Posts Tagged ‘O Kay Henderson’

Tax Roundup, 5/14/14: Earned income credits, still busted. And: extenders advance.

Wednesday, May 14th, 2014 by Joe Kristan
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.

Nope.  Still busted.  From WashingtonExaminer.com comes an update on what some call America’s most successful anti-poverty program:

The Treasury Department has released its latest report  on the fight against widespread fraud in the Earned Income Tax Credit program. The problem is, fraud is still winning. And there’s not even much of a fight.

“The Internal Revenue Service continues to make little progress in reducing improper payments of Earned Income Tax Credits,” a press release from Treasury’s inspector general for Tax Administration says. “The IRS estimates that 22 to 26 percent of EITC payments were issued improperly in Fiscal Year 2013. The dollar value of these improper payments was estimated to be between $13.3 billion and $15.6 billion.”

Wait.  Didn’t the President sign a bill in 2010 to fix all this?

The new report found that the IRS is simply ignoring the requirements of a law called the Improper Payments Elimination and Recovery Act, signed by President Obama in 2010, which requires the IRS to set fraud-control targets and keep improper payments below ten percent of all Earned Income Tax Credit payouts.

Whatever the EITC does to help the working poor, it is a boon to the Grifter-American community.  Fraudulent EITC claims are a staple of ID theft fraud and low-tech tax cheating in general.

It’s worth noting that the high rate of improper EITC payouts has not gone down in spite of the ever-increasing IRS requirements for preparers who issue returns claiming the credits.  This should give pause to folks who think IRS preparer regulations will stop fraud, though it won’t.

It’s also notable that Iowa recently increased its piggyback EITC to 15% of the federal credit — increasing the annual cost of the credit by an estimated $35 million.  Assuming Iowans are just as honest as other Americans, that means about $8 million of additional stimulus to the Iowa grifter economy.

Finally, the phase-out of the EITC functions as a hidden high marginal tax rate on the program’s intended beneficiaries, the working poor.  The effective marginal rate in Iowa exceeds 50% at some income levels.  Combined with other income-based phase-outs, the EITC becomes a poverty trap.

 

Related: Arnold Kling,  SNEP and the EITC. “My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game.”

 

 

Extenders advance in Senate.  Tax Analysts reports ($link)

Legislation that would extend for two years nearly all the tax provisions that expired at the end of 2013 cleared a procedural hurdle in the Senate May 13.

Senators voted 96 to 3 to invoke cloture on the motion to proceed to H.R. 3474, a bill to exempt from the Affordable Care Act’s employer mandate employees with healthcare coverage through the Veterans Benefits Administration or through the military healthcare program TRICARE.

The bill is the legislative vehicle for the tax extenders. It will be amended to include the text of the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 (S. 2260) and likely that of the Tax Technical Corrections Act of 2014 (S. 2261), both of which the Senate Finance Committee passed April 3 via voice vote.

The bill that passes will probably look much like the Senate bill.  The House has advanced bills to make some of the perpetually-expiring provisions permanent, but the President, pretending that they won’t get passed every year anyway, says permanent extension is fiscally irresponsible.

Among the provisions to be extended yet again, mostly through 2015, are the research credit, new markets credits, wind and biofuel credits, bonus depreciation, and increased Sec. 179 deductions.  The five-year built-in gain tax recognition period is also extended through 2015.

Related: TaxGrrrl, Senate Moves Forward To Extend Tax Breaks For 2014

 

20120906-1O. Kay HendersonKnoxville Raceway ceremony for state tax break of up to $2 million:

Governor Terry Branstad went to Knoxville today to sign a bill into law that gives the Knoxville Raceway a state tax break to help finance improvements at the track.

“This is a great facility,” Branstad told Radio Iowa during a telephone interview right after the event. “Last year, in 2013, they attracted 211,000 visitors, so it’s a big tourism attraction and it’s a good investment and it’s great for the state to partner with the community for a project of this magnitude.”

Here’s how that partnership works: the racetrack will charge sales tax to its customers, and keep the money.  Only two other businesses are special enough to get this sweet deal.  Tough luck for the rest of us who don’t have the good connections and lobbyists.

 

Walnut st flowersJana Luttenegger, Updated E-Filing Requirements for Tax Preparers (Davis Brown Tax Law Blog).  “The handbook is not exactly clear.

Jason Dinesen, Things Tax Preparers Say: S-Corporation Compensation.  “But too many business owners — and their accountants — treat S-corps like a magic wand that can just make taxes disappear completely.”

Kay Bell, IRS fight to regulate tax preparers officially over…for now

Peter Reilly, Can Somebody Explain Tax Shelters To Thomas Piketty?  In the unlikely event that the Piketty recommendations are ever enacted, Peter notes that “there will be a renaissance of shelter activity.”  Peter provides a “Cliff Notes” summary of this year’s big forgettable book I’ll never read, which I appreciate.  Also: Peter uses the tax-law-as-Swiss Army Knife analogy that I am so fond of.

Robert D. Flach, STILL MORE CLIENTS SCREWED BY THE TAX CODE.  “The list of taxpayers screwed by our current Tax Code is not a short one.  Today I add taxpayers with gambling winnings.”

 

20130110-2Howard Gleckman, How “Dead Men” Fiscal Policy Is Paralyzing Government (TaxVox).  He reviews a new book, Dead Men Ruling, by Gene Steurle:

“We are left with a budget for a declining nation,” Gene writes, “that invests ever-less in our future…and a broken government that presides over archaic, inefficient, and inequitable spending and tax programs.”

All this has happened due to a confluence of two unhappy trends: The first is what the late conservative writer Jude Wanniski memorably described almost four decades ago as the “Two-Santa Theory.”

The Santas are the two parties, each of whom pick our pockets to fill our stockings.

 

Alan Cole, The Simple Case for Tax Neutrality (Tax Policy Blog).  “When states give preferential rates of sales tax to certain goods, the most visible result is the legal bonanza that follows from trying to re-categorize goods into the preferred groupings. ”

David Brunori, Repealing the Property Tax Is an Asinine Idea (Tax Analysts Blog). “Public finance experts are almost unanimous in their belief that the property tax is the ideal way to fund local government services… Most importantly, the property tax ensures local political control.”

William McBride, What is Investment and How Do We Get More of It? (Tax Policy Blog).  “Full expensing for all investment, according to our analysis, would increase the capital stock by 16 percent and grow GDP by more than 5 percent.”

 

TaxProf, The IRS Scandal, Day 370

News from the Profession.  AICPA Tackling the Important Issue of Male CPAs Wanting It All (Going Concern). 

 

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Tax Roundup, 5/7/14: How to keep from beating up the poor with high marginal rates? And: priorities!

Wednesday, May 7th, 2014 by Joe Kristan
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.

Arnold Kling ponders solutions to the hidden high tax rates on the poor in SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance.  The problem arises because many welfare benefits phase out as income rises.  For example, the phase-out of the Earned Income Tax Credit means Iowans who qualify can face a combined federal and state tax rate of over 50% on additional income.  The problem is finding a way to means-test benefits without turning the inevitable reduction of benefits as income rises into a poverty trap.  Some Kling thoughts:

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

This would give recipients some power over their benefits, and the ability to choose which ones are more important to them — like normal people do with their earnings.  Unused  flexdollars would go into a savings account, which “could be used for medical emergencies, down payments when buying a home, or to save for retirement.”  This would reduce the incentive for “use it or lose it” spending binges.

Implicit marginal ratesImplicit marginal ratesThis seems like a much more promising approach than the current system with its overlapping benefits and multiple phase-outs that sometimes result in effective marginal rates over 100% for the working poor.   Modifying the income tax to provide a standard deduction up to the amount at which the phase-outs end would complement this system, keeping the income tax from adding a layer of explicit marginal tax rates to the rate implicit in the phase out.

Mr. Kling is a brilliant and underappreciated thinker.  I’m re-reading his Unchecked and Unbalanced, which among other things ponders ways to move decision-making on government services to the household and neighborhood level.

 

O. Kay Henderson, About 91 percent of Iowans e-filed their state income taxes:

A dwindling number of Iowa taxpayers submit paper income tax returns to the State of Iowa. Victoria Daniels of the Iowa Department of Revenue has preliminary results for all but the last three days of the tax season, which ended April 30 for Iowa income taxpayers.

“E-filing is up about 4.1 percent and approximately 91 percent of Iowans, to date, have filed electronically,” Daniels says.

I’ve been a fan of e-filing, but the IRS is doing its best to change my mind.

 

 

20140507-1Paul Neiffer, Payments to Veterinarians Require 1099 (Even If Incorporated)!

Peter Reilly, IRS Cannot Levy Tribal Payments

TaxProf, The IRS Scandal, Day 363.  This Washington Post Op-ed linked in today’s scandal roundup gets it right: “The very idea that the administration would protect someone who is hiding behind the fifth when there is not only smoke, but there is actually a clear glow of flames, is insulting.”

Annette Nellen, Taxes and Deficits in the Highway Trust Fund.  “Certainly, if we have more electric cars on the road, which don’t generate anything for the HTF, but still use the roads, a funding mechanism tied only to gasoline purchases is outdated.”

Kay Bell, Home prices, construction outlook up. So are property tax bills

 

Alan Cole, US International Tax System is Fundamentally Unserious (Tax Policy Blog):

The United States is one of the last six remaining countries in the OECD – along with Chile, Ireland, Israel, South Korea, and Mexico – to use a “worldwide” system of corporate taxation. The other twenty-eight countries in the OECD use the much sounder territorial system.

A territorial tax system ends at its country’s borders. In contrast, the United States tries to levy taxes on profits earned in countries other than the United States. The tax system sees an auto assembly plant in Craiova, Romania, built using international funding, staffed by Romanian workers, building a vehicle – the Ford B-Max – that isn’t even sold in the United States – and says “Aha! This is economic activity the United States should be able to tax!”

While it may seem unserious, worldwide taxation is deadly serious to Americans abroad and to U.S. Green Card holders.  Serious, and sometimes catastrophically costly.

 

taxanalystslogoTax Analysts Blog is on an equality kick:

Martin Sullivan, Piketty, Zuckerberg, and a Plan to Tax Wealth That Conservatives Can Support.  “David Miller, a tax attorney at Cadwalader,Wickersham & Taft in New York, has proposed that the federal government tax stock gains of the wealthy whether or not those stocks are sold.”   So they get to deduct losses, too?

David Brunori, Tax Follies in Pursuit of Equality.  “The fact that rich people are rich bugs the heck out of folks on the left.” David points out the folly of a California tax scheme that would try to control CEO compensation by hitting CEOs with punitive California tax rates.  That would make sure no corporate headquarters stay in California.

Joseph Thorndike, Piketty Is Wrong: Americans Don’t Have a ‘Passion for Equality’.  This strikes me as correct.  Patrick Henry said “give me liberty or give me death,” not “Give me liberty or give me equality.”  That contrasts with the “Liberté, égalité, fraternité” of Picketty’s France.

Renu Zaretsky, Retirement, Driving, Greenhouse Gases and Tax Burdens.  The TaxVox tax headline roundup covers a disturbing increase in retirement plan early withdrawal penalties and the Missouri override of its governor’s tax cut veto.

 

Sadly, this may compare favorably with all adults.  According to This FINRA Foundation Quiz, 76% of Millennials Have Absolutely No Clue (Going Concern)

 

Priorities.  From the Milwaukee Journal Sentinel:

George W. Curtis, 77, of Pickett, who practices law in Oshkosh, was charged with willfullly failing to pay taxes he owed for 2007, 2008 and 2009, a period when his law practice generated profits of more than $1 million. Curtis has been designated a “Super Lawyer” several times and has practiced for more than 50 years.

77?  Some people just love the law.  Except maybe not the tax law:

Assistant U.S. Attorney Matthew Jacobs, the prosecutor, said Curtis testified that his income wasn’t steady, that he had to front many expenses, and that he had higher financial priorities at times than paying taxes. In fact, Curtis did file returns that showed his income, but just didn’t pay.

