Posts Tagged ‘Obamacare’

Tax Roundup, 3/23/15: ACA is five years old today. How’s that working out?

Monday, March 23rd, 2015 by Joe Kristan

Productivity wins! All three Iowa teams are out of the men’s NCAA basketball tournament. Back to those 1040s, fans!

 

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President Obama signs the Affordable Care Act. Image via wikimedia.org

Five years. The Affordable Care Act, or Obamacare, was signed into law five years ago today. Thanks to many delays — some part of the original law, others done in spite of the law to get past the elections — taxpayers and preparers are just beginning to cope with key portions of the law.

This is the first year for returns with the individual mandate — officially, and creepily, the “Individual Shared Responsibility Provision.” While many taxpayers thought this would only amount to $95, taxpayers hit with the penalty are learning that their refunds will get dinged for up to 1% of their AGI over a relatively low threshold.

This is also the first year that taxpayers have to true up overpayments of the advance premium tax credit.  Many taxpayers who bought policies on the ACA exchanges had their monthly premiums reduced based on their estimates of 2014 earnings. This subsidy is actually a tax credit, and it has to be reconciled at year end with the actual earnings.  Taxpayers with earnings in excess of what they estimated are now learning from their preparers that they need to write checks.

20121120-2The premium tax credit is horribly designed, with a stepped, rather than gradual, phaseout. One additional dollar in income can result in a loss of thousands of dollars in premium tax credits, which then have to be repaid with the tax return. H&R Block reports that most taxpayers who claimed the credit have to repay an average of $530. The IRS has tried to patch over some of the unpleasantness, unilaterally waiving penalties this year for taxpayers who have to repay the credits.

Here in Iowa, smaller employers who want to offer ACA-approved health insurance can’t, in the wake of the failure of the heavily-subsidized CoOportunity health insurance carrier. The IRS will still allow Iowa businesses to claim the convoluted credit for small employers for 2015. It required carriers who had signed up with CoOportunity to scramble to find new coverage, and it required many families who had already reached their out-of-pocket limits to start them over with a new carrier.

 

Looming over all this is the Supreme Court’s impending decision in King v. Burwell. The IRS decided to allow the premium tax credit in the 34 states using federal exchanges, in spite of statutory language limiting the credits to exchanges created “by the states.” If the court goes with the way the law is drafted, the premium tax credit will be gone for those 34 states, including Iowa. Employers in those states will be suddenly exempt from the “employer mandate” that begins to take effect in 2015. Millions of taxpayers will also be free of the individual mandate penalty because their insurance will no longer be “affordable.”

If you want to celebrate, head over to Insureblog, where they are always updating the latest developments and unintended consequences of the ACA.

 

 

20150312-1William Perez, Did You Pay Interest on Student Loans? It May be Tax Deductible

TaxGrrrl, Understanding Your Forms: 1098-T, Tuition Statement

Roger McEowen, Are Payments Made to Settle Patent Violations Deductible? (ISU-CALT)

Kay Bell, Tax returns on hold while IRS asks ‘Who Are You?’

Peter Reilly, Ninth Circuit Rules Against War Tax Resister

Jim Maule, Tax Credit for Purchasing a Residence Requires a Purchase. “Nothing in the opinion explains why the taxpayer thought she had purchased the residence. Nor does it explain why the taxpayer, if not thinking that she had purchased the residence, would claim that she did.”

Peter Hardy, Carolyn Kendall, Between the National Taxpayer Advocate and the Courts: Steering a Middle Course to Define “Willfulness” in Civil Offshore Account Enforcement Cases Part 1 (Procedurally Taxing). “The OVD programs have netted many people who may have inadvertently failed to file FBARs, and who are not wealthy people with substantial accounts.”

In other words, shooting jaywalkers while giving international money launderers a good deal.

