scandal, Day 989Day 990Day 991. Hard drives as doggie treats.

Renu Zaretsky, Snow, Settlements, and Sales Taxes. Today’s TaxVox headline roundup covers Snowzilla, online sales tax cheats, and Oregon liquor taxes, among other things.

Matt GardnerAdobe Shifts Hundreds of Millions Offshore, Revealing, Like PDF Documents, Its Profits Are Portable Too (Tax Justice Blog). For some reason, this only inspires the Tax Justice folks to do what’s failing more and harder.

 

Career Corner. Let’s Review: Deloitte Demotivation, Denim, Bad Managers (Caleb Newquist, Going Concern).

 

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Tax Roundup, 1/22/16: Tax scams for tax pros. And: How Des Moines got so cool once I moved here.

Friday, January 22nd, 2016 by Joe Kristan

Accounting Today Visitors:  Click here for the post on Popular wisdom and tax rates.

 

Gone Phishing. It’s not just taxpayers that get scam emails. Scammers also aim at tax pros. For example:

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Of course the message is a fake. It was sent by the sketchy-sounding email address “info@tablerockbelize.com” and the link goes to something called “otadealsbox.com/irs.” Nothing good would happen from following that link. Be careful out there.

 

Nicole Kaeding, Map: State-Local Tax Burden Rankings for FY 2012 (Tax Policy Blog):

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While Iowa’s tax burden isn’t that out of line — it’s actually a little better than average — our business tax climate is one of the worst. It’s a result of how poorly designed Iowa’s tax system is. The good news is that there’s a lot of room to improve our tax system without increasing the overall tax burden.

 

Start your weekend right with fresh Buzz! from Robert D. Flach. Today’s links cover lots of ground on early filing, and a good explanation of why the talk of how “IRS now has six years to audit your taxes” isn’t right.

Jason Dinesen, Do I Need Form 1095-C to File My Tax Return? The next question: how many taxpayers even know to expect one?

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William Perez reminds readers to Communicate Effectively with Your Tax Preparer

Annette Nellen, Filing 2015 tax returns – help for practitioners

Kay Bell has 4 filing tips to ensure you get your tax refund ASAP

Robert Wood, What To Do If Form 1099 Reports More To IRS Than You Received

Paul Neiffer, Mr. Market Wants Its Excess Profits Back. “We know what happened after the 1970s and now Mr. Market is now trying to grab those excess profits back from farmers from the ‘ethanol’ boom.”  Of course, aging corn state politicians are fighting back by yelling at clouds.

Jim Maule, Deductions Arising from Constructive Payments. “The Tax Court explained that payment by an S corporation of a shareholder’s personal expense is a constructive distribution. It pointed out that this principle had previously been articulated by the court. Thus, explained the court, ‘It also follows that for purposes of claiming the deduction, the shareholder is treated as constructively paying the obligation.'”

Peter Reilly, Tax Planning In Bernie Sanders Land Would Feel Familiar To Elderly CPAs. Older than me, even.

E. Martin Davidoff, New Format of Notice of Intent to Levy Fails to Provide Sufficient Notice (Procedurally Taxing)

Russ Fox, Fail, Caesar! An Update. Implications for poker pros.

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TaxProf, The IRS Scandal, Day 988. “Tax Agency Erased Hard Drive Despite Litigation Hold.” Don’t try that with your tax records.

Jeremy Scott, Furor Over Extenders and Rising Deficits Disingenuous (Tax Analysts Blog), my emphasis:

So the new CBO report is something of a bitter pill for Obama. But the president isn’t to blame, according to some observers. In fact, the CBO itself points out that about half the cost of rising deficits is from tax legislation enacted since August 2015. The biggest chunk, of course, comes from the extenders compromise, which made some expiring (or expired) tax provisions permanent. That hurts the budget outlook, which always assumed expiring tax provisions would stay expired.

But extenders have never been allowed to stay expired. They are always renewed — sometimes late and sometimes retroactively, but without significant exception. And that makes the CBO’s observations about extenders deceptive. It also highlights why previous CBO projections about the deficit were always too rosy. By assuming that extenders would go away once they expired, budget forecasters were always showing too much revenue. If the CBO had used a model that assumed Congress would continually renew popular provisions like the research credit, the deduction for state and local sales taxes, and bonus depreciation, the numbers would look almost identical to what the January 19 report is showing now.

Exactly. The extenders were an ongoing accounting scam, pretending provisions that were permanent in reality would go away. “By making some extenders permanent, Congress has finally allowed the CBO to paint a more realistic portrait of the federal deficit and the long-term budget outlook.”

Matt Gardner, After Years of Shrinking, Nation’s Deficit Set to Grow in 2016; Recent Tax Cuts a Contributor (Tax Justice Blog)

 

Howard Gleckman, What Are the Consequences of a Financial Transactions Tax? (TaxVox). Aside from moving exchanges offshore, damaging markets, erasing wealth, and making it harder for the little guy to close transactions, it’s a great idea.

 

Joseph Thorndike, Do Progressives Hate Tax Reform? (Tax Analysts Blog):

The Tax Reform Act of 1986 was far from perfect, but it made good on the lower rates/broader base mantra. Almost immediately, however, both parts of the bargain began to fray; rates began creeping up within a few years, and preferences (never vanquished entirely in the first place) also began to grow. By the mid-1990s, tax reform was starting to look like a disappointment, to both liberals and conservatives.

Today, classic tax reform has little real support outside the wonk community. So it’s fair to say, as Holtz-Eakin does repeatedly, that liberals don’t care about tax reform.

But neither do conservatives.

I think that’s always true, in a way. That doesn’t mean it’s not worth doing.

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News from the Profession. Report: CPAs Exaggerate Their Success at the Bar, Pretty Much Everywhere (Caleb Newquist, Going Concern).

Fun link: How America’s Dullest City Got Cool. I think they overstate how much of the revival of Des Moines was planned by anyone, but they are right to point out home much this town has improved since I moved here in 1985 (proving that correlation is definitely not causation). Thanks to @lymanstoneky for the link on Twitter.

 

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Tax Roundup, 1/18/15: Popular wisdom and tax rates. And more Monday goodness!

Monday, January 18th, 2016 by Joe Kristan
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Math is hard.

Vox Populi. It’s a slow tax news day, with schools and government offices closed and e-filing not beginning until tomorrow. That enabled me to spend a little time with Peter Reilly’s coverage of Disparate Tax Views At Opening Of Bernie Sanders Worcester Office. Peter chatted up Sanders volunteers about their views on the proper top marginal tax rates. He was surprised by his first conversation:

Deb Bock, my first victim, said 15%.  I hadn’t gotten into the listening groove yet so I failed to hide my shock and asked her why she wasn’t backing Ben Carson – “Because he is an idiot.”

Those of us who live in the tax world can easily forget how poor the knowledge of actual tax law, including rates, is among the general public. The Tax Foundation has printed some fascinating surveys about what people think tax rates should be. Here is some information from their 2009 survey, the most recent available on the Tax Foundation website. It shows that Peter’s friend Ms. Bock is close to the  consensus view of what the effective combined federal, state and local effective rate on taxable income should be: 15.6%:

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Source: Tax Foundation

Of course, effective rates are much higher than this, as The Tax Foundation explains in its 2015 Tax Freedom Day explanation:

In 2015, Americans will pay $3.28 trillion in federal taxes and $1.57 trillion in state and local taxes, for a total tax bill of $4.85 trillion, or 31 percent of national income.

That’s just about twice the average effective rate that people think should apply. Because the tax law is very progressive, many taxpayers pay a much higher percentage.

Still, politicians like Mr. Sanders continue to get votes by convincing us that taxes are too low. Of course, they do so by telling people that those taxes will be paid by somebody else.

Related:

Tony Nitti, Bernie Sanders Releases Tax Plan, Nation’s Rich Recoil In Horror. “Democratic Presidential hopeful Bernie Sanders took a break from yelling at clouds long enough to release his tax plan today, and it’s, how should I put this…aggressive.”

Me, The rich guy can’t pick up the tab.

 

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Kyle Pomerleau, Congressman Nunes Introduces Business Tax Reform (Tax Policy Blog):

Details of the plan:

-Cutting the corporate income tax to 25 percent;

-Limiting the top tax rate on non-corporate business income to 25 percent;

-Allowing businesses to deduct investment costs when they occur (full expensing);

 

-Eliminating most business tax credits and many deductions;

 

-Moving to a territorial tax system like most developed nations;

 

-No longer letting nonfinancial businesses deduct interest costs but no longer taxing them on interest receipts;

 

-Applying the same tax-rate limitation to individuals’ interest income as now applies to their capital gains and dividend income; and

 

-Eliminating the individual and corporate alternative minimum taxes (AMTs).

This would be a big improvement.

 

Russ Fox, Those “Extra Services” Were Great for Business. A massage business.

Jason Dinesen, Choosing a Business Entity: Wrap-up Post

Robert D. Flach, COME IN TO THE OFFICE AND WALK OUT WITH CASH!

Kay Bell, Finding a charity to volunteer with on MLK Day 2016

Jack Townsend, Prosecuting Corporate Employees and Officers, with Focus on Swiss Banks. “Corporations cannot go to jail; individuals can.”

Jim Maule, Birthdays in the Tax Law (and Obituaries?).

Actually, the tax law uses the phrases “attain the age of” and “attain age” far more often that its occasional use of the word “birthday” but few of us talk about “attaining an age” when we are conversing about the anniversaries of our arrival on the planet.

When was the last time you ever said “attain” out loud?

Robert Wood, IRS Lax Controls Enable Targeting Based On Religion + Politics, Claims Report

 

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Len Burman, Ted Cruz’s Business Flat Tax is a VAT. “It’s also important to point out—as Cruz did in the debate—that his plan also repeals the payroll and corporate income tax.”

TaxProf, The IRS Scandal, Day 982Day 983Day 984.

