Posts Tagged ‘megan mcardle’

Tax Roundup, 2/12/16: I want my K-1. I want it now, Daddy!

Friday, February 12th, 2016 by Joe Kristan

Accounting Today visitors, click here for the post on password hygiene.

20160212-1No, your K-1 isn’t late. As even late 1099s are arriving, more and more taxpayers are ready to file their 2015 1040s. So why is that stupid partnership or S corporation taking so long to get me that 1099? Isn’t there a penalty for not getting that to me by the end of January?

No, there isn’t. First, it’s not a 1099, it’s a K-1. The earliest any K-1s are due is March 15, and that’s only for “electing large partnerships”  — typically publicly-traded ones (and if you own a bunch of these, expect a dirty look from your tax preparer, as they are time-consuming and therefore bill-increasing).

K-1s for S corporations are due March 15 for calendar-year corporations. Unlike with 1099s, though, the S corporation can get an automatic extension of the filing deadline until September 15. This is often needed because preparing a business return is a more complicated project than computing someone’s wages or interest income. It can be more complex still if the S corporation itself has to wait on…

Partnership K-1s. For 2015, these have an April 15 deadline that can be extended to September 15 (except for the publicly-traded partnerships due March 15). Preparing partnership returns can be devilishly complex, especially when partners come and go. The deadline becomes March 15 next tax season, but that just means more extensions will be filed.

Trust K-1s are also due April 15. Most bank trust departments can get their trust returns and K-1s filed in January and February, as they have all of the information at hand. If the trust has business or rental property, or is waiting on K-1s of its own, though, expect delays.

Remember, almost all pass-throughs are calendar year taxpayers. That means everybody is trying to get their returns done at once. We preparers do our best, but the pipe is only so wide.

Tax is hard. If you think preparing your 1040 is painful, it’s minor compared to doing a return for an operating business.  Look at the IRS publications for partnerships or S corporations if you don’t believe me. If you have to wait on your K-1, it’s not because the partnership, S corporation or tax preparer is indolent or incompetent. It just takes time to get it right — and when you have a bunch of 1040s that will be thrown off if you goof, you really want to get it right.

This is another in our irregular series of 2016 filing season tips

 

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Taxable Talk, Phishers Target Tax Professionals:

Tax professionals, be wary. There are phishing emails supposedly from the IRS targeting tax professionals. Now, we have supposed new clients emailing tax professionals. My mantra, if it sounds too good to be true it probably is, holds for tax professionals, too. Do not click on links that you do not know for certain are valid.

Read the whole thing for more good advice on protecting yourself.

 

William Perez, 3 States are Delaying Tax Refunds

Kay Bell, Full, permanent Internet access tax ban approved

Stuart BassinDistrict Court Certifies Class Action in Tea Party Challenge to IRS (Procedurally Taxing).

Robert Wood, IRS And Justice Department Push Tax Prosecutions

TaxGrrrl, Ask The Taxgirl: Solar Panels & Tax Credits

Kristine Tidgren, Iowa Court Denies Private Condemnation of Right of Way (AgDocket). “Iowa Code § 6A.4(2) confers the right to take private property for public use ‘upon the owner or lessee of lands, which have no public or private way to the lands, for the purpose of providing a public way which will connect with an existing public road.'”

 

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Howard Gleckman, Rubio’s Ambitious Consumption Tax Would Reduce Revenue by $6.8 Trillion, Give Most Benefits to the Highest-Income Households (TaxVox):

Senator Marco Rubio would convert the income tax into a progressive consumption tax, an ambitious idea that would eliminate the income tax’s penalty on saving. However, a new Tax Policy Center analysis finds that Rubio’s version would slash federal tax revenues by $6.8 trillion over the next decade with most of the benefits going to high-income households.

The “mostly benefits high-income households” is the most tiresome and useless cliché in tax policy. Considering that the high earners pay almost all the income taxes, any improvement to the (awful) system will inevitably benefit them disproportionately. But the possible revenue loss is a serious issue, if Rubio remains a serious candidate.

Alan Cole, The Most Important Chart from Tax Policy Center’s Analysis of the Rubio Plan (Tax Policy Blog). “Our latest estimates, calibrated for Washington’s traditional ten-year budget window, showed the plan reducing overall tax revenues by $6.1 trillion on a static basis, while TPC shows a reduction in revenue of $6.8 trillion.”

If only there was a candidate with a plan that would improve the tax system and not increase the deficit

 

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Megan McArdle, Obama’s Oil Tax Is Running on Empty. “The administration has made some gestures toward mitigating this opposition, notably by claiming that the tax will be paid by oil companies. But this is obvious nonsense.”

Carl Davis, More Details Emerge on President’s Proposed Oil Tax (Tax Justice Blog)

TaxProf, The IRS Scandal, Day 1009

Alex Durante, High Corporate Taxes May Increase Debt, Study Finds (Tax Policy Blog). “A new paper published in the Journal of Financial Economics finds that countries with high tax rates on corporate income also have higher corporate leverage ratios. This paper improves upon the methodologies of prior research that had struggled to confirm a link between tax rates and corporate structure.”

 

News from the… Profession? Area Police Department Offers Help to Drug Dealers Struggling With Tax Season Preparations (Caleb Newquist, Going Concern)

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Tax Roundup, 2/5/16: The IRS isn’t a bank, and a 1099 isn’t what makes income taxable. And: oil companies, money trees.

Friday, February 5th, 2016 by Joe Kristan

20151217-1Nice Try. The tax law discourages taxpayers from tapping retirement savings too early with a 10% early withdrawal tax. The tax law also allows an above-the-line deduction for penalties imposed by banks for closing out a CD or savings account before maturity.

They aren’t the same thing.

A Mr. Martin learned that lesson this week in Tax Court. He was 54 years old when he pulled out $55,976.29 from his IRA. He reported the 10% penalty tax, but then he also deducted it on line 30 of his 1040 as a “penalty on early withdrawal of savings.”

I can see the logic, as it does look like, well, a penalty on an early withdrawal of savings. But that’s not how the Tax Court sees it (my emphasis):

Martin argues that the additional tax imposed by section 72(t) is deductible under section 62(a)(9). We disagree. Section 62(a)(9) provides a deduction for an amount “forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.” The section 72(t) additional tax is payable to the federal government, not to a “bank” or similar institution listed in section 62(a)(9). Therefore, it is not deductible under section 62(a)(9). Further, the additional tax imposed by section 72(t) is a federal-income tax. Section 275(a)(1) disallows any deductions for “Federal income taxes” (A deduction for certain other taxes, including State income taxes and some other federal taxes, is allowed by section 164(a).).

There was one other problem with the return. He won $1,000 at a casino, an amount arguably below the threshold for which casinos most report gambling winnings on a W2-G. They reported it anyway. Again, the Tax Court:

The casino reported on an information return its $1,000 payment to Martin. Martin argues that, because he earned entries into the lottery by playing slot machines, his gambling winnings should be subject to the $1,200 reporting threshold. Thus, Martin argues, the casino should not have reported the gambling  winnings of $1,000 because the payment fell below the $1,200 reporting-requirement threshold for gambling winnings from slot machines.

Martin assumes that gambling winnings that are not reportable on information returns are not includible in gross income. At trial he said that the IRS is “trying to separate the taxation from the reporting when it is undeniably one and the same”. Martin does not see, or refuses to see, the distinction between information-reporting requirements and the imposition of income tax. Whether the casino was required to report Martin’s winnings is irrelevant to the question of whether his winnings are includible in his gross income. The Internal Revenue Code does not exclude a payment from income when the payment is not large enough to require the payor to report the payment on an information return.

A lot of people think that when something doesn’t show up on an information return, it’s tax-free. It just doesn’t work that way.

Cite: Martin, T.C. Memo. 2016-15

 

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Obama seeks oil tax, destruction of self-driving car industryCNBC reports:

President Barack Obama will propose a $10-per-barrel charge on oil to fund clean transportation projects as part of his final budget request next week, the White House said Thursday.

Oil companies would pay the fee, which would be gradually introduced over five years. The government would use the revenue to help fund high-speed railways, autonomous cars and other travel systems, aiming to reduce emissions from the nation’s transportation system.

“Oil companies would pay the fee.” Such a kidder, that President. Apparently the oil companies will pay it by planting more carbon-absorbing money trees out behind their refineries.

It’s a credit to misguided persistence that the President is still pursuing high-speed passenger rail, an idea that California is busy proving once again to be ridiculously expensive and impractical. And somehow I’d feel much safer in an autonomous car from Google or Apple than one from the the same government that brings us the IRS.

 

Scott Hodge, New IRS Data: Wealthy Paid 55 Percent of Income Taxes in 2014 (Tax Policy Blog).

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“So while many politicians may argue that the wealthy don’t pay their fair share of income taxes, the data simply does not support that opinion.”

 

Russ Fox, Maryland Suspends Processing Tax Returns from 23 Liberty Tax Service Locations:

For consumers, the advice that Maryland noted in their press release is accurate: “Taxpayers should carefully review their returns for these issues and should be suspicious if a preparer: deducts fees from the taxpayer’s refund to be deposited into the tax preparer’s account; does not sign the tax return; or fails to include the Preparer Taxpayer Identification number “PTIN” on the return.” I’ll add, if you don’t own a business and see business income on your return, there’s a problem.

Indeed.

Kay Bell, Lesson from IRS hardware failure: Be prepared for the unexpected during tax filing season. The hardware went back on line yesterday afternoon. 

TaxGrrrl, Update: IRS Website Back Online, Tax Refunds Unaffected

Peter ReillyIRS And The Tea Party – Scandal Enters A New Millennium. Peter observes The TaxProf’s Day 1000 Tea Party Scandal entry.

Keith Fogg, Discharging Late Filed Returns – A Novel but Unsuccessful Approach. “The case shows the creativity that can come into play in the face of very long odds.”

Robert Wood, Bank Julius Baer Hit With $547M Criminal Tax Evasion Penalty, Two Bankers Plead Guilty

 

Me, Tax credits for a few vs. business deductions for everyone. I take my battle against cronyism and for conforming Iowa tax law to 2015 federal changes to IowaBiz.com, the Des Moines Business Record Business Professional’s Blog.

 

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TaxProf, The IRS Scandal, Day 1,002. Another supposedly-erased hard drive sought by investigators miraculously reappears.

Megan McArdle, Obamacare’s Cadillac Tax Will Not Survive. The way pieces of the machine keep falling off, you might wonder if it wasn’t very well designed.

Renu Zaretsky, A Budget, Capital, Growth, and TransparencyToday’s TaxVox news roundup covers the Obama oil fee, last night’s Sanders-Clinton debate, and lots more.

News from the Profession. Lying About Your Financial Statements Being Audited Still Frowned Upon (Caleb Newquist, Going Concern).

 

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Tax Roundup, 2/2/2016: I caucused, and lived. And: actually useful things!

Tuesday, February 2nd, 2016 by Joe Kristan

20160131-1Caucuses yesterday, thundersnow today. I caucused last night at the elementary school behind my house. As usual, my candidate did poorly (fourth in my precinct, fifth in the state).

Because they only happen every four years, these things are always a bit chaotic, but the guy running the show did a pretty good job. Once we selected him as a permanent chairman, things went reasonably efficiently. The chairman called on the audience to allow a speaker for each candidate to talk for three minutes. It went alphabetically (apparently “Jeb!” is in the alphabet before “Ben.”). Nobody rose to speak for Fiorina, Gilmore, Kasich or Santorum, telegraphing their poor performances. The Wall Street Journal reports that Gilmore got fewer votes in the whole state than six candidates received in my precinct.

The most entertaining moment was when the last one, a 25-year West Des Moines city councilman speaking for Trump, went over time. He tried to “borrow” time from the campaigns who had no speakers — and was booed into silence.

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Talking for Donald too long.

They then passed out pre-printed ballots — an innovation since the last presidential caucus. The counting went reasonably quickly, with the speakers for each candidate and a TV camera looking over the shoulders of the counters.

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You know by now how Iowa came out, but in case you are curious, here are the results in my precinct: Jeb! 18, Carson 17, Cruz 35, Christie 8, Huckabee 4, Fiorina 1, Kasich 1, Paul 20, Rubio 108, Santorum 4, Trump 56. The suburbs like Rubio.

Now we have a thundersnowstorm going, with 6-10 inches forecast. I’m afraid that if they don’t get out soon, our Caucus media guests may get to enjoy another lovely Des Moines day.

PS. I forgot to add my insta-analysis. Winner: Steve King, who endorsed Cruz, likely pushing him over the top. Losers: Terry Branstad, who came out against Cruz, and only Cruz, trying to turn the vote into an ethanol referendum. Oh, and ethanol.