But the government argued Curtis could have paid. During the period he wasn’t, he was paying his wife’s children’s college tuitions and a wedding, a new Lincoln SUV and buying $17,000 on wine.

You need a nice SUV to transport high-class wine.  Have you ever tried to get your wine home in a tax payment?

 

 

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Tax Roundup, 4/29/14: Funding what we do anyway edition. And: the real IRS crisis.

Tuesday, April 29th, 2014 by Joe Kristan

Remember, Iowa 1040s are due tomorrow!  They extend automatically, with no need to file an extension, to October 30 if you have at least 90% of your 2013 tax paid in.  If you need to pay in some more, use Iowa 1040-V.

 

Via Wikipedia

Via Wikipedia

O. Kay Henderson reports on a New state tax break proposed for Iowa parents who adopt:

The legislature has voted to establish a new tax credit for Iowa parents who adopt a child. If the governor signs the bill into law, Iowans could claim a credit of up to $2500 per child for adoption-related expenses.

The bill would allow the credit for expenses like legal fees and the medical bills for the birth mother.

So the legislature is boldly addressing the lack of available parents wanting to adopt children by subsidizing the process.  Except there is no lack of willing prospective adoptive parents.  In fact, the high cost of adoptions is largely driven by the lack of U.S. babies available, forcing parents wanting to adopt to pursue expensive overseas adoptions.

Adoptive parents do a wonderful thing, taking a stranger’s child into their house as their own.  But all good things don’t necessarily need their own tax break.  This break pays people to do what they are already doing.  If the tax law needs to encourage something, is this the most important thing to do?  Should it instead encourage something people wouldn’t do otherwise?  Should people choose what to do without tax law involvement?  Is it really worth making the Department of Revenue an overseer of the adoption process?  Nobody cares, apparently, as HF 2468 flew through the Iowa Senate 48-0, and the Iowa House, 95-1.  Governor Branstad will come out against farmers before he vetoes this one.

 

I’m sure they are.  Iowa Renewable Fuels Group Pleased With Biofuels Bill Approval. More special favors for special friends.

 

A scene from the heydey of Iowa energy independence.

A scene from the heydey of Iowa energy independence.

 

Kay Bell, Maryland pays $11.5 million to keep House of Cards.  Some people never learn.

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Janet NovackThere’s A Crisis At The IRS And It’s Not What You Think:

The IRS is, however, an insular, often tone deaf and sometimes bumbling bureaucracy which is being starved of the resources it needs to do its job.  Since 2010, its Congressional appropriations have fallen 7% —-and that’s in nominal dollars, before any adjustment for inflation. During the same period, its appropriations funded workforce has shrunk by 10%, with enforcement staff down 15%, according to numbers Congress’ Government Accountability Office released last week. Meanwhile, the tax agency’s workload has increased with the explosion of identity theft tax refund fraud; a 4% growth in returns filed; and new laws to administer, including the Affordable Care Act  (a.k.a. Obamacare).

That is precisely true.  It’s also mostly the agency’s own fault.   The agency been shown to have used its powers against political opponents of the administration.  It refuses to back off of proposed regulations that would make its political role permanent.  Until it swears off that approach, it can only expect short funding.  The House GOP would be fools to fund an agency dedicated to the other party.  Untill Commissioner Koskinen can rise above pro-administration partisanship and pull the proposed regulations, the agency will continue to be shorted.

 

Annals of Public Service.  Rep. Grimm charged with tax fraud, says he won’t quit (USA Today):

Republican Rep. Michael Grimm was indicted Monday on federal charges of tax evasion and perjury for allegedly hiding more than $1 million in revenue from a New York City restaurant he owned where, prosecutors said, he also hired undocumented immigrants.

Grimm, a former FBI agent who has been under federal investigation regarding campaign contributions, said he is the victim of a “political witch hunt” and said he would not resign his seat.

While you can’t rule out a political explanation, the man is a politician, so the charges are at least plausible.  If it is an unsupported political prosecution, that will become apparent quickly.

Even if the charges are supported, that doesn’t rule out political bias.  After all, Democrat Charlie Rangel was never indicted, in spite of failing to pay his taxes for years.  That’s why arguments that the Tea Party persecution was OK, because some Tea Party groups didn’t qualify for exempt status, are unconvincing.  When a law is enforced only against opponents,  it is a gross injustice, even if the selective enforcement catches some actual violators.

 

IMG_1944Peter Reilly, Tax Court Denies Amway Losses – Again.  Peter ponders the Amway couple I discussed last week.  Peter has actually attended an Amway presentation, and he explains how the program works – or doesn’t.

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part II.  This post discusses the tax-free kind.

TaxGrrrl, Let’s Go Places: Toyota Workers Could Save Big Tax Dollars With Move.  Food for thought for those who think state taxes are irrelevant.

 

TaxProf, The IRS Scandal, Day 355

Tyler Cowen, Accounting for U.S. Earnings and Wealth Inequality.  “So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.”

Richard Borean, Does a Flat Income Tax Create Income Inequality? (Tax Policy Blog).  Short answer: no.

20140429-1

 

Jeremy ScottThe Most Expensive Extenders (Tax Analysts Blog).  “Temporary tax policy is generally bad, but temporary policy that is designed to encourage long-term investment decisions is even worse. ”

 

It’s Tuesday!  That makes it Robert D. Flach Buzzday!

 

Russ Fox, It’s Probably Not Good for Your Case When the Court Considers Sanctioning Your Attorney.  When  your lawyer angers the judge, he may not be helping.

News from the Profession.  This Off-Kilter Accounting Firm Just Launched a New Website Begging to Be Judged (Going Concern)

 

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Tax Roundup, 4/28/14: No connection found for Iowa broadband credit. And: it can take a long time to recover from tax season.

Monday, April 28th, 2014 by Joe Kristan


20120906-1
Truly we live in the age of wonders.  
A new set of economic development tax credits made it to the floor of the Iowa House on a Friday — and failed.  It’s a wonder that they actually showed up on a Friday — and to reject corporate welfare, to boot.

Before we get excited, it would be wrong to believe that the Iowa General Assembly has suddenly come to its senses about tax incentives.  It appears that many of the “no” votes on HF 2472 were from people who felt it wasn’t a big enough giveaway, reports the Des Moines Register:

Democratic leader Mark Smith, D-Marshalltown, said his members voted against the bill because they felt it didn’t go far enough in incentivizing and stimulating the expansion of high-speed Internet service.

Governer Branstad was unhappy:

“Rather than coming together to pass common sense legislation to increase broadband access in rural Iowa, Iowa House Democrats have turned their backs on rural Iowans and those who are under served,” Branstad said. “Today, the Iowa House Democrats played the worst of political cards; the Washington, D.C., hand of ignoring what is in the best interest of the taxpayers for political purposes.”

But nine Republicans also voted no in the 44-51 vote against the bill: Heartsill (Marion), Mawell (Poweshiek), Pettengill (Benson), Salmon (Black Hawk), Shaw (Pocahontas), Sheetas (Appanoose), Upmeyer (Cerro Gordo), Vander Linden (Mahaska), and Watts (Dallas).  If four of them had voted with the Governor, the bill would have passed.   The Des Moines Register didn’t bother to ask the Republicans why they voted no, but O. Kay Henderson did:

Representative Guy Vander Linden of Oskaloosa was among the nine Republicans who voted no.

“The ‘Connect Iowa’ bill, in my mind, doesn’t connect any Iowan, let alone every Iowan,” Vander Linden said.

Vander Linden faulted the bill for the way it handed out tax breaks to companies.

“We don’t say they need to meet any requirements in terms of our capacity, speed — anything. All we say is: “If you will put broadband infrastructure in place in any unserved or underserved area…we’ll give you all these benefits,” Vander Linden said. “That, to me, sounds like a blank check that I’m not willing to sign up to.”

Lack of standards and accountability hasn’t stopped tax credit giveaways before.  And they actually worked on a Friday, too. Yes, it truly is an age of wonders.

 

20140307-1Jason Dinesen, I Get Very Sad When a Client Gets Involved in Multi-Level Marketing.:

The reason I get sad nothing to do with taxes or fears that the client will be over-aggressive with deductions.

The reason I get sad is: so few of them actually make money.

 

Russ Fox, Your Dependents do have to be Your Dependents…

Kay Bell, Storm season 2014 arrives with a vengeance. Disaster victims should seek tax recovery help after the skies clear

TaxGrrrl, Now That Tax Day Has Passed, How Long Should You Keep Those Tax & Financial Records? 

Paul Neiffer, Are You Still Running Windows XP?! I finally upgraded to Windows 8.1 at home this weekend — a virtual machine on an iMac running Parallels Desktop.  It was the smoothest Windows installation I’ve ever done — it actually went without a hitch the first time through.

 

 

TaxProf, The IRS Scandal, Day 354

Renu Zaretsky, Tax Shelters, Tax Fights, and One Way to Reform a Zombie.  The TaxVox headline roundup includes an update on House taxwriter plans to work on an “extenders” bill this week.

Tax Justice Blog, Lawmakers Will Move Tuesday to Approve Hundreds of Billions in Business Tax Breaks — and Still No Help for the Unemployed.

William McBride, Corporate Exits Accelerating, Taking Jobs with Them (Tax Policy Bl0g).  Rates matter.

 

IMG_2493U.S. residents must pay U.S. tax, regardless of celestial citizenship.  A Minnesota couple hasn’t gotten the message, according to PioneerPress.com:

Living in the “Kingdom of Heaven” will not get you out of paying taxes, according to federal prosecutors.

On Tuesday, Tami Mae May, 55, was indicted in U.S. District Court in Minneapolis on 15 counts of filing fraudulent tax returns and a single count of obstruction of due administration of internal revenue laws, according to the U.S. attorney’s office.

Through 2013, she claimed “zero income,” signed under altered certifications, said both she and her husband were not citizens of the United States but were instead permanent residents of the “Kingdom of Heaven,” and reported false withholdings in an attempt to claim “hundreds of thousands of dollars in fraudulent … refunds,” the U.S. attorney’s office said. 

I need to research where the Bible says you can recover cash from the IRS as a result of a divine passport.

 

20140330-1Practitioners everywhere are putting their lives together after another tax season.  Yes, it’s rough, but it’s unlikely you will still be sorting out this tax season two years from now, like an Iowa woman who is just getting her 2012 tax season put to bed.

Here’s what this North Liberty tax practitioner faced in 2012:

The co-owner of a local tax service has been accused of using more than $22,000 from the business’s savings account to cover her credit card bills and her husband was arrested for allegedly causing a drunken disturbance at a local elementary school.

According to an Iowa City police criminal complaint, an investigator met with a co-owner of C & M Tax Service. The other co-owner is 31-year-old Melissa M. Frost of North Liberty.

But it was worse than that:

Police said Frost’s husband, 33-year-old Cory A. Frost was also arrested on Friday. Cory Frost went to North Bend Elementary in North Liberty at 2:45 p.m. to confront an employee there concerning a “situation with his wife,” according to North Liberty police Lt. Diane Venega. It is unclear if that situation is related to Melissa Frost’s arrest.

[…]

When police found Frost, he smelled of alcohol and appeared to be intoxicated. Police said Frost had a blood-alcohol content of .204 percent. He was previously convicted of public intoxication.

KCRG provides an update:

A North Liberty woman accused of stealing money from her own business entered an Alford plea as part of a plea deal with prosecutors.

Melissa Frost, 34, entered the pleas on two separate counts of tampering with records last week, according to online court records. Under the Alford Plea, Frost admits no guilt but acknowledges there is likely enough evidence to convict her.

As part of the deal, Frost received a sentence of probation and deferred judgement, which means she could have the conviction expunged from her record if she fulfills the terms of her probation.

So however bad your tax season was, this is a reminder that somebody, somewhere, probably had it worse.

 

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Tax Roundup, 4/24/14: A(m)way to deduct your car? And: shame on you for doing my bidding!