Tax Justice Blog, Obama Policies Curbed Tax Break for 400 Richest Americans; Choice of Next President Will Reverse or Continue This Shift. Once again Tax Justice Blog entirely misses the point that it’s never the same 400 people who pay tax in any given year.

Career Corner. Let’s Review: Side Gigs, Email, Lunches and Logos (Caleb Newquist, Going Concern).

 

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Tax Roundup, 1/15/16: Tax credits and their opportunity costs. And: a turnaround in IRS service!

Friday, January 15th, 2016 by Joe Kristan

haroldReport: Tax credit for me would benefit me. Report: Tax credit would help Iowa biochemical industry (Des Moines Register).

The argument that this industry, above the thousands of industries out there, deserves funding at the expense of other businesses in the state, and that Iowa’s elected officials are just the ones to figure that out, is hard to credit. It might almost be plausible if it came at the end of a careful and systematic process where the state looked at all of the possible industries that would be good for the state to have and then carefully selected finalists based on objective and unbiased review.

That never happens.

Instead, the Bio-renewables credit is following a path blazed by the film industry and other credit recipients. Somebody decides a tax credit would be a good thing. It’s never hard to get the industry that would receive the subsidy on board. Local business boosters climb on because they know of a local business that would benefit. They fund studies to prove that this industry offers extraordinary benefits. Economic development officials join in, because that’s what they do. Politicians like giving away money, and soon you have amazing results.

I don’t fault businesses for using state tax credits. If somebody gives you money, you take it. But that doesn’t make it good policy for the rest of us.

There are two little words that credit boosters never bring up: opportunity costs. The money spent on the favored industry isn’t conjured into existence out of thin air. It is taken from somebody else. This year it’s taken from every Iowa business that uses the $500,000 Section 179 limit, which the Governor says the state can no longer afford. There are businesses in every county that will pay higher taxes if Iowa reduces its Section 179 limit to $25,000. Those businesses lose the opportunity to use funds to grow their own businesses and hire their own employees.

If there is to be any benefit here, it’s that it might actually teach the General Assembly about the opportunity costs of benefiting sympathetic industries. Here, it’s the cost of the lost Section 179 benefit to constituents statewide.

Related:

LOCAL CPA FIRM VOWS TO SWALLOW PRIDE, ACCEPT $28 MILLION

List of Iowa incentive tax credits budgeted for 2017.

 

Service: It’s in our nameA new report from the Government Accountability Office documents the decline in IRS service that we’ve all experienced under Turnaround Artist John Koskinen:

The Internal Revenue Service (IRS) provided the lowest level of telephone service during fiscal year 2015 compared to prior years, with only 38 percent of callers who wanted to speak with an IRS assistor able to reach one. This lower level of service occurred despite lower demand from callers seeking live assistance, which has fallen by 6 percent since 2010 to about 51 million callers in 2015. Over the same period, average wait times have almost tripled to over 30 minutes. IRS also struggled to answer correspondence in a timely manner and assistors increasingly either failed to send required correspondence to taxpayers or included inaccurate information in correspondence sent.

The picture they draw isn’t pretty:

 

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When you turn around, it’s important to turn in the right direction.

Related: TaxProf, GAO:  Only 38% Of Taxpayers Who Called IRS Got Through In 2015 (Down From 74% In 2010); Wait Time Increased From 11 To 31 Minutes

 

buzz20150804Robert D. Flach has your Friday Buzz! He covers ground from choosing a tax professional to extenders to a certain presidential candidate.

William Perez, How to Know if You Should Hire a Tax Attorney

Matthew McKinney, Iowa’s open records law – who, what, when, and why? (IowaBiz.com).

Kay Bell, N.J. Gov. Chris Christie kills film & TV tax credits. Good. 

Jack Townsend, Updated FAQs for SFOP and SDOP Streamlined Processes. “The IRS has updated the FAQs for the Streamlined Domestic and Streamlined Foreign Offshore Procedures.”

Leslie Book, State of the Union: Tax Administration a Small But Important Part of the Speech

Robert Wood, Beware: IRS Now Has Six Years To Audit Your Taxes, Up From Three. “The three years is doubled to six if you omitted more than 25% of your income.”

Peter Reilly, Conservation Easement Tax Deductions And Valuation Abuse. “I think this is another instance of what Joe Kristan calls using the Tax Code as the Swiss Utility Knife of public policy.”

 

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Megan McArdle, Gaming of Obamacare Poses a Fatal Threat. “The problem: People signing up during ‘special enrollment’ (the majority of the year that falls outside of the annual open enrollment period) were much sicker, and paying premiums for much less time, than the rest of the exchange population.”

Scott Greenberg, The Cadillac Tax will Now Be Deductible. Here’s What That Means. (Tax Policy Blog)

TaxProf, The IRS Scandal, Day 981. “Today, the Government Accountability Office (GAO) released two new reports regarding serious flaws in the Internal Revenue Service’s (IRS) audit selection processes. GAO confirmed that these flaws mean the IRS could continue to unfairly target American taxpayers based on their political beliefs and other First Amendment protected views.”

Robert Goulder, India’s Long Journey to a VAT (Tax Analysts Blog)

Renu Zaretsky, Winners, Losers, and Movers. Today’s TaxVox headline roundup covers last night’s presidential debate, Missouri earnings taxes, and  innovation boxes.

 

Jim Maule, Powerball, Taxes, and Math:

The expectation that widened my eyes is a meme circulating on facebook, and elsewhere, I suppose, that claims splitting the $1.4 billion evenly among all Americans would give each person $4.33 million. Good grief! This is just so wrong. The responses pointing out the error are themselves amusing, with the best one pointing out that it would generate $4.33 per person, enough to buy a calculator.

This meme:

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This explains more about the political process than I care to contemplate.

 

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Tax Roundup, 1/13/16: Considering the “small partnership exception.” And lots more!

Wednesday, January 13th, 2016 by Joe Kristan
Today in Helsinki. Photo: Sini Hämäläinen

Today in Helsinki. Photo: Sini Hämäläinen

Small partnerships, big risks. A venerable voice in Iowa tax, Neil Harl, has for some time touted the “small partnership exception” as a way for partnerships with 10 or fewer members to avoid filing tax returns, and the operation of the partnership rules in general. A version of it appeared at Tax Analysts yesterday ($link), where he argues that a tax case defeat for a non-filing small partnership does not call his argument into question. Non-subscribers can read his basic argument here.

I find it unconvincing as a legal matter. Dr. Harl’s argument is that a provision that applies by its terms to the Code subchapter covering how partnership examinations are conducted (“For purposes of this subchapter,” meaning Chapter 63, Subchaper C) creates a blanket exemption to the filing requirement imposed in a different part of the code (Chapter 61, Subchapter A). Time has resolved the argument after 2017 as the Code section Dr. Harl relies on has been repealed effective in 2018.

1065 2015 cornerStill, even assuming Dr. Harl is correct on the law, he is unconvincing on the practicalities. Dr. Harl himself says that partnership failure to file penalties are proper unless “all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.”

That puts any managing partner at the mercy of his least responsible partner. There’s no practical way to force a partner to file. In a ten-person partnership, one non-filing partner triggers $1,950 in monthly failure to file penalties. That’s a big risk for a partner to take on just to save filing a return, and it was a losing bet for the South Dakota Battle Flats partnership.

Dr. Harl summarizes the advantages he sees in his approach (my emphasis):

The availability of the exception generally means a lower annual cost for income tax return preparation and freedom from the onerous penalties for failure to file a timely or complete Form 1065, not to mention the advantage of sidestepping the complex rules that apply to partnerships generally such as the depreciation rules applicable to partnerships after transfer of depreciable assets to the partnership.

The Battle Flats case disposes of the “freedom from onerous penalties” bit. As far as return prep costs, Dr Harl himself notes that the income of a small partnership has to be reported somehow:

So how do the small partnerships report their income? The statute is not clear on that point but the definition of “partner” implies that each partner is to take into account the “partnership items” which would include income, gains, losses and credits. Those items would be reported on Schedule C, F or E as would be appropriate for that partner.

That means the partnership has to provide each partner with the income from operations sorted in a way that enables the partner to properly file their 1040s. That’s exactly what Form 1065 and its Schedule K-1 do. Either you prepare a homemade document to do what the K-1 does, or you do a K-1. It’s hard to see why it’s cheaper to design a homemade K-1 than to use the one the IRS provides.

Tax pro Chris Hesse responds to Dr. Harl in the comments to his Tax Analysts piece:

Readers who carefully read Rev. Proc. 84-35 will conclude that Dr. Harl’s position is not sustainable. Those who follow Dr. Harl’s path will find themselves not only subject to the penalties for late filing, but incurring the professional costs of defending a losing argument. Advisors should counsel that it is less costly to comply.

I think that’s correct.  Even if you are convinced that Dr. Harl has the law right, I don’t see why it makes sense for a partnership to place its tax compliance, and the risk of severe non-filing penalties, in the hands of its least responsible partner.

Related: Roger McEowen, IRS Guidance on Reasonable Cause Exception to Penalties for Failure to File Partnership Return Upheld.

 

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Kristine Tidgren, DMWW Court Certifies Questions to Iowa Supreme Court (AgDocket). Developments in the Des Moines Water Works environmental lawsuit against upstream farming counties.

William Perez, New Rules for Deducting Repairs and Maintenance

Tony Nitti, IRS Continues To Whipsaw Taxpayers: Sales Of Land Generate Ordinary Income, Capital Loss

Robert D. Flach recaps THE FAMOUS STATE TAX SEMINAR last weekend in New Jersey.

 

Jim Maule offers Another Reason Tax Professors Don’t Need to Invent Hypotheticals. If you made up a case like the real one he discusses, everyone would say it was too far-fetched.

Question, answered:

Peter Reilly, How To Cash Your Powerball Winning Ticket Anonymously.

Robert Wood, Copy Hillary Clinton: Transfer Powerball Tickets Now Before Win, Avoid Taxes.