 

TaxGrrrl, Understanding Your Tax Forms 2016: 1099-MISC, Miscellaneous Income. “A form 1099, Miscellaneous Income, is a “catch all” form. It’s used to report income that can’t be neatly categorized anywhere else.”

Robert Wood, Hate 1099 Forms? IRS Loves Them, Here’s Why

William Perez, Tax Refunds by Direct Deposit: How to Do It and Problems to Prevent

Stephen Olsen, Procedure Grab Bag (Procedurally Taxing)

Peter Reilly, You Do Not Have To File A Joint Return And There Are Some Reasons Not To

Dave Nelson, Cyber insurance advice (IowaBiz.com). “You should purchase cyber insurance this year.”

Kay Bell, February is filled with hearts, flowers, frogs & tax moves

 

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Megan McArdle, Tax Cuts Can’t Motivate the Republican Base Anymore

TaxProf, The IRS Scandal, Day 999. Sadly, Herman Cain is not mentioned.

Alex Durante, Bonus Depreciation Boosts Investment, New Research Confirms (Tax Policy Blog). But Iowa is having none of it.

Richard Auxier, Why are states letting the NFL rule their sales tax out of bounds? (TaxVox

Matt Gardner, What Free Roaming Chickens and Accounting Tricks Have in Common. They’re tough and chewy?

 

Career CornerShould More Accounting Firms Implement ‘Work Anywhere’ Policies? (Caleb Newquist, Going Concern). Some days I have trouble working anywhere.

 

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Tax Roundup, 1/7/16: Taxpayer Advocate report describes IRS “pay to play” plans. And: IRS nixes plan to make charities collect tax ID numbers.

Thursday, January 7th, 2016 by Joe Kristan

20150107-2Have you heard about the IRS “Future State Plan?” Or “CONOPS?” Me neither.

The latest annual Taxpayer Advocate Report to Congress is the first I’ve heard about this mostly-secret IRS initiative. The report explains (my emphasis):

During the past year-and-a-half, the IRS has devoted significant resources to creating a “future state” plan that details how the agency will operate in five years. The plan is explained and developed in a document known as a Concept of Operations (CONOPS). There are many positive components of the plan, including the goal of creating online taxpayer accounts through which taxpayers will be able to obtain information and interact with the IRS.

However, the CONOPS also raise significant questions and concerns. Implicit in the plan — and explicit in internal discussion — is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers. The IRS is hoping that taxpayer interactions with the IRS through online accounts will address a high percentage of taxpayer needs. It is also developing plans to enable third parties like tax return preparers and tax software companies to do more to assist taxpayers for whom online accounts are insufficient — an approach that will increase compliance costs for millions of taxpayers.

Nina Olson, Taxpayer Advocate

Nina Olson, Taxpayer Advocate

The IRS, as usual, is cooking this all up in secret, with only well-connected insiders in on the plan. Tax Analysts describes the report ($link):

A major concern is the aura of secrecy around the CONOPS documents. Despite the fact that the IRS is conducting internal discussions about its “future state” plans, Olson’s report says the Service has repeatedly declared CONOPS data elements and documents “official use only” and not for public dissemination. “Never before has the IRS made this assertion in so many instances,” the TAS report says. One area where the IRS has shared its CONOPS plans — the Large Business and International Division — caters to a group of taxpayers that can afford to “pay to play,” the TAS said, while future service plans remain under wraps for the roughly 150 million individual taxpayers and 54 million small business taxpayers.

If you look at it from the viewpoint of most taxpayers, this plan seems incomprehensible. But if you believe that the IRS is really trying to serve the interests of the national tax prep franchise outfits, national accounting firms, and the biggest law firms, it completely makes sense.  It actually fits in well with the IRS preparer regulation efforts to eliminate competition for the national tax prep firms — a regulation effort that the Taxpayer Advocate still regrettably and unwisely supports. Those who are drafting the new taxpayer service labyrinth can be expected get nice raises by going out into the tax industry to help their new employers navigate through it.

Related: Leslie Book, The National Taxpayer Releases Annual Report to Congress (Procedurally Taxing); Accounting Today, Taxpayer Advocate Concerned about IRS Plans for ‘Pay to Play’ Taxpayer Service,

 

Another IRS screw-up averted. I just received a Tax Analysts breaking news email saying:

The IRS has withdrawn proposed regulations that would implement the statutory exception to the contemporaneous written acknowledgement requirement for substantiating charitable contribution deductions of $250 or more.

These rules would have required donors to provide charities with their social security numbers — a horrible idea in the identity theft era. Expect the IRS to try to sneak them back in when they think people aren’t looking.

 

Nicole Kaeding, American Migration in 2015 (Tax Policy Blog).
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Four of the ten states with the most inbound migration have no personal income tax. Most of the states where the population is fleeing have very hign income taxes, including Illlinois, Connecticut, New York and New Jersey. To be fair, high-tax Vermont seems to be attracting people, probably from dysfunctional New York.

This won’t help inbound migration. Illinois Announces Plans To Delay Tax Refunds Through March (TaxGrrrl)

Kay Bell, Delayed state tax refunds in Illinois, Louisiana & Utah because of tougher tax identity theft procedures. And because Illinois is broke.

Robert Wood, Obama Executive Action? Tax Hikes Could Be Next. “President Obama has stretched executive authority with immigration and gun law changes. And he is “very interested” in executive action on taxes too.”

Jack Townsend, Government Asserts Wylys’ Fraud in Bankruptcy Court. It’s a multibillion dollar tax case involving offshore trusts and a “blame the tax pro” defense. Mr. Townsend goes deep on the cases being made by both sides.

Paul Neiffer, “BIG” Might Not Be a Problem. Paul discusses the now-permanent five year “recognition period” for S corporation built-in gains.

William Perez lists Tax Deadlines for 2016

Robert D. Flach posts MY ANNUAL POST FOR JOURNALISTS AND BLOGGERS, reminding us all that he doesn’t care for conflating “tax professional” with “CPA.”

Peter Reilly, No Foreign Income Tax Exclusion For Army Civilian In Afghanistan

Tony Nitti, Love In The 21st Century: Bad Breakup Leads To Form 1099, Lawsuit. I’m not a trained relationship professional, but I think its safe to observe that issuing a 1099 to your ex-girlfriend burns all the bridges.

 

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Megan McArdle, Closing Tax ‘Loopholes’ Would Choke the Middle Class. “If you want to pay for any major new program by “closing the loopholes,” it is these loopholes that you will need to close, because the amount of revenue raised by, say, doing away with carried interest treatment of sweat equity partnership stakes works out to a rounding error on the federal budget.”

David Brunori, Taxing Guns Is Just Wrong (Tax Analysts Blog). “The fact is that a gun tax will have no effect on gun violence.”

TaxProf, The IRS Scandal, Day 973. A dispatch from the denialist front.

 

News from the Profession. #BusySeason Has Arrived (Caleb Newquist, Going Concern).

 

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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, 11/20/15: IRS issues workaround for absurdly complex “repair regs.” And: more good ACA news!

Friday, November 20th, 2015 by Joe Kristan

See update below. 

IMG_1218In a tacit admission that the new repair regs are nightmarishly complex, the IRS has issued a new “safe-harbor” procedure for allocating remodeling costs for restraurants and retail buildings between deductible repair costs and capitalized improvement costs.

Rev. Proc 2015-56 is available to most retail buildings and to restaurants.

(UPDATE: Brian Coddington notes correctly in the comments that this procedure only applies to taxpayers with an “applicable financial statement.” These are SEC statements, audited financial statements, or statements supplied to regulators other than the IRS. This seemingly gratuitous requirement greatly reduces the potential usefulness of this procedure. Why the IRS would restrict simplification to just those taxpayers least likely to need it is beyond me. I missed the applicable financial statement requirement in my initial take on the rule. My apologies, and my thanks to Brian for correcting me. Brian’s comment goes beyond this issue and is worth reading in full.)

It excludes vehicle dealers, gas stations, manufactured home dealers and “nonstore retailers.” It applies to business that own their own buildings and to landlords whose buildings hold qualifying businesses.

Under the procedure, 75% of “qualified remodel-refresh costs” are deductible, with the remaining 25% capitalized. The amount capitalized is depreciated over the life otherwise applied to the building. That generally means a 39-year life, but if the building is “qualified restaurant property” or “qualified retail improvement property,” the life can be as short as 15 years.

At first glance, it seems like a much more useful set of rules than the repair regs we were all fretting about this time last year. The biggest potential downside is that Rev. Proc. 2015-56 requires taxpayers to forego “partial disposition” treatment for buildings covered by the safe harbor. The taxpayer also has to elect “general asset account” depreciation for the building covered by the safe harbor.

The election will be made on Form 3115 as “automatic” accounting method change, as newly-designated automatic change number 222. It is available for years begining on or after January 1, 2014. As automatic changes have to normally be made with a timely-filed return, I don’t think we can change already-filed 2014 filings, but I will be digging into the lengthy procedure, and will amend this as needed as I get to understand it better.

 

The insurance markets aren’t doing what the President told them to do. 

First, Tyler Cowen, Further wounds for Obamacare: “To put it bluntly, I don’t think the mandate part of the bill is working.  These are mostly problems which decay and get worse, not problems which self-correct.”

Next, Megan McArdle, Obamacare Insurers Are Suffering. That Won’t End Well:

What UnitedHealth’s action suggests is that the company is not sure it can make money in this market at any price. Executives seem to be worried about our old enemy, the adverse selection death spiral, where prices go up and healthier customers drop out, which pushes insurers’ costs and customers’ prices up further, until all you’ve got is a handful of very sick people and a huge number of very expensive claims.

She adds:

This was part of a terrible, horrible, no good, very bad news cycle for Obamacare; as ProPublica journalist Charles Ornstein said on Twitter, “Not since 2013 have I seen such a disastrous stream of bad news headlines for Obamacare in one 24-hour stretch.” Stories included not just UnitedHealth’s dire warnings, but also updates in the ongoing saga of higher premiums, higher deductibles and smaller provider networks that have been coming out since open enrollment began.

I remember when we were told that the ACA would just get more popular over time as we all grew to love its benefits.

 

No, but they do make it easier to jack up tuition and administrative salaries. $23 Billion In Annual Federal Tax Credits For Higher Education Have No Effect On College Attendance (TaxProf). 

 

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Jana Luttenegger Weiler, Quiet Changes to Social Security Could Have Big Impact (Davis Brown Tax Law Blog):

The file and suspend option was and still is used by couples when one spouse, typically the higher earner, files for benefits but then suspends receiving his or her own benefits. This allows the other spouse to file and receive spousal benefits based on the higher earning spouse’s record for a certain number of years while the higher earning spouse delays benefits and earns delayed retirement credits. The result is larger benefits for the higher-earning spouse at age 70, but still allowing the lower-earning spouse to take benefits. This option has been eliminated — though there may still be time to file and suspend in the next 180 days and be grandfathered in for those who are currently eligible to do so.

Jana expects additional guidance soon.

 

Gretchen Tegeler, Many Iowa public employees are better off in retirement than working (IowaBiz.com). In some cases, we’re better off that they’re retired too.

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2015: #7: Decoding The Mortgage Interest Limitation, “Cohabitation, of course, is not limited to same-sex couples, and so the Ninth Circuit’s decision to allow each taxpayer who co-owns a house to claim an interest deduction on the full $1,100,000 of debt — provided they are not married filing separately — should be a welcome one for many.”

Russ Fox, Update on the Future of Daily Fantasy Sports:

I still think we will end up with a dichotomy within the states. States that are notoriously anti-gambling or have constitutional provisions against gambling (including much of the South: Texas, Florida, and Tennessee; Utah, and Hawaii) will ban DFS, either by Attorney General rulings or by court actions. Other states will regulate DFS. Some states will order the DFS companies to shut down until regulations are in place. A very small number of states will just ignore the issue, and leave DFS in an unregulated state.

A very small number of states realize that fantasy sports aren’t one of the major problems plaguing the republic.

TaxGrrrl, ‘Real Housewives’ Stars Joe & Teresa Giudice Hit With Federal Tax Lien

Robert Wood, More Banks Spill Tax Evasion Secrets To Avoid Criminal Charges, Account Holders Beware. Bank secrecy is pining for the fjords.

 

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Stephen J. Entin, Michael Schuyler, Some Tax Trip-Ups in the Democratic Debate (Tax Policy Blog):

Senator Sanders was asked how high he would raise the top tax rate. He answered, jokingly, that he would boost it a lot, although perhaps not to the 90% top tax rate in the Eisenhower Administration; that he, the Senator, was not as much of a socialist as Eisenhower!  In fact, the top tax rate was 91%…

One result of Ike’s policies was that he presided over three recessions in his eight years in office. Presumably, the Senator would not want to repeat that outcome.

