Posts Tagged ‘megan mcardle’

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).

Distribution of Pension Income-02

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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Tax Roundup, 2/3/15: President announces fresh new hopeless tax proposals!

Tuesday, February 3rd, 2015 by Joe Kristan

Economic supergenius

160 tax proposals. Close to 160 doomed tax proposals. The President released the details of the tax proposals for his 2015 budget yesterday. Tax Analysts Reports ($link):

The added details on international reforms the administration is seeking serve as “a significant step forward” to flesh out its business tax reform framework and see if there is an “opportunity for movement” on business reform with Congress, a senior Treasury official told reporters at a February 2 briefing on the release of the Treasury’s green book explanation of the revenue proposals in the budget.

Overall, the fiscal 2016 budget includes roughly 160 tax proposals, of which about 30 are new, 45 are modifications or combinations of old proposals, and 85 are the same or similar to the administration’s fiscal 2015 budget, the Treasury official said.

Almost all of these proposals are doomed for this Congress. As most of these couldn’t pass when Democrats controlled the Senate, they’re hardly likely to pass now that they don’t. A GOP Congress is also not about to pass some of the more publicized class warfare proposals, like the increase in the capital gain rate, the taxation of capital gains at death, increase the estate tax rate to 45% (from 40$) and lowering the estate and gift tax lifetime exclusion to $1 million (from $5+ million).

No Walnut STA few proposals might get a sympathetic hearing on their own from GOP taxwriters. These include:

– Cash basis accounting and repeal of Section 263A inventory capitalization for companies with up to $25 million in gross receipts.

– Permanent extension of the Section 1202 exclusion for qualifying small C corporation stock gains.

– Permanent extension of the refundable Child Tax Credit.

– Increasing the maximum Section 179 deduction from $500,000 to $1 million.

A few other corporate welfare gimmicks that might get a hearing include permanent research credits and permanent New Markets Tax Credits.

While there are a few items that might attract GOP support, overall this batch of proposals is more extreme than the ones that went nowhere before. The President probably won’t let Congress just pick out the tasty bits from his proposals, so I expect little to none of this to actually pass.

Flicker image courtesy Michael Coghlan under Creative Commons license.

Flicker image courtesy Michael Coghlan under Creative Commons license.

Other Coverage:

TaxProf, Tax Provisions in President Obama’s FY2016 Budget

WSJ, Obama Would Block Strategies to Pump Up Roth IRAs

Accounting Today, Obama Proposes Sweeping Tax Changes in 2016 Budget

Jeremy Scott, Obama’s Foreign Earnings Tax: 19 Percent Minimum DOA but Deemed Repatriations Key (Tax Analysts Blog)

Kyle Pomerleau, The President’s Tax on Offshore Earnings Represents the Worst of Retroactive Policy (Tax Policy Blog)

Len Burman, Are Accrued Capital Gains Income in the Year You Die? (TaxVox). “But reclassifying exceptionally thrifty middle-class families to the top of the income distribution by counting a lifetime of unrealized gains in income when they die clearly overstates their well-being.”

Tony Nitti, Tax Aspects Of The President’s FY2016 Budget

TaxGrrrl, Obama Budget Proposal Tackles Small Business, Changes To IRS

Kay Bell, Tax highlights in Obama’s FY2016 budget proposal

Annette Nellen, President Obama’s 2015 Tax Proposals

 

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Megan McArdle, Government Blinks Again on Obamacare, a discussion of the IRS announcement that it won’t impose the failure-to-pay penalty on exchange policy purchasers who have to repay some subsidy:

The IRS emphasizes that this is a one-time-only deal, just for 2014. But I’m not sure if you should believe that. This emphasizes one of the problems we’ve spoken about a lot in this space: The political will to impose the costs of the Affordable Care Act is a lot less strong than the will to distribute the benefits.

It also telegraphs that the IRS expects that a lot of taxpayers who are anticipating a refund will be instead writing a check on April 15.

 

20140925-2Peter Reilly, Repair Regs And Tax Pros Are Like Headlights And Deer:

For the most part, the people who have been really looking at these regulations have had a large firm perspective.  To be a just a little cynical, they actually kind of like all this complexity, since they can make a case for sending out big bills to entities that can afford to pay them.  My brief time at the national level, not Big 4, but with many former Big 4 people made me realize there is a radically different perspective at that level.  They are used to having a very small number of competitors for any client who more or less sing from the same hymn book.  The client people that they deal with are quite likely fellow members of the Big 4 cult rather than tight fisted entrepreneurs who resent every penny they spend on professionals.

Regulation always favors the big, and the “repair regulations” are no exception.

 

Russ Fox, Fake Interest Income, Fake Withholding, Real Fraud at the Tax Court. “What is amazing to me is that the petitioner has not, as far as I can tell, been criminally indicted.”

Robert Wood, The Truth About Lying On Your Tax Return.  “…as with your resume, making up something on your tax return is a terrible idea.”

Martin Sullivan, JCT Report Provides New Insight on Competitiveness (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 635

 

News from the Profession: How Internal Controls Will Keep You Safe From Velociraptors (Leona May, Going Concern).

 

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Tax Roundup, 1/27/15: IRS waives late payment penalty for ACA tax credit recapture. And more!

Tuesday, January 27th, 2015 by Joe Kristan

20140413-1Be thankful for small favors. Perhaps millions of taxpayers will face an unhappy surprise this tax season thanks to the Affordable Care Act. The ACA provides a tax credit to help taxpayers up to 400% of the poverty level pay for insurance purchased on an ACA exchange. The credit is computed based on an estimate of the taxpayer’s household income and paid directly to the insurance company; the premium paid by the taxpayer is reduced by the same amount.