 

Robert Goulder, When All Else Fails, Blame a Tax Pro (Tax Analysts Blog) “OK, the tax code is a disgrace. I get it. But a member of Congress is blaming tax professionals? Really?”

Congress is sort of like the guy who leaves his food plate on the floor, falls asleep, and then blames the dog for eating it.

 

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Joseph Henchman, 10 Remaining States Provide Tax Filing Guidance to Same-Sex Married Taxpayers. “After the IRS decision to allow gay and lesbian married couples to file joint federal tax returns, we noted that a number of states would have to provide guidance because they require two contradictory things: (1) if you file a joint federal return, you must file a joint state return, and (2) same-sex married couples cannot file jointly.”

Renu Zaretsky, Budget Battles and Filing Follies: The Sagas Continue. Today’s TaxVox headline roundup tells of abundant ACA tax filing headaches and more tax nonsense from the only avowedly-socialist senator, Bernie Sanders.

TaxProf, The IRS Scandal, Day 683Day 682Day 681. “Commissioner John Koskinen, testifying before the House Appropriations subcommittee this week, admitted that nearly a dozen grassroots conservative groups seeking tax-exempt status are still awaiting determination.”

Robert Wood, Report Says Former IRS Employees–Think Lois Lerner–Can Still Peruse Your Tax Returns. Well, that’s reassuring.

 

Career Corner. Going Concern March Madness: More #BusySeasonProblems (Caleb Newquist, Going Concern). Brackets asking important work life questions like Which is the bigger busy season problem? Working Saturdays (#1 seed), or Colleagues who heat up smelly leftovers (16 seed).”

I’ll take the underdog.

 

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

Wednesday, March 4th, 2015 by Joe Kristan

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

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

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

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

 

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

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

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

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

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

 

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

 

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

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

 

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Tax Roundup, 2/23/15: 800,000 blown ACA reporting forms; tens of thousands of already-filed returns are wrong. And more!

Monday, February 23rd, 2015 by Joe Kristan
The Younkers Building ruins, morning, March 29, 2014.

Be calm. All is well.

Tax Season is Saved! 800,000 Taxpayers Received Wrong Tax Info from Health Insurance Marketplace (Accounting Today):

“About 20 percent of the tax filers who had Federally-facilitated Marketplace coverage in 2014 and used tax credits to lower their premium cost —about 800,000 (< 1% of total tax filers) —will soon receive an updated Form 1095-A because the original version they were issued listed an incorrect benchmark plan premium amount,” said a blog post on the Web site of the Centers for Medicare and Medicaid Services. “Based upon preliminary estimates, we understand that approximately 90-95% of these tax filers haven’t filed their tax return yet. We are advising them to wait until the first week of March when they receive their new form or go online for correct information before filing. For those who have filed their taxes—approximately 50,000 (< 0.05% of total tax filers) —the Treasury Department will provide additional information soon.”

It says something about how screwed up this tax season is that the IRS can issue:

– A blanket waiver for the $100 per-day penalty for health insurance reimbursement arrangements;

– A small business waiver the Form 3115 filing requirement for “repair reg” accounting method changes;

– A blanket waiver for late payment penalties for advanced Obamacare tax credit clawbacks;

And still have a filing season full of “mayhem.”

Related: 

Caleb Newquist, You Won’t Mind if Your Tax Refund Is a Little Late, Will You? (Going Concern)

Ellen Steele, The Affordable Care Act Tax Filing Season: A View From the Trenches (TaxVox). “Filing is not simple, even for our volunteers who all undergo rigorous training in tax law.”