I think Bernie would be willing to take that price to stick it to the man.

William Gale, David John, Two Important New Retirement Savings Initiatives from the Obama Administration (TaxVox) These guys think the MyRA program is important.

TaxProf, The IRS Scandal, Day 925

 

Peter Reilly, Princeton University Will Have To Prove It Deserves Property Tax Exemption. I’d make them apologize for Woodrow Wilson first.

 

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Tax Roundup, 10/1/15: Carried interests are good for you. State tax incentives aren’t.

Thursday, October 1st, 2015 by Joe Kristan

Public domain image via WikipediaSympathy for the Devil. The devil is “carried interest” taxation of partnerships interests. Megan McArdle discusses this devilry in Sure, Debate Carried-Interest Taxes. Or Something That Matters.:

It’s fundraising gold for Democrats, and a perennial talking point for liberal columnists: hedge funders pay taxes on some of their income at the lower rate for capital gains, rather than the higher rates assessed on “ordinary income” (read: money you earn by working).

If you only know about it from politicians, you get the idea that the only beneficiaries of the carried interest are hedge fund managers who light their cigars with $100 bills. If you see it in tax practice, though, it looks different.

The “carried interest” is really a profits interest, or a preferential allocation of profits, to an employee or manager of a partnership. A private equity manager might get no current equity in an investment, but a portion of the profits. The same rule lets a partnership give an interest in future earnings to the business’s managers or employees. It’s a partnership version of stock options (options are allowed for partnerships, but the differences between partnership and corporation taxation makes options less attractive in partnerships).

Carried interest opponents find this “abusive” when the business does well and gets sold. The result is a portion of the gain on the sale of the business goes to the managers and employees with carried interests, who may have not put cash into the business. But it’s the same total amount of gain taxed. It’s just that some of it gets allocated from the investors to the managers. The investors are presumably fine with it because they have gain to share — that’s why they cut the managers and employees into the deal in the first place.

But isn’t this abusive because it treats “compensation” as capital gain rather than ordinary? Not really — the investors are forgoing the same ordinary deduction, so the net effect is the same. There’s no conceptual reason why a profits interest — which by definition has no value when granted — can’t generate capital gain. (Of course, I think taxing capital gains in the first place is the real abuse). And in many cases the carry includes an allocation of ordinary business income in tax years prior to the sale, so for that part of the deal, there’s not even a conceptual abuse.

Ms. McArdle is puzzled about the attention the issue gets:

The carried interest issue is thus a convenient way for Democrats making stump speeches to claim that they’re really going to do something about inequality and cronyism, and maybe fund some important new spending on hard-working American families. With the entrance of Jeb Bush and Donald Trump into the arena, it is also a way for Republicans to seem tough on rich special interests while simultaneously proposing tax plans that will help affluent Americans hold on to a lot more of their income and wealth.

As with most Washington Issues, my actual level of concern about carried-interest taxation hovers somewhere between “neighbor’s bathroom grout drama” and “Menudo reunion tour.” Nonetheless, I’m beginning to wish that Congress would get rid of it without demanding anything in return, just to force politicians to talk about something that actually matters.

I’m less willing to just go along. Any “reform” of carried interest will complicate an already byzantine partnership tax law. It will inevitably create traps that will cause tax pain for people just trying to run their business and put beans on the table. At worst, it can become a potential nightmare like the Section 409A rules, which were enacted to punish long-defunct Enron, but which now menace any employees who have a deferred comp deal with their employer.

And of course any carried interest “reform” won’t shut up those who want to jack up taxes on “the rich” for more than a moment before they find another hate totem.

Related, but not agreeing: Peter Reilly, President Obama Could End Special Tax Treatment For Two Twenty Guys

 

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Don Boudreaux, a blogging economics professor, makes a good case against the Export-Import Bank that works just as well against state “economic development” subsidies and tax credits (my emphasis):

Second, subsidies doled out by governments weaken, not strengthen, their economies.  To see why, suppose that other governments conscript all 22-35 year olds within their borders and force these conscripts to work at subsistence wages for the industries located within those countries.  Further suppose that the results are beneficial for corporate shareholders in those countries: their companies export more and rake in higher profits than they would without such conscription.  Should Uncle Sam therefore follow suit? 

Economically, the only difference between export subsidies as they exist today in reality and the above hypothetical is that real-world export subsidies are less extreme than is conscription.  Yet no essential economic difference separates real-world subsidies from such hypothetical conscription: each is a government policy of forcibly seizing resources from some people in order to bloat the purses and wallets of other people.

Substitute “economic development tax credits” for “subsidies” and “other states” for “other countries,” and you have the case against the tax credits paid for by Iowa taxpayers to lure and subsidize their competitors.

 

David Brunori, A Word of Advice for Legislators of All Stripes (Tax Analysts Blog). You should read the whole thing, but I especially like this: “That politicians can impose economic policy through tax incentives is more akin to a Soviet five-year plan than to anything Adam Smith ever said.”

 

Robert D. Flach, IRS UPDATES PER DIEM RATES FOR BUSINESS TRAVEL

Russ Fox, TIGTA: “IRS Can’t Track International Correspondence.” IRS: “So What.” “It turns out that the IRS doesn’t know what happens to much of the mail the agency sends overseas.” And it doesn’t much care.

TaxGrrrl, Government Shutdown Avoided For Now: Funding Bill Only Temporary.

Kay Bell, Federal government funded for 10 more weeks

 

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TaxProf, The IRS Scandal, Day 875. Today’s installment features Robert Wood on newly-revealed bonuses to IRS employees:

As you read about bonuses, you might recall other reports saying that 61% of IRS employees caught willfully violating the tax law aren’t fired, but may get promoted.

And people wonder why anyone might not want this organization regulating tax preparers.

 

News from the Profession. Accounting Had a Toxic Culture Before It Was Cool (Leona May, Going Concern). “As ‘The Great Email Chain of 2013’ demonstrates, the public accounting workaholic culture has spawned a whole bunch of work-obsessed, white-collar monsters.”

Well, our little firm isn’t so monstrous. If you feel abused and would like to live in Central Iowa, drop me a line. We might be able to improve things for you.

 

 

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Tax Roundup, 9/29/15: Iowa, worst of the worst in corporate taxes. And: Trump, CPA extinction events, more!

Tuesday, September 29th, 2015 by Joe Kristan

20120906-1The U.S. Corporation tax is the worst in the OECD. So that makes Iowa… The Tax Foundation yesterday released its 2015 International Tax Competitiveness Index, an international counterpart to their State Business Tax Climate Index. The news isn’t good for the U.S. (my emphasis):

The United States provides a good example of an uncompetitive tax code. The last major change to the U.S. tax code occurred 29 years ago as part of the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent in an attempt to make U.S. corporations more competitive domestically and overseas. Since then, member countries of the Organisation for Economic Co-operation and Development (OECD) have followed suit, reducing the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today. In 1993, the U.S. government moved in the opposite direction, raising its top marginal corporate rate to 35 percent. The result: the United States now has the highest corporate income tax rate in the industrialized world.

Iowa’s 12% rate is the highest state corporate tax rate in the U.S. Iowa’s corporation tax ranks 49th out of 50 states in the 2015 State Business Tax Climate Index. That makes us extra-special.

The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Estonia gets the best scores:

Estonia currently has the most competitive tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land rather than taxing the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of the foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

Unfortunately, for some of the current presidential candidates, the worst features of the U.S. system are their favorite parts.

 

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Robert D. Flach’s Tuesday Buzz rounds up topics from Blue-to-Red migration, saving too much (hard to do), and the tax costs of stock sales.

Russ Fox, Cash & Carry Your Way to Tax Evasion:

Mr. Kobryn was determined to lower his tax burden. Instead of making sure all expenses were noted on his tax returns and perhaps contributing to a SEP IRA, he decided to not deposit all of the cash into his business bank account. He knew about the currency transaction reporting (CTR) rules, so he made his cash deposits just under $10,000 and deposited them into several branches of his local bank.

That’s a reliable way to attract IRS attention.

Robert Wood, Lance Armstrong Legal Settlement Makes Tax Problem On Steriods. He paid tax on his biking income, but deducting the lawsuit costs isn’t so straightforward.

Stephen Olsen, Summary Opinions for the week ending 8/28/15 (Procedurally Taxing). This roundup of recent tax procedure developments includes a baby picture, no extra charge.

 

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Megan McArdle, Obamacare’s Nonprofit Insurers Are Failing, Predictably. Iowa’s CoOportunity was only the first.

TaxProf, The IRS Scandal, Day 873

 

Howard Gleckman, Trump Proposes a Huge Tax Cut. YUUUGE!

Peter Reilly, Trump’s Plan Inverts Traditional Tax Planning Makes Carried Interest Moot. “If you think that Trump will win and enact this program normal tax planning is the order of the day.”

Kay Bell, Trump’s ‘amazing’ tax plan zeroes out taxes for some.

 

News from the Profession. In Order Save the Accounting Profession, It Has to Be Destroyed First (Caleb Newquist, Going Concern). “I’ll even take it a step further and say a mass extinction is exactly what the accounting profession needs.”

 

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Tax Roundup, 8/19/15: Even if it faxes, it’s still a printer in Iowa. And: the rich guy still isn’t buying.

Wednesday, August 19th, 2015 by Joe Kristan

20150813-1All for one, one for all. Iowa has a sales tax exclusion for “Computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise.” But what is a computer anymore, now that everything has a computer in it?

Last week Iowa released a ruling (Document 15300028) holding that Principal Financial Group’s all-in-one devices count as computers and are exempt from sales tax. From the ruling:

The protest was filed due to the Department’s partial denial of a refund claim which involved, among other issues, several multi-function devices which provide copy, print, scan, and fax services.  Your position is that because the multi-function devices are connected to your company’s computers and used in the manner described that these devices qualify as exempt computer peripheral equipment under Iowa’s statutes and administrative code…

Rule IAC 701—18.58(1), which was written, in part, to implement that code section, defines computers as the following:

…stored program processing equipment and all devices fastened to it by means of signal cables or any communication medium that serves the function of a signal cable. Nonexclusive examples of devices fastened by a signal cable or other communication medium are terminals, printers, display units, card readers, tape readers, document sorters, optical readers, and card or tape punchers.

The Department of Revenue had argued that copiers and fax machines don’t qualify, and these functions disqualified the multi-function devices. Principal brought its considerable in-house tax expertise to bear:

However, since the filing date of the protest, you have provided the auditor with the “click count” information for each individual multi-function device included in the refund claim.  This documentation verifies that each unit individually qualifies for exemption because the majority of the usage for each of the devices is for exempt printing and scanning. 

Attached to the protest as Exhibit B was a summary schedule in which you determined that 96.67% of the usage of the devices was for exempt purposes.  This percentage was utilized by Principal to determine the amount of tax under protest ($145,134.80).  However, because each device qualified for exemption, the purchase prices of these units are fully exempt from Iowa sales tax.  Therefore, the Department will refund 100% of the sales tax paid on the purchases of these devices. 

So after a struggle, the Department settles on the right legal answer. The policy answer is only half-right, though. All business inputs should be exempt from sales tax, regardless of whether they are hooked up to a computer.

I rarely fax or copy anything anymore, and I think that this is true nowadays for most businesses. It could say something about how they do things at the Iowa Department of Revenue that they assumed otherwise. In any case, this ruling tells us that fax and copy capability doesn’t make an otherwise exempt scanner/printer subject to sales tax for an Iowa business.

 

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Megan McArdle discusses presidential candidate Scott Walker’s Obamacare replacement (my emphasis):

In this debate, you can see the shape of where our politics may go over the next 20 years. Many Republicans would like a much smaller entitlement state; some Democrats would like a much bigger one, with Sweden-style universal coverage of virtually everything, crib to grave. Neither one is going to get what they want, because Americans are not prepared to give up their Social Security checks, or 60 percent of their paychecks either — and no, there is not enough money to fund these ambitions, or even our existing entitlements, by simply taxing “the rich.”

The discussion is becoming more urgent, as Obamacare as it stands is not working well; the big premium increases and the struggles of the “cooperatives” us that. It could be harder to fix the health insurance market than it was to wreck it in the first place.

 

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Robert D. Flach brings the Tuesday Buzz on Wednesday, covering the tax blog ground from property taxes to the Get Transcript data breach.