Thursday, April 24th, 2014 by Joe Kristan

logoamwCan an Amway distributorship ever be taxed as a legitimate business?   It must be possible, but I’ve yet to see one win in Tax Court.  A case decided this week illustrates common tax problems seen with “downline” folks involved in Amway and other multi-level marketing ventures.

A doctor and his wife got involved with Amway, an MLM operation that sells household, nutritional and cosmetic products.  In addition to the medical practice income, they reported Amway results on a Schedule C.  We can guess from the results how they attracted IRS notice:

20140424-1

The Tax Court case involved their 2009 tax year.  Here are the expenses that went into their 2009 loss:

 

20140424-2

For some reason the IRS questioned the need for $25,000 in vehicle and travel expenses to sell stuff out of their home.  The tax law’s Section 183 “hobby loss” rules prohibit deductions in excess of income if the business isn’t conducted for profit.  The courts have developed a set of factors to evaluate in determining a taxpayer’s intent.  Tax Court Judge Guy went down the list, including:

Manner in Which Petitioners Carried On the Amway Activity

Although petitioners kept records of their Amway expenses, they did not use those records to analyze their business performance or to prepare profit projections, a break-even analysis, or a formal budget. Despite several years of activity during which they realized cumulative net losses of $192,427, petitioners failed to make any meaningful change in their strategy or tactics in an effort to increase the likelihood of earning a profit. On this record, it is a fair inference that petitioners used their records only to compute the amounts of losses attributable to the Amway activity when preparing their tax returns. Considering all the facts and circumstances, we conclude that petitioners did not conduct the Amway activity in a businesslike manner.

And:

Petitioners’ History of Income or Loss

 At the time of trial petitioners had never reported an annual profit in respect of the Amway activity. To the contrary, they reported cumulative net losses of $192,427 from 2005 through 2011. The modest gross receipts that petitioners derived from the activity have been eclipsed by the substantial expenses they incurred over the years. Although petitioners testified that they believe the Amway activity will eventually generate profits, we cannot discern on this record any definitive trend to the upside for petitioners, and there certainly is no indication that they are on their way to the level of profitability that would allow them to recoup the substantial cumulative losses they have incurred to date. In sum, petitioners’ history of consistent and substantial losses is indicative of a lack of profit objective.

I avoid multi-level marketing clients because their “profit” so often comes from putting personal expenses on Schedule C.  It sure seems that way here.

The Tax Court declined to impose penalties, citing taxpayer maintenance of good records and reliance on a CPA to prepare their returns.  Considering that the Tax Court has upheld penalties for taxpayers who are more sympathetic than a doctor deducting his car, it’s somewhat surprising.  It shows that even if you can’t show a profit motive, using  good records and a preparer can at least help avoid penalties.

Cite: Mikhail, T.C. Summ. Op. 2014-40

 

For a recent taxpayer victory on a hobby loss case, see Peter Reilly’s Horse Breeder/Lawyer Wins In Tax Court. Was It Worth It? 

 

20120906-1Special favors for special friends. Senate sends governor a bill containing tax break for Knoxville Speedway. (O. Kay Henderson).  Iowa’s long-time sprint-car track gets a special deal to keep sales tax it collects, like the NASCAR track in Iowa.  Meanwhile, everybody else competing for Iowa entertainment dollars has to remit to the state the sales taxes they are required to collect.  Sweet deal, when you have the pull.

 

Iowa WatchdogIowa congressman urged IRS to investigate nonprofits:

Four days after the head of the Internal Revenue Service denied the agency was targeting conservative social welfare organizations applying for tax exempt status, Rep. Bruce Braley signed a letter urging a probe into the political activities of social welfare organizations.

Braley was one of 30 Democratic members of Congress who signed the letter, dated March 26, 2012, to IRS Commissioner Douglas Shulman urging him to investigate whether “any groups qualifying as social welfare organizations under section 501(c)(4) of the federal tax code are improperly engaged in political campaign activity.”

It’s funny how so many folks who urged the IRS to get all political on their opponents now deny it did any such thing.  Mr. Braley takes a different approach:

In May 2013, Braley called the IRS targeting of conservative groups “shameful,” saying “there is no place for politics at the IRS.”

Shame on you for doing what I told you to do!

 

20140401-1Paul Neiffer, Social Security Drops Efforts To Collect Old Debts From Children of Debtors. Maybe.

Kay Bell, Got debts? They could eat into your tax refund

Keith Fogg, Collection of Restitution Payments by the IRS (Procedurally Taxing)

Jason Dinesen, Is it Okay for Clients to Text a Professional Service Provider?   Not if they don’t have your cell phone number!

Jack Townsend, Crossing the Line in Tax Planning:

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case… Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the [first-time homebuyer] credit, but the facts outside the paperwork showed that they did not qualify.

You see a lot of that with refundable credits.

 

 

Andrew Lundeen, How High Investment Taxes Contribute to Inequality. (Tax Policy Blog)

William Perez, Tax Reform Act of 2014, Part 6, Retirement Plans

Cara Griffith, Solving the ‘Problem’ of Remote Sales (Tax Analysts Blog). “All things being equal, I would rather enforce the use tax than needlessly broaden the sales and use tax nexus standard.”

Tax Justice Blog, Missouri Lawmakers Relentless in Quest for Tax Cuts for the Wealthy.  In Iowa, we prefer to do favors for the well-connected, rich or poor.

TaxProf, The IRS Scandal, Day 350.  Includes a link to Bruce Braley Urged IRS to Target Groups Before IRS Targeting Scandal Emerged.

Me: HSA Contribution Max for 2015 $3,350 single, $6,650 family.

KSDK.com: Man swallows 12 gold bars to evade taxes.  Sometimes you can actually feel sorry for the tax collector.

Career Corner.  Judge: Talking dirty not reason enough to lose job (Des Moines Register)

 

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Tax Roundup, 4/7/14: Where’s my K-1? And why you should e-file that extension.

Monday, April 7th, 2014 by Joe Kristan

1040 2013The deadline for 2013 1040s is a week from tomorrow, so we may as well start our annual Filing Season Tips feature.  

Many folks arrive here with a search engine query that goes something like “why don’t I have my K-1, should the partnership go to jail?”  A quick reminder of what a K-1 does, and why they often arrive late in the tax season.

K-1s come from partnerships, S corporations and trusts.  Partnerships and S corporation businesses don’t pay the tax on their income.  The income is instead taxed on your 1040.  They have to compute their own taxable income first — as you might imagine, a more complex process than doing the average 1040.  They then have to sort the income into a bunch of different bins so that all the pieces end up on the right spot on the owner 1040s.  The K-1 is best understood as the collection bins for your shares of the various pieces of the business’ income and expense items.

Furthermore, many businesses and trusts that issue K-1s are awaiting K-1s of their own.  Even if they have their own tax information ready, if the business is still waiting on a K-1, it can’t issue yours.

But, but! Aren’t K-1s supposed to be out by January 1?  You’re thinking of 1099s.  K-1s are due with the S corporation returns (March 15) or the partnership returns (April 15), but they can be, and often are, extended to as late as September 15 — legally.

So what to do?  If you don’t have your K-1 yet, try to at least get an idea of what the income will be, and extend your own return accordingly.  It’s always better to extend than to amend.

This is the first 2014 filing season tip — come back for one each day through April 15!

 

Russ Fox, Bozo Tax Tip #6: Just Don’t File

 

e-file logoKristy Maitre, IRS Change in Extension Processing Makes E-Filing That Extension Critical.

The campus could take up to 6 weeks to process a [paper] extension, and it will not show up on the transcript until processed. With that time delay, it is helpful to have the acknowledgement of an e-filed extension.

With the delay in processing of the extensions, remember if you file a return within that 6 week timeframe, it may not show the extension on the module, and your client could get a penalty for filing late if there is a balance due. This will also have an impact on refund returns if they are later picked up for audit, a balance due results, and the extension was not processed properly.

And why, if you do paper file, you shouldn’t bundle extensions for your family or clients to save postage.

TaxGrrrl, Not Ready To File Your Taxes? Don’t Stress Out, File For Extension 

William Perez, Federal Tax Relief for Victims of Washington State Mudslide and Flooding

Jana Luttenegger, DIY Will is a ‘Cautionary Tale’ (Davis Brown Tax Law Blog). “As a result, two of Ann’s nieces received property that it appears clearly from the will and attempted amendment was meant for Ann’s brother instead.”

 

20140321-3Kay Bell, 3 popular refundable tax credits: Are they worth it?  Good question, and no.

Peter Reilly, Easement Valuations Not So Easy Anymore

Keith Fogg, Reliance on Counsel to Avoid Tax Liability.  (Procedurally Taxing).  Not likely to work.

 

TaxProf, The IRS Scandal, Day 333.  Featuring the Washington Post “fact checker” calling shenanigans on IRS Commissioner Koskinen for denying that IRS had “targeted” Tea Party groups.  It’s safe to say Mr. Koskinen has botched his entrance.

Andrew Lundeen, Senate Finance Committee Passes $85 Billion Tax Extenders Bill (Tax Policy Blog)

20121120-2Tax Justice Blog, Five Key Tax Facts About Healthcare Reform.  Ones they like that I despise: “Only two percent of Americans will pay the tax penalty for not having insurance and  “95 percent of the tax increases included to pay for health reform apply solely to businesses or married couples making over $250,000 and single people making over $200,000.”

This attitude is exactly what is awful about the TJB mindset.  No matter how fickle, arbitrary,   unworkable or economically harmful a tax is — and the Obamacare taxes are all of those — we’re supposed to be OK with them as long as they apply only to “the rich.”  Carried to the logical conclusion, it would be just fine to execute the 1-percenters, confiscate their property, and sell their families into slavery — it only affects the rich anyway, and they don’t count.

 

Arnold Kling has a little reminder for folks hung up on inequality, quoting Lawrence Kotlikoff:

The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.

And remember, the rich guy isn’t picking up the tab.

 

O. Kay Henderson, No traction for increasing state gas tax.  Not happening this year, apparently.

 

haroldJennifer Carr at Tax Analysts has a good summary of the research as to the economic effect of state film tax credits:

The film industry and lawmakers doubtless believe that film credits are a great deal for everyone involved — and that would be fantastic if it were true — but the most credible studies don’t reflect that.

Her article (unfortunately available only to State Tax Notes subscribers) discusses the funky analysis that film credit boosters use to justify the subsidies.  The boosters like to overstate the tourism effects of films and assume fantastical “multiplier” effects of film spending.  They also ignore opportunity costs — assuming that if the taxpayer money was not spent on Hollywood, it would just crawl in a hole and die.

 

Career Corner.  Crime May Not Pay But Whistleblowing Certainly Does (Going Concern)

 

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Tax Roundup, 3/27/14: NASCAR subsidy heads to Governor. And lots more!

Thursday, March 27th, 2014 by Joe Kristan

20120906-1Don’t worry, our subsidies are carefully crafted to only help Iowans, and only for a limited time.  Until it’s slightly inconvenient.

When they built the big new racetrack in Newton, they had a unique deal: the track got to keep the sales tax it collected.  The deal was crafted to require the track be partly owned by Iowans, and that it would expire at the end of 2015.

Then NASCAR bought the track.  NASCAR is controlled by a wealthy North Carolina family , with nary an Iowan.  No problem!  The Iowa House sent a bill to the Governor yesterday (SF 2341) repealing the Iowa ownership rule and extending the subsidy through 2025.

The stories in Radio Iowa and the Des Moines Register only quoted the giveaway’s supporters.  For example:

Representative Tom Sands, a Republican from Wapello, said it’s a “performance based” tax break because NASCAR won’t get the rebate unless there are on-site sales.

“One of the questions might be: ‘What kind of return do we, taxpayers, get in the state of Iowa?’ And I drive on Interstate 80 twice every week like many of you do coming to Des Moines and have seen the construction that has happened around that Speedway just since it’s been there,” Sands said, “and we’ve got probably lots more of that we can expect into the future.”