At tax time, the policyholder-taxpayers have to compare their actual income to the income they estimated when they bought the policy. If the actual income is higher than what was estimated, they may have to repay thousands of dollars in credits paid to the insurers.

Yesterday the IRS provided some cold consolation (Notice 2015-9) for these folks, for 2014 returns only. If they can’t come up with the cash to pay the tax on April 15, the IRS will waive the penalty for late payment of taxes if the amount is reported on a timely return. They are also waiving penalties for underpayment of estimated tax attributable to the credit.

20121120-2Taxpayers claiming the waiver are just supposed to file the return without the payment for the recaptured excess credit. Then when the IRS sends an underpayment demanding payment with penalties, they are supposed to respond with a letter saying “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.” That will go over well, I’m sure. They also have pay up by April 15, 2016, with interest.

These waivers don’t cover the separate penalty for failing to carry health insurance — the “individual mandate” — because the IRS can’t assess penalties for not paying it in the first place.

Unfortunately, the IRS has not yet issued a blanket waiver for the much more severe penalties on employers with non-compliant premium reimbursement arrangements (“Section 105 plans“). We’ll see if the IRS wants to tangle with the thousands of 2014 waiver requests they will receive if they don’t issue a blanket waiver, one-at-a-time.

Related:

Tony Nitti, IRS: No Penalties For Late Repayments Of The Premium Tax Credit

Megan McArdle, Reality Check on Obamacare Year Two

Me: The ACA and filing season. Be afraid.

 

Robert D. Flach brings you your fresh Tuesday Buzz, including advice about checking information returns and choosing a preparer.

TaxGrrrl, Credit Cards, The IRS, Form 1099-K And The $19,399 Reporting Hole. “Tucked in the middle of the housing bill was a provision that had absolutely nothing to do with housing: a new requirement that banks and credit card merchants to report payments to the IRS.”

Kay Bell, Don’t become a tax identity theft victim. Good idea.

William Perez, A First Look at TaxACT Free File Edition

Russ Fox, The Form 3115 Conundrum: “This year there’s a conundrum faced by tax professionals: Do we need to file a Form 3115 for every taxpayer who has equipment, depreciation, rental property, inventory, etc.?”

I think we will need many 3115 filings, but I don’t think they are required for everyone. As Russ notes, nobody seems to know for sure.

Robert Wood, How Yahoo’s Alibaba ‘Sale’ Skirts Tax Billions, Buffett-Like.

Peter Reilly, A Free Kent Hovind Might Have Backing For A Bigger Better Dinosaur Theme Park. It really is an amazing world.

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Stephen Entin, The President Proposes a Second Tax on Estates (Tax Policy Blog):

The step-up in basis is no loophole. The step-up is needed to prevent double or triple taxation of the same assets. Without it, the president’s plan could result in a 68 percent tax rate on capital gains upon death (the inheritance would be taxed at the 40 percent estate tax rate plus the proposed 28 percent tax rate on capital gains).

It’s worse than that, considering inflation and the fact that those assets were purchased with after-tax income in the first place.

Jeremy Scott, Three Early Signs of What to Expect From Congress (Tax Analysts Blog): “It will be unpredictable.”

IMG_1116TaxProf, The IRS Scandal, Day 628 “The pattern begins with blatant denials — bald lies — and stonewalling. … Next in the pattern, when the lies fail, comes the attribution of responsibility to the lowest level of bureaucrat. …”

Martin Sullivan, Is There Now a Window of Opportunity for Tax Reform? (Tax Analysts Blog). Spoiler: “We will have to wait until 2017 for any real progress on tax reform. And by no means is there any guarantee of movement then.”

Howard Gleckman, Is Dynamic Scoring of Tax Bills Ready For Prime Time?

Sebastian Johnson, Sam Brownback’s White Whale. “Little did Kansas voters know that in reelecting Sam Brownback they were actually voting for a vengeful old sea captain obsessed with one issue above all others – eliminating the state’s personal income tax.”

 

Career Corner. Stop Using These Played Out Words in Your LinkedIn Profile Immediately (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 1/26/15: Is Iowa 2014 tax season in jeopordy? And: how “trust fund tax” encourages trusts.

Monday, January 26th, 2015 by Joe Kristan

Accounting Today visitors: Here is the accounting method post mentioned by “in the blogs.”

 

20130117-1Uh-oh. Is there a holdup on passing the annual “conformity” bill at the statehouse? This from Republican State Senator Bill Anderson in the Sioux City Journal is a bad sign:

Senate Democrats are playing politics with the issue. The Department of Revenue is recommending accountants tell clients to delay filing their taxes until a decision is made. Senate Democrats’ indecisiveness to pass legislation in a timely manner creates uncertainty for taxpayers and tax professionals, preventing them from filing returns.

I had not heard there was any difficulty here. I hope it’s not serious, but I will be watching it more closely now.

This is another example of why Iowa should have a “floating conformity” rule. I don’t understand why they can’t say they will automatically adopt federal extender changes. If they want to leave out bonus depreciation, that could be done with language excluding that from the automatic conformity. We shouldn’t have to go into February without knowing what the state tax law is for the prior year.

 

Janet Novack, Obama Attack On “Trust Fund Loophole” Could Increase Tax Advantage Of Trusts. “Without step-up, there would, for example, be an even greater tax advantage to putting assets that are likely to explode in value—such as founders’ stock in a hot start-up—into an irrevocable trust for children or grandchildren.”

 

Kay Bell, Capital gains gain in income reporting, but tax hike unlikely

Jack Townsend, Fifth Circuit Rejects Attempt on Direct Appeal to Withdraw Guilty Plea in False Claims Conspiracy Case

Jim Maule, No Agreement? No Alimony Deduction. In divorce, paperwork is everything.