TaxGrrrl liveblogged the State of the Union. State Of The Union 2016 – LIVE. That’s dedication.

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David Brunori, Montana’s School Credit Is Unconstitutional, but Not for Obvious Reasons (Tax Analysts)

Joseph Henchman, Pretend You Won the Powerball. What Taxes Do You Owe? (Tax Policy Blog).

TaxProf, The IRS Scandal, Day 979

Renu Zaretsky, Tax Hikes, Relief, Dedication, and Resurrection. Today’s TaxVox headline roundup covers State of the Union tax talk, campaign tax proposals, and lots more.

 

Career Corner: Let’s Get Worked Up About: Email Pet Peeves (Caleb Newquist, Going Concern). Hey, Caleb sent me one yesterday!

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Tax Roundup, 1/6/16: Oh, I meant that other year. And: IRS won’t rule on truck rehab “glider kits.”

Wednesday, January 6th, 2016 by Joe Kristan

20160106-1Better increase their budget. The IRS provides a special “Identity Protection Personal Identification Number,” or “IP-PIN,” to identity theft victims to help them with future tax filings. The IP-PIN lets them tell the IRS that the return being filed is being filed by the real taxpayers, rather than by some grifter in Tampa (Florida) or St. Petersburg (Russia).

Now, after the IRS has already screwed up things for innocent taxpayers by sending their refunds to thieves, they have added insult to the injury. TaxGrrrl reports IRS Sends IP PIN Letters With Wrong Tax Year, Stresses It Will Not Affect Returns Filed In 2016.

Letters sending out IP PINs for the 2016 filing season (for the 2015 tax year) were mailed out at the end of December 2015 (but dated January 4, 2016) marked with the incorrect year. The letter, also referred to as a CP01A Notice, incorrectly indicates the IP PIN issued is to be used for filing your 2014 tax return when the number is actually to be used for your 2015 tax return. 

The IRS isn’t sending correction letters.

The funny thing: the IRS gets really mad if impatient taxpayers use forms for the wrong year and cross off the year at the top of the form, writing in the right year. Do as we say, not as we do…

Related:

IRS Notice on Your Identity Protection PIN.

Russ Fox, IRS Errs on Identity Theft PIN Letters. “One would think that the IRS proofed important letters and notices before they’re finalized.”

 

ice truck“Glider kit” guidance grounded. The IRS will decline to issue rulings on whether the excise tax on over-the-road tractors applies when a new cab, chassis, frame and axle — a “glider kit” is applied to an old engine and power train. Tax Analysts reports ($link):

Section 4052(f)(1) provides that if a modification to the chassis or body doesn’t exceed 75 percent of the retail price of a comparable new chassis or body, then it won’t incur the section 4051 tax. The IRS decided that it will not rule on whether a modification using a glider kit qualifies for the 75 percent exception under section 4052(f)(1).

A more recent legal memorandum (ILM 201403014) makes clear that the IRS has evolved its thinking on the issue, determining that when an outfitter combines an old engine and transmission with a new cab, chassis frame, and axles, the excise tax applies and the exception isn’t applicable. It also explains that taxpayers must include a 4 percent markup in the price of the refurbished truck for purposes of computing the tax, minus the value of used components if they’re customer provided.

The article adds:

The Iowa Motor Truck Association, in an alert (http://goo.gl/IXnYaS) issued to its members following the release of ILM 201403014, also warned that “the memo probably indicates that IRS auditors will now be more aggressive about glider-kit transactions, and that at least some transactions that have been regarded as exempt may turn out not to be.”

This is obviously a big deal to dealers and their customers. It’s terrible that the IRS is making this sort of policy by internal memos rather than through published guidance, leaving taxpayers hanging.

 

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

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

Megan McArdle has some wise thoughts on the tax law in Why We Fear the IRS (my emphasis):

Legal complexity does not accumulate linearly; it accumulates exponentially. When you have one law on the books, and you add a second, the new law may (or may not) have some unexpected interaction with the old law. This would be one complexity point for regulators to manage. But with each new law, the number of potential interactions grows quickly, until it passes the ability of any layman to grasp it (and eventually, surpasses the professionals as well, which is why they’re increasingly specialized in narrow areas). We are long past that point with the tax code.

That’s a point universally ignored by politicians who use the tax law as the Swiss Army Knife of public policy. A Swiss Army Knife the size of a railcar is interesting, but it’s not much good as a knife.

Her post also covers important ground on why the tax law has gotten so bad. Recommended.

 

Paul Neiffer, Is Section 179 a Ticking Tax Time Bomb?. The ability to deduct up to $500,000 in new equipment may have unintended consequences:

On the face, this sounds like a great tax deduction for farmers, however, with continued low commodity prices, might this be a ticking tax time bomb for many farmers.  This is due to a farmer having to liquidate some farm equipment due to the bank requiring additional liquidity be put into the farm operation or perhaps the farmer has lost some ground and no longer needs the equipment.   This sale of equipment causes the Section 179 to be “recaptured” as ordinary income and since the farmer probably does not have sufficient liquidity to prepay additional farm expenses, causes the farmer to be in a high tax bracket.  This leads to a large tax bill which then requires the farmer to sell additional equipment or grain to cover the tax bill.  This is especially harsh when the equipment was financed 100%.

In theory, the tax savings from the original deduction should be available to cover that tax bill, but if you are having to liquidate to pay the bank, the savings have already been spent on other things.

 

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Robert D. Flach, THE PATH ACT OF 2015 AND TAX PLANNING FOR 2016

William Perez, What Is the Alternative Minimum Tax? “Essentially, this is a tax based on a person’s adjusted gross income if they aren’t itemizers.”

Kay Bell, Seattle gun & ammo taxes drive gun seller out of town.  The criminals, they get to stay.

Jason Dinesen, What is Form 1023-EZ? “Form 1023-EZ is a new IRS form used by some not-for-profits to apply for tax-exempt status as a 501(c)(3) organization.”

Jim Maule, Is This Proposed Tax Necessary or Even Sensible?:

Several days ago, in a New York Times editorial, Max Frankel proposed “a relatively simple new tax – officially called a user fee – “ based on “the grandeur of each lofty view” from the apartments being built in very tall luxury skyscrapers along the southern edge of Central Park. He suggested it could informally be called a “window tax” and he suggested various dollar amounts for windows and doors based on height, the existence or absence of obstructions, and the nature of what can be seen.

Gee, what could go wrong? A little history shows some problems with Mr. Frankel’s proposal:

The window tax was a property tax based on the number of windows in a house. It was a significant social, cultural, and architectural force in England, France and Scotland during the 18th and 19th centuries. To avoid the tax some houses from the period can be seen to have bricked-up window-spaces (ready to be glazed or reglazed at a later date).

Prof. Maule rightly criticizes the proposal.

 

Robert Wood, As Offshore Banks Agree To U.S. Tax Evasion Deal, Account Holders Must Deal With IRS. Betting on foreign bank secrecy is a bet against the odds.

Keith Fogg, Fulfilling the Requirements of Section 6751 When the IRS Imposes a Penalty (Procedurally Taxing). “In Legg v. Commissioner, the Tax Court issued a division opinion concerning this little known provision that serves as a gatekeeper to the assertion of many penalties.”

Peter Reilly, Tax Court Sorts Out Basis On Russian Fast Food Merger. “The IRS can argue that what you said you did – the form – is not what actually happened – the substance.  You can’t generally do that yourself, because you got to choose the form, so you are stuck with it.”

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Renu Zaretsky, The Case of Tax Scams, Private Debt Collectors, and Wishful Thinking (TaxVox). “There is one way Congress could make tax compliance and collection easier and tax avoidance harder, while improving the public’s perception of the IRS. It could simplify the tax code. Unfortunately, that’s a call Congress has not chosen to make.”

Stephen J. Entin, Michael Schuyler, Are Dividend Taxes Harmless? Don’t Bet On It!

TaxProf, The IRS Scandal, Day 972

 

Career Corner. New Year’s Resolutions That Will Make Busy Season Less Awful (Leona May, Going Concern). It’s hard to argue with “Stop stealing co-workers’ lunches”

 

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Tax Roundup, 1/5/16: Start your year-end planning today! And: private tax audits for fun and profit!

Tuesday, January 5th, 2016 by Joe Kristan

IMG_1182Welcome to 2016. We’ve just finished another round of 2015 year-end planning. It’s too soon for most of us to be working on our 2015 filings, given the need for 1099s, W-2s, K-1s, etc. But it is a good time to start getting things in order for 2016.

Too many people want to know the last day they can do something for their tax planning. It’s better to worry about the first day to do something. Many tax moves are best done at the beginning of the year. If you fund a tax-deferred account at the beginning of the year, you start sheltering the investment income from taxes 15 1/2 months sooner than somebody who waits until the end of the year.

Here are a few 2016 tax planning moves you can make right now:

Fund an IRA. You can fund a 2016 IRA to the extent of the lesser of your 2016 earned income or $5,500 – or $6,500 if you are going to be 50 years old by year-end. You don’t have to wait until you have earned that $5,500 or $6,500; if you are still working, you’ll get there. And don’t forget a spousal IRA, same limits.

Health Savings Accounts for 2016 can be funded up to $6,750, or $7,750 if you will reach age 55 by year-end.

A 55 year-old working couple with a high-deductible health plan can stash $20,750 in tax-deferred IRAs and HSAs today and shift the earnings on those funds to the non-taxable category now, instead of waiting until April 2017. Not only do they start their tax savings right away, but they aren’t tempted to spend that money between now and then.

While Section 529 plans can’t generate deductions like HSAs and traditional IRAs, they do shelter investment earnings like HSAs and IRAs, and they have more flexible contribution limits. The IRS explains:

Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year.

Taxpayers filing in Iowa can deduct their contributions to the College Savings Iowa Section 529 plan up to $3,188 per beneficiary, per donor on their Iowa income tax return. A married couple funding plans for their two children can therefore deduct up to $12,752 in 2016 CSI contributions.