Paul Neiffer, Perhaps 800,000 or More Form 1095-A Are Wrong

 

Tax Season is saved! Ripping off your refunds: One little number fuels South Florida’s tax-fraud explosion (MiamiHerald.com

Tax Season is saved! Wow! The IRS Will Pay Out This Much in Fraudulent Tax Refunds By 2016 (Motley Fool)


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Iowa Public Radio, Administration Grants Tax Time Reprieve For Obamacare Procrastinators:

The Obama administration said Friday it will allow a special enrollment period from March 15 to April 30 for consumers who realize while filling out their taxes that they owe a fee for not signing up for coverage last year.The special enrollment period applies to people in the 37 states covered by the federal marketplace, though some state-run exchanges are also expected to follow suit.People will have to attest that they first became aware of the tax penalty for lack of coverage when they filled out their taxes.

Megan McArdle called it. So once again they bend the ACA rules because following the law as enacted would be unpalatable. It’s as if the entire legislation is optional. Here are other made-up-on-the-fly amendments to ACA decreed by the Administration that I can think of off the top of my head:

– Waiving the $100/day penalty for employer insurance reimbursement arrangements.

– Waiving tax penalties for failure to pay the premium credit clawbacks.

– Rolling back the employer mandate penalty by a whole year — two for smaller employers.

– Allowing premium tax credits in states using federal exchanges when the statute only allows them where there is an exchange “established by a state.”

You almost might conclude that they didn’t really think things through very well when they enacted ACA.

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William Perez, Social Security Benefits are Partially Taxable: How Much Depends on Your Other Income.

Roger McEowen, Primer on the Income Taxation of Trusts and Estates (ISU-CALT)

Peter Reilly, You And Your Shadow Do Not A Partnership Make. “I don’t think it is news that you can’t create a partnership with yourself and a disregarded entity, but it is a point that bears repeating.”

Russ Fox, Solely a Way to Go to ClubFed. “As always, the usual warning applies: If it sounds too good to be true, it probably is. If you use a corporation sole as a vehicle to avoid taxes, you’re heading down a road that leads to ClubFed.”

Jack Townsend, Another UBS Customer Pleads

Rashia says "thanks, Commissioner!"

Someday this may seem quaint.

TaxGrrrl, What If Tax Refund Theft Isn’t Really About Refund Theft?:

In the case of Anthem, the hack was massive. Potentially 80 million customers had their data compromised, prompting the state of Connecticut to warn taxpayers that it might be to their advantage to file their taxes early.

That, security experts say, isn’t the work of a small time hack. It’s not folks working out of a van with stolen laptops or a teenage kid in a basement. It’s bigger. It’s been suggested that the hack could be related to an international crime group or perhaps even an international government. I spoke with experts in tech and security arenas – who, like Jim, wished to remain anonymous – and they’ve suggested that they would not be surprised to find that the hacks were orchestrated by the Chinese government.

Have a nice day.

David Henderson, From 2007 to 2012-13, The Income Share of Top 1% Fell (EconLog).

Andrew Lundeen, A Cut in the Corporate Tax Rate Would Provide a Significant Boost to the Economy (Tax Policy Blog). “The corporate tax rate is, in effect, a tax on corporate investment; a high corporate tax rate discourages investment, whereas a low corporate tax rate encourages investment.”

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David Brunori ($link): 

A California company that makes cans is demanding a 20-year, 100 percent property tax exemption in return for opening a plant in Iowa. The plant will employ 120 people. The company, Silgan Containers, makes metal cans (think the containers that hold vegetables and dog food). I’m sure it’s a great company. But why should it be relieved of paying its just share of taxes? And if its demand is met, what does the Iowa government say to the companies that are already in place and employing 120 or more people? There is nothing good about this.

“Economic development” is pretty much taking money from you and your employees to lure and subsidize your competitors.

 

TaxProf, The IRS Scandal, Day 653The IRS Scandal, Day 654The IRS Scandal, Day 655

Kay Bell, All of 2015’s best picture Oscar nominees got tax break help. We would like to thank all of the chumps, er, taxpayers of the various states that help us buy these $168,000 swag bags. We wouldn’t want to do it without you.

 

 

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Tax Roundup, 2/17/15: Iowa 2014 code conformity bill set to become final this week. And: tax season saved again!