Tony Nitti, Tax Court Reminds Us That You Should Never Toy Around With Your Retirement Account:

Section 72 clearly mandates that annuity income is ordinary income, rather than capital gains. Thus, it is immaterial whether, as the taxpayer asserted, the annuity generated most of its income in the form of capital gains. Because once the annuity distributed the cash generated from those capital gains on to the taxpayer, the tax law required it to be treated as ordinary income.

Oops.

 

Jason Dinesen, Why is Self-Employment Tax Based on 92.35% of Self-Employment Income?

William Perez, These 6 states will waive penalties if you pay off your back taxes.

Paul Neiffer, Highway Use Tax Return Due August 31, 2015

Jim Maule, More Tax Fraud in the People’s Court. “It was an attempt to change a non-deductible cost of a boat into a business deduction.”

Kay Bell, A-list performers would get tax credit for New Jersey shows.

Republican Sen. Tom Kean, Jr. this week renewed a push for his bill that would provide a tax break for so-called A-list performers in the Garden State.

Not every problem is a tax problem. Especially this one.

TaxProf, The IRS Scandal, Day 832.

 

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David Brunori, Retroactive Tax Laws Are Just Wrong (Tax Analysts Blog):

There are two fundamental problems with changing the rules retroactively. First, it is patently unfair. People who follow the rules should not be penalized later. We would never stand for it in the criminal context. Why should we accept it for taxes? Second, retroactively changing the rules undermines confidence in the tax system. Most people try to do the right thing. Often they spend a lot of money paying lawyers and accountants to guide them to the right result. The good taxpayers might not be diligent in following the rules if those rules might change.

It’s harder to justify spending money on tax compliance when it doesn’t do any good.

 

Howard Gleckman, New Rules Will Require States to Be More Transparent About Tax Subsidies (TaxVox): “While local governments have complained that the new rules will be complicated and burdensome, it is frankly a scandal that governments have been able to keep these subsidies under wraps for so long.”

 

News from the Profession. Only 20% of Companies Using Creative Accounting to Its Full Potential (Caleb Newquist, Going Concern). “…it’s not technically fraud”

 

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Tax Roundup, 6/26/15: Supreme Court saves ACA subsidies — and taxes.

Friday, June 26th, 2015 by Joe Kristan

 

supreme courtThe Supreme Court upholds new punitive taxes on thousands of Iowa employers and uninsured individuals. That’s the flip side of the decision yesterday ruling that tax credits remain available for health insurance purchased on the federal exchanges, despite the language of the Obamacare statute — a ruling characterized by the Des Moines Register as “Obamacare ruling protects 40,000 Iowans’ subsidies.

Here’s what it means to those footing the bill:

– The employer mandates will take effect in all states as scheduled. The “Employer Shared Responsibility provisions” require employers to purchase “adequate” health coverage for employees.  It applied in 2014 to employers with over 100 “full-time equivalent” employees in 2013.  In 2015, it applies to employers who had over 50 full-time equivalent employees in 2014. It applies to government and non-profit employers, as well as to businesses.

Employers who fail to offer coverage to 95% of their FTEs and dependents are subject to a $2,000 penalty, pro-rated for months where coverage is lacking, for non-covered FTEs, with a 30-employee exemption. “Full-time Equivalent” means 30 hours per week.

The penalties kick in only if at least one employee claims the coverage tax credit. Yesterday’s decision ensures the mandate applies in all states — rather than just the 14 with state-run exchanges — because the triggering credits will remain available nationwide.

The individual mandate tax applies fully in all states. The “Individual Shared Responsibility Provision” penalizes individuals who aren’t covered at work and who fail to purchase “adequate” and “affordable” coverage. The penalty for 2015 is the greater of $325 ($162.50 for those under 18) or 2% of “household” income. It is prorated if coverage is obtained for some months and not others.

Yesterday’s decision broadens the reach of the tax because the penalty only applies if available coverage is “affordable.” The tax credits are used in computing “affordability,” so the availability of the credits nationwide broadens the tax to many more taxpayers.

20121120-2The Section 36B tax credit remains available nationwide. This is the refundable credit that was the subject of yesterday’s decision. It is estimated when coverage is obtained and applied against coverage costs for the year. It is “trued up” when the taxpayer files their 1040 for the coverage year — a process that can sometimes mean more credit, but that sometimes triggers a big balance due.  Because the credit phases out in steps, one extra dollar of income can trigger thousands of dollars of additional taxes:

Consider a middle-aged married couple earning $62,040, 400 percent of the FPL for a two-person household ($15,510.) If the second cheapest Silver plan in their area costs $1,200 per month, they would receive a subsidy of $8,506 in order to cap that plan’s price at 9.5 percent of their income. However, if they earned $62,041—only a dollar more—the entire subsidy would evaporate. 

Because the $8,506 would have been applied to health premiums, the household would have to pay it back on April 15.

What do I think of the decision? In March I wrote:

In a less politically-sensitive context, one could expect a 9-0 or 8-1 decision against the IRS. That’s what happened in Gitlitz, where the court ruled that the IRS couldn’t regulate away a perceived misdrafting of the tax code’s S corporation basis rules that allowed a windfall to taxpayers whose S corporations had debt forgiveness income. “Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.” But because a decision against IRS here would invalidate key parts of Obamacare in most of the country, politics is a big part of the process.

That means I think the Scalia dissent gets it right, but we don’t get to file tax returns based on the dissent. It should give pause to those who write legislation, though — there’s no telling how the Supremes will read their work if they don’t like what it does.

Other coverage:

William Perez, What You Need to Know about the Premium Assistance Tax Credit

TaxGrrrl, Supreme Court Upholds King, Says Obamacare Tax Credits Apply To All States

Kay Bell, Let the Affordable Care Act repeal efforts begin (again)

Hank Stern, SCOTUScare Fallout. “Obamacare Ruling May Have Just Killed State-Based Exchanges

Andy Grewal, Grewal: King v. Burwell — The IRS Isn’t An Expert? (TaxProf Blog)

Tyler Cowen, King vs. Burwell, and other stuff. “So on net I take this to be good news, although arguably it is bad news that it is good news.”

Megan McArdle, Subsidies and All, Obamacare Stays

Alan Cole, James Kennedy, King v. Burwell: Supreme Court Upholds Subsidies to Federal Exchanges (Tax Policy Blog)

Roger McEowen,  The U.S. Supreme Court and Statutory Construction – Words Don’t Mean What They Say (AgDocket)

 

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Stuff other than the Supreme Court decision:

Jason Dinesen, Choosing a Business Entity: Sole Proprietor

Joseph Thorndike, Rand Paul’s Tax Plan May Be Radical, But It’s Not Impossible (Tax Analysts Blog) “But radical doesn’t mean impossible. Since proportionality lies at the heart of Paul’s plan, history suggests it might have a shot.”

Ethan Greene, Net Investment Income Tax Handicaps Those Meant to Benefit (Tax Policy Blog). “The irony of the NIIT is it taxes the very demographic it was intended to aid; that is, retirees relying on their savings and investment, and those with disabilities, counting on trust income or estate inheritance to maintain their quality of life.”

Donald Marron, Everything You Should Know about Taxing Carbon. (TaxVox)

TaxProf, The IRS Scandal, Day 778

Caleb Newquist, The Accounting Profession’s Murky Future (Going Concern)

 

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Tax Roundup, 5/29/15: A distracted IRS takes its eye off the ball. And more Friday goodness.

Friday, May 29th, 2015 by Joe Kristan
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.

The IRS Fails at Job One(Christopher Bergin, Tax Analysts Blog).

Over the years, as the fight for transparency continues, I’ve marveled that while the IRS was willing to waste hundreds of thousands of dollars to hide information the courts eventually would force it to turn over to the public, it never shirked from its responsibility to protect the truly private information it was entrusted with. I’ve always admired the IRS for its unflinching diligence in putting that job well ahead of its paranoia of public scrutiny regarding how it operates.

But now there’s a chink, and a big one, in that armor.

The IRS has too much to do. It has its hands full just with its primary job of assessing and collecting taxes, issuing refunds, and protecting taxpayer data. But Congress has chosen to use the tax law as the Swiss Army Knife of public policy. As a result, the IRS has become a sprawling superagency with a portolio that includes the nation’s health finance system, industrial policy, welfare for the poor, campaign finance… you name it. It should be no surprise that its real job suffers.

 

William Perez, Identity Theft Statistics from the Latest TIGTA Report. “I was curious, just how big is identity theft, and how much money is leaking out of the Treasury?”

Annette Nellen, IRS Data Breach Unfortunate in Many Ways – PIN? “Why not use of a PIN as is used to access bank data and use credit cards?”

Kay Bell, IRS security breach highlights need to rethink online privacy. “We’ve all to some degree shared details of our lives to broader audiences.”

Justin Gelfand. Most Recent IRS International Hacking Reveals Vulnerability ( Procedurally Taxing). “Perhaps more than anything else, this cyber-attack reveals that stolen identity tax refund fraud is not a problem the Government can prosecute its way out of.”

 

eic 2014Arnold Kling, The EITC in Practice. Mr. Kling quotes Timothy Taylor on some of the practical problems in administering this program, and then considers an alternative:

One of the advantages of a universal benefit is that you give the money to everyone. My idea is that you would then tax some of it back at a marginal rate of 20 or 25 percent. That is, for every dollar that someone earns in the market, they are lose 20 cents or 25 cents in universal benefits. Compared to a marginal tax rate of zero, 25 percent is more complex and has a disincentive. But it is much less complex and de-motivating than our current system of sharp cut-off points for benefits like food stamps and housing assistance. And having a non-zero tax rate allows you to have a higher basic benefit at lower overall budget cost.

In another post, he says:

I think that the incentive problems with the current system are so bad that I would like to see the next Administration take its best shot at something better. As you know, my preference is for a negative-income-tax type system, but with the added administrative issue of having the grants be in the form of flexible-benefit dollars that only can be used for food, housing, medical care, and education.

I like that idea much more than refundable credits, which are a fraud magnet.

 

Jason Dinesen, From the Archives: Adjunct Professors and Mileage Deductions

Robert D. Flach has some fresh Friday Buzz!

 

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Megan McArdle. Obamacare’s Intent? Just Read the Law. “Memory is so very terrible, and this law is so very complex. Anyone who tells you that they have a full and accurate memory of the evolution of the various moving parts is lying — at least to themselves.”

Hank Stern, A Quarter Trillion Here, A Quarter Trillion there…  “Obamacare is set to add more than a quarter-of-a-trillion—that’s trillion—dollars in extra insurance administrative costs to the U.S. health-care system”

 

Joseph Henchman, Major Tax Actions in Texas, Illinois, Nevada, and Louisiana (Tax Policy Blog). The Illinois legislature continues its rush to fiscal disaster. Nevada advances an unwise gross receipts tax. Louisiana advances a bill to kill its poorly conceived franchise tax.

Sebastian Johnson, State Rundown 5/28: Deals Made, Dreams Fade (Tax Justice Blog). State tax news from New York and Alabama, where a flat tax proposal has fizzled.

 

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Howard Gleckman, The Perpetual, Immortal, Eternal, Never-Ending Tax Extenders. “The magic number for today is 16. That is, remarkably, the number of times Congress has extended the allegedly temporary research and experimentation tax credit since it was first enacted in 1981.”

Jack Townsend, Former House Speaker Indicted for Stucturing and Lying to Federal Agents. It appears blackmail was involved. Robert Wood has more.

TaxProf, The IRS Scandal, Day 750

 

Well, it’s not brain surgery. Accountants Lack Some Skills (Caleb NewquistGoing Concern).

 

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Tax Roundup, 5/26/15: It’s not always the onions that make you cry. And: beer taxes and other summer fun!

Tuesday, May 26th, 2015 by Joe Kristan

IMG_1589Onions aren’t the only thing that will make you cry. An S corporation brokering onions tried to reduce its tax bill through a “Section 419(f)” arrangement that purported to be a tax-exempt employee benefit plan. In reality, many such plans were actually tax shelters attempting to invest deductible employer contributions in variable life policies and similar financial instruments benefiting the owner.

The IRS got wise to these plans and issued Notice 95-34, ruling that such arrangements are “reportable transactions” subject to special taxpayer disclosure rules. Failure to make such disclosures can trigger severe penalties

A Wisconsin U.S. District Court has ruled the onion broker had such a plan, and is subject to the penalties, to the tune of $40,000:

In short, the trial evidence showed that CJA’s Affiliated Employers Health & Welfare Trust was an aggregation of separate plans maintained for individual employers that were experience-rated with respect to individual employers, that is, they were structured so as to assure each employer that its contributions would benefit only its own employees. The money that participating employers paid into the Plan bought insurance for only their own employees; there was no pooled risk.