Robert Wood, 10 Crazy Sounding Tax Deductions IRS Says Are Legit. My favorite is “free beer.”

20130607-2Anthony Nitti, IRS Futher Limits Deductions For State-Legal Marijuana Facilities:

Most notably, Section 280E provides that “no deduction is allowed for any amount incurred in a business that consists of trafficking in controlled substances.” Because marijuana finds itself on Schedule I of the Controlled Substances Act, the IRS has the ammunition necessary to deny the deductions of any facility that sells the drug.

And it does. Regularly.

I hope nobody really believes this actually prevents any drug crimes. What it does is add a crushing tax debt that helps ensure that anybody who gets involved in drug traffic can never reform and become a productive member of society.

 

Robert Goulder, Should the Mayor of London Pay U.S. Taxes? (Tax Analysts Blog):

True, there are tax treaty protections at play and foreign tax credits available. But the point of the story isn’t double taxation; it’s jurisdictional overreach. Many will argue that a citizenship-based tax regime is unfair and heavy-handed.

The U.S. is the only country that does it. Oh, Eritrea, too.

Stephen Olsen, The Gift that Keeps on Taking–Does Section 6324(b) Limit Gift Tax to the Value of the Gift or Can the IRS Take More? (Procedurally Taxing)

 

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.

Alan Cole, The IRS Has Too Many Responsibilities (Tax Policy Blog):

On one hand, the IRS’s basic responsibilities have gotten less onerous over the years. More and more taxpayers file electronically, which means that everything just zips straight into the IRS’s computer system with little need for human oversight. This should mean that the IRS really doesn’t need to grow, and if anything it could stand to shrink.

But on the other hand, the IRS has been overloaded with all sorts of additional responsibilities. It’s acting as an extension of the Department of Health and Human Services in enforcing the Affordable Care Act. It’s acting as an extension of the Federal Election Commission and regulating political speech (an authority it has perhaps not used so well.) It’s acting as an extension of the Department of Energy with its residential energy credits, and it’s acting as an extension of the Department of Education in offering deductions and credits for teachers and students. It has to figure out who has health insurance and who has children and where the children live. It even has to try to get data from foreign banks, due to the complexity of our worldwide system of taxation. The more arbitrary things find their way into the tax code, the more verification systems the IRS has to put in place.

These are only a few of the non-revenue responsibilities dumped on the IRS that uses the tax law as the Swiss Army Knife of public policy. Beyond the bottle opener and the screwdriver, every gadget you add makes it harder to use it as a knife, and now we have a Swiss Army Knife the size of a railcar.

 

20140919-2Gretchen Tegeler, Benefits and Costs of DARTing Forward  (IowaBiz.com), on the troubling financial structure behind Des Moines’ public tansportaiton:

Despite a nearly 20 percent increase in ridership over this period, there has been no associated increase in fare-based revenue.  If more millennials are riding the bus, why aren’t we seeing an increase in operating revenue?  The absence of growth in operating revenue suggests that all of the recent improvements in service and ridership have been funded by non-users, i.e. from increases in property taxes.  Are we okay with this model? How far should we go with it?

Maybe if they had to rely more on farebox revenue, they would spend less on things like the downtown Palace of Transit.

 

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TaxProf, The IRS Scandal, Day 627

Glenn Reynolds, Middle-class Savings Like Blood in the Water. Paying for “free” college and student loan subsidies by taking money out of the pockets of those who save for college sets up a strange incentive structure.

Megan McArdle, Uncle Sam Is Coming After Your Savings. They need it to buy you “free” stuff.

 

Career Corner. The Public Accountant’s Definitive Guide to Disclosure of Past Convictions (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 1/9/15: Senators: preparers aren’t doing a good enough job on the tax law we’ve butchered.

Friday, January 9th, 2015 by Joe Kristan
wyden

Senator Wyden

Senators get behind IRS preparer regulation power grab. Accounting Today reports:

Two Democrats on the Senate Finance Committee have introduced legislation to regulate paid tax preparers in response to the federal court decision that found the Internal Revenue Service had exceeded its statutory authority in regulating preparers.

Senate Finance Committee ranking member Ron Wyden, D-Ore., and Senator Ben Cardin, D-Md., unveiled legislation Thursday that provides the Treasury Department and the IRS explicit authority to regulate paid tax return preparers. Wyden chaired the committee until control of the Senate changed after last November’s elections.

They call their yet unnumbered bill the “Taxpayer Protection and Preparer Proficiency Act of 2015.” A better name would be “A Bill to Boost the Revenue of the Major Franchise Tax Preparation Outfits.”

Whatever idealistic motives might be behind this bill (though I don’t give senators the benefit of the doubt for a second), the effect will be to protect and enhance the market share of the national tax prep firms. It was no coincidence that the overturned IRS preparer regulation program was drafted by a former H&R Block executive who came out the other side of the revolving door as a Treasury employee.

Regulation always favors the big. The national firms can spread the costs of compliance over a much bigger base of work, while a sole practitioner has to be her own regulation compliance department. A paperwork hangup or computer burp in the preparer regulation database can wreck a year’s business for a sole practitioner, but wouldn’t stop H&R Block or Liberty Tax for a moment.

It is argued that such regulation is needed to protect us from incompetents by imposing a “competency test.” As the test administered under the abortive IRS regulation program was more a literacy test than a competency test, this is hard to credit.  And anybody who has practiced in a regulated profession like accounting or law knows that while you can make someone pass a test, you can’t make him competent.

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 list of bills introduced this week in Congress in today’s Tax Notes shows what the real tax prep problem is: Congresscritters like Senator Wyden. In addition to his preparer bill, the Senator introduced a bill:

To amend the Internal Revenue Code of 1986 to provide a tax incentive to individuals teaching in elementary and secondary schools located in rural or high unemployment areas and to individuals who achieve certification from the National Board for Professional Teaching Standards, and for other purposes. 