So start that 2016 year-end planning right away!

 

Tax Analysts reports ($link) that a Chicago Whistleblower Has Filed 938 FCA Tax Cases, Attorney Says. It quotes the director of the Illinois Department of Revenue, Connie Beard, talking about False Claims Act lawsuit trolling:

Beard told the lawmakers that the suits “are not true whistleblower lawsuits,” wherein an insider who has knowledge of a company’s fraudulent behavior seeks to report it to the state. “These are lawsuits that simply accuse business taxpayers, big and small, of incorrectly collecting and reporting tax,” she said.

As if Illinois wasn’t hopeless enough.

 

nytchart20151229-7Scott Hodge, IRS “Fortunate 400” Report Shows Evidence of Significant Income Shifting to Avoid Fiscal Cliff Tax Rate Hikes (Tax Policy blog). They show how taxpayers shifted income to beat the 2013 tax hikes:

Finally, we get to the bottom line and can see that taxable income declined 23 percent in 2013 to $85 billion from $111 billion in 2012.

So what explains this? Well, the more interesting narrative to come out of the IRS report is the evidence of income shifting in 2012 as the 400 wealthiest taxpayers anticipated the eventual tax increases on personal and investment income that would result from the fiscal cliff tax legislation.

Nearly all the major sources of income for these 400 taxpayers were up significantly in 2012 compared to 2011, as they pulled income from the future into a lower-tax year…

The lesson here is that high-income taxpayers have considerable flexibility as to how and when they report income. Headlines reporting that the rich are paying higher average tax rates as a result of the fiscal cliff deal don’t really tell the whole story.

People aren’t stupid. If they have a choice between recognizing income in a low-tax or a high-tax year, a sensible person picks the low-tax one. As the biggest source of income of the “400” is capital gains, there was a lot of pressure to beat the 2013 rate hikes from 15% to 23.8%.

Related coverage here.

 

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Robert D. Flach gets 2016 started with a bang Buzz! A tremendous link fest to start they year.

William Perez, How Soon Can We Begin Filing Tax Returns?

Andrew Mitchel, Flowchart – Section 267(a)(2) & (3) Related Party Matching Rules (International Tax Blog). Andrew’s charts are a wonderful resource.

Annette NellenTop Ten Items of Tax Policy Interest for 2015 – #10. The “gig economy.”

Kay Bell, 2016’s first tax tip: Filing season starts on Jan. 19

Jason Dinesen, Choosing a Business Entity: LLC. “LLCs provide legal protection much like a corporation, but LLCs are easier to form and are generally easier to administer.”

Jack Townsend, Judge Criticizes Prosecutor’s Use of Language Directing Secrecy for Receipt of Grand Jury Subpoena. “I hope that all readers of this blog know that grand jury proceedings are generally secret and the grand jurors and government actors in the process must keep them secret.  FRCrP 6(e)(2), here.  But the obligation of secrecy is not imposed on witnesses before the grand jury.”

Jim Maule, Taking (Tax Breaks) Without Giving (What Was Promised). “Too many tax breaks are handed out in exchange for promises by the recipients to do something beneficial for the community at large.” Once the politicians issue the press release and cut the ribbon, they have what they want, and they don’t much care what happens next.

Peter Reilly, Family Partnership Valuation Discounts Approved By Tax Court. A big year-end Tax Court case is discussed.

Leslie Book, NY Times Article Today Highlights Why People Pay Taxes as Well as Some of My Favorite PT Posts of 2015 (Procedurally Taxing)

Robert Wood, 2016 Brings IRS Power Over Passports, Use Of Private Debt Collectors

TaxGrrrl, 100 Things You Absolutely Need To Know About Money Before You’re 35

Tony Nitti, Ben Carson Releases Tax Plan, Promises End To Mortgage Interest, Charitable Contribution Deductions.

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TaxProf, The IRS Scandal, Day 967Day 968Day 969Day 970Day 971.

Howard Gleckman, What Can Congress and President Obama Accomplish in 2016? Pray they don’t define “accomplish” the same way.

2015 top news from the profession. Going Concern Editor’s Picks for 2015: Relationships at Work, Bad Auditing, Women in Accounting and More (Caleb Newquist, Going Concern)

Russ Fox, My Day on Jury Duty. Congratulations to Russ on getting it out of the way January 4.

 

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Tax Roundup, 12/23/15: The wisdom, or not, of paying taxes by year-end. And: Deep thoughts at Think Progress.

Wednesday, December 23rd, 2015 by Joe Kristan

dimeIs it wise to prepay deductible taxes? Paying 4th quarter estimated taxes before December 31 is a standard piece of the year-end tax planning toolkit. Sometimes taxpayers go further and pay in December all of their taxes that would be due in the following April. Is it wise to pay all of your taxes 3 1/2 months early to move a deduction up a year?

The first question you have to answer, with regard to payments of state and local taxes deductible on your federal return, is whether you will be paying alternative minimum tax this year or next year. For example, a taxpayer with an unusual lump of income this year who waits until next year to pay state taxes may trigger AMT next year, wasting those state tax deductions. On the other side of the coin, taxpayers who are in AMT this year get no value from prepaying deductible taxes, so they might as well put the money to work until the taxes are due.

If the taxes are just as deductible in either year, it’s a time value of money question. What is the present value of spending a dollar now to get a fraction of that back as a tax benefit a year earlier? I’ve run some numbers, using the top Iowa marginal tax rate and the rates at the different federal brackets:

2015 year-end payments pv2

This shows a benefit at all brackets from prepaying estimates due in January, but prepaying taxes due in April only makes sense at higher brackets, and it never works to prepay September property taxes in the prior year if AMT is not a factor.

This is another installment of our 2015 year-end planning tips series

 

Think Progress is an openly partisan agitation outfit, so we shouldn’t expect it to know much about taxes. Still, it is a regular source of talking points for a certain breed of politicians who promise to spend everything on everyone, all to be paid for by someone else. That makes it worthwhile to occasionally correct it for saying something half-baked like this (my emphasis):

There may be some truth to the, as no one has accused Apple of doing anything illegal. But while Cook has advocated for lowering the corporate tax rate and closing loopholes, corporate taxes are already a shrinking portion of the government’s revenue, getting replaced instead by payroll taxes paid by working people.

Yes, corporate taxes are a shrinking portion of government revenue. But it’s not because the corporate tax law has suddenly become lax. It’s because most businesses are no longer taxable as corporations in the first place.

entity forms chart

Source: Tax Foundation

The 1986 tax reforms made it sensible for most closely-held businesses to be partnerships or S corporations. Unlike C corporations, which pay corporation taxes, these “pass-through entities” don’t pay taxes; instead, the income is reported on their owners’ 1040s.

Think Progress says the C corporation taxes are being replaced by “payroll taxes on working people.” That’s demonstrably wrong. C corporation taxes are being supplanted by business taxes paid on 1040s, which are generally paid at high tax brackets. Perhaps Think Progress has developed a strange new respect for hard-working high-bracket individuals.

Tax foundation Distribution of Federal Taxes in 2014

Chart Courtesy Tax Foundation

Cracking down on C corporations, as Think Progress advocates, will do nothing but confirm the trend away from C corporation taxation. I suppose then they’ll just continue the beatings until morale improves.

Related: Individual Tax Rates Also Impact Business Activity Due to High Number of Pass-Throughs (Scott Hodge, Alex Raut)

 

WOWT.com, Former Omaha IRS Agent Arrested for Tax Fraud Scheme. And yet we are told that these people need to regulate preparers to stop tax fraud.

 

Jared Walczak, States Lag Behind Federal Government on Small Business Expensing (Tax Policy Blog). “Forty-five states and the District of Columbia allow first-year expensing of small business capital investment under Section 179. Of those, thirty-four states are in conformity with the now-permanent $500,000 federal expensing level.”

William Perez, How Do You Claim a Sales Tax Deduction on Your Federal Taxes?

Annette Nellen, Top Ten Items of Tax Policy Interest for 2015 – #3. Thoughts on the Quill decision.

Kay Bell, Home energy tax breaks are extended, just in time for the arrival of, for many, an unusually warm winter

Jack Townsend, U.S. Taxpayer Seeks Declaratory Judgment that Goevernment Must Prove Willfulness for the FBAR Willful Penalty by Clear and Convincing Evidence. Given the stakes, it seems only fair, but the IRS prefers to be able to cause financial ruin with cloudy and unconvincing evidence.

 

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Jason Dinesen, From the Archives: Taxpayer Identity Theft, Part 2

Jim Maule asks Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit? I say its a revenue grab combined with moral preening.

Stephen Olsen, Summary Opinions for November (Procedurally Taxing). A roundup of tax procedure headlines.

Robert Wood, 5 Things To Know About Year-End’s Massive Tax Bill

TaxGrrrl, Real Housewife Teresa Giudice Released From Federal Prison

Tony Nitti, Moving? Don’t Forget The Tax Deduction. “At 23 years old I packed up my life, and in a move made popular by members of the witness protection program, fled New Jersey for the quiet of the Colorado mountains.”

Robert D. Flach talks about priorities in A YEAR-END TAX QUESTION FROM A CLIENT

 

Cheer up! Social Security is Still Going Broke (Arnold Kling)

TaxProf, The IRS Scandal, Day 958

Howard Gleckman, Trump Would Slash Taxes for the Top 0.1 Percent By An Average of $1.3 Million, Add Nearly $10 Trillion to the Debt (TaxVox)

 

Thanks a bunch, Prof. Avi-Yonah. CBS News:  Vanguard Investors, Your Fund Fees Could Quadruple If Michigan Tax Prof Reuven Avi-Yonah Is Right (TaxProf). A great example of how with a little corporation-bashing, busybody do-gooders would screw millions of small investors.

 

Holiday Giving News from the Profession. This Flask-Calculator Is the Perfect Gift for the Accountant Who Drinks Everything (Caleb Newquist, Going Concern)

 

 

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Tax Roundup, 12/21/15: Winter’s here, along with a new tax law. Fixed-asset planning time!