The Moral? It’s a cliché, but it’s still valid: when something seems too good to be true, it probably is. The taxpayer presumably lost their deductions on top of the $40,000 penalty.

Cite: Vee’s Marketing, DC-WD-WI No. 3:13-ccv-00481

 

 

With summer here, you may want to know How High Are Beer Taxes in Your State? Scott Drenkard of the Tax Policy Blog provides this map:

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I don’t understand the high rates in the southeast. Whisky protectionism? Temperance movement echoes? Whatever the reasons there, it’s hard to imagine why they would apply to Alaska and Hawaii.

 

Megan McArdle, Sticker Shock for Some Obamacare Customers:

So the proposed 2016 Obamacare rates have been filed in many states, and in many states, the numbers are eye-popping. Market leaders are requesting double-digit increases in a lot of places. Some of the biggest are really double-digit: 51 percent in New Mexico, 36 percent in Tennessee, 30 percent in Maryland, 25 percent in Oregon. The reason? They say that with a full year of claims data under their belt for the first time since Obamacare went into effect, they’re finding the insurance pool was considerably older and sicker than expected.

Obamacare? You mean the “Affordable” Care Act.

 

TaxGrrrl, Civil War Widows, General Logan & Why We Celebrate Memorial Day. Interesting history involving an Illinois politician who made a pretty good Civil War general.

Kay Bell, Memorial Day thanks for the ultimate military sacrifice

Robert D. Flach starts this short work week with fresh Buzz! Robert takes issue with Warren Buffet’s support for the Earned Income Tax Credit: “While federal welfare, which is what the EITC is, may be appropriate, it should not be distributed via the US Tax Code.”

Jason Dinesen, From the Archives: New Preparer Requirements on Earned Income Credit = Higher Fees for Clients

Tony Nitti, Tax Geek Tuesday: When Can A Business Deduct Prepaid Expenses? A surprisingly complex issue.

Russ Fox, Staking and the WSOP: 2015 Update. Having backers can complicate a poker pro’s tax life.

 

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Robert Wood, Florida Says Uber Drivers Are Employees, But FedEx, Other Cases Promise Long Battle

Stephen Olsen, Summary Opinions. The latest roundup by Procedurally Taxing of developments in the tax procedure world.

Jack Townsend, IRS Establishes Cybercrimes Unit to Combat Solen ID Tax Fraud. At least five years too late.

Paul Neiffer tells about this year’s ISU-CALT Summer Seminar Series. I’m not participating this year, probably making it a better program than ever!

 

Renu Zaretsky, Roads, Schools, Sales and Wills. A delay in the federal highway bill, gas tax politics in California, and Amazon pays U.K. tax in today’s TaxVox headline roundup.

TaxProf, The IRS Scandal, Day 744Day 745Day 746Day 747

Career Corner. More Quick and Dirty Tips for Your Insider Trading Scheme (Leona May, Going Concern)

 

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Tax Roundup, 5/21/15: Credits targeting what you would do anyway! And: minimum wage, ACA, and lots more.

Thursday, May 21st, 2015 by Joe Kristan

 

IMG_0603Paying people to do what they would do anyway. Rhode Island is proposing a new credit for “job creators,” reports David Brunori:

It would work the same way other bad tax incentive programs work: A company that creates new jobs in the state would receive a reduction in its income tax. The proposal mirrors a bill introduced earlier this year. Basically, the bill, if signed into law, would reduce the tax rate for companies that hire full-time employees in Rhode Island who work at least 30 hours per week and receive a salary that is at least 250 percent of the prevailing hourly minimum wage in the state. Large companies would be eligible for a 0.25 percent tax incentive off their net income tax rate for every 50 new hires. Smaller companies would be eligible for a 0.25 percent incentive off their personal income tax for every 10 new hires. The rate reduction would be limited to a maximum of 6 percentage points for the applicable income tax rate and to no more than 3 percentage points for the applicable personal income tax rate. Complicated? You bet. But that’s why law firms like the incentive business.

Statewide employment is expected to grow in Rhode Island in the next several years without the political gimmicks of tax incentives. So this bill is unnecessary (no one thinks the incentives will lead to growth greater than what’s expected). In other words, there is no incentive being provided; the state is just making a welfare payment.

This is true of all “job creation” credits. As David points out: “No sane business owner will hire someone for $40,000 simply to save $4,000 on her tax bill. This bill will not create one new job in Rhode Island.”

An Illinois representative has proposed a “Patriot Employer Tax Credit Act,” (Tax Analysts, $link) with a tax credit of up to $1,500 for employers who:

-Invest in American Jobs: Does not move its headquarters overseas or reduce the number or percentage of U.S.-based workers in comparison to workers overseas.

-Pay Fair Wages: Pay 90% or more of U.S. workers an hourly wage of at least $15 per hour.

-Provide Quality Health Insurance: Offer ACA-compliant healthcare to employees.

-Prepare Workers for Retirement: Provide 90% of non-highly compensated U.S. employees a defined benefit plan OR a defined contribution plan and contribute at least 5% of worker compensation.

-Support Our Troops and Veterans: Pay the difference between regular salary and military compensation for all National Guard and Reserve employees called for active duty and have a plan in place to recruit veterans.

-Create a Diverse Workforce: Have a plan in place to recruit employees with disabilities.

By claiming the word “patriot,” it wraps bad economics in the flag. Because nothing says “I love my country” like tax credits.

 

20150423-1Jana Luttenegger Weiler, Health Savings Accounts: Beneficiaries and Taxes (Davis Brown Tax Law Blog). “As HSAs become more common, it is important to consider the HSA in various capacities, including in premarital agreements, death, and divorce.”

Tony Nitti, Tax Court: In Order To Convert A Home To A Rental, You Should Probably Rent It

Jason Dinesen, Glossary of Tax Terms: AMT.

TaxGrrrl, Taxpayer’s Call To IRS Accidentally Broadcast On Howard Stern’s Radio Show. I’m just amazed the caller reached an actual IRS agent.

Peter Reilly, Tax Girl Challenges Homeownership And You Should Really Listen To Her. “To many of us homeownership is a necessary step in becoming a full-fledged adult and a house that is rented can never be a home.  This book might help you rethink that attitude.”

Jim Maule, The Dependency Exemption Parental Tie-Breaker Rule. “Under the parental tie breaker rule in section 152(c)(4)(B), if the parents claiming a dependency exemption deduction for a qualifying child do not file a joint return, the child is treated as the qualifying child of the parent with whom the child resided for the longest period of time during the taxable year, or if the child resides with both parents for the same amount of time during the taxable year, the child is treated as the qualifying child of the parent with the highest adjusted gross income.”

Paul Neiffer, April 18 (or 19), 2016 is Due Date for 2015 tax returns

Jack Townsend, Remaining Swiss Bank Criminal Investigations Likely to Go Into 2016

Robert Wood, Appalling $187 Million Cancer Charity Fraud Case Settles — When 97% Of Money Isn’t For Charity

Keith Fogg, Argument Over Furlough of National Taxpayer Advocate Set for June 2 Before the Federal Circuit (Procedurally Taxing)

 

 

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Cara Griffith, Tax Reform Laboratories (Tax Analysts Blog). “Federal lawmakers could learn a lot from an examination of what has worked and what hasn’t across the nation.”

 

Insureblog, Dear HHS, Will You Share My ACA Success Story?:

  So how has this Obamacare thingy helped my small company:-We have seen an overall decrease in benefits since 2010.
-From November 2010 to our current plan year premiums have increased 58.7%.
-If we would have been forced to an Obamacare compliant plan the increase would have been 116.7%

Tom Vander Well, Placing customers on hold without diminishing satisfaction (IowaBiz.com). The suggestions do not endorse the IRS practice of “courtesy disconnects.”

 

Carl Davis, Sweet Sixteen: States Continue to Take On Gas Tax Reform (Tax Justice Blog). To the Tax Justice folks, tax reform = tax increase.

 

Joseph Thorndike, Republicans Should Embrace the Gas Tax – After All, They Invented It (Tax Analysts Blog). Everyone loves being told what they “should” like.

 

Kay Bell, Will Congress OK highway money before it hits the road?

 

Elaine Maag, A Redesigned Earned Income Tax Credit Could Encourage Work by Childless Adults. (TaxVox). Only if they can re-design it so that it doesn’t squander 25% of the cost on improper payments.

 

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Megan McArdle, $15 Minimum Wage Will Hurt Workers. A well-explained post explaining what should be obvious:

When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can’t justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it’s no longer worth putting their hours into the business, so they’ll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks.

These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss — that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour.

Most people who insist that minimum wage increases are harmless snicker at those who believe in “intelligent design.” Yet they are themselves trying to impose their own design on an eveolutionary system. At least creationists don’t claim to be designing species.

 

TaxProf, The IRS Scandal, Day 742

 

News from the Profession. Accountants Lack Some Skills (Caleb Newquist, Going Concern). “But it’s foolish to expect accounting graduates to have skills for corporate accounting. They don’t have them because they don’t learn them in school and they don’t learn them in public accounting.”

 

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Tax Roundup, 4/21/15: Loans aren’t taxable, until you don’t have to pay them. And: ACA, dope, and lots of other stuff.

Tuesday, April 21st, 2015 by Joe Kristan

20120511-2Pay me now, tax me later. A hospital in a poor county in Central Florida wanted to recruit an OB-GYN. Rural employers often have to do something extra to recruit good help, so the hospital offered him a $260,000 loan. It came with a sweetener: if certain goals were reached, the loan would be forgiven.

It’s well established that loans aren’t taxable income. That can be pretty sweet to have $260,000 to spend with no withholding and no tax bill. But there’s a catch. You either have to repay the loan (out of your after-tax income), or you have to pay tax on the loan amount if the debt is forgiven.

It’s natural to try to want to have your cake and eat it too — to not pay the loan, and not pay the taxes. That is the very trick behind the leveraged ESOP. But for the rest of us, it’s an elusive goal. It eluded the doctor in Tax Court yesterday.

The doctor met his goals, and $260,000 of debt was cancelled over four years. The doctor didn’t report the income, so the IRS assessed additional tax. The doctor objected. From the Tax Court opinion:

Although the amount that petitioner received from the hospital pursuant to the Revenue Guarantee/Repayment Forgiveness addendum represented a bona fide loan, petitioner contends that the loan was a nonrecourse loan, i.e., that he was not personally liable for its repayment, and that, as a consequence, he did not receive income when the loan was forgiven and canceled by the hospital. The Court disagrees with the premise of petitioner’s argument.

The court pointed out that the terms of the note did make the doctor liable, and added:

Further, although the Court does not accept the premise of petitioner’s contention regarding the nature of the loan, it bears mention that just because a taxpayer is not personally liable for a debt does not mean that cancellation of indebtedness cannot give rise to income…

Under these circumstances, forgiveness and cancellation of the loan gave rise to income.

The Court added in a footnote:

…petitioner argues that when debt is canceled, the creditor should issue a Form 1099-C, Cancellation of Debt, and not a Form 1099-MISC. Although this may be so, the fact of the matter is that a bookkeeping error does not serve to negate income arising from the forgiveness or cancellation of debt.

Apparently the hospital knew that there was income, but issued the wrong kind of 1099. But the 1099 doesn’t change the nature of the income.

The moral? Forgivable loans are nice — cash now, tax later. But later happens.

Cite: Wyatt, T.C. Summ. Op. 2015-31.

 

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Megan McArdle, Obamacare’s Tax Day Mystery:

Meanwhile, Louise Radnofsky of the Wall Street Journal offers an example of Effect 3, which I confess hadn’t occurred to me: folks who were covered in 2014, got their refund docked to cover subsidy overpayments, and therefore decided to cancel their insurance for this year.

At first blush, this seems irrational. You don’t need to cancel your insurance to make sure that your tax refund remains intact; you just need to do a better job of estimating your income when you go to buy your insurance so that you don’t end up with overpayments. Of course, the taxpayer in question might not have bought the insurance if she’d known what it was actually going to cost her.

Complex systems have unintended consequences.

Hank Stern, The 4% Solution (Insureblog). “Only 4% of people who signed up for ObamaCare got the correct subsidy”

Christine Speidel, Penalty Relief and Premium Tax Credit Reconciliation (Procedurally Taxing). “This post will describe the penalty relief available under Notice 2015-09 and some of the barriers that may prevent low-income taxpayers from accessing the relief.

 

William Perez, Taxes When Hiring Household Help

Tony Nitti, IRS Seeks Record $2 Billion In Back Taxes From Prominent Businessman And Philanthropist Sam Wyly. Offshore trusts are involved.