The answer to that is: what makes this private business more worthy to keep its sales taxes than anyone else?  It’s a special deal that every other Iowa business competing for leisure dollars doesn’t get.  It’s the government allocating capital, and if anybody thinks the state is good at that, I’d like my Mercedes, please.

While this corporate welfare passed, at least some legislators are starting to wonder about this sort of thing.  14 representatives joined 9 state senators in opposing the bill.  When the Iowa Film Tax Credit passed, there were only three lonely opponents.  The 14 representatives who stood up for the rest of us: Baudler (R, Adair), Fisher (R, Tama), Heddens (D, Story), Highfill (R, Polk), Hunter (D, Polk), Jorgensen (R, Woodbury), Klein (R, Washington), Olson (D, Polk), Pettengill (R, Benton), Rayhons (R, Hancock), Salmon (R, Black Hawk), Schultz (R, Crawford), Shaw (R, Pocahontas) and Wessel-Kroeschell (D, Story).  Maybe we have the makings of a bi-partisan anti-giveaway coalition.

 

20120702-2Jason Dinesen, Iowa Tax Treatment of an Installment Sale of Farmland By a Non-Resident.  “The capital gain is recognized in the year of the sale and is taxable in Iowa. But what about the yearly interest income the taxpayer receives on the contract going forward?”

TaxGrrrl, Taxes From A To Z (2014): N Is For Name Change   

Paul Neiffer, Painful Form 8879 Process is on its Way.  The IRS, which has forced us to go to e-filing, now plans to make it a time-consuming nightmare for practitioners and clients because of the IRS failure to prevent identity theft.

Tax Trials, U.S. Supreme Court Reverses Sixth Circuit on FICA Withholding for Severance Payments

Margaret Van Houten, Digital Assets Development: IRS Characterizes Bitcoin as Property, Not Currency

William Perez, Tax Reform Act of 2014, Part 2, Income

 

Illinois sealLiz MalmHow much business income would be impacted by Illinois House Speaker Madigan’s Millionaire Tax?

These data indicate that:

  • 54 percent of total partnership and S corporation taxable income in Illinois would be impacted by Speaker’s Madigan’s millionaire surcharge. That’s almost $10 billion of business income.

  • 6 percent of sole proprietorships AGI would be impacted. Important to note here is that not all sole proprietorships earn small amounts of income. Over three thousand would be hit by the millionaire tax, impacting $674 million of income.

  • Taken together, this indicates that 36 percent of pass-through business income is earned at firms with AGI with $1 million or more.

I don’t think this will end well for Illinois.  When you soak “the rich,” you soak employers.  When states do this, it’s easy to escape.

 

Christopher Bergin, Good Grief! Tax Analysts v. Internal Revenue Service (Tax Analysts Blogs)

I have been involved in two Tax Analysts FOIA lawsuits against the IRS. Neither one of them should have gone to federal judges. But the IRS’s secrecy, paranoia, and belief that it has the absolute right to hide information drives it in this area. This lawsuit was a waste of time and money – against an agency that argues that it doesn’t have enough of either — over documents that should have been public from the beginning.

I’m left to quote Charlie Brown: Good grief! What an agency.

Commissioner Koskinen’s pokey response to Congressional document requests needs to be considered in this context.  The IRS has not earned the benefit of the doubt.

Kay Bell, IRS chief Koskinen spars with House Oversight panel

 

Greg Mankiw, Not Class Warfare, Optimal Taxation:

Today’s column by Paul Krugman is classic Paul: It takes a policy favored by the right, attributes the most vile motives to those who advance the policy, and ignores all the reasonable arguments in favor of it.

In this case, the issue is the reduction in capital taxes during the George W. Bush administration. Paul says that the goal here was “defending the oligarchy’s interests.”

Note that when Barack Obama ran for President in 2008, he campaigned on only a small increase in the tax rate on dividends and capital gains. He did not suggest raising the rate on this income to the rate on ordinary income. Is this because Barack Obama also favors the oligarchy, or is it because his advisers also understood the case against high capital taxation?

Oligarchists everywhere.

 

20140327-1Leigh Osofsky, When Can Concentrating Enforcement Resources Increase Compliance? (Procedurally Taxing)

Cara Griffith, Taxing Streaming Video (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 322

Renu Zaretsky, Friendly or Penalty? Taxes on Married Couples, Businesses, and the Uninsured (TaxV0x).  Rounding up the tax headlines.

Jack Townsend, Scope and Limitations of this Blog: It Is a Tax Crimes Blog, not a Tax Crimes Policy Blog.  “I conceive my blog as a forum to discuss the law as it is, including how it develops.  It is not a tax policy blog addressing issues of what the law ought to be.”

 

Russ Fox, Bozo Tax Tip #9: 300 Million Witnesses Can’t be Right.  Richard Hatch is not widely considered a tax role model.

News from the Profession.  Frustrated EY Employee Vandalizes Office Breakroom in Protest Over March Madness Blocking (Going Concern)

 

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Tax Roundup, 3/26/14: Using Bitcoins regularly will get you a really long Form 8949. And: underpants!

Wednesday, March 26th, 2014 by Joe Kristan


Bitcoin
Bitcoins may act like money, but IRS says they aren’t.  
The IRS yesterday announced how that it will treat Bitcoin “virtual currency” as property, rather than currency, for tax purposes.  Notice 2014-21 lays out the IRS treatment of Bitcoin and similar virtual money.  Some key points:

- As property, gains and losses on Bitcoin are normally capital gains and losses, unless the taxpayer is a dealer in Bitcoins.  That means losses are limited to capital gains plus $3,000 for individuals.  This contrasts with currency transactions, which normally generate ordinary income and loss under Section 988.

– Transactions in virtual currency will normally generate gains and losses:

If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

That makes using Bitcoins a hassle for taxpayers who try to follow the law.  Everytime you buy something with Bitcoin, you will have a capital gain or loss, depending on fluctuations in the Bitcoin market.  Imagine if you had to record a little capital gain or loss based on the currency markets anytime you bought anything with cash.  If you use Bitcoins every day you’ll have a horrifying Form 8949 to report all of your gains and losses.

– The basis in virtual currency is its value on date of receipt, if you acquire it in a transaction.  That same value is the amount you use to compute income if you are paid in virtual currency

They point out the obvious:  “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Also, payments in virtual currency are subject to information reporting, same as cash.

– Virtual currency “miners” generate ordinary income.  If they do it as a trade or business, it’s subject to self-employment tax.

The TaxProf has more; Accounting Today also has coverage.  Peter Reilly has Bitcoins Not Tax Fairy Dust – Second Life Still A Tax Haven?, wisely noting that the virtual currency isn’t generated by the Tax Fairy.  And TaxGrrrl weighs in with IRS Says Bitcoin, Other Convertible Virtual Currency To Be Taxed Like Stock .

 

Ashlea Ebeling, Supreme Court Says FICA Tax Due On Severance Pay:

What the Supreme Court decision means for employers is that what had long been the case –severance pay is subject to FICA tax—remains the case. And for employees who are laid off, it means that they will continue to get a little less in “take-home” severance because it’s dinged for their share of FICA tax.

It seemed like a reach to say otherwise, but now it’s not even that.

 

 

A hard-working fictional student.

A hard-working fictional student.

O. Kay Henderson, Legislators ponder tax credit for student loan payments.  A truly awful idea.  This credit doesn’t encourage getting higher education; it encourages borrowing to pay for higher education.  As an unintended but obvious consequence, it discourages saving to pay for college — there’s no tax credit for foregoing current consumption to pay for college later.  It’s stunning that lawmakers actually want to encourage more student debt when many students already are entering a brutal job market with crushing loan obligations.

Joseph Henchman has two posts at Tax Policy Blog that should be read together: Wisconsin Approves Income Tax Reduction, Business Tax Reforms and Who Would Pay a Higher Illinois Income Tax?  Not the folks that move to Wisconsin, for sure.

 

Jason Dinesen, More on the 0.9% Medicare Tax and Iowa Tax Returns

Paul Neiffer, Schedule F Reporting Update:

I got some feedback on my previous post on Tax Reform and low Schedule F reporting of income. Several sources of farm income does not show up on a Schedule F. This includes many common sales of farm assets such as breeding stock and equipment. Most of the expenses associated with this income is deducted on Schedule F, however when these assets are sold, none of the gains appears on Schedule F.  Rather, this income is usually reported on Form 4797.

That still doesn’t change the fact that these simple farmers play the cash method like a violin to achieve tax results other businesses can only dream of.

Tony Nitti, Tax Geek Tuesday: Demystifying The Deduction Rules For Accrued Liabilities   

William Perez, Identity Theft and Your Income Taxes

Kay Bell, IRS gives Colorado flood victims until Oct. 15 to file 2012 or 2013 tax returns claiming disaster losses

Janet Novack, Gotcha! Tax Court Penalizes IRA Rollover That IRS Publication Says Is Allowed   

 

David Brunori, Hang On to Your Wallets (Tax Analysts Blog)

Howard Gleckman, Dave Camp’s Plan for the Expired Tax Provisions: An Almost-Good Idea (TaxVox)

TaxProf, The IRS Scandal, Day 321

Tax Justice Blog, State News Quick Hits: To Cut or Not to Cut?

 

Joseph ThorndikeRaising Taxes on the Rich Won’t Balance the Budget — But It’s Still Important (Tax Analysts Blog):

 The modern American fiscal state is predicated on a bargain. During World War II, lawmakers were forced to expand the personal income tax to help pay for the fighting. Over the course of just a few years, they added millions of middle-class Americans to the tax rolls for the first time, transforming the income tax from a rich man’s burden to a middle-class millstone. In return, however, these same lawmakers offered the middle class an implicit (and sometimes nearly explicit) guarantee — rich people would be asked to pony up, too.

Cool story.  Let’s see how that works nowadays:

Top 1 pays more than bottom 90

Chart by Tax Foundation

So now the “rich” aren’t paying their “fair share,” they’re picking up most of the tab.  How does it work if you break it down further?

20131030-2

So not only do “the rich” pay their share of the freight, they pay a lot more than their share of earnings.  And when you take government benefits into account, the whole “fair share” argument is tough to support:

givers and takers

Chart by Tax Foundation

I don’t buy Joseph’s “social contract” thinking.  The whole emphasis on inequality being peddled by the administration is a diversion, an attempt to change the subject from the manifest failures of Obamacare and foreign policy blundering.  No matter how hard they hit “the rich,” or how bad doing so is for the overall economy, there is never a point where the politicians will say the rich are being hit enough.

To the extent “inequality” persists, it’s clearly not a direct function of the tax code or government spending.  Politicians, though, find it useful to encourage the belief that they can spend on whatever pleases the crowd by just by making the rich pay their “fair share” — as if they weren’t already.  It’s the flip side of the widespread belief that the government can just balance the budget by cutting foreign aid.   It’s just an attempt to fool the gullible long enough to win another election.

 

Going Concern, Thrift Shops Issue Specific Guidance on Deduction Amounts for Used Underpants.  I didn’t know there was a deduction for toxic waste.

 

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Tax Roundup, 3/7/14: Expanded Iowa 10-and-10 capital gain break advances. And: more rave reviews for Camp plan!

Friday, March 7th, 2014 by Joe Kristan

20130117-1Expansion of Iowa 10-and-10 gain exclusion advances.  The bill to expand the availability of Iowa’s super-long-term capital gain break cleared its first legislative hurdle this week, as a House Ways and Means subcommittee approved H.F. 2129.

Iowa allows an exclusion from state taxable income of certain capital gains when the taxpayer meets both a 10-year material participation test and a ten-year holding period test.  This exclusion is available for liquidating asset sales and the individual tax on corporate liquidations, but is not available if the taxpayer is selling partnership assets or corporation stock to a third party, or for sales of less than “substantially all” of a business.