Tuesday, February 17th, 2015 by Joe Kristan

IMG_1291Iowa Code Conformity Update. The bill updating Iowa’s 2014 tax law to include December’s retroactive “extender” bill, SF 126,  was officially transmitted to the Governor yesterday. He has three days to act; if he doesn’t sign within three days, the bill becomes law automatically. That means it will be official this week, unless the Governor shocks everyone with a veto.

The bill adopts almost all of the “extender” items, including the $500,000 Section 179 deduction, but it does not adopt 50% bonus depreciation for Iowa.

Update, 2:30 pm. The bill is signed.

 

 

The tax season is saved!  Covered California Sends Out Nearly 100,000 Tax Forms Containing Errors, Others Deal With Missing Forms (CBS San Francisco):

Stacy Scoggins gets plenty of mail from Covered California, but the one tax form the agency was required to send her by February 2nd still hasn’t arrived.

“After being on hold for 59 minutes, told me that the 1095-A was never generated,” Scoggins told KPIX 5 ConsumerWatch.

When they finally do get their forms, many of them will find out that they have to repay advanced premium tax credits, as Insureblog’s Bob Vineyard reports in Paybacks are hell, quoting a MoneyCNN report:

Some 53% of Jackson Hewitt clients who received subsidies have to repay part or all of it, with the largest being $12,000, said Mark Steber, chief tax officer. 

Clients love to hear that they owe.

Related: Oops (Russ Fox).

 

Kay Bell serves up 6 ways to get electronic tax help from the IRS

Accounting Today, IRS Eases Repair Regulations for Small Businesses

Josh Ungerman, IRS Expected To Issue Hundreds Of Deficiency Notices TO USVI Residents.

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Tony Nitti, Lance Armstrong Ordered To Repay $10 Million Of Prior Winnings: What Are The Tax Consequences?  They could be ugly.

Kristine Tidgren, Value of Closely Held Corporation Increased in Dissolution Proceeding (ISU Center for Agricultural Law and Taxation).

Robert Wood, Marijuana Tax Up In Smoke? Don’t Worry, Feds Plot 50% Tax.

Peter Reilly, Islamic Teaching On Usury Kills Property Tax Exemption In Tennessee

Jack Townsend, ABA Tax Lawyer Publication Comment on FBAR Willful Penalty

 

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Matt Welch, Record Number of Americans Renounce Citizenship in 2014 (Reason.com). “Terrible tax law produces predicted results”

TaxProf, The IRS Scandal, Day 649

 

Norton Francis, State Revenue Growth Will Remain Sluggish (TaxVox)

Sebastian Johnson, State Rundown 2/13: Snow Way Forward (Tax Justice Blog). Developments in Oklahoma, Arizona, North Carolina, Mississippie and Massachusetts, from a left-side view.

 

Things that are better now. From Don Boudreaux, a reminder of one area where a dollar goes a lot further than it used to:

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I dare you to access taxupdateblog.com from the Olivetti.  More at HumanProgress.org.

 

 

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Tax Roundup, 1/28/15: President scurries away from plan to tax college savings. And: more hard-hitting journalism!

Wednesday, January 28th, 2015 by Joe Kristan

csi logoAccounting Today reports: Obama Said to Drop Proposal to Repeal 529 College Tax Break. Good.

This was perhaps the most obnoxious of the proposals in the President’s budget, and that’s saying something. Promoting “free” community college tuition, while punishing those who actually save for college to avoid government loans, is a model of awful incentives and policy.

I can’t let pass this item from the Accounting Today report (my emphasis):

The administration’s quick retreat on the proposal emphasizes the difficulty of changing popular tax breaks, even in ways that lower the overall tax burden.

Yes, hard-hitting journalism in the form of making excuses for the President. It what way does repealing the exclusion for Section 529 plan withdrawals from taxation help “lower the overall tax burden?” The CBO estimates the President’s proposals would increase taxes by over $1 trillion over ten years.