Peter Reilly, Superior Point Of Sale Software Does Not Mix Well With Skimming

Jason Dinesen, Breakeven Analysis for Small Businesses, Part 1

Kay Bell, IRS telephone tax help was a dismal 38.5% this filing season. Part of your Commissioner’s “Washington Monument Strategy” of making taxpayers suffer to boost his budget.

 

20130607-2TaxGrrrl, 4/20: The Blunt Truth About Marijuana & Taxes

James Kennedy, Marijuana Dispensary Settles Case after IRS Suggests It Engage in Money Laundering (Tax Policy Blog):

Imagine running a small business and being assessed a penalty by the IRS. Then imagine being told by the IRS that the only way to avoid the penalty is to commit a serious felony, laundering money. This Kafkaesque nightmare actually became reality for a Colorado marijuana dispensary called Allgreens when it tried to pay its federal payroll taxes.

At some point this decade or next, marijuana will become more or less legal. I wonder if the tax law will be the last bastion of prohibition.

 

TaxProf, The IRS Scandal, Day 712. “The IRS Assures an Atheist Group It Will Monitor Churches.” What could go wrong?

Robert Wood, Before IRS Targeting, Lois Lerner Targeted At Federal Election Commission

 

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Paul Neiffer, Senator Wyden Indicates Tax Reform Must Include Flow Through Entities

Joseph Thorndike, Republicans Want to Repeal the Estate Tax Because Too Much Is Never Enough (Tax Analysts Blog).

For my money – and admittedly, it’s not my money, since I don’t expect the tax to be an issue for my heirs – repeal is a bad idea under any circumstances. But it’s an especially bad idea when paired with a continuation of stepped-up basis.

If there is a good argument for the estate tax, it’s to allow basis step up. The “breaking up dynasties” thing is silly. From what I’ve seen in practice, all you need to break up inherited wealth is a second generation.

Eric Toder, Corporate Tax Reform and Small Business (TaxVox).

Sebastian Johnson, State Rundown 4/20: State Houses Consider Cuts (Tax Justice Blog).

 

Career Corner. The Non-Golfing Accountant’s Guide To Hitting the Links (Leona May, Going Concern)

 

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Tax Roundup, 4/20/15: Cheer up, it could have been even worse!

Monday, April 20th, 2015 by Joe Kristan

20140929-1Tax Season is over. For me, the end is officially the moment I transmit my e-file extension to the IRS. Now it’s time to pick up the threads of the life and tax practice that are put aside in the final three-week frantic trudge.

Tax Season has become, for me, all about the last three weeks. That’s when everybody finally has their corrected 1099s, most of the public partnership K-1s are in, and the pass-through closely-held businesses are mostly done. No matter how well I keep up until then, suddenly I am a week behind and working frantically to catch up. Inevitably something unexpected snarls the works — maybe an unexpected client crisis, or a business transaction unhappily timed to coincide with filing season. As the tax law gets more complex every year, it compresses the filing season for many clients to a narrower period beginning closer to April 15 every year.

Robert D. Flach has posted his paper-filed thoughts on the recent filing season: “It certainly wasn’t the worst, or the best, in my 44 years.”

It wasn’t the worst I’ve seen. That was the one two years ago, when a January 1, 2013 tax law changed the rules for 2012, and Iowa dawdled in updating its code references to incorporate the federal changes — leading to filing season chaos.

Our worst fears of tax season weren’t realized, thanks to last-minute filing relief for ACA victims participants owing money, a one-year waiver of the deadly penalties for ACA non-compliance by small-employer insurance reimbursement arrangements, and an 11th-hour waiver of the “repair regs” accounting method change filing for smaller businesses.

Still, it was pretty bad. Probably the worst part of this season was the exponential increase in identity theft. The continuing failure of the IRS to deal with this problem is disgraceful. The failure of Congress to address it is nearly as bad.

No, the solution isn’t to give Commissioner Koskinen all the money he wants. It’s a systems and controls problem, and the last time the IRS got a blank check for systems upgrades, they boggled it entirely. And nothing Mr. Koskinen has done gives any confidence that he can be trusted with it.

20140910-1The solution starts with a new commissioner. It will include slower refunds. It will include system upgrades that will, for example, reject e-filings claiming earned-income credits for somebody who habitually files returns with adjusted gross income in the millions (We had multiple ID thefts of six and seven-figure filers this year). It will include a long-term system upgrade, with long-term funding to be released only in steps as progress is made. And maybe the solution includes changing the culture that thinks tax refunds are a good thing.

Related: Fix The Tax Code Friday: Delaying Tax Refunds To Stop Fraud (TaxGrrrl). “Would you be willing to wait a few more weeks for your refund to allow for forms matching if it slowed down the incidents of tax fraud?”

 

Tony Nitti, How (Not) To Spend Your Tax Refund. “The goal with sound tax planning should never be to generate the largest refund; after all, the bigger the refund, the more of your hard-earned money you loaned, interest-free, to the IRS for a period of months.”

Jason Dinesen, Tax Season Recap 2015: What a Strange Season, Part 1

William Perez, What To Do if You Missed the Tax Deadline. “There were the usual issues here and there with getting info from clients, and a few clients were surly or price-sensitive. But it wasn’t too bad overall.”

Kay Bell, Missed April 15 tax deadline? Got an extension? Now what?

Robert Wood, You Just Filed Your Taxes, Is It Too Early To Amend?

Peter Reilly, Heir Of Honduran Timber Fortune Wins Large Refund In Tax Court. “Using the IRS as a weapon in a business dispute is, well, not good business.”

 

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While I took a break, the IRS Tea Party Scandal rolled on. The TaxProf continued his IRS Scandal Series: The IRS Scandal, Day 711Day 710Day 709Day 708Day 707.

 

David Brunori, The Arrogant and the Greedy Team Up to Take Your Money (Tax Analysts Blog). David explains (my emphasis)  the real reason why certain people have their dresses over their heads about the menace of e-cigarettes:

E-cigarette taxation best illustrates the confluence of arrogance and avarice. Those who cannot keep themselves from playing nanny have already begun to bar e-cigarettes from public places (to prevent the dreaded secondhand water vapor). And of course we have the obligatory restrictions on their use by kids. But the tobacco abolitionists would like to tax e-cigarettes with the knowledge that if you tax something, you get less of it. Don’t be fooled. These people do not care about your health. They care about lording over you.

But there are others (like Bowser) who cast a covetous eye on electronic smokes. Two factors drive that thinking. If people smoke real cigarettes less, the states will lose tens of millions of dollars. E-cigarettes need to be taxed to replace that revenue (because it really isn’t about your health). Since a lot of tobacco tax revenue is earmarked for schools, taxing e-cigarettes is all about the kids. Raising real taxes to pay for public services is hard. Teaming up with the prohibitionists is much easier.

It’s Baptists and bootleggers all the way down.

 

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Gretchen Tegeler, There’s more to the story than tax rates (IowaBiz.com). “Property taxes are a combination of the property tax rate, applied to the portion of a property’s assessed value that is taxable. Even if a city keeps a constant rate, it may be collecting a lot more property tax revenue (with property owners paying a lot more, too), if there’s more valuation to tax.”

Career Corner. What Did You Learn This Busy Season? (Caleb Newquist, Going Concern).

 

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Tax Roundup, 3/6/15: Crime Watch Edition. Rashia, still 21.

Friday, March 6th, 2015 by Joe Kristan

It’s the time of the year when exasperated taxpayers and preparers are tempted to say, “bugger all this, I’m going to go for the gusto and cheat on my taxes!” That’s when it’s useful to look in on an old friend of the Tax Update to see how well that’s going.

Rashia says "thanks, Commissioner!"

Rashia says “thanks, Commissioner!”

Let’s look in on Rashia Wilson, who proclaimed herself (on Facebook!) the “Queen of IRS Tax Fraud.” Her reign was cut short by federal identity theft tax refund charges, resulting in a 21-year sentence. And with federal sentences, you have to serve at least 90% of the time.

Ms. Wilson naturally was unhappy with this judicial lèse-majesté, so she appealed, citing procedural irregularities. The trial judge was ordered to reconsider. On further review, the call on the field stands. 21 years.  Robert Wood has more.

Iowa has tax ID fraud too. While South Florida may be the kingdom of tax refund fraud, it has colonies everywhere. Even in Iowa: Cedar Rapids woman charged with filing false tax returns (KWWL.com):

The United States Department of Justice says 33-year-old Gwendolyn Murray is charged with twelve counts of filing false claims for tax refunds, seven counts of theft of government property, and two counts of aggravated identity theft.­ The indictment containing the charges was unsealed on Tuesday.

It is alleged that Murray filed 12 fraudulent tax returns in 2012 and 2013 using other people’s names. She received refunds on seven of those tax returns. The court also alleges that Murray stole the identities of two people.

It’s good to prosecute ID thieves, but it’s far better to keep them from thieving. It’s eye-opening that 7 of the 12 alleged attempts allegedly succeeded. Criminals aren’t known for their impulse control or their ability to anticipate long-term consequences. If they see somebody get a bunch of cash just from keying in some numbers on a computer, they’re going to want some of that bling themselves, and they aren’t going to ponder the likelihood of a prison sentence first.  The IRS is pretty much leaving the door unlocked and the cash register open.

 

Megan McArdle says the culture of “getting a big refund” is part of the problem in Fewer Tax Refunds, Fewer Scams:

If all returns were submitted at the same time, and refunds were held until they could be cross-checked against the IRS’s copies of W-2s and 1099s, then this sort of fraud wouldn’t work very well; the IRS would know it had two returns and could start the process of figuring out which one was fraudulent before it mailed the check. But we love our early refunds, and people often count on getting that check as early as possible.

She offers wise advice:

However, there’s one thing you personally can do to fight tax fraud, and that’s make sure that you don’t give the government more money than you have to. You should never get excited about a tax refund; all it means is that you gave the government a substantial interest-free loan by withholding too much tax throughout the year. You should aim for your refund to be as small as possible — ideally, zero.

A system that sends $21 billion annually to fraudsters — and that number is rising rapidly — can’t continue forever. Part of this will be a technological fix.  My wife can’t buy a dress at Nordstrom in Chicago without triggering phone calls from two credit card companies.  Meanwhile, the IRS happily wires wads of cash to Rashia. One would hope the IRS could learn something from Visa and Discover.

But the IRS is bad at technology, so part of the fix will have to be slower (and ideally, smaller) refunds. This could include lower penalty thresholds for underpayments so that taxpayers will be more willing to risk owing a bit on April 15 — perhaps combined with withholding tables that leave taxpayers owing a bit, rather than getting refunds.

 

What else can you do to protect yourself? 

  • Be careful with your tax information. Never divulge your bank account or credit card info to strangers over the phone.
  • Assume any unexpected call from a tax agency is a scam.
  • Don’t send copies of 1099s and W-2s as e-mail attachments to your preparer, and don’t email a pdf of your 1040 to a loan officer. That leaves your information exposed.
  • When you transmit confidential information, use strong encryption, or better yet upload it via a secure file transfer site, like the FileDrop system we use at Roth & Company.

 

 

20150105-2Peter Reilly, IRS Grossly Unqualified To Make Determinations About Software Related Exempt Applications. The IRS is grossly unqualified for any number of things that Congress gives it to do. Just a very few that come immediately to mind:

– Determining what is “qualified research” for the research credit.

– Determining the energy properties of “green fuels” for the biofuel subsidies.

– Running the nation’s healthcare insurance finance system.

– Policing political speech by tax-exempt organizations.

An outfit that can’t keep two-bit grifters from cashing in billions in tax refunds annually shouldn’t be looking for new things to do.

 

Kay Bell, Tax identity thief mistakenly sends fake refund to real filer. The police don’t spend their days chasing geniuses.

Jack Townsend, More on Light Sentencing for Offshore Account Tax Crimes.

 

Russ Fox provides a valuable service with Online Gambling Addresses Updated for 2015. Taxpayers with offshore online gambling accounts are required to report them on the “FBAR” report of foreign financial accounts (Form 114). The FBAR requires a street address for the account, and these can be hard to find for gambling websites.

William Perez offers advice on how to Communicate Effectively with Your Tax Preparer. We aren’t always the best company this time of year. Come prepared, be efficient, and you can leave our office before we do something bizarre. Other than what we do for a living, of course.

Jason Dinesen, Marriage in the Tax Code, Part 3: Big Changes in 1917

Jim Maule, The IRS and the Taxpayer: Both Wrong. “The taxpayer argued that because the distribution from the IRA was less than the his investment in the IRA, it should be treated as a return of investment. The IRS argued that the entire distribution should be included in the taxpayer’s gross income. The Tax Court concluded that both the taxpayer and the IRS were wrong.”