H.F. 2129 expands the exclusion “to include the sale of all or substantially all of a stock or equity interest in the business, whether the business is held as  a sole proprietorship, corporation, partnership, joint venture, trust, limited liability company, or other business entity.”

This would be a big change for Iowa entrepreneurs.  Consider how the current law affects a business started by two partners, with one older than the other.  The older partner retires more than ten years and pays full Iowa capital gain tax when he is redeemed out.  A few years later, the younger partner sells the business and retires himself.  The younger guy gets out with no Iowa capital gain tax under current law.  Under H.F. 2129, in contrast the 10-and-10 exemption would be available in both cases.

A “Fiscal Note” prepared by the Legislative Services Agency on the bill provides some statewide numbers:

Using State and federal tax returns of Iowa taxpayers, the Department of Revenue identified 369 tax returns reporting a capital gain for tax year 2012 where the taxpayer had participated in the business for a minimum of 10 years.

The total capital gain identified on those 369 returns that would be eligible under the capital gains exclusion expansion proposed in HF 2129 is $28.0 million.

Is this a good thing?  I think all capital gains should be tax-free, because they represent either a double-tax on the capital invested in them or, worse, a tax on inflation.  Anything that relieves this is arguably a good thing.  Still, it’s a complex carve-out for a limited class of taxpayers, one that creates a lot of errors by taxpayers who take the deduction erroneously or fail to use it when they are eligible; that sort of thing is almost a definition of bad tax policy. The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would provide a much better approach.

 

O. Kay Henderson, Two tax cuts passed in 2013 showing up in February’s state tax report (Radio Iowa).  The increase in the Iowa Earned Income Tax Credit is properly understood as an increase in a welfare program and a poverty trap,  not a tax cut.

 

20140307-1Jason Dinesen, Glossary of Tax Terms: Passive Activity/Passive Activity Losses   

William Perez, Need to File a 2010 Tax Return? Deadlines and Resources.  Why 2010?  The statute of limitations for 2010 refunds expires April 15, 2014.

TaxGrrrl, Taxes From A To Z (2014): C Is For Clothing And Costumes.  Good stuff.    Related: Dress for success, but don’t look to the IRS for any fashion help.

Russ Fox, Your Check Might Not be in the Mail:

I used to live in Orange County, California. Earlier this week a US Postal Service caught fire as it was heading toward an airport after leaving the Santa Ana mail sorting center. So if you mailed something on Monday, March 3rd from ZIP Codes starting with 926, 927, 928, 906, 917 and 918, it might have been burnt to a crisp. All the mail the truck was carrying was destroyed (an estimated 120,000 pieces).

Another argument for electronic filing and payment.

Kay Bell, IRS criminal investigators are putting more tax crooks in jail.  If you are cheating on taxes big-time, you are a lot more likely to get caught than you might think.

 

taxanalystslogoThat means it must be a weekday.  More Arrogance and Secrecy From the IRS  (Christopher Bergin, Tax Analysts Blog):

I don’t know if these apparent political decisions were made by Lerner or others either inside or outside the IRS, because trying to get information out of that agency is like trying to get sweat out of a rock. Over the years, it has fought the silliest things. I’m only half kidding when I say that if you asked the IRS to see the kind of staplers it’s using, it would tell you it doesn’t have staplers.

The IRS will go to great lengths not to be scrutinized. And that breeds an atmosphere of no accountability — which leads to arrogance. We have seen that arrogance consistently throughout the congressional investigations of several IRS officials. And where will it lead us? Not to a good place, especially for those of us getting ready to file our yearly income tax returns. A tax collector that treats its “customers” as guilty until proven innocent is a tax collector out of control. That is precisely what the national taxpayer advocate has been warning about. If IRS officials don’t believe they are accountable to Congress, the rest of us don’t stand a chance.

This is part of an excellent and thoughtful post, written more in sorrow than anger by a long-time observer of the agency; you really should read the whole thing.  I’ll add that all of these seemingly endemic problems in IRS should warn us off the Taxpayer Advocate’s awful idea of giving IRS more control over the tax preparers who help taxpayers deal with the out-of-control agency.

 

Jack Townsend, Fifth Amendment and Immunity in Congressional Hearings.  Good discussion of the law, in spite of his calling the Issa investigations a “witch hunt.”  It’s the job of Congress to oversee federal agencies, especially an agency that has already admitted gross misbehavior here.

TaxProf, The IRS Scandal, Day 302

 

20130113-3More rave reviews for the Camp “Tax Reform” plan:

William McBride, Camp and Obama Gang up on Savers

Kyle Pomerleau, Are Capital Gains and Dividend Income Tax Rates Really Lower Under the Camp Tax Reform Plan?  “If you take into account all the phase-outs of deductions and benefits in the Camp plan, marginal tax rates on capital gains and dividends are higher than current law at certain income levels.”

Tax Justice Blog, House Ways and Means Committee Chairman Dave Camp Proposes Tax Overhaul that Fails to Raise Revenue, Enhance Fairness, or End Offshore Tax Shelters

 

Roberton Williams, A Web Tool to Calculate ACA Tax Penalties  (TaxVox).  “It is often said the tax is $95, but for many people it will be much more.”

News from the Profession.  Some CPA Exam Candidates Skeptical the Illinois Board of Examiners Can Tell Time (Going Concern)

 

Peter Reilly, Could You Make Tax Protester Theories Work For You?:

If you are willing to entirely discount the quite remote chance of criminal prosecution, it may well be a decent percentage play particularly if you are just about maximizing your current lifestyle rather than accumulating net worth and entirely amoral when it comes to meeting tax obligations…

I still think it is a really terrible idea to enact Hendrickson’s strategy, but that’s just me.

No, it’s not just you, Peter.  And unless your income is generally not subject to third-party reporting like W-2s or 1099s, you will be caught, and then clobbered by back taxes, penalties and interest.

 

 

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Tax Roundup, 12/17/2013: Map day! A B+ for Iowa tax administration.

Tuesday, December 17th, 2013 by Joe Kristan

I did my last session of the year yesterday for the ISU-CALT tax school in Ames, and I have much catching up to do today in the office.  It’s a two-day school, and today Paul Neiffer is on the Day 2 team at the Ames Tax School.

 

Ben Harris, The US Income Tax Burden, County by County (TaxVox):

While the median federal income tax burden across counties is about $3,400, approximately 10 percent of counties  have average tax burdens less than $2,100 and around 10 percent of counties have  average tax burdens over $6,700.

20131217-1

I think the right side of the little color key is supposed to read $7,000, not $70,000.  Unless Central Iowa has higher income than I thought, anyway.

 

Meanwhile, Joseph Henchman reports that the Council on State Taxation graded the states on “taxpayer administration,” with this map (Tax Poliy Blog):

20131217-2

Iowa gets a B+:

20131217-3

 

I think they are grading on a curve.  And Iowa gets credits for making rulings and decisions available; that hasn’t been done since August, at least not on the Iowa Department of Revenue website.

 

Jeremy Scott, IRS Moves Closer to Having a Commissioner (Tax Analysts Blog).  How novel.

O. Kay Henderson,  Energy execs say end of federal credit to curb wind energy expansion.  When something can’t happen without subsidies, that’s nature’s way of saying it shouldn’t happen.

Jason Dinesen, Will Same-Sex Married Couples Pay More or Less in Taxes Now?  “I answer by saying that the answer is: ‘yes, no, maybe.'”

 

Leslie Book, Omitted Income, Accuracy-Related Penalties and Reasonable Cause (Procedurally Taxing).  He talks about the case I discussed here, saying:

Sometimes when I read penalty cases involving individuals I am struck by how the penalties are inappropriate. Here, I understand why IRS counsel stuck to its guns and tried the case, but I also agree with the court’s conclusion on these facts. I suspect that very few taxpayers leaving off this amount of income would get relief from the penalties, though wonder if the IRM should extend the first time abatement relief to penalties other than failure to file or failure to pay, so that perhaps Counsel or Appeals will feel more comfortable in exercising discretion if there are facts suggestive of an isolated and understandable mistake.

IRS is much too quick to assess foot-fault penalties on taxpayers with a good compliance history.

 

William Perez, IRA Distributions at Year End:

Taxpayers who are age 70.5 or older are required to distribute at least a minimum amount from their traditional IRAs, 401(k) plans and similar pre-tax savings plans. These required minimum distributions must begin no later than April 1st after the reaching age seventy and a half. Individuals continue taking required minimum distributions each year. So the first year-end tactic is to figure out how much needs to be distributed from the retirement plan to satisfy the required minimum distribution rules.

Basic, but missed surprisingly often.

 

Tony Nitti,  IRS Issues Guidance On Employee Benefit Plans For Same-Sex Couples

Russ Fox,  Health Care Fraud Leads to Tax Charge

Kay Bell, Medical tax breaks’ 10% and FSA year-end considerations

TaxGrrrl has kicked off her “12 Days of Charitable Giving 2013.”  Today she highlights Children Of Fallen Patriots 

TaxProf,  The IRS Scandal, Day 222

 

Grab a Tuesday Buzz from Robert D. Flach!

News From the Profession.  Accounting Firm Busted Stealing From the Cloud in “Plain, Vanilla Dispute About a Customer List” (Going Concern)

 

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Tax Roundup, 3/25/2013. Three weeks to go. And Cargo Cults!

Monday, March 25th, 2013 by Joe Kristan
Ceremonial cross of John Frum cargo cult, Tanna island, New Hebrides (now Vanuatu), 1967 (via Wikipedia)

Ceremonial cross of John Frum cargo cult, Tanna island, New Hebrides (now Vanuatu), 1967 (via Wikipedia)

Heresies of the Cargo Cult.  When some remote societies encountered the industrial world in World War II, they had trouble grasping what they were seeing.  Wikipedia explains:

Cargo cult activity in the Pacific region increased significantly during and immediately after World War II, when the residents of these regions observed the Japanese and American combatants bringing in large amounts of matériel.   When the war ended, the military bases closed and the flow of goods and materials ceased. In an attempt to attract further deliveries of goods, followers of the cults engaged in ritualistic practices such as building crude imitation landing strips, aircraft and faux radio equipment out of bamboo or whatever materials they had at hand, and mimicking the behavior that they had observed of the military personnel operating there.

While it’s easy to mock an islander for building a refrigerator-like box in hopes of conjuring up an icy six-pack, cargo cult behavior also occurs in modern societies.   Without describing it as such, tax historian Joseph Thorndike writes about the cargo cult of the 1950s, where modern policy wonks try to conjure up 1950s-style growth through a ritualistic process of duplicating tailfin-era totems.  For example, Timothy Noah thinks the crushing stated top marginal rates of that era might help generate those Happy Days results.  Mr. Thorndike sees problems with that approach:

We still don’t know if high statutory rates and (relatively) high average rates were a drag on growth. And we can’t know, because we also can’t know what growth might have been in a different tax climate.

Moreover, a range of nontax factors were probably more important in shaping growth patterns in the 1950s. In particular, the economic disruptions of World War II had left the United States in a uniquely dominant position; by one estimate, U.S. manufacturing output constituted 60 percent of the world’s total in 1950.

In other words, it takes more than a bamboo box to conjure up that beer.

After all, the tax system of the Eisenhower era was not a very good one: It paired notionally sky-high rates with a deeply flawed tax base and created distortions both coming and going.

I understand that progressives like Noah are fighting a different battle: They are trying to beat back the rate-cutting mania that often serves as a definition of tax reform these days. But I think we might take a lesson from the tax experts of the 1950s, who understood the problems bedeviling their own tax system. As economist Harold Groves said at the time, “The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that makes these rates specious.”

Mr. Thorndike is more sympathetic to high rates than I ever will be.  Doing taxes for a living, I see first-hand how high rates affect behavior, and I have no patience for academics who say otherwise.  But he wisely notes that simply trying to recreate the totems of the 1950s, like high tax rates, misses all of the other things that put cold beer in the refrigerator.  Same thing goes for other 1950s fetishes like tail fins, industrial unionism and defined benefit pension plans.