This is just one more example of legislators using the tax law as the Swiss Army Knife of public policy. As the knife gets more unwieldy with every new gadget added to it, the tax law gets a little less better at collecting revenue with every new program added to it. Picture a Swiss Army Knife the size of a railcar.

 

And it’s not like Congress isn’t already doing enough for the national tax prep outfits, as Megan McArdle explains in Latest Tax Season Headache? Obamacare:

There’s been a lot of talk about the “hidden taxes” in the Affordable Care Act, but here’s one I hadn’t thought of before or seen mentioned anywhere: the sudden need for folks with simple tax returns to avail themselves of the services of a paid professional. If you have no income outside a modest salary, and not much in the way of potential deductions such as huge mortgage interest or state tax bills, then there was really no reason to use a tax preparer. Even the mathematically challenged should, with the aid of a calculator, be able to fill out their 1040EZ forms just fine. But Obamacare has introduced a significant level of complexity into the taxes of lower-middle-class wage earners.

That’s true. And a lot of folks who have used preparers will find their costs going up to pay for the extra work that will be required.

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Kay Bell, IRS contacts tax preparers about filing mistakes; Thousands warned of Schedule C business income & child tax credit errors. Funny, I thought preparers weren’t regulated at all.

Jason Dinesen, The IRS’s Preparer Directory Will Be Bad News for Enrolled Agents. EAs have less lobbying clout than CPAs or the national tax prep outfits, and it shows.

 

Paul Neiffer, Should I File By March 1? “Therefore, if your tax for 2013 was very low and your tax for this year will be very high, talk this over with your tax advisor to see if it makes sense to pay an estimated tax payment on January 15 and wait until April 15 to make the final payment.”

Remember, only farmers get this break, and many are finding that the need to wait on K-1s from other investments makes filing a correct March 1 return impossible.

William Perez, Tips for a Tax-Efficient Divorce, Plus a List of What to Do First. From what I’ve seen, it’s even more tax-efficient to stay married.

In spite of the cold, we can count on Robert D. Flach for a fresh Friday Buzz roundup of news from around the tax blog world.

 

20130130-4Tim Worstall, Tax Avoidance And Tax Evasion Are To The Benefit Of Us All, picking up on David Henderson’s post that we mentioned earlier this week:

The crucial point is really how one views the activities of government. And there’s two views that seem to be held. One that I regard as hopelessly naive and simplistic, the second something very much closer to reality. That first is that all of the things that government does for us are beneficial to us and that limiting what it does do harms us all. The second is that some parts of what government does are things which both must be done and can only be done by government, but that a rather large part of what it attempts to do shouldn’t be done at all, whether by government or not.

I think this point is correct, though I’m sure Jim Maule would disagree with vigor. I also agree with this point that he quotes: “Government maximizes revenues; it does not levy revenues only to produce genuine public goods.” I also believe tax avoidance and evasion can serve as a check on overreach, but I suspect it only works in pretty bad situations.

TaxProf, The IRS Scandal, Day 610

Renu Zaretsky, Taxes: To Be Considered, Rejected, or Collected. Today’s TaxVox headline roundup covers the upcoming federal budget proposal, Cadillac taxes on health plans, and an “impossible dream” bill that purports to both abolish the imcome tax and balance the budget.

 

IMG_2535Cara Griffith, Mississippi Needs a Dose of Transparency (Tax Analysts Blog). “The Mississippi Department of Revenue does not publish opinions and decisions resulting from its audit appeals process, even though it may use those opinions and decisions as precedent.”

I notice Iowa hasn’t published any new rulings in two months now.

Liz Malm, Taxplainer: The State and Local Tax Impact of the Keystone Pipeline. “According to the analysis, property taxes collected during construction would amount to just under $4 million and would be spread out over seven counties in the three impacted states. ”

Sebastian Johnson, State Rundown 1/8: All Eyes on the Governors (Tax Justice Blog)

 

Career Corner. Make the Best of Busy Season, You Big Babies (Amber Setter, Going Concern)

 

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Tax Roundup, 1/8/15: Tax shelter turned upside down: S Corp – ESOP structure produces pretend income. And: you are the 1%!

Thursday, January 8th, 2015 by Joe Kristan

tack shelterFlaky tax shelters are supposed to generate pretend losses. You know a shelter has gone very bad when it generates pretend income instead. Yet that’s how it worked out for an “S corporation ESOP management company” plan considered by the Tax Court yesterday.

The plan involved a partnership, a C corporation, an S corporation, and an Employee Stock Ownership Plan. The ESOP owned 100% of the S corporation. S corporation income is taxed to its owners. As a tax-exempt entity receiving special treatment from the tax law, ESOP-owned S corporations can achieve Tax Fairy-like results. The ESOP’s can earn non-taxed business income passing through from the S corporation (though this gets very tricky and dangerous when there are few ESOP beneficiaries).

The plan was hatched by A. Blair Stover, who has shown up in these pixels before. Mr. Stover started his tax career with a national firm in Nebraska, moving on from there to Kansas City and then to California, leaving questionable tax shelters in his wake. He was barred from promoting shelters like the one in this case in an injunction affirmed by the Eighth Circuit in 2011.

This plan involved the payment of “management fees” and other purported expenses by a partnership owned by the taxpayer and his spouse that ended up in his ESOP-owned S corporation. The partnership appears to have had no other purpose than to gin up deductions by paying pretend management fees and other expenses. The taxpayers deducted the “expenses” on their 1040, with the idea that they would avoid tax because they flowed through the S corporation to the ESOP.

tax fairyWhen the IRS went after Mr. Stover’s shelters, his clients received unpleasant IRS attention. In yesterday’s Tax Court case, the taxpayers signed a settlement agreeing to include in income on their 1040 the purported management fees paid to the ESOP.