 

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Kyle Pomerleau, The Rubio-Lee Plan Would be Good for Everyone, Especially Low Income Earners (Tax Policy Blog):

If you take all the pieces of the Rubio-Lee tax plan together, it actually produces the largest increase in after-tax income for the lowest income earners, not the highest.

According to our analysis, the bottom decile of taxpayers will see an increase in after-tax income of 44.2 percent, a percentage increase in income nearly four times larger than the top 1 percent’s increase in after-tax income. But the plan doesn’t just increase the after-tax income of the top and the bottom. All taxpayers will see higher after-tax incomes due to this plan.

The Rubio-Lee plan, with its elimination of the double corporate tax and its business rate reductions, is the most promising tax reform plan to surface in a long time. But its opponents can never see wisdom in anything that benefits “the rich,” even when it benefits everyone else.

 

Renu Zaretsky, Expensive Plans, ACA Developments, and Exercises in Futility. Today’s TaxVox roundup has links to folks hating on Rubio-Lee, Spanish film tax credits, and more.

Patrick Smith, Supreme Court’s Direct Marketing Case May Have Great Significance in Anti-Injunction Act Cases (Procedurally Taxing)

 

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Spring will come!

 

 

Cara Griffith, The Use of Big Data in Auditing (Tax Analysts Blog). “For state auditors, big data (like other types of data) could be used to better evaluate and select taxpayers for audit.”

TaxProf, The IRS Scandal, 666

 

Why would he want a job with less power? Former IRS Commissioner Mark Everson To Run For President. Yes, Of The United States (Tony Nitti)

Culture Corner. A Tax Shelter Board Game Is a Thing That Exists (Caleb Newquist, Going Concern).

 

 

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Tax Roundup, 3/5/15: More tax credits! Also: ACA on the dock again, and good tax news for gamblers.

Thursday, March 5th, 2015 by Joe Kristan

Accounting Today visitorsclick here for the frosty Iowa tax climate post, or go here for a longer treatment.

 

David Brunori has a wise post about Michigan’s disastrous tax credits: Tax Incentives Cause Trouble For More Reasons Than You Might Think (Tax Analysts Blog). “The history of job creation tax credits in Michigan is a story of corporate welfarism.”

20120906-1That’s just as true here in Iowa, where every legislative session seems to bring a new tax credit, to go with the dozens already on the books. From today’s Des Moines Register: New chemical production tax credit bill advances.

For example, companies like Cargill that produce ethanol and other fuels from corn produce corn oil in the process. The tax credit is geared toward companies that take that oil and other byproducts to create higher-value chemicals. Those higher-value chemicals can then be used to produce plastics, paints or pharmaceuticals.

The legislation would provide a credit of 5 cents for every pound of chemical a company produces. It would not apply to chemicals that are used in the production of food, animal feed or fuel.

These byproducts are already used somewhere. That means the credit would do one or more of the following:

– Subsidize companies that are already making the chemicals.

– Divert the byproducts from their current buyers — producers of food and animal feed, for example — to those who would receive subsidies, forcing the current buyers to find more expensive substitutes.

– Create subsidized competition for companies that already produce chemicals from other sources.

In short, they would take money from existing businesses and their customers and give it to someone with a better lobbyist.

The bill is HSB 98. The bill also contains increases in “seed capital” and “angel investor” tax credits, expanding the Iowa’s dubious role as an investment banker that doesn’t care whether it makes money.

 

supreme courtYesterday was the current Obamacare challenge’s day in the Supreme Court. It’s pretty clear that the four liberal justices will vote to uphold the IRS, and the subsidies to taxpayers outside of state exchanges. Justices Scalia, Alito and Thomas will vote no. The decision is in the hands of Justices Kennedy and Roberts, who aren’t giving much away.

I’ll defer to others for coverage of yesterday’s hearing, including:

Megan McArdle, Life or Death. “This morning, someone on Twitter explained that this case really is different because if the Supreme Court rules the wrong way, thousands of people will die. I find this explanation wholly unconvincing, for two reasons.”

Jonathan Adler, Oklahoma’s response to Justice Kennedy and Things we learned at today’s oral argument in King v. Burwell.

 

Russ Fox, IRS Proposes Session Method for Slot Machine Play and a Revision to the Regulations on Gambling Information Returns:

There’s a lot to like in IRS Notice 2015-21, the IRS’s proposal for a “Safe Harbor Method for Determining a Wagering Gain or Loss from Slot Machine Play.” The proposal is for a daily session for slot machine play where there are electronic records. Let’s say an individual plays slot machines at Bellagio from 10:00am – 12:00pm and from 3:300pm – 5:00pm. That can all be combined into one session per this revenue procedure (if it is finalized).

This is important for gamblers because gambling winnings are included in Adjusted Gross Income, but losses are itemized deductions. If you treat each play as a separate taxable event, then you inflate both the above-the-line winnings and the below-the-line deductions. Increasing AGI causes all sorts of bad things, including making Social Security Benefits taxable, and at higher levels causing a loss of itemized deductions and exemptions and triggering the Obamacare Net Investment Income Tax of 3.8%. Allowing winnings and losses to be netted over a day reduces this inequity.

 

IMG_1219Where red-light cameras take you. The Ferguson Kleptocracy (Alex Tabarrok, Marginal Revolution). When the role of law enforcement becomes picking the pockets of the citizenry, bad things happen.

 

 

Scott Drenkard offers a link rich state tax policy roundup: More Research against the Texas Margin Tax, New Kansas Pass-Through Carve Out Data, and Capital Gains Taxes in Washington (Tax Policy Blog). It includes this:

Barbara Shelly at the Kansas City Star has a review of the Kansas income tax exclusion for pass through entities that blew a hole in the budget. Kansas expected 191,000 people to take advantage of the exclusion, but 333,000 people ended up taking it, for a loss of $207 million in revenues. I testified today to the Ohio House Ways & Means Committee on a similar provision being considered by Gov. Kasich.

Imagine that.

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Kay Bell, Alabama’s GOP governor calls for – gasp! – new, higher taxes

Peter Reilly, Government Focusing On Codefendant Hansen As Kent Hovind Trial Commences. More coverage of the young-earth creationist tax case.

Robert Wood, Despite FATCA, U.S. Companies Stash $2.1 Trillion Abroad—Untaxed

TaxGrrrl, Taxes From A To Z (2015): B Is For Bona Fide Residence Test

 

William McBride, Rubio-Lee Plan Cuts Taxes on Business Investment to Grow the Economy by 15 Percent (Tax Policy Blog):

  1. It cuts the corporate and non-corporate (or pass-through) business tax rate to 25 percent.
  2. It eliminates the double-tax on equity financed corporate investment, by zeroing out capital gains and dividends taxes.
  3. It allows businesses to immediately write-off their investments, instead of requiring a multi-year depreciation.

Also:

Second, the growth in the economy would eventually boost tax revenue, relative to current law. We find after all adjustments (again, about 10 years) that federal tax revenue would be about $94 billion higher on an annual basis. This is our dynamic estimate. Our static estimate, i.e. assuming the economy does not change at all, shows a tax cut of $414 billion per year. We believe the dynamic estimate is much closer to reality.

For another (non-dynamic?) view, there’s Howard Gleckman, The Rubio-Lee Tax Reform Plan Raises Important Issues But Would Add Trillions to the Debt. (Tax Vox)

 

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Accounting Today, Senate Report Blames Tax Pros for Unfair Tax Code. I think that’s a little like criminals blaming their victims for their crimes. I agree with Tony Nitti: Senate Report Blames Tax Professionals For Inequities In The Tax Code; Is Completely Insane.

 

TaxProf, The IRS Scandal, Day 665.

Joseph Thorndike, Voters Are Confused About the Difference Between Tax Avoidance and Evasion – Because Politicians Blur the Line (Tax Analysts Blog)

 

News from the Profession. PwC Concludes Female Millennials Are Great For Vague, Pointless Research (Adrienne Gonzalez, Going Concern). “It’s the 3% that don’t care about work/life balance I’m worried about…”

 

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Tax Roundup, 3/4/15: Big week for trusts. And: Iowa gets its own tax phone scam!

Wednesday, March 4th, 2015 by Joe Kristan

1041Friday is Day 65 of 2015. Though March 6 is just another day to most people, it has always meant something to me (happy birthday, Brother Ed!). It also means something to trustees. The tax law allows trusts to treat distributions made during the first 65 days of the year as having been made in the prior year. This allows complex trusts to control their taxable income with a distribution, because trust distributions carry trust taxable income out of the trust to beneficiary 1040s.

This has become more important since the enactment of the Obamacare 3.8% Net Investment Income Tax. This tax hits trusts with adjusted gross income in excess of $12,150 in 2014. If a trust has beneficiaries below the much-higher NIIT thresholds for individuals, it can make at least some of that tax go away with 65-day rule distributions.

This affects “complex trusts,” which are trusts that are not required to distribute their income annually and which are not otherwise taxed on 1040s. Distributions from such normally carry out ordinary income, but not capital gains. If the trust has income that is not subject to the NIIT, the distribution will be treated as carrying out some of each kind of income, so trustees have to take that into account in their NIIT planning.

Income subject to the NIIT includes interest, dividend, most capital gains, rents, and “passive” income from businesses or K-1s. Retirement plan income received by trusts is normally not subject to the NIIT. A 2014 Tax Court decision makes it easier for trusts to have non-passive income, but trust income is normally passive.

 

20120920-3An Iowacentric tax scamThe Iowa Department of Revenue warns of a scam targeted at Iowans:

The Iowa Department of Revenue has been made aware of a potential scam targeting Iowa taxpayers. The scam begins through an automated phone call, which shows on caller ID as being from 515-281-3114. That phone number is the Department’s general Taxpayer Services number; however, no automated phone calls can originate from that number.

When answering the call, the taxpayer is informed they are eligible for a refund from the Iowa Department of Revenue. The taxpayer is then asked whether the refund should be deposited into the account the Department has on file or if they’d like to donate the refund to an animal charity.

The Iowa Department of Revenue does not make these types of calls. We believe this is an attempt to steal bank account or other personal information. By fraudulently displaying the Department’s phone number on caller ID, the scammer is attempting to convince the taxpayer of the legitimacy of the call.

The Iowa Department of Revenue doesn’t phone you out of the blue. The IRS doesn’t phone you out of the blue — they barely even answer phones anymore. If you get a call from a tax agency, assume it is a scam. It is, unless you have already been in contact with the agency because of a notice you’ve received in the mail

 

Obamacare is again on the dock in the U.S. Supreme CourtThe IRS decision to allow tax credits for policies in the 37 states that did not set up ACA exchanges is up for debate. The law provides for credits only for exchanges “established by a state.”

In a less politically-sensitive context, one could expect a 9-0 or 8-a decision against the IRS. That’s what happened in Gitlitzwhere the court ruled that the IRS couldn’t regulate away a perceived misdrafting of the tax code’s S corporation basis rules that allowed a windfall to taxpayers whose S corporations had debt forgiveness income. “Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.” But because a decision against IRS here would invalidate key parts of Obamacare in most of the country, politics is a big part of the process.

Those arguing for the IRS interpretation say the chaos will ensue and thousands of people will dieMichael Cannon, a prime architect of the case against the IRS rule, has a more measured discussion of the consequences of a decision against the IRS rule in USA Today. Aside from upholding the rule of law, a decision against the IRS rule could have many benefits.

Related: Megan McArdle, Obamacare Will Not Kill the Supreme Court. For a roundup of posts on the topic, try King v. Burwell — The VC’s Greatest Hits, from the Volokh Conspiracy’s attorney-bloggers.

Update: From Roger McEowen, Would It Really Be That Bad If the U.S. Supreme Court Invalidated the IRS Regulation on the Premium Assistance Tax Credit?

 

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William Perez, Self-employed? SEP IRAs Help Reduce Taxes and Save for Retirement

TaxGrrrl, Taxes From A To Z (2015): A Is For Actual Expense Method

Kay Bell, Some Ohio taxpayers stumped by state’s tax ID theft quiz

Jason Dinesen, Is Chamber of Commerce Membership Worth It?. Our local group functions as an alliance of crony capitalists.

 

TaxProf, The IRS Scandal, Day 664. Today’s edition mentions my high school classmate and junior class president election opponent, Al Salvi, and his outrageous treatment at the hands of Lois Lerner when she was with the Federal Elections Commission. For the record, Lois Lerner had nothing to do with my electoral triumph.