Speaking of hard hitting journalism, we have this from the Des Moines Register today:

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For those who no longer take the print edition, be assured that this important story is also available to internet readers.

Related: Annette Nellen, President Obama’s 2015 Tax Proposals

 

William Perez, Tips for Green Card Holders and Immigrants Who are Filing a US Tax Return. “Being a resident for tax purposes doesn’t necessarily mean you actually live here full time. As long as you have a green card, for example, you are responsible for reporting and paying tax on your worldwide income.”

Jason Dinesen, Iowa Trust Fund Tax Credit for 2014 Tax Returns. $15 per person this year.

Kay Bell, New IRS Form 1095-A among tax docs that are on their way. ACA adds a new wrinkle to this year’s filings.

Robert D. Flach, OBAMACARE AND 2014 TAX RETURNS

 

1099misc2014TaxGrrrl, Where Are My Tax Forms? Due Dates For Forms W-2, 1099, 1098 & More. Including a reminder that K-1s from S corporations, partnerships and trusts are not due when 1099s and W-2s are.

Leslie Book, Thumbs Up on No Income Even When IRS Serves up 1099 DIV: Ebert v Commissioner (Procedurally Taxing)

Robert Wood, Disagree With An IRS Form 1099? Here’s What To Do. “What happens if the issuer won’t cooperate?”

 

Jim Maule on The Taxation of Egg Donations. “The Court’s conclusion makes sense, and not simply because it reaches the conclusion I advocated for reasons I suggested relying on cases on which I relied.”

Russ Fox, One Good Crime Deserved Another:

Let’s say you’re involved in a 20-year scheme that has successfully evaded millions of dollars in payroll and income taxes for your largest client. However, you’ve only had minor profits from the scheme. So why not embezzle millions of dollars from that client?

Russ offers some pretty good reasons why not.

 

cooportunity logoHank Stern, CoOpportunity assumes room temp (InsureBlog). More on the demise of Iowa’s sole SHOP provider, set up with millions in government grants and loans. Underwriting is hard.

Jack Townsend asks Why the Lenient Sentencing for Offshore Account Tax Crimes. “But, from my perspective, it seems to me that one can fairly question the notion that commission of tax crimes via offshore accounts is any less blameworthy — i.e., punishable — than commission of tax crimes in other contexts.”

 

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Kyle Pomerleau, Richard Borean, Pass-through Businesses Account for More than $1.6 Trillion of Payroll (Tax Policy Blog):

Today, Pass-through businesses pay a significant role in the United States Economy. They account for 95 percent of all businesses, more than 60 percent of all business income, and more than 50 percent of all employment.

These are businesses taxed on owner 1040s. Remember that when politicians want to raise rates on “the rich” even more — they are hammering employers when they do this.

Richard Auxier, Pitching, Defense, and State Tax Policy (TaxVox): “So is Max Scherzer saving money in DC? Yes. Are the District’s tax laws a big reason why he signed with the Nationals? I doubt it.”

TaxProf, The IRS Scandal, Day 629

News from the Profession. Jilted Girlfriend Has Totally Had It With Cheap Accountant Boyfriend and His Stupid Spreadsheet (Adrienne Gonzalez, Going Concern).

 

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

Tuesday, January 27th, 2015 by Joe Kristan

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

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

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

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

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

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

Related:

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

Megan McArdle, Reality Check on Obamacare Year Two

Me: The ACA and filing season. Be afraid.

 

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

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

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

William Perez, A First Look at TaxACT Free File Edition

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

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Tax Roundup, 1/16/15: Insurance reimbursements may trigger $100/day penalty, but at least they’re not on W-2.

Friday, January 16th, 2015 by Joe Kristan

20121120-2Letter to Congressman says insurance reimbursements that trigger $100/day Obamacare penalty still excludible from W-2. 