So far, so good. But the agreement didn’t address the other side of the deal – the deduction for the payment of the purported fees by the partnership. The taxpayers claimed that if they had to pick up the pretend fees in income, they should get to deduct them too. Fair’s fair.

But if you want fairness, the tax law might not be the place to seek it.  The court held that while they agreed to pick up the extra income, their settlement said nothing about a deduction, and they were stuck with the results (my emphasis, citations omitted):

Generally, recognition of income does not inexorably prove a corresponding deductible expense. For example, payments to a promoter in furtherance of a tax avoidance scheme constitute income to the promoter, but they are not deductible under section 162 by the payor.  Furthermore, that petitioners might otherwise be obliged to recognize phantom income does not relieve them of their obligation to identify some legal authority for the deduction, nor does it permit the Court to manufacture such authority from whole cloth.

Petitioners’ phantom income argument amounts, in essence, to a plea for fairness. This Court strives to avoid unjust results, but “we are not a court of equity and cannot ignore the law to achieve an equitable end.” Moreover, the parties’ recent stipulation assuages our fairness concerns. In our order of July 1, 2014, we directed the parties to stipulate if possible, or to otherwise brief, the source of and factual and/or legal basis for the income inclusions required by the SOSI. The parties stipulated that the required income inclusions represent “the amount of taxable income petitioners avoided reporting” for tax years 2001 through 2003 because of their use of the management S corporation/ESOP structure. Taxable income is a term that is defined in the Code. Section 63 generally defines taxable income as gross income less allowable deductions. The parties’ chosen language thus implies that the $84,837 of income petitioners must include for 2003 pursuant to the SOSI represents not “phantom income” but bona fide, net taxable income that petitioners received and should have reported. So interpreted, the stipulation is difficult, if not impossible, to reconcile with petitioners’ theory for deducting the administration fee.

The result: a reverse tax shelter, generating only phantom income.

I’m not sure this too-bad-to-be-true result would hold up on appeal, but it does serve a warning. The Tax Fairy is a fickle sprite, and she can magically generate income for those seeking magical deductions. And if you agree to include phantom income when the IRS comes after you, make sure they allow the offsetting phantom deduction in writing.

Cite: Wakefield, T.C. Memo 2015-4.

 

IMG_0598Leslie Book, Bank of America on Hot Seat For Issuing Allegedly Incorrect 1099C to Disabled Veteran (Procedurally Taxing)

Robert D Flach explains WHAT’S NEW FOR THE 2014 FORM 1040?

Kay Bell, Daily Tax Tip #2: A tax quiz!

Robert Wood, The 1031 Exchange That Ate New York City. A lesson on the scalability of swaps.

TaxProf, The IRS Scandal, Day 609. The Worst Commissioner Ever comes out the other side of the revolving door.

 

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Scott Sumner on low-income use of untraceable cash at Econlog:

College professors who advocate the elimination of currency are often unaware of how important currency is for those with low incomes, many of who lack bank accounts. For instance, consider someone getting government benefits that are conditional on income (food stamps, EITC, disability, welfare, Medicaid, etc.) This group often faces relatively high implicit marginal tax rates. However currency allows them to supplement their meager benefits with additional earned income, perhaps doing home repair for neighbors, or working as a nanny. Lots of those jobs are paid in cash. If we eliminate physical cash then all transactions will be easily traceable by the government… That’s bad for two reasons; low-income people would see reduced incomes (increasing inequality), and the rest of us will be denied the services that they might have produced in the underground economy. Economists who advocate the elimination of currency need to consider those side effects.

This highlights one of the dangers of the earned income tax credit: its phase-outs serve as a hidden high tax rate on low incomes, resulting in a poverty trap on those earning their way out of poverty.

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Russ Fox, The Tax Court Looks for $1,410 in Dividends. Sometimes you can fight a small injustice and win.

 

We are the 1% Admit It: You’re Rich (Megan McArdle):

The cutoff for the global 1 percent starts quite a bit lower than the parochial American version preferred by pundits. I’m on it. So is David Sirota. And if your personal income is higher than $32,500, so are you.  

It’s all a matter of perspective.

 

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Tax Roundup, 12/29/14: Why AMT matters in year-end planning. And: Laffering it up.

Monday, December 29th, 2014 by Joe Kristan

Accounting Today visitors! Click here to find the capital gains planning item from “In the Blogs.”

IMG_1944How AMT can make prepaying state and local taxes a false move. Prepaying state and local taxes is a venerable year-end tax planning move. It can also be a costly one, thanks to the Alternative Minimum Tax. If you are in AMT this year — perhaps thanks to a big non-recurring capital gain — but you won’t be next year, prepaying your state and local taxes might result in your taxes actually being much higher over the two-year period.

An example involving a fictional Iowa married couple shows how this works. The couple has one earner with $150,000 in self-employment earnings in 2014 and 2015. In 2014 the couple generates $300,000 in a one-time capital gain.

If the couple prepays their 2014 state tax on the capital gain, they get a federal tax benefit of precisely zero in 2014; the capital gain causes them to be in AMT whatever they do because the capital gain rates are the same for AMT and regular tax.

In 2015, the couple has no AMT on their $150,000 of self-employment income. Nor do they have AMT even after paying both their 2014 Iowa balance due and their 2015 Iowa estimates. My projection software comes up with these numbers (yes, oversimplified, but the concepts hold):

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This shows that prepaying the taxes would be a $6,043 mistake for the couple.

There are cases where prepaying state taxes makes sense. There are also cases where AMT makes doing so a blunder. Make sure you run the numbers before you mail that check.