Monday, December 21st, 2015 by Joe Kristan

20151211-1It’s the darkest day of the year, but with the signing of the Extender Bill, H.R. 2029, we are no longer in the dark for year-end fixed asset tax planning. The “PATH” act has some important fixed-asset provisions:

A permanent (and inflation-indexed) $500,000 annual limit for Section 179 deductions. This provision lets qualifying taxpayers deduct currently fixed asset costs that would otherwise have to be capitalized and depreciated over multiple years.

“Bonus Depreciation” is extended through 2019. This provision allows taxpayers to deduct 50% of the cost of depreciable property in the first depreciable year, with the remaining cost depreciated over the property’s normal tax life. Unlike Section 179, it cannot be taken for used property, but unlike Section 179, it can be used to generate net operating losses.

-15-year depreciation is made permanent for “Qualified Leasehold Improvement Property , Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements. These rules enable taxpayers to depreciate these items over 15 years, rather than the usual 39 year life for commercial buildings.

In theory, this provides a great opportunity to knock down your 2015 tax bill with last-minute purchases of fixed assets. But there’s a catch. It’s not enough to buy and pay for new fixed assets to deduct them this year. They also have to be “placed in service” by year end. From the IRS publication on depreciation:

You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.

Example 1.

Donald Steep bought a machine for his business. The machine was delivered last year. However, it was not installed and operational until this year. It is considered placed in service this year. If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year.

It’s not enough to have a new machine in crates on the loading dock. It has to be set up and ready to go. If you are buying a farm building, having it in pieces waiting for assembly doesn’t get you there.

That’s why year-end purchase of vehicles and farm equipment are popular. Once they arrive, they are pretty much ready to go. But you have to actually take delivery. “On order” isn’t enough. And remember that there are limits on the amount of Section 179 deduction and depreciation for passenger vehicles.

This is the first installment of our 2015 year-end planning tips series

 

6th avenue 1910

 

Russ Fox, Once Again, the IRS Doesn’t Start by Calling You:

My mother received a phone call on Saturday morning at 6 am from “Agent Smith” of the IRS demanding immediate payment of her taxes or she would find herself “thrown in jail.” Yes, the scamsters are still out there.

Now imagine you’re a senior citizen, and you get a phone call waking you up telling you to pay the IRS or you’ll find yourself in prison. It doesn’t take a genius to know that these scamsters can intimidate their victims.

Remember, if the caller demanding payment and saying the police are coming says he’s from IRS, he’s not from IRS.

Tony Nitti, Tax Court: Luring Pigs To Untimely Demise With Kool-Aid Counts As Material Participation. Sooey!

Robert D. Flach, THERE IS STILL TIME TO TAKE ADVANTAGE OF A “QCD” FOR 2015!

 

Paul Neiffer, Wind Energy Credits Extended and Phased-Out

Annette Nellen is counting down the “Top Ten Items of Tax Policy Interest for 2015.” #1 is non-tax bills used to change the tax law; #2 is IRS Funding Challenges. Anybody who is serious about improving IRS funding should be demanding the resignation of Commissioner Koskinen. Nobody’s going to trust him with extra funding.

Jason Dinesen, From the Archives: Insolvency and Canceled Debt: Make Sure You Can Prove It!

Jim Maule, Winning Back Your Tax Payments. “A reader made me aware of a recent suggestion that every taxpayer who files a timely and honest tax return, along with timely payment, be entered into a lottery.” It a way, that’s already true.

Leslie Book, Extenders Bill Gives IRS Additional Powers to Impose Penalties on Preparers and Disallow Refundable Credits (Procedurally Taxing). “Under the new law,  the accuracy-related penalty can be applied to any part of a reduced refundable credit subject to deficiency procedures.”

Peter Reilly, Bernie Sanders And The 90% Income Tax Rate That He Does Not Call For. ” Bernie Sanders wants us to have an economy like it was in the sixties and early seventies, when a summer of hard work could pay a year’s tuition and there were plenty of factory jobs that would support a family.” Maybe Bernie should reconsider his nostalgia.

Robert Wood, New Law Says Money For Wrongful Convictions Is Tax Free

TaxGrrrl, 12 Days Of Charitable Giving 2015: Wounded Warrior Project

Kay Bell gets into the holiday spirit with Christmas gifts for tax and financial geeks

 

old walnut

 

TaxProf, The IRS Scandal, Day 954Day 955Day 956. Coverage of the limits on IRS power included in the extender and omnibus legislation.

Alex Tabarrok, Subsidies Increase Tuition, Part XIV (Marginal Revolution):

Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.

So naturally the Extenders bill made the American Opportunity Tax Credit permanent.

Jared Walczak, The Opening Salvo of 2016’s Soda Tax Battle (Tax Policy Blog). “Soda taxes are poised to be on the agenda in many cities in 2016, an effort spearheaded by former New York City Mayor Michael Bloomberg.” I propose a tax on people who can’t mind their own business.

Renu Zaretsky, Promises, Hopes, and Complaints. Today’s TaxVox headline roundup covers Hillary promises, Nevada trolling for ribbon-cuttings with taxpayer money, and Apple’s CEO tax code thoughts: “He wants changes to the US tax code, which ‘was made for the Industrial Age, not the Digital Age… It’s backwards. It’s awful for America.'”

 

News from the Profession. Let’s Help Deloitte Global CEO Punit Renjen With His First Tweet (Caleb Newquist, Going Concern).

 

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Tax Roundup, 12/18/15: 2016 standard mileage rates are out. And: Extender bill clears House.

Friday, December 18th, 2015 by Joe Kristan

Accounting Today newsletter visitors: The post about fines and penalties is here.

54 cents

54 cents. The IRS yesterday released the new standard mileage rates for 2016:

Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 54 cents per mile for business miles driven, down from 57.5 cents for 2015
  • 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
  • 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased 3.5 cents per mile and the medical, and moving expense rates decrease 4 cents per mile from the 2015 rates. The charitable rate is based on statute.

Gas has come down. Blame the speculators!

Related: William Perez, How to Deduct Car and Truck Expenses on Your TaxesKay Bell, Business mileage deduction rate to drop in 2016Russ Fox, 2016 Standard Mileage Rates Released

 

Extender bill moves to Senate. The House of Representatives yesterday approved the permanent extender bill, H.R. 2029, on a 318-109 vote. The bill moves to the Senate. The Hill reports:

In the Senate, support for the tax measure is more bipartisan than it is in the House. Senate Finance Committee ranking member Ron Wyden (D-Ore.) joined with the Republican chairmen of the House and Senate tax-writing committees in announcing the deal.

The Senate’s third-ranking Democrat, Charles Schumer (N.Y.), released a statement Wednesday praising the fact that the bill would cement a tax benefit for mass transit commuters in a win for his state.

The Extender bill will be considered as part of a package in the Seanate, reports Tax Analysts ($link):

House GOP leaders worked throughout the day to build support for passage of an omnibus appropriations bill for fiscal 2016. The $1.1 trillion spending measure, which is also an amendment to H.R. 2029, is scheduled for a vote on December 18. Lawmakers expect that both the tax and spending measures will be combined into one bill and move to the Senate later that day, where it is expected to pass with bipartisan support. 

The Hill reports the Senate vote may happen as soon as today.

Related: Scott Greenberg, The Twelve Most Important Provisions in the Latest Tax Bill (Tax Policy Blog). #1 on the list is the permanent $500,000 Section 179 ceiling.

 

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Fresh Friday Buzz! From Robert D. Flach.

Gretchen Tegeler, Change is difficult, as failed suburban services merger showed (IowaBiz.com).  “First, never assume anything when it comes to change, even if it seems like reasonable change. Always expect active opposition.”

Jim Maule, You Mean That Tax Refund Isn’t for Me? Really?. Judge Judy deals with a tax refund spent by an ex-girlfriend.

Peter Reilly, Venus Flytraps And Elusive Gator On Golf Course Not Worth Millions In Tax Deductions. A conservation easement goes very bad.

Robert Wood, Supermodel Bar Refaeli’s Alleged Tax Evasion On Gifts: Must You Report Yours? Gifts aren’t taxable income in the U.S., but the IRS doesn’t have to believe that money you receive is actually a gift, rather than compensation. It even has a form to report large gifts from overseas (Form 3520) so they can second guess whether amounts really are “gifts.” Large fines apply if you don’t file the form for years you receive such gifts.

TaxGrrrl, Tax Preparer For Mike ‘The Situation’ Sorrentino Pleads Guilty To Tax Fraud Conspiracy.

 

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Renu Zaretsky, Will they or won’t they? Today’s TaxVox headline roundup covers prospects for the extender bill, among other things.

TaxProf, The IRS Scandal, Day 953

Richard Phillips, Tax Wars: 3 Lessons about Tax Policy from the Star Wars Universe (Tax Policy Blog). “The Star Wars universe has problems with corporate tax enforcement and shell companies.”

News from the Profession. Big 4 Firms Still Getting Used to This Whole Regulation Thing (Caleb Newquist, Going Concern)

 

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Tax Roundup, 12/4/15: Keeping inmates busy, Keeping CPAs fit.

Friday, December 4th, 2015 by Joe Kristan

20150916-3It’s important that our inmates feel they have a purpose. A few years ago Edward Hugh Okun was sentenced to 100 years in federal prison after being convicted on charges of buying and looting Section 1031 exchange intermediaries, stealing $126 million earmarked to close tax-free swaps, spending it on yachts and other rich-man toys.

Mr. Okun apparently tried to make the best of his situation. Tax Analysts reports ($link) that David Chityal, a Canadian national, has pleaded guilty to helping Mr. Okun divert $2.3 million in tax refunds from a fund set up to pay restitution to Mr. Okun’s fraud victims. From the report:

Following Chityal’s release in March 2010 and his deportation to Canada, the men maintained regular contact and developed plans to obtain $2.3 million in tax refunds intended for the bankruptcy estate handling Okun’s businesses. The indictment said the two men planned to put $500,000 of the tax refunds toward hiring a specific “prestigious New York lawyer” to handle Okun’s appeal and use the remainder for personal enrichment.