Small employers have long used “Section 105″ plans to reimburse employee purchases of individual health insurance, in lieu of setting up an employer group health plan. Such reimbursements were excludible from employee W-2 taxable income.

Under the Administration’s interpretation of the Affordable Care Act, such plans trigger a $100 per-day, per-employee penalty starting in 2014. Many employers are just learning that they had disqualified plans last year and are scrambling to comply; fixing a plan within 30 days of compliance may enable such taxpayers to avoid the $36,500 hit for each employee on “reasonable cause” grounds.

One question that has hung over this is whether the employer has to put the reimbursements that trigger the penalties on employee W-2s as income. A letter to an Illinois Congressman reprinted today in Tax Analysts says they don’t. From the letter  (my emphasis and links):

Prior to the ACA, an employer could reimburse employees for the medical expenses of the employee and the employee’s family and exclude those amounts from the employee’s income and wages under section 105(b) of the Code. The ACA has not changed the tax treatment of the reimbursement for employee medical expenses. However, these arrangements, under the ACA, are considered to be group health plans and must satisfy the market reform rules for them.

The guidance that we provided in Notice 2013-54 did not change the tax results described in Revenue Ruling 61-146. This ruling says that under certain conditions if an employer reimburses an employee’s substantiated premiums for individual health insurance policies, the payments are excluded from the employee’s gross income under section 106 of the Code. This exclusion also applies if the employer pays the premiums directly to the insurance company.

W2Note that the exclusion “applies.” That’s present tense, meaning it’s still alive.

Some employers responded to Notice 2013-54 by treating reimbursements as taxable, but subsequent guidance issued in November last year said that didn’t work to make the $100/day penalty go away.

While they scramble to terminate their now horrifyingly expensive Sec. 105 reimbursement arrangements and figure out how to get out of the penalties, employers still have to issue W-2s this month. Now they know they can at least leave the reimbursements off employee W-2s. Given how widespread the problems seems to be, and how terrible the penalties, the IRS ought to just issue a blanket penalty waiver on this for everyone for 2014 if the non-compliance is disclosed.

Why wasn’t this printed as guidance? This letter went to Congressman Lipinski in September. A similar letter went to Kansas Congressman Goodlatte about the same time. Obviously the IRS knew from the Congressional inquiries that guidance was needed, but until Tax Analysts published this guidance, the IRS had never explained how to handle the W-2s. They still haven’t published guidance telling employers how to  “correct” the erroneous plans, as required on the penalty waiver instructions to the penalty reporting form, Form 8929.

 

IMG_0598Yeah, like he’d admit that. From Tax Analysts ($link):

The IRS is not pursuing a “Washington monument” strategy of discontinuing taxpayer services to protest recent congressional budget cuts, Commissioner John Koskinen told reporters at a press conference on January 15.

The Washington monument strategy refers to claims made by some media outlets during the October 2013 government shutdown that various federal agencies seemed to be closing highly visible public services as a protest against the shutdown.

Koskinen denied that any such calculations entered into the IRS’s decision-making regarding service and enforcement constraints that he said were induced by Congress’s $346 million cut (to $10.9 billion) to the IRS budget for fiscal 2015.

I’ll believe that he’s serious when he closes the “voluntary” preparer registration program and stops paying IRS employees to work full-time for the Treasury Employees Union.

James Taranto at the Wall Street Journal doesn’t deny that the IRS needs more money, but doesn’t have much sympathy anyway (WSJ subscription may be required to access original):

It’s all rather comical—but also galling. The IRS’s abuse of power in its harassment of conservative nonprofits aimed in substantial part at suppressing opposition to ObamaCare. That is, the IRS traduced the free-speech rights of citizens in order to preserve a law expanding IRS power and creating more work for IRS agents.

Now the commissioner complains that the IRS has too much work and not enough resources and threatens to make life even more difficult for taxpayers. It’s like the guy who killed his parents and then pleaded for mercy because he was an orphan.