 

In case you missed it over the holidays, central Iowa’s only SHOP marketplace insurance provider was taken over by Iowa’s insurance regulators last week.  Read about it here.

 

Younkers ruins 20140610William Perez offers A First Look at ABLE Savings Accounts. These accounts, included in this month’s “extender” bill, allow Section 529-like benefits for accounts set up to pay disability costs.

Robert D. Flach, THE CLOCK IS TICKING. For 2014 Qualified Charitable Distributions from IRAs.

Mitch Maahs, Summary of the Tax Extenders in the Tax Increase Prevention Act (Davis Brown Tax Law Blog)

Kay Bell, Look out for phishing scam from fake Treasury Secretary

Jack Townsend, Tax Return Preparers Convicted of Conspiracy and Failure to File FBARs. They chose badly.

Cara Griffith, Crowdfunding and State Taxation (Tax Analysts Blog). Is Kickstarter funding taxable income or taxable sales?

Tim Todd, 4th Cir. Rejects Conservation Easement with Substitution Provision

Peter Reilly, Phantom Mares And Real Trucks Don’t Make For A Winning Horse Loss Tax Case. Plus, it’s really hard to find good phantom breeding studs.

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Renu Zaretsky, Will Tax Reforming Be Forgot and Never Brought to Mind? This TaxVox headline roundup covers the Kansas struggles with careless tax reform, among other things.

TaxProf, The IRS Scandal, Day 599

 

Stephen MooreThe Laffer Curve turns 40: the legacy of a controversial idea:

To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve”…

Laffer Curve, via Wikipedia

Laffer Curve, via Wikipedia

The idea that tax rates can become so high that they actually reduce net revenue shouldn’t be controversial. If you have a 100% tax rate on an activity, you will avoid that activity, or at least letting the government know about it. Of course, a zero rate will also generate no tax revenue. The revenue-maximizing rate is somewhere in between.

Unfortunately, some people on the right have taken this point and jumped to the conclusion that tax cuts will always cause such increased taxable activity that tax revenues will increase. That’s as much a fallacy as left-side assumptions that increasing taxes can never be economically-harmful or revenue-reducing.

The real issues should be identifying the point at which the harms to economic activity and to revenues occur. It seems likely that the economically-damaging rate is lower than the revenue-maximizing rate, as Megan McArdle discusses here. These points have to differ for different kinds of tax. A 30% income tax rate might not be very destructive to economic activity, but a 30% sales tax would hurt, and a 30% gross receipts tax would be ruinous. The results also differ for state and federal taxes, given how much easier it is for activity to to move between states than between countries.

All this, of course, ignores the obvious question of how much revenue the government needs in the first place. I would argue that a well-run government limited to its proper sphere wouldn’t have to ask these questions all the time.

 

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Tax Roundup, 11/20/14: ACA and filing season pessimism revisited.

Thursday, November 20th, 2014 by Joe Kristan

Programming note: The Tax Update will take tomorrow off. I will be in Phoenix tomorrow on a panel on state film tax credits sponsored by the National Conference of State Legislators.  The panel will include, among others, Joseph Henchman of the Tax Foundation. Normal programming resumes Monday.

 

guillotineACA frenzy! Thanks to a kind Twitter mention from Megan McArdle (who you really should follow at @asymmetricinfo), my Tuesday post on ACA and filing-season dread made it to a wider audience than usual, including the readers of Real Clear Politics. A cousin who I normally only see at family weddings and funerals saw it and sent me a note (Hi, Bob!), so I know it really got around.

It has also generated questions in the comments and the Twitterverse that are worth addressing. We’ll start with this from Alan in the comments:

In a few months when people receive their W2’s they will get a real shock when all the employer paid share of the company paid share of health care plan is included in their gross pay and now they must pay taxes on all that extra income.

Obamacare is ugly, but it isn’t that ugly. While many (but not all) employers will disclose the cost of coverage on W-2 box 12 (code DD), it will not be included in W-2 Box 1, “taxable wages.” From IRS.gov, Employer-Provided Health Coverage Informational Reporting Requirements: Questions and Answers:

Q1. Does the cost of an employee’s health care benefits shown on the Form W-2 mean that the benefits are taxable to the employee?

A. No. There is nothing about the reporting requirement that causes or will cause excludable employer-provided health coverage to become taxable. The purpose of the reporting requirement is to provide employees useful and comparable consumer information on the cost of their health care coverage.

20121120-2From Ms. McArdle on Twitter:

Any chance it won’t be that bad?

I suppose that depends on what “that bad” means. Blood seeping from the walls, shape-shifting brain-eaters from Planet Zargon, cats and dogs living together– probably not that bad. But there’s still plenty of bad to go around. The things that worry me:

– Many taxpayers will not have the information handy to determine their health insurance status for all 12-months of 2014. Only those who buy insurance on the exchanges will have Form 1095, the information return on insurance status.  Others are supposed to get information from employers, but they are likely to lose track of it, especially this first year.

– Lacking any matching documents, taxpayers will be tempted to claim coverage where there is none, or maybe wasn’t for part of the year, to avoid penalties. There won’t be an easy way to verify this. Preparers will either have to take taxpayers at their word or send them back for proof (or, inadvertently, to another preparer). It’s always bad when taxpayers feel they should lie to preparers. Yet as the IRS will often have no way to detect false claims of coverage, they will feel like chumps for telling the truth.

– Taxpayers with penalties for non-coverage will be irate when they find they get no refund. As Ms. McArdle wisely put it, “I do not have hard figures on this, but my basic experience in personal finance and tax reporting suggests that approximately zero percent of those affected will be expecting the havoc it will wreak on their tax refund.” Experience shows that the taxpayer’s first instinct is that the preparer screwed up.