Chityal hired a Canadian lawyer to complete a process to grab the tax refund checks, travel to the Beaumont prison to have Okun endorse the checks, and then fly to the Turks and Caicos Islands to deposit the checks in a trust controlled by Okun. However, an attorney for the bankruptcy estate discovered the scheme, tracked the Canadian lawyer to the islands, and had the checks sent back to the United States hours before they were to be deposited.

The Bureau of Prisons inmate locator says Mr. Okun has a projected release date of April 30, 2095. This sort of thing could roll that back a bit.

Related:

A 10-year sentence is plenty, assuming fire ants are involved

WHEN A LIKE-KIND EXCHANGE IS TOO TAX FREE

Department of Justice Press release

 

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Kyle Pomerleau, Deficit Worries Over a Permanent Extenders Package? (Tax Policy Blog). The post addresses the lie underlying the nature of “temporary tax breaks”:

The extenders are a perfect example of what the current law baseline can miss. Under current law, extenders have already expired. So current law estimates assume that the federal government will collect revenue as if the extenders are no longer there.

However, this does not reflect our recent experiences with the extenders. Every year, for the past several years, Congress has retroactively extended the extenders and reduced actual revenues that the CBO believes the Treasury will collect. And there is no reason to believe that this would not keep happening. However, CBO’s current law baseline will still assume that the government will collect revenue over the next decade as if the extenders didn’t exist. In other words, the CBO current law baseline likely overstates the amount of revenue that the federal government will actually collect over the next decade.

Any “temporary” tax break that is extended once should be considered permanent for budget purposes. Maybe we should even remove the four words of the preceding sentence starting with “that.”

 

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It’s Friday! Get ready for your weekend with fresh Buzz from Robert D. Flach. Today’s roundup from Robert runs from musical theater to fraudulent earned income tax credit claims.

Speaking of musical theater, I have a son playing bass in the house band for a run of Ain’t Misbehaving in Chicago right now. Go if you can, because it’s a great show and because I want to stay in a nice nursing home someday.

Robert Wood, When Foreign Banks Ask For U.S. Taxpayer ID, How Should You Respond? “FATCA letters are everywhere, and foreign banks want you to certify that you’re complaint with the IRS.”

Jim Maule, Rubbing Tax Penalty Salt Into the Tax Liability Wound:

There are two lessons here. First, if using a preparer, be certain to provide the preparer with all necessary information, even if that means providing the preparer with more information than is needed. It is better to over-include than to under-include. Second, review the return.

A preparer signature isn’t a magic charm that makes any tax problems go away.

Keith Fogg, Who Can/Must Sign the Power of Attorney Form (Procedurally Taxing)

Jack Townsend, IRS Use of Cell-Site Simulators (Also called Stingray) to Retrieve Information About and From Cell Phones

Me, Estimated tax payments: who needs to file quarterly. My new post at IowaBiz.com, the Des Moines Business Record’s Business Professionals’ Blog.

 

Howard Gleckman, The Highway Bill Takes Congress on a FAST Track to More Debt (TaxVox). Fiscal gimmickry lives.

TaxProf, The IRS Scandal, Day 938. Today’s post links to a voice for the “no scandal here” crowd.

They lack a lot more than that. Illinois Needs Budget, but Leaders Lack Urgency (Sebastian Johnson, Tax Justice Blog).

 

News from the Profession. Here Are Some Health Iniatives Accounting Firms Should Consider for the Upcoming Busy Season (Leona May, Going Concern). I’m not sure “treadmill desks” send the right message.

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Tax Roundup, 12/2/15: A defender of tax credits makes his case. Also: escalating the war on offshore taxpayers.

Wednesday, December 2nd, 2015 by Joe Kristan

 

20120906-1Bribe them and they will come. The Atlantic asks Why Are There So Many Data Centers in Iowa?. “When I’ve asked data center operations managers, the answer has varied from approximately forty characteristics to a blunt four: ‘Networks, land, power, and taxes'” By “taxes,” that generally means “tax incentives,” or special breaks unavailable to the rest of us.

In a post at IowaBiz.com, Brent Willett makes an unabashed argument for more of the same in Economic development has an image problem (IowaBiz.com). It’s an interesting piece. Its premise is that people think that special tax deals to lure companies are shady, but that we would feel otherwise if incentive boosters just made a better case.

For an attempt to make the case that incentives are a good thing, the post is  short of actual evidence. It instead makes flat assertions that incentives are necessary and proper, and are obviously good because everybody does them. For example (emphasis in original):

Incentives play a fundamental role in securing job- and wealth-creation projects for communities in every corner of this country and in many countries of the world. This is pure, unadulterated fact.

If it were pure unadulterated fact, you might think that it would be easy to marshal some data that says so. Yet in the only attempt ever made by Iowa to quantify the value of its dozens of tax credit giveaways, by a blue-ribbon committee appointed in the wake of the Iowa Film Tax Credit fiasco, failed to identify a single tax credit that clearly was worth more than it cost.

The two magic words omitted by defenders of tax credits are “opportunity cost.” They point to projects that receive tax credits, assert they would not have happened anyway, and ignore the idea that the money used for the credits would have been used elsewhere. They also ignore the cost to all businesses of the tax law complexity and high rates that inevitably accompany special interest tax breaks.

It’s not just accidental that tax incentives have a bad image. They are like a guy who takes his wife’s purse to the bar to buy drinks for the girls. The girls might accept the free drinks (development success!), but it doesn’t help the person who foots the bill. Nor is it impressive, and any of the girls won over by this tactic aren’t likely to be real prizes. In any case, his image is unlikely to be helped by a better explanation when his wife finds out.

Related: Local CPA Firm vows to swallow pride, accept $28 million

 

Best done by not giving them in the first place. States Can Avoid the Fiscal Risks Tax Incentives Create, Pew Report Says (LexisNexis Legal Newsroom).

Jim Maule, Tax Credit Giveaways Don’t Deserve Credit, “If the Michigan tax credit had done what it was promised to do, the increased tax revenues should have more than offset the cost of the credit. But that hasn’t happened, as evidenced by the budget deficits that were spiraling out of control on account of the tax credit giveaway.”

 

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Andrew Mitchel, The Escalation of Offshore Penalties Over the Last 20 Years. An excellent summary of the unconscionable increase in foot-fault penalties for paperwork violations of foreign reporting rules. He describes the same “violations” taking place in 1995 and now.

In 1995, the individual was only required to file two forms (the FBAR and Form 5471) and would be subject to penalties totaling $2,000. In 2011, the same individual was required to file six forms (the FBAR, Forms 3520, 3520-A, 5471, 8865, 8938) and would be subject to penalties totaling $70,000.

Read the whole thing.

Peter Reilly, IRS Trying To Make It Harder To Qualify As Real Estate Pro. An excellent, in-depth discussion of a taxpayer victory in the eternal IRS war against deducting real estate losses.

William Perez, Tips for Green Card Holders and Immigrants Who are Filing a US Tax Return

Kay Bell, Charitable donation tax deduction rules apply on Giving Tuesday and year-round. A good summary of rules on year-end charitable giving.

Amanda Klopp, A Snow Holiday? Not if the IRS Can Help It. (Procedurally Taaxing).

TaxGrrrl, Congress Moves Towards Granting IRS Authority To License Tax Preparers. “Representatives Diane Black (R-TN) and Pat Meehan (R-PA) have introduced H.R. 4141, the Tax Return Preparer Competency Act.”  When taxwriters demonstrate competency, then they can complain about preparers.

Russ Fox, My Love/Hate Relationship with the FTB. “Yet for all the excellence in how the FTB communicates some of the FTB’s practices leave a lot to be desired.”

Robert D. Flach, NEW JERSEY LLC FAQ

Tony Nitti, Top Ten Tax Cases (And Rulings) Of 2015: #6 – More Bad News For The Marijuana Industry.

 

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Jeremy Scott, Congress Gives Up on Paying for Extenders . . . And That’s Fine (Tax Analysts Blog). “Taking a few of the most popular extenders off the table by making them permanent would only help with a limited legislative calendar, which could give some juice to tax reform efforts or at least end the silly end-of-the-year, Mock Turtle-like dance Congress has performed for most of the last 30 years.”

Renu Zaretsky, The Case of the Mislabeled ABLE Account (TaxVox). “Here’s the catch: There’s a good chance that by the time she reaches 18 the value of her account will exceed $102,000. If her nest egg tops that amount, the state would suspend her SSI benefits until her account fell below that threshold.”

TaxProf, The IRS Scandal, Day 937.

Richard Phillips, Congress Should Embrace the International Consensus to Crack Down on Corporate Tax Avoidance (Tax Justice Blog). Um, no.

News from the Profession. Tax Nerds Set Record Straight on Tax Code vs. NFL Rulebook Complexity (Caleb Newquist, Going Concern).

 

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Tax Roundup, 11/25/15: Don’t bother depreciating things up to $2,500. And: Have a great Thanksgiving!

Wednesday, November 25th, 2015 by Joe Kristan

20141226-1$2,500 is the new $500. The IRS yesterday announced (Notice 2015-82) that it was increasing the maximum “safe harbor” expensing amount from $500 per item to $2,500 for taxpayers without an “applicable financial statement” — that is, most taxpayers. Taxpayers with an AFS can elect to expense items up to $5,000. These safe harbors enable taxpayers to not worry about capitalizing and depreciating items up to these amounts.

The new safe harbor takes effect for years starting January 1, 2016 and later.

The safe harbors are authorized by treasury regulations for taxpayers who have in place at the beginning of the tax year “accounting procedures treating as an expense for non-tax purposes” that expense such “per invoice (or per item as substantiated by invoice)” So make sure you write down somewhere that you have a policy of expensing everything up to $2,500 before December 31.