 

 

To serve and protect.  Former Pittsburgh Police Chief Charged with Conspiracy, Failure to File Federal Tax Returns (FBI Press Release):

Former Pittsburgh Police Chief Nathan E. Harper has been indicted by a federal grand jury in Pittsburgh on charges of conspiracy and willful failure to file income tax returns, U.S. Attorney David J. Hickton announced today.

The five-count indictment named Harper, 60, of Pittsburgh.

According to the indictment, Harper was the chief of the city of Pittsburgh Police Department. From 2009 to 2012, he caused at least $70,628.92 in checks and cash received by the special events office of the department to be diverted to two accounts at the Greater Pittsburgh Police Federal Credit Union. Using Visa debit cards, Harper obtained more than $31,000 in ATM withdrawals and debit purchases, all for his personal benefit. Harper also failed to file federal tax returns for the years 2008 through 2011.

If he’s convicted, maybe the special events office can throw a little party for the occasion.

 

What could possibly go wrong?  James Timothy Turner was convicted last week of masterminding a cunning plan.  DothanEagle.com reports:

According to a U.S. Department of Justice press release, Turner was convicted of conspiracy to defraud the U.S., attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the Internal Revenue Service, failing to file a 2009 federal income tax return and falsely testifying under oath in a bankruptcy proceeding.                           

The FBI began investigating Turner in 2010 after he and three other people sent packages to all 50 governors demanding they leave office.                           

Turner is the president of a group of what prosecutors called “sovereign citizens” known as the “Republic for the united States of America.”

Send “packages” to all of the governors telling them to resign?  Well, at least they weren’t trying to hide what they were doing.

Turner toured the country in 2008 and 2009 teaching seminars that instructed attendees how to submit bonds to pay off tax debt.                           

According to prosecutors, these bonds were completely fictitious and often written for amounts in excess of $1 billion.

Silly man.  Only the Federal Reserve can do that.  Unless we’re talking about the $1 trillion magic coin

 

Every theater needs a dirctor, including economic development theater.  Economic development director accuses senator of engaging in “political theater” over Orascom deal (O. Kay Henderson, via TheBeanwalker)

 

William Perez,  Penalty Relief Available for Some 2012 Federal Tax Returns

Jack Townsend,  Ethicist Question About Tax Professionals Exploiting Loopholes:

So, for those tax professionals engaging in such transactions that they know violated a known legal duty, their conduct is illegal and unethical.  For those transactions engaging in such transactions where they don’t know (perhaps are willfully ignorant) that the conduct is illegal (ultimately most of the b—-t tax shelters are found to be
illegal), then at least the ethical issues arise.  These are smart professionals, paid (supposedly) to predict what a court will do with the b—–t tax shelter.  Yet, in the prominent civil cases that swat down b—–t tax shelters, they fail miserably in their predictions.

 

Kay Bell,  A tax lawyer has ethical problems with tax loopholes

Janet Novack,  How Much Tax Will You Owe On A $320 Million Powerball Jackpot? A Lot More Than In 2012 .  I knew I should have arranged to win that Powerball last year.

Jim Maule,  Tax Meets the Chicken and the Egg

Trish McIntire,  Extensions

Patrick Temple-West,  Athletes’ tough tax bills, and more

TaxGrrrl,  Senate Passes Budget, Calls For Nearly $1 Trillion In Tax Increases

You are required to go to the party.  The Affordable Care Act Turns 3 (Richard Morrison, TaxVox).

 

The Critical Question: Who Will Play Margaret Fuller When The Movie Comes Out ?  (Peter Reilly)

Tony Nitti, IRS Employees’ Star Trek Parody Is As Wonderfully Awful As It Sounds

Russ Fox,  To Boldly Go Where No IRS Employee Has Gone Before…

You mean it’s not a documentary?  IRS Releases Gilligan’s Island Parody Training Video (TaxProf).

Frankly, they don’t give a dam. Beavers defiant after convicted of tax evasion (Chicago Tribune)

 

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Tax Roundup, 1/24/2013: Tax increases for everyone, anyone? And more bad news for tax season!

Thursday, January 24th, 2013 by Joe Kristan

 

Tax Foundation graphic.

TaxProf,  NY Times: it Is Time to Raise Taxes on Everybody — Including the Middle ClassPaul Caron links to a New York Times Op-ed:

To make ends meet, both parties agree, spending must be drastically cut. Under the White House budget proposal, discretionary spending on everything except the military is projected to shrink to its smallest share of the economy since the Eisenhower administration by the beginning of the next decade. Though he has resisted Republican demands to slash entitlements, President Obama remains willing to look for further savings from Medicare.

This is not, however, the only option we have. There is an alternative: raising more money from all taxpayers, including the middle class.

Nobody wants to talk about this. … Yet Americans would benefit from a discussion of this possibility.

It’s not true that “both parties agree” that spending must be drastically cut.  It’s not clear that either party, as a whole, admits it, and at least one party remains in firm denial.  The President’s campaign was all about spending money and sending the bill to the rich guy.  Still, it’s nice that finally somebody at the New York Times admits that the rich guy isn’t buying.  He can’t.

 

Janet Novack,  As IRS Tax Filing Season Begins, Bad News For Honest Taxpayers.  She20130121-2 speaks with Taxpayer Advocate Nina Olson.  The article has some depressing truth:

Customer service at the Internal Revenue Service is dismal and deteriorating. (Only 68% of telephone callers who wanted to talk to a human at the IRS last tax filing season eached one, and then only after an average 17 minute wait.)  The epidemic of identity theft refund fraud hasn’t yet been contained.  Hope for a major reform that might simplify the tax code is waning.

The article also has some serious nonsense about last week’s ruling shutting down the IRS preparer regulation power grab:

“If the injunction stands, the taxpayers of the United States will be grievously harmed,” IRS National Taxpayer Advocate Nina E. Olson told Forbes. “The practical effect of not having some kind of consumer protection for taxpayers going to return preparers is enormous. And I say that seeing all the return preparer fraud, and the return preparer negligence, and the return preparer inadvertent mistakes that happen.”

Enormous?  More like what we did forever until two years ago.  If anybody has evidence that last year’s tax preparers were significantly more accomplished and accurate than they were before the regulations, they haven’t shared it.  And the idea that the RTRP literacy competency test and minimal CPE requirement would have changed that is silly.

Ms. Olson believes that depriving consumers of choices in preparers is in their interest because the diminished choices would be better.  That flies in the face of all we know about regulation.  The net result would be higher prices, driving more taxpayers to do their returns and driving some on the margins out of the system altogether, while sending more business to the big franchise tax prep outfits.

 

Robert D. Flach, TAX RETURN PREPARER REGULATION, LICENSURE, AND/OR CERTIFICATION.  Robert’s magnum opus on how tax preparers should be regulated.

While I agree that having the Internal Revenue Service regulate tax preparers is not the best option – it is without a doubt a far superior option to having Congress legislate regulation.  My opinion of the intelligence, competence, and ability, or rather lack of intelligence, competence, and ability, of the current members of Congress is well known.
The optimal source of tax preparer regulation/licensure/certification, whether mandatory or voluntary, would be an independent industry-based organization, not unlike the AICPA or ABA, such as the National Institute of Registered Tax Return Preparers that I have proposed.

Robert also calls me out:

As I have asked in response to Joe’s assertion, would you want a “casual” electrician wiring your kitchen, or a “casual” dentist filling a cavity, or a “casual” architect designing your home?

If I do, what business is it of anybody else?  If I want to pay a talented handyman neighbor or cousin to install a ceiling fan for me, why is it anybody’s business?  Why should he be not allowed to take my money just because he doesn’t have an electrician card from the Bureau of Electrical and Mortuary Science?  As TaxGrrrl noted yesterday, occupational licensing is taking over the economy, and that’s not a good thing.

 

TaxGrrrl, With A Week To Go, IRS Talks Opening Day and Refunds

 

Cara Griffith, Have State Income Taxes Run Their Course? (Tax.com)

The corporate income tax is inefficient and a not sufficiently stable source of revenue for states. It should be eliminated. The individual income tax is likewise not a particularly stable source of revenue for states, and while counterintuitive, progressive tax systems do not work well at the state-level. Income redistribution, to the extent that it should be a goal at all, should not be undertaken at the state-level. So  in a perfect world, yes, the state individual income tax should be eliminated as well.

Christopher Bergin agrees.

 

Good. Another bid to ban traffic enforcement cameras in Iowa. (O. Kay Henderson, via The Beanwalker).  Traffic cameras are your local government’s most sincere way of showing their contempt for you.

 

Trish McIntire,  Form 8332 and Fairness.  How the IRS enables bitter ex-spouses.

Paul Neiffer,  Why Imputed Interest Matters For 2013 (And Beyond)

Kaye A. Thomas,  Another Demutualization Case

Robert W. Wood, Golfer Phil Mickelson Is Not Alone In Fleeing Taxes (Via Kerry Kerstetter)

Peter Reilly, Why Phil Mickelson’s Remark Was Really Dumb

Brian Mahany, Is FATCA In Trouble? Unfortunately, NO

Joseph Henchman,  CBPP’s Misleading Chart on Debt Stabilization (Tax Policy Blog).  A study in cherry-picking.

Jen Carrigan, Should Capital Gains Be Taxed Differently? (Guest post at The Missouri Taxguy blog).

Patrick Temple-West,  Firms keep stockpiles of ‘foreign’ cash in U.S., and more

Tax Trials,  District Court Decision Prevents IRS from Regulating Certain Tax Return Preparers

Kay Bell,  Fiscal cliff tax provision could help stem fraudulent refund claims by prisoners

 

News you can use:  Passing the CPA Exam While Billing Over 2500 Hours in a Year Is Way Harder Than Having a Baby(Going Concern).  Also less useful and not as smart.

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Tax Roundup, 1/16/2013: Iowa legislators to push Alternative Maximum Tax? Also: new home office deduction option.

Wednesday, January 16th, 2013 by Joe Kristan
20130116-1

Kraig Paulsen

It looks like the Republican leadership in the Iowa House of Representatives will be pushing income tax changes this year.  Unfortunately, it looks like they are pushing the plan I call an “alternative maximum tax” like the one floated by Governor Branstad last year and quietly dropped after the election.  O. Kay Henderson reports:

House Republicans are calling for a “flat” state income tax. If their idea becomes law, Iowans would have the option of filing their personal income taxes under the current system — which has a top rate of nearly nine percent — or opting to pay a four-and-a-half percent rate, with no deductions.

 The governor has made it clear property tax reform is his top priority,
but House Speaker Kraig Paulsen of Hiawatha, the top Republican in the
legislature, says Branstad hasn’t said no to cutting income taxes.

20130116-2Any tax practitioner will point out that this will in practice just be one more complication in computing Iowa taxes.  Taxpayers will compute their taxes under both the current system and the flat system and choose the one that results in the lower tax.  I assume the legislative leaders are resorting to this awkward plan to get around the implacable opposition of the powerful Muscatine-based Iowans for Tax Relief to any tax reform that would repeal the deduction for federal taxes on Iowa returns.  Their plan is likely based on that proposed by Iowans for Discounted Taxes.

Far better to just clean up Iowa’s tax law.  Repeal the special interest loopholes and corporate welfare tax credits, get rid of all non-federal deductions, get rid of the deduction for federal taxes, tie the tax law to the federal code, drastically lower the rates, and eliminate the corporation income tax entirely.  In short, enact The Quick and Dirty Iowa Tax Reform Plan.

 

Flickr image courtesy e53 under Creative Commons license

Flickr image courtesy e53 under Creative Commons license

Whether or not Governor Branstad wants to deal with income taxes, he may have to.  His neighbor in Nebraska may be forcing his hand.  1011Now.com reports:

Gov. Dave Heineman is calling for an overhaul of Nebraska’s tax system, saying the state needs to get rid of its individual and corporate income taxes and make up the lost revenue by shutting off as much as $2.4 billion in tax breaks for businesses.