– It will be even worse when we have to tell people to repay advance health-care tax credits paid to insurers to lower consumer out-of-pocket costs. This can happen when actual taxable income exceeds the amounts estimated when coverage was obtained on the exchanges. As the taxpayer never “saw the money” — it was paid to the insurer, not to the taxpayer directly — she may not be easily convinced that she has an excess benefit to repay.

20140521-1– Preparers haven’t had to deal with this before. Any new tax provision has a learning curve, and this is a complicated one that will apply to almost everyone. In many cases, preparers will mess up, being human. Getting it right will take extra time that is hard to come by during tax season.

– This doesn’t even touch the problems that many small employers are going to be dealing with as they realize their Section 105 individual coverage premium reimbursement plans, and their cafeteria plans funding premium payments on individual policies obtained by employees, are considered non-compliant under the ACA “market reforms.” At $100 per employee, per day, the penalties could be ruinous. While taxpayers are encouraged to report the penalties on Form 8928 and zero them out with a “reasonable cause” claim, we don’t know yet how generous the IRS will be in granting reasonable cause relief. Figuring out what to do here will be time-consuming and nerve-wracking for taxpayers and preparers, unless the IRS issues a blanket penalty waiver for 2014 (as it should).

On top of all this, we will probably have another late “extender” bill like we had two seasons ago, which made for an awful tax season by itself. Maybe things will go well this season, but so many things seem likely to go wrong that it’s hard to be optimistic.

 

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2014: #6-The IRS (Finally) Figures Out The Real Estate Professional Rules. It’s an excellent lesson on the tax rules covering “real estate professionals” and passive losses — and by extension, the 3.8% net investment income tax.

TaxGrrrl, Al Sharpton Denounces Claims He Owes Millions In Taxes To IRS, New York.

Jack Townsend, Another UBS/Wegelin Related Indictment in SDNY

Peter Reilly, Kent Hovind And Creation Science Evangelism – How Not To Run A Ministry. When it gets you imprisoned, you may well be doing it wrong.

Kay Bell, Former GOP VP candidate Paul Ryan to head House tax panel

Jason Dinesen, I Don’t Have Time to Write Grant Proposals or Meet with Donors … But Give Me Money Anyway!  OK, then…

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Work proceeds in clearing the ruins of the Younkers department store, which burned in March.

 

TaxProf, The IRS Scandal, Day 560.

Cara Griffith, Bad News for State Public Pension Plans (Tax Analysts Blog). “New research has come out revealing the level at which state public pension plans are underfunded, and it’s not good news.”

The denial of reality in administering public pensions is amazing. Public defined benefit plans are a lie. Either the public is being lied to about how much current public services cost, or current employees are being lied to about their retirement benefits. Maybe both.

 

20140910-1Alan Cole, Extenders and the Opportunity for Tax Reform (Tax Policy Blog):

The Examiner characterizes many of the extenders as “repugnant carve-outs.” This is undeniably true, but it is also the case that some – but not all – of the tax extenders are genuinely good policy. Particularly, Bonus Depreciation and Section 179 are important for moving the tax code towards proper treatment of new investment.

In any case, the current system of pretending tax provisions are “temporary” to hide their true cost is dishonest and should end.

Renu Zaretsky, “Dead Reform Walking:” On Fairness, Immigration, and Spending. The TaxVox headline roundup covers developments in the Marketplace Fairness Act, extenders and immigration, among other things.

 

News from the Profession. KPMG Gives the Department of Homeland Security a Clean Audit Opinion Because of Course They Did (Adrienne Gonzalez, Going Concern). “I don’t know about you but I feel safer already.”

 

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Tax Roundup, 11/18/14: The ACA and filing season. Be afraid.

Tuesday, November 18th, 2014 by Joe Kristan

20121120-2Megan McArdle, Reality Check on Obamacare Year Two:

Another thing to keep in mind, however: This open enrollment period isn’t the biggest test for Obamacare in the next 12 months.  The biggest test will be what happens on or around April 15th.  That’s the first time all the people who didn’t buy insurance will get hit with the individual mandate penalty, and the ones who thought that it was a nominal $95 fee are in for a nasty shock .  April 15th will also be the first time that people who got too much in subsidies are going to be asked to pay back some of that money.  I do not have hard figures on this, but my basic experience in personal finance and tax reporting suggests that approximately zero percent of those affected will be expecting the havoc it will wreak on their tax refund.  Brace for a wave of taxpayers angrily complaining to congressmen and their local newspapers.  

After completing the first six sessions as a panelist in continuing education for tax preparers around Iowa, I completely agree. Preparers learning about the process of computing the individual mandate penalty and the tax credit adjustments are appalled.

The first question we receive is: how are we going to get people to pay for this? The taxpayers who will have the biggest issues here will be the ones who formerly had the simplest returns and who will not be excited about paying for an extra 1-4 hours of preparer time.  A chart prepared by the ISU Center for Agricultural Law and Taxation to guide preparers through the client interview process for ACA return issues looks like this:

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Courtesy Iowa State University Center for Agricultural Law and Taxation. Full-size version available to TaxPlace subscribers.

 

But it’s worse than even Ms. McArdle knows. It’s not just individual taxpayers who look to get clobbered by this. Based on what I’ve seen at our sessions, dozens or hundreds of Iowa small businesses are starting to figure out that they have had non-compliant health insurance plans so far in 2014 as a result of the ACA “market reforms.”  Non-compliance carries a penalty of $100 per day, per employee. At $36,500 per employee per year, it doesn’t take too much of this to bankrupt a small business. And it’s not as though these employers are doing something abusive; they have just continued funding employee insurance the way they always had, but in ways the “Departments” that run Obamacare no longer like. Or they just might have done all the right things, except for properly notifying employees of their coverage options in writing. Trivial violations, crushing penalties.