This is a good, if small, step towards allowing taxpayers to expense capital costs. I object to the “applicable financial statement” requirement for the $5,000 amount, as the tax law shouldn’t care whether you have a CPA-certified audit or that you have to report your financials to a government agency, but at least this closes the gap some.   I should be happy, I suppose, that it gives my auditing brethren a small sales tool.

Related: Russ Fox, IRS Increases De Minimis Expense Threshold to $2,500 from $500 for 2016 OnwardTony Nitti, IRS: Taxpayers May Immediately Deduct The Purchase Of Assets Costing Less Than $2,500.

 

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William Perez, Year End Tax Planning Ideas for Self Employed Persons.

Robert Wood, Passports Required For Domestic Travel In 2016, But IRS Can Revoke Passports For Taxes. Giving IRS control over passports is a horrible idea. They make so many errors, and the errors can be so hard to fix.

Robert D. Flach, MORTGAGE INTEREST LIMITATIONS. “But the Court of Appeals ruled that [unmarried] co-owners of one primary residence can each claim mortgage interest on up to $1 Million in acquisition debt and $100,000 of home equity debt.”

 

Annette Nellen, Sales Tax as a Penalty? “A proposed California initiative may surprise you.  It calls for a 1000% sales tax on ‘political advertisements.'”

Kay Bell, IRS should focus tax audit efforts on richer taxpayers. Willie Sutton might agree. 

Paul Neiffer, FAFSA Reporting Changes. “The Department of Education has issued new rules that make this process be much less of a hassle; however, you have to wait until 2017 to take advantage of it.  Beginning in that year, your required FAFSA income tax return will be a whole year in arrears.” About time.

Jason Dinesen, From the Archives: Home Offices, Principal Place of Business, and Mileage Deductions

Carl Smith, New, Additional Proposed Innocent Spouse Regulations Issued (Part 1), (Part 2) (Procedurally Taxing)

TaxGrrrl, Don’t Try This At Home: Avoid These 10 Money Missteps That Landed Reality TV Stars In Trouble.

 

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TaxProf, The IRS Scandal, Day 930. Today’s link on the “investigation” of the scandal by the Justice Department.

 

Scott Hodge, The Simple Solution to the Pfizer Deal: Cut the Rate and Move to a Territorial Tax System (Tax Policy Blog). So, you could actually do something like this that makes sense, or you could listen to….

Richard Phillips, Congress Must Act Now to Stop Pfizer and Other Companies from Inverting (Tax Justice Blog). The “continue the beatings until morale improves” approach.

News from the Profession. A Surprising Number of Accountants Think Accountants Are Incredibly Corrupt (Caleb Newquist, Going Concern).

 

Programming Note: The Tax Update will be taking the rest of the week off to celebrate Thanksgiving. I am thankful for the many fine tax bloggers I get to read when putting the Tax Roundups together, and I am especially thankful for those of you who stop by to read the Tax Update. Enjoy your Thanksgiving, and maybe start with Jim Maule’s holiday musings: Thanks Again! “For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things.”

 

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Tax Roundup, 11/23/15: Maquoketa! And, bought and paid-for at year-end insufficient for golf-cart credit.

Monday, November 23rd, 2015 by Joe Kristan
A Maquoketa Cave. Picture by Iowa Department of Natural Resources.

A Maquoketa Cave. Picture by Iowa Department of Natural Resources.

Maquoketa! The Day 1 team of the  ISU Center for Agricultural Law and Taxation Farm and Urban Tax Schools is in the northeast Iowa town of Maquoketa, known for its cave system and the 61 Drive-in theater, “one of the few remaining outdoor theaters in the United States.” We then get two weeks off before the penultimate session in Denison, on the other side of the state, and our December 14 final session in Ames. Register here for one of the final schools or for the webcast of the Ames session.

 

“Ordered” doesn’t cut it for year-end asset purchases. Among the many silly tax rules enacted in the panicked response to the 2008 financial crisis was the tax credit for “low-speed electric vehicles,” more conventionally known as golf carts. This led to panic buying of golf carts to claim the lucrative tax spiff. Last week the Tax Court disappointed one buyer who tried to get a tax credit purchase in under the wire. It provides a lesson for all taxpayers looking at year-end purchases to get a Section 179 deduction or bonus depreciation.

The credit was available only for carts “placed in service” in 2009. Judge Paris sets the stage (all emphasis mine, footnotes omitted):

Respondent determined a deficiency of $6,253 in petitioners’ Federal income tax for 2009. The issue before the Court is whether petitioners are eligible for a New Qualified Plug-in Electric Drive Motor Vehicle tax credit (PEVC) of $6,253 pursuant to section 30D for 2009. The notice of deficiency did not determine a penalty.

The electric vehicle at issue, a Spark NEV-48 EX, was manufactured by Zone Electric Car, LLC (Zone Electric). Pursuant to Notice 2009-54, 2009-26 I.R.B. 1124 (June 29, 2009), Zone Electric submitted a request on October 1, 2009, to the Internal Revenue Service (IRS) to certify that its electric vehicles were qualified plug-in electric vehicles for purposes of section 30D, which as of the date of the notice allowed a tax credit for qualified plug-in electric vehicles placed in service from January 1 to December 31, 2009. On October 7, 2009, the IRS issued a letter to Zone Electric stating that the Spark NEV-48 EX model “meets the requirements of the Qualified Plug-in Electric Vehicle Credit as a Qualified Plug-in Vehicle.

$6,253 off if delivery taken by December 31, 2009!

$6,253 off if delivery taken by December 31, 2009!

So the Spark NEV-48 EX qualified — if it beat the deadline. Back to Judge Paris:

The electric vehicle was delivered to petitioners on June 8, 2010, even though petitioners placed an order for a low-speed electric vehicle reflecting their choice of color, radio, and size from Drive Electric, LLC (Drive Electric), through its Web site FreeElectricCar.com on December 21, 2009.

On December 21, 2009, petitioners remitted full payment of $7,786.53 for the vehicle with a credit card and promptly commenced insurance on the vehicle on December 28, 2009.

For charitable contributions and cash-basis business expenses, this would normally be all that is necessary, as a credit card transaction is as good as cash to IRS. But not this time:

Petitioners argue they remitted payment and acquired title to a qualified electric vehicle on December 21, 2009. Petitioners assert that legal title passed to them on the date of purchase and therefore they are entitled to a PEVC for 2009 because the vehicle was acquired before December 31, 2009. However, the statute effective on the date of purchase also required a qualified motor vehicle to be placed in service on or before December 31, 2009. 

Petitioners entered into the transaction for purchase of the vehicle just before the close of the year. As previously discussed, they received a bill of sale, which contained a VIN, and a certificate of origin shortly after they remitted full payment. However, a bill of sale containing a description of the vehicle and a VIN is not sufficient to show the vehicle was ready and available for full operation for its intended use. Petitioners have not offered evidence to show the vehicle was available for their use, much less fully manufactured. In fact, the vehicle was not delivered until June 8, 2010, making it impossible for the vehicle to be available for use until that date. Even if the Court were to assume the vehicle was fully manufactured and operational while awaiting shipment to petitioners, Brown and Noell tell us that the vehicle could not be considered placed in service unless and until the vehicle was readily available to serve its assigned function for petitioners’ personal use on a regular basis. The Court finds that the low-speed electric vehicle was not available for its intended use on a regular basis until it was delivered on June 8, 2010. Consequently, petitioners did not place the vehicle in service in 2009 and are not eligible for a PEVC for that year.

So the taxpayer’s golf cart just went up $6,000 or so in price.

The lesson for year-end tax planning is that the same “placed in service” rule applies to year-end fixed asset purchases by taxpayers wanting Section 179 deductions or bonus depreciation. If your business races to buy a big SUV or a new tractor by year-end, it needs to be in your garage or barn by December 31. A new machine has to be on the shop floor, ready to go.  “Bought and paid-for” isn’t enough.

Cite: Podraza, T.C. Summ. Op. 2015-67.

 

 

Peter Reilly, Tax Court Denies Exempt Status To Group Using Trading Card Games To Promote Sobriety. Peter has an in-depth exploration of last week’s Gamehearts Tax Court case. It explains that the organization denied tax exemption in the case was involved in non-casino games, including “Magic: The Gathering and similar games such as Pokemon and World of Warcraft Trading Card Game.” I had assumed that it was more of a gambling thing. I have edited my original post on the case accordingly.

Peter does not agree with the decision:

This is another example to me of the IRS EO group being out of touch with the modern world.  Magic the Gathering has been a thing since 1993.  You will also see IRS giving a hard time to not for profits dedicated to open source software.  It also turned down a sorority that wanted to operate on-line and a group planning to provide free wi-fi.

The whole exempt organization function is in disarray.

 

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Kay Bell, Is Alaska getting closer to enacting a state income tax? The oil bust has clobbered Alaska revenues.

Jason Dinesen, From the Archives: Issuing 1099s to an Incorporated Veterinarian

Jim Maule, Old Tax Returns Have Value. I keep my tax returns forever; Prof. Maule explains why being a tax hoarder can be useful.

Robert Wood, Your Passport Could Be Cancelled If You Owe IRS. Because Congress apparently feels we need one more poorly-considered bill that will hugely inconvenience honest taxpayers and will be impossible to undo.

Russ Fox, The Turf Monster Striketh. With a caution against sending tax ID numbers via e-mail.

TaxGrrrl, Jay Z Loses On Alvarez-Cotto Boxing Bet As Charity Gets Big Win.

Robert D. Flach, YEAR-END TAX UPDATE WORKSHOPS. With some sound year-end planning reminders.

 

Me, How your calendar might help you beat the IRS. My newest post at IowaBiz.com, the Des Moines Business Record’s business professional’s blog, covers the importance of keeping track of your time to document “material participation” to take tax losses and to avoid the 3.8% Obamacare Net Investment Income Tax.