The Republican governor unveiled his tax plan Tuesday during his annual State of the State address to lawmakers.

Heineman says his plan would keep the state competitive with two neighboring states, Wyoming and South Dakota. Both have no individual income tax.

It sounds much like the plan proposed by Louisiana Governor Jindal this week.   If the other states massively improve their income tax systems and Iowa doesn’t, all of the fertilizer tax credits in the world won’t help Iowa’s business climate.

 

 

IRS unveils simplified home office deduction for 2013.  The IRS yesterday unveiled a new optional way to compute home office deductions.  From IR-2013-5:

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

This will be handy.  When you depreciate part of your home for a home office deduction, you lose the ability to exclude that much gain on a later home sale.  Home office deductions are also complicated and a magnet for IRS examiners.  This looks like it will be useful for the growing ranks of people who run businesses out of their home.  Taxpayers will still be allowed to opt out of this new method and compute their home office deductions the old way.  Full details are found in Revenue Procedure 2013-13.

Other coverage:

TaxProf,  IRS Announces Optional $1,500 Home Office Deduction in Lieu of Depreciation

Russ Fox, Is A Simplified Home Office Deduction Better?  “The reality is that $5 per square foot understates the cost of most home offices, especially when factoring in depreciation.”

 

Paul Neiffer,  Senator Grassley Wants Extension of March 1 Filing Deadline:

Due to the passage of the new tax law, the ability of the IRS to accept most farmers tax returns by March 1 is very uncertain.  Senator Grassley’s letter indicates that the IRS has granted an extension in the  past, most recently last year when the MF Global mess occurred.  In that case, the IRS did not actually extend the filing date, but granted  waivers of the penalty for any estimated tax penalty caused by MF Global  untimely mailing of form 1099.

Farmers don’t have to make estimated tax payments if they file by March 1.  If they can’t do that, the IRS can impose estimated tax penalties on the whole balance due.  The late enactment of new tax laws for 2012 may make it impossible for the IRS to process returns by then.

 

January: the month to start your 2013 year-end tax planning!  My new post at IowaBiz.com, the Des Moines Business Record’s blog for entrepreneurs.

Jason Dinesen, Rental Properties and Basis Allocation

TaxGrrrl,  IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More

Mary Ellen Goode,  A Stark Reminder of the Excessive Cost of Complying with the Tax Code

Rush Nigut,  Iowa Business Specialty Court Pilot Project.  I hope it leads to a specialized Iowa Court for tax cases.  Taxpayers are at a huge disadvantage arguing before District Court judges with no tax expertise.

Kay Bell, The 1040 is ready! The 1040 is ready!

Anthony Nitti,  Dear America: Your Higher Payroll Taxes Are Not The Result Of A Tax Increase.  Only if the multi-year payroll tax break didn’t count as a tax cut.

Janet Novack,  11 Ways To Tap Retirement Cash Early, Without A 10% Penalty

David Brunori, Virginia’s Gas Tax Reform (Tax.com)

Howard Gleckman,  A Budget Deal is Staring Them in the Face, But Here’s Why Lawmakers Won’t Compromise in 2013 (TaxVox)

Robert D. Flach has a new Buzz!  He responds to my take on his take on CPAs.

Jim Maule,  Still More Joys of IRC Section 86.

 

Kyle Pomerleau, New Paper on Estate Tax Misses the Mark.  (Tax Policy Bl0g). It’s about…

Caron & Repetti: Occupy the Tax Code: Using the Estate Tax to Reduce Inequality (TaxProf)

My experience in tax practice convinces me that the estate tax is unnecessary to break up and dissipate large estates.  Beneficiaries take care of that just fine.

 

Hey!  I said I was sorry!  Defendant Screws Up His Acceptance of Responsibility (Jack Townsend):

Although the defendant claimed remorse, his actions after the time of the guilty plea continued the obstructive conduct.  Hence, this defendant got no benefit from pleading guilty, and saving the Government and the court the time and expense of trial.  Not only that, his obstructive conduct convinced the judge to sentence him at the top of the unreduced Guideline range.

If you want the judge on your side, it might be a good idea to stop committing the crime for awhile.

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Tax Roundup, 1/15/2013: Branstad not leading on income tax reform. And: Cage Fight! CPAs vs. RTRPs!

Tuesday, January 15th, 2013 by Joe Kristan
Via Wikipedia

Via Wikipedia

Might the Iowa legislature lead on income tax reform?  If it’s going to happen, they will have to, as Governor Branstad only wants to talk about property taxes this year.  O. Kay Henderson reports:

During a recent interview with Radio Iowa, Governor Branstad made it clear he is focused on cutting property taxes.

“Sure, I’d like to see the income tax reduced, too, but in terms of my priority — and I’ve been working on this for a couple of years and we’re really trying to perfect it — our focus is going to be on significant property tax reduction and replacement,” Branstad said a month ago.

Some legislators are more ambitious, reports Henderson:

Representative Tom Sands, a Republican from Wapello, is the chairman of the House Ways and Means Committee that writes tax policy.

“I think there is some pressure building from Iowans to cut both income taxes — look at some reform as well as a cut to the individual income tax,” Sands says. “We’re hearing from corporations as well, on the income side.”

I doubt anything good will happen with income taxes this session.  The Iowa Chamber Alliance even wants to to go the wrong way, pushing more tax credits for the well-connected.  No organization seems to be pushing for the rest of us.  But The Quick and Dirty Iowa Tax Reform Plan is ready to go if the legislature needs some ideas.

 

Russ Fox, Estimated Tax Payment Deadline Is January 15th.  For 1040 and 1041 filers. Kay Bell has more.

 

Nick Kasprak, Monday Map: State Gasoline Tax Rates, 2013 (Tax Policy Blog):

 20130115-1

Robert D. Flach, CHOOSING A TAX PREPARER.  I suppose I should be upset by this:

Contrary to the popular “urban tax myth” perpetuated by uninformed journalists, just because a person has the initials “CPA” after his/her name does not mean that he/she knows his arse from a hole in the ground when it comes to preparing 1040s.

But I’m not.  It’s true, if roughly stated.

Robert goes astray in his next paragraph:

Only those individuals who possess the “EA” (Enrolled Agent) or “RTRP” (Registered Tax Return Preparer) designations have demonstrated competency in 1040 preparation by taking an IRS-sponsored test, and are required to remain current in 1040 law by taking a minimum number of hours in continuing professional education (CPE) in federal income taxes each year.

False.  The RTRP test is open book.  It demonstrates that somebody can read.  It’s a literacy test, an empty exercise to justify the IRS power grab over the preparer industry.  It’s different with Enrolled Agents, like Jason Dinesen and Russ Fox,  who have to meet much stricter standards than RTRPs.    One of the underreported nasty consequences of the RTRP designation is that it damages the EA brand.

I also disagree with the implied conclusion that CPAs who prepare returns are less competent as a group than EAs or RTRPs.  Some are incompetent, no doubt, but many tax CPAs are highly-skilled.    I think the competency curve for non EA preparers vs. CPAs would look something like this:

http://www.rothcpa.com/misc/20110118-2.png

Substitute “RTRP” for “unenrolled preparer.”

There are excellent non-CPAs and there are incompetent CPAs.   Still, I think as a group the CPAs who do tax for a living will tend to be more competent.

My rule of thumb for choosing a preparer: buy as much preparer as you need, but no more.  Many taxpayers who only have wage and investment income and routine itemized deductions will do fine with an RTRP (and would have done fine with an unenrolled preparer without the new IRS preparer regulations).  If you have business income, a multistate return, or a complicated financial life, your needs go up; you need a high-end RTRP like Robert, or an EA, or a CPA. As your business gets bigger, you are more likely to want to hire a good CPA.  And when Robert gets to the bottom line of his post, I think he agrees.

But be careful which one you hire: Lawyer, Accountant Implicated in Estate Fraud Case (Brian Mahany)

 

Trish McIntire, Preparer Conflict of Interest

 

Jack Townsend, The Big Boys Get Better Treatment in Our Tax System Than Do Minnows.

I speak again on the basic relative unfairness of the treatment of many, if not most, in the IRS’s offshore voluntary disclosure initiatives.

They have to shoot the jaywalkers so they can slap the real offenders on the wrist.

 

You pay more in taxes this year than last year.  How do you like your tax cut? At Tax.com, Jeremy Scott tries to convince us that we just got a tax cut:

 The income tax rates, the estate tax, and the alternative minimum tax  patch are all here to stay.  And, according to the Tax Policy Center’s (TPC’s) preliminary study on distributional effects, the act essentially provided a big tax cut for almost everyone.

Funny, everybody’s taking home less.  How does that work? My emphasis:

Using the Congressional Budget Office’s old baseline (which assumed that  the Bush tax cuts would expire for everyone) and looking at the effects of the tax cut in 2018, the TPC says that the average taxpayer will receive a $2,335 tax cut under ATRA

I see.  Because the tax increase could have been bigger, we got a tax cut.  I’ll see if I can cut staff accountant pay and convince them they got a raise because we didn’t cut more.

Janet Novack, Obama Vows Republicans Won’t Collect ‘Ransom’ For Raising Debt Limit.  No, they’ll ultimately let the President continue the insane spending pace.

 

Paul Neiffer, We Wonder What the Investment Income Tax Form Will Look Like

Avoiding Excess Credit Card Interest Should Not Be A Taxable Event.  But it can be, if you get the bank to forgive unpaid interest that would be non-deductible.

IRS Releases Additional Inflation-Adjusted Figures for 2013

Robert Goulder, Taxes & Corruption: Another Greek Tragedy (Tax.com)

TaxGrrrl, Ask the taxgirl: IRS Delayed Tax Filing Season Applies To Everybody

Martin Sullivan, IRS: Women At Work (Tax.com):

According to the latest IRS Data Book  60,623 of the agency’s 104,402 employees in 2011 were women. That 66 percent is far more than the 44-percent figure for government’s total civilian labor force and the 47-percent figure for the overall US civilian workforce.

 

Ben Harris, Should Louisiana Dump Its Income Tax for a Bigger Sales Tax? (TaxVox)

News you can use.  FYI: Attorneys Think Auditors’ Legal Confirmation Letters Are a Giant Waste of Time (Going Concern)

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Tax Roundup: 1/8/2013: Iowa to issue mortgage credit certificates. And: got change for a trillion?

Tuesday, January 8th, 2013 by Joe Kristan

 

20130108-2

Dave Jamison

Iowa issuing new certificates for federal mortgage interest tax credits.  The Iowa Finance Authority yesterday announced that it will issue mortgage credit certificates that enable Iowans to qualify for the federal mortgage interest credit.  O. Kay Henderson reports:

The Iowa Finance Authority is offering a new tax credit for new homeowners who fall under limits on annual income and the purchase price of their home. Iowa Finance Authority director Dave Jamison says it’s a credit linked to the mortgage interest new homeowners are paying.

“Yet another way that Iowans who meet our program guidelines can experience the many benefits of home ownership,” Jamison says.

Iowans with the certificates may be able to claim the federal credit on Form 8396.  The IRS describes the credit here.  They note that interest that qualifies for the credit does not qualify for the home mortgage deduction.  You only qualify for the credit if you have a mortgage credit certificate from a qualifying agency; in Iowa, that agency is the Iowa Finance Authority.

The credit isn’t for everyone; there are limits based on income and home price.  From the O. Kay Henderson story:

Eligibility guidelines are different for each Iowa county. In the state’s largest county, Polk County, a couple with an annual income of up to $75,000 could qualify for the credit on a home that was purchased for $250,000 or less.

More from  WHOTV.com.

 

Nick Kasprak, Monday Map: Percentage of Taxpayers with AGI over $500,000 (Tax Policy Blog)

 20130108-1

 

Fiscal Cliff Notes

TaxGrrrl,  IRS Issues Statement On Tax Legislation, Makes No Promises About Start Of Tax Season:

The delay means that now, there are a lot of new forms to be printed, a lot of software programs to finagle. I’d be surprised – and wildly impressed, mind you – to see tax season kick off on time this year for all taxpayers. But fingers crossed, right?