While there is a provision to have the penalty waived for reasonable cause, that’s not very comforting in a state where the IRS is willing to loot a restaurant’s bank account without any indication of wrongdoing.  In addition to dealing with a parade of irate individuals with sticker shock from their return fees, let alone their new taxes and penalties, preparers also have to tell noncompliant business-owning clients that they suddenly have a potentially devastating tax liability.

If taxpayers are upset after tax season as practitioners are before it, Obamacare will be about as popular as Ebola by April 15.

 

 

Today in Red Oak.Kay Bell, IRS offers tax relief in certain Ebola situations

Robert D. Flach discusses TAX EFFICIENT INVESTING

Leslie Book, Living With Your Decisions: Delinquent Mortgage Debt (Procedurally Taxing). “Courts and IRS put the kibosh on deductions when the new loan comes from the same lender as the old delinquent loan; the theory in those cases is that the taxpayer has not really gone out of pocket and that there is just a shuffling of papers.”

 

Martin Sullivan, Why the Upcoming Battle Over Expiring Tax Provisions Matters — A Lot (Tax Analysts Blog). “Extenders legislation is not just about the fate of a grab bag of miscellaneous tax provisions this year. If Republicans can get expensive expiring provisions permanently extended, the chances for enactment of tax reform will be significantly improved.”

Steve Warnhoff, New CBO Report: Yes, the Rich Are Paying “a Bit” More (Tax Justice Blog). How much more, Steve?  “New CBO study shows that ‘the rich’ don’t just pay their ‘fair share,’ they pay almost everybody’s share.” (Via Instapundit):

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Kyle Pomerleau, CBO: Overall Federal Taxing and Spending is Progressive (Tax Policy Blog)

 

Donald Marron, Spin Alert: DOE Loans Are Losing Money, Not Making Profits (TaxVox). Of course they are losing money. If they were profitable, they wouldn’t need the feds to make the loans.

TaxProf, The IRS Scandal, Day 558

 

News from the Profession. You’re Not Really as Busy as You Claim (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 10/28/14: Back-to-school edition! And: IRS says it will stop stealing.

Tuesday, October 28th, 2014 by Joe Kristan

The 2014 tour of Iowa begins. I am helping Roger McEowen and Kristy Maitre teach Day 1 of the Farm and Urban Tax School this year, and this morning we are starting the first of eight sessions in Waterloo. We hit Maquoketa Thursday.  Other sessions will be in Sheldon, Red Oak, Ottumwa, Mason City, Denison and Ames. It’s two great days of CPE, and it’s a bargain. Get your details and sign up for a convenient session at the ISU Center for Agricultural Law and Taxation today.  Here is the crowd this morning:

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Looks like fun, no?

f you are a Tax Update reader, come see me (Hi, Kevin!). You qualify for a discount! Well, not really, but I can get you a free postcard from the DNR Chickadee Checkoff booth…

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Have a nice day. We’re All Flies in the IRS’s Widening WebMegan McArdle on the IRS’s sudden turnabout on asset seizures stealing from innocent businesses after the New York Times reported on it:

It’s as if the IRS just noticed that they were grotesquely abusing their power in order to punish people who appear to have done nothing actually wrong. Did this not occur to them when the victims’ lawyers pointed it out? Did none of their thousands of employees wonder aloud whether they really needed to make war on America’s college funds?

I’m sure it was forced on them by budget cuts.

So think about what has happened to our government agencies. We passed a law, to raise taxes, or curb the usage of addicting drugs. That law didn’t work as well as we wanted, because a lot of people were evading it. So we passed new laws, to make it easier to enforce the original one, like requiring banks to report all transactions over $10,000. And then people evaded that, so we made another rule … and now people who had no criminal intent find themselves coughing up tens of thousands of dollars they shouldn’t owe. 

There’s a lot of that in the tax law. FATCA and the FBAR foreign financial account reporting requirements are classic examples of laws nominally aimed at big-time tax evaders that destroy the finances of thousands of innocent foot-faulters.

As in the case of the fly, we were better off leaving the original ailment alone. No, I’m not saying that we shouldn’t try to catch tax evasion. I’m saying we shouldn’t try so hard that we end up criminalizing a lot of innocent behavior. There are worse things than a country with some tax fraud. And one of those things is a government with vast and arbitrary power to punish people who have done no wrong. 

And a willingness to use it carelessly.

Joseph Henchman, IRS Promises to Curtail Property Seizures After Abuses Come to Light (Tax Policy Blog)

Kay Bell, IRS seizes honest taxpayers’ assets under forfeiture program. “Oh my Lord, IRS. What in the hell were you thinking?”

 

buzz20140909Paul Neiffer, IRS Disagrees With Morehouse Ruling (Of Course). It looks like they will continue to assess SE tax on non-farmers with CRP income outside the Eighth Circuit.

Robert D. Flach has fresh Tuesday Buzz!!

Tax Prof, Tax Revolving Door Enriches Former IRS Officials Who Cash in by Navigating Inversions Through Rules They Wrote. And Commissioner Koskinen approves.

 

Leslie Book, A Combo Notice of Deficiency Claim Disallowance Highlights Tax Court Refund Jurisdiction (Procedurally Taxing)

 

Jeremy Scott, Will a Graduated Income Tax Sink Martha Coakley? (Tax Analysts Blog)

Steve Warnhoff, Senators Defend LIFO, a Tax Break that Obama and Camp Want to Repeal (Tax Justice Blog)

 

TaxProf, The IRS Scandal, Day 537. Today’s scandal roundup features Bob Woodward saying “If I were young, I would take Carl Bernstein and move to Cincinnati where that IRS office is and set up headquarters and go talk to everyone.

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