 

TaxProf, The IRS Scandal, Day 926Day 927Day 928, Day 926 discusses the ties between Lois Lerner and the architect of Wisconsin’s Kafkaeske partisan “John Doe” witchhunt.

 

Steven Rosenthal, Treasury Pulls its Punches on Earnings Stripping (TaxVox). “Treasury made only small technical changes to the definition of an inversion.  News reports suggested something much larger—namely limits on earnings stripping, which would have made inversions (and other combinations of U.S. firms with foreign corporations) much less profitable.”

 

Career Corner. Let’s Enjoy Some Intern Reviews of Various Accounting Firms (Caleb Newquist, Going Concern).

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Tax Roundup, 11/18/15: A 3% Iowa income tax rate? And: Californians, taxes could be worse!

Wednesday, November 18th, 2015 by Joe Kristan

engageiowalogoNew policy group proposes bold Iowa tax reform. In the wake of another Tax Foundation report showing that Iowa’s business tax policy stinks, there is a new proposal to do something about it. Tax Analysts reports ($link):

Iowa’s nine-bracket personal income tax would be flattened to a single rate of about 3 percent under a proposal from a recently formed Iowa policy group.

Engage Iowa, founded in August by Cedar Rapids Mayor Ron Corbett, is calling for changes to the state’s income tax code that it says would improve the state’s business climate and reduce the outflow of high-income taxpayers to states such as Texas and South Dakota.

Like The Tax Update’s Quick and Dirty Iowa Tax Reform Planthe Engage Iowa paper does not advocate a tax cut. It attempts to come up with a rate and tax structure that raises the same amount of tax as the current Iowa tax system. The paper presents several proposals, including one that uses a 1 percentage point increase in the state sales tax rate to reduce the income tax rate.

The plan has a lot going for it. Its one glaring weakness is its omission of any corporation tax reform. Iowa has the highest corporation tax rate in the country, but one so full of loopholes and corporate welfare tax credits that it generates a relatively paltry amount of revenue for the state. Iowa’s 49th place corporation tax rating in the Tax Foundation State Business Tax Climate Index is a big reason for Iowa’s perennially poor ranking.

Naturally the high-tax, high-complexity lobby is unimpressed by the plan. From TheGazette.com:

Peter Fisher, research director for the left-leaning Iowa Policy Project in Iowa City, on Monday said he applauded Engage Iowa for pointing out that Iowa’s current income tax system is less progressive than it might seem after deductions and credits are factored in. He said the Engage Iowa policy suggestions also might help eliminate “the perception problem” that Iowa has as a higher top income tax rate than it does in practice.

However, Fisher said the Engage Iowa flat tax seems like others of its kind: It lowers taxes for the wealthier and makes up for it with taxes on the lower end of the income earners.

The tax law is a poor vehicle for income redistribution in general, but the state income tax is an awful vehicle in particular, given the ability of high income earners to leave the state. The focus on “the rich” also skates by the reality of who “the rich” are: primarily employers who run their businesses through pass-through entities and pay their business taxes on their 1040s. Bashing “the rich” bashes employment, especially with zero-tax South Dakota right next door.

 

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Russ Fox, Yes, Two States Rank Lower than California. “It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey.”

Robert Wood, Man Gets $21.5M Verdict For Door Injury, But IRS Is Biggest Winner. “Damages for physical injuries are tax free, but punitive damages are taxed. For this reason and others, your taxes might be lower if you settle a lawsuit rather than going to verdict.”

 

Mitch Maahs, Report Highlights IRS Shortcomings Preventing Business ID Theft (Davis Brown Tax Law Blog). “In most cases, an ID thief files a business tax return using an Employer Identification Number (EIN) of an active or inactive business without permission to obtain a fraudulent refund, often claiming extensive refundable tax credits.”

Kay Bell, Tornadoes, other wild November weather: Be ready! “Be ready, on the physical and financial and especially tax fronts, for dangerous weather, this week and any time of the year.”

Janet Novack, After Budget Deal’s Surprise Cuts, Can Boomers Really Count On Social Security? It’s always dangerous to count on a fiscally insane scheme for your retirement security.

Jim Maule, The Fallacy of “Job Creating” Tax Breaks, Yet Again. “Job relocation is not job creation.”

 

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Scott Greenberg, Section 179 Really Does Benefit Small Businesses (Tax Policy Blog). “Ideally, all business investments would be given the same treatment as Section 179 and businesses would be able to deduct all investment costs in the year that they occur. But until the U.S. tax code adopts this ideal, Section 179 remains an important provision that allows some businesses to deduct investment costs as they occur.”

TaxProf, The IRS Scandal, Day 923. And all politicians are honest in Chicago. “President Barack Obama’s public comments appearing to prejudge the outcome of Justice Department investigations don’t affect the decisions in those inquiries, Attorney General Loretta Lynch said Tuesday.”

Renu Zaretsky, Budgeting, Wooing, and Taxing. Today’s TaxVox headline roundup covers highway bill politics and Michigan’s entirely unoriginal idea of bribing companies to lure data centers.

Danshera Cords, Unintentionally Undermining Voluntary Compliance: Balancing Accountability and Budget (Procedurally Taxing). Another call to increase the IRS budget. If you want the IRS budget increased, you want Commissioner Koskinen to resign, because it’s not happening otherwise.

 

Career Corner. The Toll of Travel: An Interview With a Former Big 4 Advisory Road Warrior  (Leona May, Going Concern)

 

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Tax Roundup, 11/17/15: We’re #40! The new State Business Tax Climate Index comes out today.

Tuesday, November 17th, 2015 by Joe Kristan
If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

Iowa rises out of bottom ten in State Business Tax Climate index. The Tax Foundation released its 2016 State Business Tax Climate Index today, and Iowa is no longer one of the ten-worst states in the index. Barely.

Maryland and Iowa changed places from last year in the index, making Iowa the 40th state in the annual index of business tax climates. Iowa’s overall score improved slightly, while Maryland got a little worse, especially in its unemployment insurance ranking. Iowa failed to improve its ranking in any of the five components making up the index. Its ranking fell in the sales tax, unemployment tax, and property tax categories, and it maintained its 32nd place individual tax and 49th place in corporation tax. Still, Maryland’s seven-place plunge in its unemployment tax rankings enabled it to crawl underneath Iowa in the index.

The result isn’t surprising, as Iowa’s tax law is nearly unchanged from last year. The split control of the Iowa legislature has blocked any significant tax legislation. I do suspect that the sales tax component will improve in the 2017 index based on the change in the definition of sales tax-exempt manufacturing supplies under an administrative ruling set to take effect July 1 of next year.

Iowa, in short, continues to have a bad system, one changed very little in structure since the 1970s, with high rates and a rat’s nest of feel-good deductions and special interest subsidies producing a hostile system for small businesses lacking expensive advisors and good friends at the statehouse. It’s a system crying for reform. The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would be a huge improvement.

Map by the Tax Foundation

Map by the Tax Foundation

 

Fresh Buzz! Tuesday again brings a fresh Buzz roundup from Robert D. Flach, covering ground from accounting nostalgia to changes in this year’s W-2.

Robert Wood, Clinton Foundation Amends 4 Years Taxes, Admits Speech Fees Weren’t Donations. Ah, but better keep an eye on those sneaky Tea Partiers. The laundering of speech fees through the foundation, instead of through Clinton 1040s, seems inherently sketchy.

Jay A. Soled, Kathleen DeLaney ThomasThe Nonreporting of Modern Fringe Benefits (Procedurally Taxing). “But there is a strange phenomenon transpiring with respect to this new breed of fringe benefits. While they generally do not fall within the delineated scope of Code section 132’s enumerated exemptions, they are nevertheless not being reported as income by employers (nor by the employees, who follow suit).”

Jason Dinesen, Glossary: Review (Of Financial Statements). “In a review, the CPA examines a company’s financials to verify that they are free of deficiencies, but the firm does not review internal controls or fraud risks as in an audit.”

Jack Townsend, Is Jury Unanimity Required as to at Least One Obstructive Act for Tax Obstruction?

Paul Neiffer, Trends in Write-Offs of Farm Assets:

The Tax Foundation periodically comes out with good information on tax statistics.  They recently issued a report on corporate investment in equipment for tax year 2012.  My perception has been that most of the equipment purchased during 2012 was new equipment.  Based on this report, my perception may be in error (or not).

I think Paul is correct in believing that Section 179 is a bigger deal for most farmers than bonus depreciation.

Kay Bell, Cell phone service taxes average 18%, an all-time high

 


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Peter Reilly, Bernie Sanders Less Of A Socialist Than Dwight Eisenhower. Peter bases this (absurd) headline on the Sanders statement that he wouldn’t raise income tax rates to the 90% amount seen in the Eisenhower administration. I suspect Peter was being deliberately provocative or sarcastic, as I think he knows his history too well to actually believe that.

UPDATE: Peter corrects my speculation in the comments: “On the not as Socialist as Dwight Eisenhower thing, I was quoting Sanders (or paraphrasing) as I was live blogging the debates.” Peter has a much stronger stomach than I do to actually watch these things.

 

Jim Maule, Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN.  While the good professor focuses on the size of the tax code, I think that’s just a reflection of a much bigger problem — one that would be corrected by my proposal that all politicians, and all candidates, be required to do their returns by hand in a live webcast. I would also require a comment bar so we could all help the politicians — “hey, do you really think your used briefs are worth $3 each?”

 

Annette Nellen, “Abolish the IRS” Distracts from Needed Reforms.

TaxProf, The IRS Scandal, Day 922. The Attorney General will get to explain why she concludes there were no crimes committed.

Renu Zaretsky, Maybe peace, definitely another patch, and many refunds… Today’s TaxVox headline roundup ranges from prospects for tax legislation this year to refunds of Cleveland’s “Jock Tax.”

 

News from the Profession. Some Audit Committee Members Just Ignoring Auditors Now (Caleb Newquist, Going Concern). Well, they’re used to it.

 

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