Robert Wood, Warren Buffett To Al Sharpton, The 1% Makes 19% Of All Income, Pays 49% Of All Taxes

Alan Cole, Most Retirement Income Goes To Middle-Class Taxpayers (Tax Policy Blog).

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Clint Stretch wonders whether it is Time to Retire Income Tax Reform? (Tax Analysts Blog). “With income tax reform out of the way, we could focus the conversation on the important issue – the size and scope of government. If eventually we can agree on how much tax we need to collect, we can always ask tax reform to come out of retirement for a little consulting.”

 

Len Burman, Cutting Capital Gains Taxes is a Dead End, Not a Step on the Road to a Consumption Tax. As someone who thinks the proper capital gain rate is zero, I can’t agree.

Career Corner. Starting a CPA Pot Practice Is Your Next Opportunity (Caleb Newquist, Going Concern). “Consider a joint venture, at least.”

 

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Tax Roundup, 2/20/15: Sometimes you just need a new voter edition. Also: time travel for a tax credit!

Friday, February 20th, 2015 by Joe Kristan

IMG_1291When the votes don’t go your way, replace the voters. The Iowa House Republican leadership seems all-in on the proposed 10-cent gas tax increase. WHOTV.com reports:

A bill that will raise Iowa’s gas tax by ten-cents per gallon, as soon as March 1, took a big step forward at the statehouse Thursday. That’s thanks in large part to a committee membership shuffle by Iowa House Speaker Kraig Paulsen.

Paulsen replaced Jake Highfill, who he says was a ‘no’ vote on raising the gas tax, with Brian Moore, who he says is a “yes” vote, on the committee. Paulsen also removed Zach Nunn from the committee for one day and put himself in Nunn’s place.

That enabled the bill to clear the committee by a 13-12 vote.  So it looks like the powers that be are determined to make the gas tax increase happen.

 

Time travel. Congress reenacted the expired Work Opportunity Credit in December, retroactively to the beginning of the year. The credit provides a tax savings up up to $9,600 for employers who hire people in groups favored by legislation — welfare recipients and veterans, for example. There was a hitch in the retroactive legislation, though. The WOTC requires employers to certify that new hires are eligible within 28 days of their start date. It’s difficult for employers to go back in time to January to comply with legislation enacted in December.

Fortunately, the IRS yesterday issued Notice 2015-13, giving employers until April 30 to obtain employee signatures on Form 8850 and submit them to the local job service to qualify 2014 hires for the credit.

Wages may qualify for the credit if paid to employees who were on public assistance or food stamps in the period before their hire date, certain veterans, or ex-felons. Details can be found on Form 8850 and its instructions.

 

No Walnut STTax Season is Saved! Obamacare Inflicts IRS Paperwork on New Victims (J.D. Tucille, Reason.com). “Perhaps the Affordable Care Act’s most-resented wrong against the American people will be initiating those previously exempt to the dull, often incomprehensible grind of Internal Revenue Service paperwork.”

Tax Season is Saved! State tax refund troubles spreading (Kay Bell).

Tax Season is Saved! IRS Paid $5.8 Billion In Fraudulent Refunds, Identity Theft Efforts Need Work (Robert Wood)

 

Megan McArdle, Will Obamacare Join Tax Season Chaos?:

Apparently, there is a movement afoot to get the Barack Obama administration to line up the Affordable Care Act’s open-enrollment period with tax season. The reason: Many people are going to find out in March or April that they owe a penalty for not having the minimum essential insurance coverage. Those unlucky people, who may decide they’d like to buy health insurance after all to avoid next year’s penalties, will be too late to go through that year’s open enrollment.

Oh, goody.

IMG_1274William Perez, Reconciling Advance Payments of the Premium Tax Credit. Though the results might not be pleasant.

Jason Dinesen, Tips For Financing a Small Business: Part 2 of 5 — Use Your Accountant as a Resource

Peter Reilly, Tom Brady’s MVP Truck Even More On The Tax Implications

Carl Smith, The Empire Strikes Back on Excessive Refundable Credit Claim Penalties (Procedurally Taxing)

TaxGrrrl, Taxpayers Sue Treasury, SSA, Alleging Improper Refund Seizures. “As the stories became more sensational – in part due to reports filed by The Washington Post – SSA was forced to announce that it would stop trying to collect debts that were more than ten years old. But by “stop,” they apparently meant ‘slow down… a little.'”

 

Kyle Pomerleau, Richard Borean, The Dual Tax Burden of S Corporations (Tax Policy Blog):
Top marginal tax rates for active shareholders then vary based on whether the last dollar is profit or wage. The following map shows the top marginal tax rate in each state for an active shareholder, assuming that their last dollar earned was a profit.
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Passive shareholders do not pay any payroll tax on their income since they do not draw a wage from the business. Instead, they are liable for the ACA’s Net Investment Income Tax of 3.8 percent, which only hits income over $200,000 ($250,000 for married filing jointly).

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I think this will motivate some S corporation owners to become surprisingly active in their retirement.

TaxProf, The IRS Scandal, Day 652

 

Kristine Tidgren ponders The Irony of Yesterday’s Limited ACA Penalty Relief (ISU-CALT). She notes that some employees whose employers terminated these plans in the face of the $100 per-day-per employee penalty end up worse off than those whose employers continued the plans and whose penalties were waived by the IRS in Notice 2015-17. “Bottom line, the employee of the compliant employer walks away with only about 60% of the benefit received by the employee of the noncompliant employer.”

And that is true, as far as it goes. The apparent purpose of these rules is to force employers to either sponsor a group health insurance plan under the employer SHOP marketplace (good luck with that in Iowa right now), or to send the employees to the individual exchange. So it wasn’t about whether employees were covered, it was about whether their coverage was done under the right government supervision.

But the Obamacare drafters were careless. While they imposed a $100-per-day, per employee penalty for sponsors of plans that reimburse employee premiums, they also left the tax incentives for such plans under Section 105 in place. So while one code section punished employers for reimbursing individual health premiums, another rewarded employees for receiving the reimbursements. Given the mixed message, no wonder many employers didn’t realize that their long-time employee benefit was suddenly a bad thing.

Of course, absent the waiver, many of the employees receiving a premium reimbursement would be much worse off — their employers would go broke paying a $36,500 non-deductible fine for each employee for the crime of covering their individual premiums. As bad results go, this is a lot worse than the loss of a tax benefit by the compliant employer’s employee.

 

Caleb Newquist, #BusySeasonZen: The Train Snowblower (Going Concern). In case you think you’re having a tough winter.

 

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Tax Roundup, 2/10/15: Iowa House may vote on conformity today. And: pass-through isn’t the same as “small.”

Tuesday, February 10th, 2015 by Joe Kristan

IMG_1284Iowa Conformity Update: No action yesterday in the Iowa House on SF 126, the Senate-passed bill that conforms Iowa income to federal rules, except for bonus depreciation. The house version of the bill, HF 125, is scheduled for debate today in the Iowa House. That means we may have a vote today.

Update, 9:15 a.m. SF 126 passes Iowa House, 94-0. The Senate-passed bill was substituted for HF 125 on the floor and approved. It now goes to the Governor, who is expected to sign.

 

Kyle Pomerleau, Some Pass-Through Businesses are Significant Employers (Tax Policy Blog):

In the United States, most businesses are not C corporations. 95 percent of businesses are what are called pass-through businesses. These businesses are called pass-throughs because their income is passed directly to their owners, who then need to pay individual income taxes on it. Contrast this with C corporations that need to pay the corporate income tax on its income before it passes its earnings to its owners. Combined, pass-through businesses employ 55 percent of all private-sector workers and pay nearly 40 percent of all private-sector payroll.

When business income is taxed on the 1040 and income tax rates are raised, the business has less income to hire and grow.

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Not recognizing the fact that pass-through businesses can be large employers can bring about poor policy choices. For example, increases in the top marginal individual income tax rate will not only hit individuals with high wage income or business income, it may hit a significant number of large employers who are organized as pass-through businesses. Conversely, some policies that are aimed at helping small businesses, such as state-level pass-through business income tax exemptions, could incidentally benefit large established businesses.

Unfortunately, no individual rate is ever high enough for some people.

 

younker elevatorsHoward GleckmanTax Subsidies May Not Help Start-Ups as Much as Lawmakers Think (TaxVox):

But the biggest reason startups may be unable to take advantage of tax subsidies is that they often lose money in their early years. In theory, generous preferences such as Sec. 179, the research and experimentation credit, or even the ability to deduct interest costs are all available to startups. In reality, many cannot use them because they make no profit and, thus, pay no tax.

Firms can carry net operating losses forward for up to 20 years but these NOLs are far less valuable than immediate deductions for three reasons—money loses value over time, some firms never generate enough income to take full advantage of their unused losses, and some lose their NOLs when they are acquired. A 2006 Treasury study found that at least one-quarter of these losses are never used and others lose substantial value.

One way to help this problem would be to increase the loss carryback period. Businesses can only carry net operating losses two years. Corporations in Iowa and some other states can’t carry them back at all.

Consider a business that has income in year one, breaks even in years 2 and 3, and loses enough to go broke in year four. It never gets the year 1 taxes back, even though over its life it lost money.

An increased loss carryback period would be especially useful to pass-through owners, enabling some of them to get tax refunds to keep their businesses alive. But once the government has your money, they hate to give it back.

Loosening the “Sec. 382” restrictions on loss trafficking would also help. A struggling business would be more likely to get investment funds if the investor could at least count on using some otherwise wasted tax losses. But the government is more interested in protecting its revenue than in helping struggling businesses.

 

Department of Foreseeable Unintended ConsequencesTax Analysts Jennifer DePaul reports ($link):

 While a joint session of the New York State Legislature on February 9 heard Democratic Gov. Andrew Cuomo’s $142 billion budget proposal, the governor released more details about several tax measures included in his budget plan.

Among them was a proposal designed to crack down on tax scofflaws by suspending the driver’s licenses of debtors who owe the state as little as $5,000.

This means taxpayers with relatively small balances due will be deprived of their legal transportation to get to work. This means some taxpayers will have to quit their jobs and never get caught up with their debt, leading to a financial death spiral. Others will try to get to work, get locked up for driving on a suspended license, lose their jobs because they didn’t show up, and go into a financial death spiral. It’s a recipe for locking more people into the underclass because their Governor wants their money faster.

Related: Brian Doherty, Drivers License Suspensions Slamming the Working Poor for No Particular Good Reason in Florida  (Reason.com); Megan McArdle, Cities Dig for Profit by Penalizing the Poor

 

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Russ Fox, Harassing IRS Agents Isn’t a Bright Idea. “Speaking of ways to get in trouble with the IRS, one is to harass an IRS agent. They don’t like it (and it’s a crime).”

Tony Nitti, Are You Exempt From The Obamacare Insurance Penalty?

Robert Wood has 7 Reasons Not To File Your Taxes Early, Even If You’ll Get A Refund. “Measure twice, cut once.”

Paul Neiffer, How Do Repair Regulations Affect My Farm Operation? It does. Find out more when Paul helps present a webinar on the topic for the ISU Center for Agricultural Law and Taxation February 18.

William Perez, How Dividends Are Taxed and Reported on Tax Returns

 

Peter Reilly, Tax Court Hammers IRS CI Who Went Out Into The Cold. The strange, sad saga of Joe Banister.

Leslie Book, Some More Updates on IRS Annual Filing Season Program and Refundable Credit Errors. Leslie thinks that preparer regulation would help. I believe the persistent high rate of incorrect EITC payments in spite of increasing IRS initiatives to bug preparers and force them to document due diligence for EITC clients shows that preparer regulation won’t solve this problem.

Jason Dinesen, Send a 1099-C to a Non-Paying Customer? Updated. Probably unwise.

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Jeremy Scott, Finance Committee Review of 1986 Act Smacks of Desperation (Tax Analysts Blog):

The Senate Finance Committee will try to use history as a guide to break the logjam on tax reform. The Republican-led body will hold a February 10 hearing featuring former Finance Chair Bob Packwood and former Sen. Bill Bradley, who will talk about the process that led to the historic legislation that redefined the tax code and has left its imprint on the minds of would-be tax reformers for almost three decades now. However, looking back at 1986 appears more desperate than inspired because most of the factors that existed then are almost totally absent now.

I think all this Congress can accomplish is to not make things work, and to lay the groundwork for a tax reform that might be enacted in a more congenial political climate.

 

TaxProf, The IRS Scandal, Day 642.

 

Career Corner. Let’s Discuss: Wearing Headphones at the Office (Jesstercpa, Going Concern). You can tell you are moving up in the CPA world if you get an office with a door, and you can use actual speakers. Unless you are in one of those hideous “open offices,” of course.

 

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