I think the federal tax season won’t be too bad.  With all of the retroactive conformity problems in the new law, though, a lot of states are likely to give taxpayers fits.

Kevin D. Williamson,  You Cannot Raise Taxes on the Rich:

Tax hikes on the so-called rich may decrease the private sector’s share of income, but they probably will not do much to decrease the real income of high-wage workers and may in reality increase government revenue at the expense of low-wage workers in the long term, though it is very difficult to disaggregate the complex relationships between taxes, wages, and prices. But those who say that they are most interested in economic inequality would do well to follow Kenworthy’s example and look at transfers rather than taxes.

James Pethokoukis,  New study undercuts Obama’s income inequality argument

Washington’s tax hike on wealthier Americans won’t accelerate economic growth, won’t create jobs, and won’t lower the debt by an more than a rounding error. So what was the point of all that debate about the fiscal cliff? Why did President Obama insist on those upper-income tax increases, especially when the economy continues to struggle?

Simple: It was a way — even if mostly symbolic — of addressing what President Obama views as America’s biggest problem: rising income inequality.

A falling tide lowers all boats.

Freakonomics,  How Much Financial Inequality Is Due to Financial Illiteracy?  Is that illiteracy of the people who are unequal, or those who think it’s a big deal.

Jeremy Scott, Both Parties Should Have Pushed Payroll Tax Cut (Tax.com)

 Hani Sarji,  More Estate Tax Changes Could Follow Fiscal Cliff Deal (via the TaxProf)

Patrick Temple-West, More tax revenue to IRS before cliff, and more

 All the talk about the fiscal cliff and the inadequacy of the last-minute deal to avert it obscures one fact: It probably provided the government with tens of billions of dollars in unexpected tax receipts.

Many taxpayers accelerated income and deferred deductions anticipating the rate increases.

Wall Street Journal, The Stealth Tax Hike: Why the New $450,000 Income Threshold Is a Political Fiction:

Paul Neiffer, Fiscal Cliff Tax Bill May Increase Divorce Rate!

 

Russ Fox,  The Problem with PEOs.  No, not these PEOs.

Trish McIntire, More ITIN Info

Missouri Tax Guy,  Married Filing ….

Jack Townsend, HSBC Depositor Pleads Guilty to Conspiracy

Kay Bell, Tax moves to make in January 2013

I like the first half. Let There Be Wine (And Taxes)  (Jason Dinesen)

The Critical Question: Can You Distinguish a Tax from a Ransom Payment? (Robert Goulder, Tax.com)

I wasn’t serious about her anyway.  Ex-KPMG Chief to Auditors: You Are All Flirting With Irrelevance  (Going Concern)

Hope and change.  A lot of change, if you use it to buy coffee.   Should the President Mint a $1 Trillion Platinum Coin? (Megan McArdle)

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Tax Roundup, 1/7/2013: Economist says Iowa’s problem is income tax, not property tax. And: thieves don’t report all of their income?

Monday, January 7th, 2013 by Joe Kristan

O. Kay Henderson reports that maybe the Branstad focus on property taxes is misplaced in Economist: Iowa income taxes not competitive:

A Midwestern economist says Iowa policymakers should focus on cutting income taxes rather than property taxes. Ernie Goss, an economist at Creighton University in Omaha, says Iowa’s income tax rates are fifth highest in the country.

“In terms of what Iowa needs to look at, in my judgement, given what’s going on in Kansas, what’s about to go on in Nebraska — Iowa’s neighbors — you need to look at income taxes, in terms of being more competitive,” Goss says.

Iowa property taxes are too high, but income taxes  matter more for many taxpayers.  While property taxes are a big deal to companies that own real estate, like a manufacturer or a big insurance company, income taxes can mean a lot more to a start-up or a tech company.  Fortunately the Tax Update’s Quick and Dirty Iowa Tax Reform Plan is ready to go!

 

Making a dent in the deficit!  A chart shows how much the tax increases on “The Rich” will reduce the $1.2 trillion federal deficit (new taxes in green, deficit in red)

Fiscal cliff taxes vs deficit

Either the government spends a lot less, or taxes go up a lot for everyone. The rich guy isn’t buying

 

The IRS isn’t buying, either.   Tax Analysts reports Better IRS Enforcement Could Net $1 Billion More a Year, Says GAO ($link).   $1 billion is less than 1/1000 of the deficit.  They won’t audit their way to solvency.

 

Breaking tax news from the Eisenhower administration:

Amity Shlaes,   Think Obama’s Tax Hikes Are Low Compared With Rates Of The 1950s? Think Again.  (Via Instapundit)

Andrew Biggs,  Were taxes really higher in the 1950s?

20130107-1

 

It’s Monday.  Do you know if your payroll taxes have been remitted?  Another sad story of a payroll service provider who decided he needed taxes withheld from his clients more than the IRS did.  Digtriad.com reports that Arthur Weiss of Winston-Salem, North Carolina is going away for 15 years:

Case documents show Weiss operated professional employer organizations (PEOs), which provided payroll-related services to client companies. For his client companies, Weiss agreed to pay the employees, withhold and remit federal and state taxes, prepare and file the federal and state employment tax returns  and provide workers compensation insurance (WCI).

Weiss did pay the employees and withhold the employment taxes, but he failed to remit the employment taxes, keeping them for his personal use.

PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS).  Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number.  This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services.  If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect.  Not many employers can afford to pay payroll taxes twice.

Russ Fox has more.

 

Few thieves report their income honestly.  From WHOTV.com:

Disgraced former Peregrine Financial CEO Russell Wasendorf Sr. is in jail awaiting sentencing for embezzling over $200-million in customer funds, fraud, and lying to federal regulators.

Now the state says he may have also cheated on his taxes.

Records show the [Iowa Department of Revenue] filed an assessment in November against Russ  and Connie seeking $14.1-million in unpaid taxes and penalties to Iowa.

Good luck collecting anything.

 

Fiscal Cliff Notes:

TaxProf,  WSJ: The Stealth Tax Hike — Why the New $450,000 Income Threshold Is a Political Fiction

Elected representatives at work.  Tim Carney: Baucus rewards ex-staffers with tax breaks for their clients:

Tax breaks for Hollywood, NASCAR, windmills, algae and multinational corporations ended up in the “fiscal cliff” bill thanks to President Obama, according to Senate Republican sources. But they were spawned by a web of lobbyists, donors and staffers surrounding Democratic Sen. Max Baucus of Montana.

Baucus’ Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama’s insistence, the Baucus bill was cut and pasted word for word into the cliff legislation.

But it’s all for our own good, I’m sure.

William Perez, President Signs the American Taxpayer Relief Act into Law

The ‘fiscal cliff’ bill and Iowa entrepreneursMy new post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

Paul Neiffer,  Up to Ten Capital Gains Tax Rates for 2013!

Janet Novack,  The Forbes Guide To The Fiscal Cliff Tax Deal

TaxGrrrl,  10 Things You Should Know About The Fiscal Cliff Deal

 

Kay Bell,  Ravens, Redskins and tax revenue

Brian Strahle,  Minimize Restructuring Costs with State Tax Due Diligence

Peter Reilly,  War Tax Resisters – Don’t Call Them Frivolous.

Patrick Temple-West,  Inquiry into tech giants’ tax strategies nears end, and more (Tax Break)

Kaye A. Thomas,  American Taxpayer Relief Act

Tax Trials,  Senate Confirms Two New Tax Court Judges

Robert D. Flach ponders whether he should rename his Buzz roundup of tax news.  Don’t do it, Robert!

 

Make up your minds!

Tax Analysts, New Congress’s Partisanship, Inexperience May Hurt Chances for Tax Reform 

The Hill:  Tax reform more likely after ‘fiscal cliff’ agreement, say House Republicans. (Via Instapundit)

 

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Iowa Property Tax Reform: dead?

Wednesday, May 9th, 2012 by Joe Kristan

The attempts to pass property tax reform and get the Iowa legislature out of town stalled last night when the Iowa Senate failed to pass a reform bill.   The Senate rejected the Republican-supported House bill, but then two Democrats torpedoed their own party’s bill. From the Quad City Times:

Senate Republicans offered the House plan in amendment form during an animated floor debate late Tuesday, but the proposal was turned back by Senate Democrats 21-26. However, Sens. Rob Hogg, D-Cedar Rapids, and Jack Hatch, D-Des Moines, joined the GOP minority in taking down the majority party’s $350 million relief plan by a 24-23 margin, leaving the future of the issue in partisan limbo as the Legislature moved to end the 2012 session as early as today.

“They sunk their own bill,” said Sen. Randy Feenstra, R-Hull, who led the effort to win Senate support of the House-passed bill and criticized Democrats for walking away from an approach that won 71-26 bipartisan support among representatives.

Failure to pass the property tax reform would also doom efforts to increase the Iowa earned income credit. It’s possible that the legislative leaders and the Governor could still throw together a compromise bill, but time is running short, with adjournment possible as soon as today.

Other tax bills also look like they will die before adjournment include:

Good riddance.

Additional coverange of yesterday’s legislative session:

Jason Clayworth (Des Moines Register), Iowa Senate rejects property tax bill; doubts arise that any reform will pass this session

O. Kay Henderson, Democrats’ property tax plan defeated in Iowa Senate

 

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Branstad to embrace EITC boost to pass property tax reform?

Friday, February 10th, 2012 by Joe Kristan

That’s the way it’s looking. O. Kay Henderson reports:

What Branstad envisions is a larger tax deal that would include reducing commercial property taxes.

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Sharks circle goat

Friday, August 5th, 2011 by Joe Kristan

Things got a little hotter for Tom Wheeler, the former director of the Iowa Film Office, today. O. Kay Henderson reports an announcement that filmmaker Bruce Elgin has pleaded guilty to a reduced misdemeanor charge and will cooperate with prosecutors — presumably against Mr. Wheeler. Mr. Elgin had faced felony charges.
Mr. Wheeler faces charges of felony misconduct in office arising out of his administration of the Iowa Film Tax Credit program, which collapsed in scandal in 2009. Subsequent investigations have revealed systematic abuse and chaotic administration of the program, including funding of luxury cars for filmmakers.
While Mr. Wheeler seems to have been cast for the role of scapegoat in this production, the legislature that passed the ill-conceived program with only three dissenting votes faces no charges; nor does the former Governor who signed the program into law and appointed Mr. Wheeler to run it.
Mr. Wheeler’s trial is scheduled to begin later this month.
Related:
Iowa Film Follies: Harold Hill meets The Pussycat Dolls
Let them eat canapes
Complete Tax Update film credit coverage.

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The morning after the Iowa bonus depreciation veto

Friday, April 22nd, 2011 by Joe Kristan

Now that the Governor has vetoed bonus depreciation for Iowa, what happens now?
From the Des Moines Register coverage, it sounds like the Democrats are truly unhappy with the veto message because it also blocks an increase in Iowa’s Earned Income Tax Credit:

Rep. Tyler Olson, D-Cedar Rapids, accused Branstad of reckless action that unraveled a carefully crafted compromise. “His insistence on rewarding special interests and big corporations at the expense of small businesses and middle-class families is bad for Iowa and a serious blow to bipartisanship,” Olson said.

The Republicans, in contrast, don’t sound like they are all that upset:

Iowa House Speaker Kraig Paulsen, R-Hiawatha, said: “I’m pleased the governor signed the Taxpayers Trust Fund, giving Iowa taxpayers a seat at the table. Obviously, I’m disappointed that he chose to veto portions of the bill. House Republicans will continue to fight for tax relief for Iowans.”

That doesn’t sound like somebody ready to lead a veto override battle, and the Democrats won’t be able to override the veto without help.
While tax conformity is always good, Iowa has been non-conforming with bonus depreciation for so long that one more year probably isn’t that big of a deal. I do like this part of the veto message:

As earlier indicated, it is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state

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