And an unapologetic one.

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Robert D. Flach has your Friday Buzz, with a warning for users of off-the-shelf software.

William Perez, The Penalty for Not Having Health Insurance. Don’t think it’s just $95.

Robert Wood. 3 Reasons Filing Taxes Sucks? Obamacare, Obamacare & Obamacare. I can think of a lot of others, myself, but these are definitely three of them.

Alan Cole, The Employer Mandate Reduces Hours Worked (Tax Policy Blog). Not by tax preparers, it doesn’t.

 

Kay Bell, IRS Free File opens Friday, Jan. 16, for eligible taxpayers, four days ahead of Jan. 20 full tax season start

Russ Fox, If You Do Government Work, It Pays to Treat the Government Well

TaxProf, The IRS Scandal, Day 617

Howard Gleckman, What To Make of the Senate Finance Committee’s Tax Reform Workgroups 

 

Keith Fogg, Eskimos and the IRS: A Winter’s Tale (Procedurally Taxing) “This post is not about tax procedure issues in the native American population in Alaska but a recent Treasury Inspector General for Tax Administration (TIGTA) report concerning frozen credits at the IRS made me think about the number of ways Eskimos have to say snow.”

 

News from the Profession. Ron Baker: You Can Put Lipstick on Billing by the Hour But Don’t Call It Value Pricing (Adrienne Gonzales, Going Concern).

 

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Tax Roundup, 1/5/15: Early year-end planning edition. And: too cold for a film credit trial?

Monday, January 5th, 2015 by Joe Kristan

Accounting Today “In the Blogs” visitors: the tax and AMT article is here. You may also be interested in these thoughts on when prepaying tax is unwise, even without AMT.

 

20150105-1Now that you’re done with 2014 year-end tax planning, let’s get started on 2015. Procrastination is as human as liking sugar and shiny things. It’s natural to get serious about anything right at the deadline, whether it’s homework or tax planning.

But it’s often wiser to get started early. That’s especially true when looking at contributions to tax-advantaged savings accounts. You should look to fund these as soon as you can, rather than putting them off to the last minute. The sooner you fund your 2015 IRA, your Health Savings Account, or your Section 529 education savings account, the sooner your funds are earning their return tax-free.

So if you have the funds on hand, here’s a new year’s resolution to keep today — fully fund your tax-advantaged savings accounts. Your limits for 2015:

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

Taxpayers filing in Iowa can deduct their contributions to the College Savings Iowa Section 529 plan up to $3,163 per beneficiary, per donor on their Iowa income tax return. A married couple funding plans for their two children can therefore deduct up to $12,652 in 2015 CSI contributions.

 

Enjoying a short Des Moines winter commute.

Too cold for a film tax credit trial? A strange development in the Iowa Film Credit scandal, reported by the Des Moines Register:

A new fraud trial for a Nebraska filmmaker accused of using a fake purchase agreement to get tax credits should be delayed because two elderly witnesses have left Iowa for the winter, according to a prosecutor handling the case.

Yes, it’s cold here. We’re supposed to get a snowstorm today, and it’s supposed to be 1 on Wednesday. For a high temperature. And I can’t say I have a great deal of sympathy for somebody who got millions in tax credit money.

But a criminal trial is serious business, and the film scandal has been going since 2009. The prosecution says the witness is worried that he might fall. I think arrangements can be made to get him safely from the car.

What’s the case about?

Dennis Brouse, 64, has been waiting for a second trial after judges on the Iowa Court of Appeals overturned a felony fraud conviction against him in April. Brouse’s company, Changing Horses Productions, received $9 million in tax credits from Iowa’s scandal-ridden film tax credit program.

Brouse faces a single fraud charge and potentially a prison sentence, stemming from the purchase of a 38-foot camper trailer he bought from Prole couple Wayne and Shirley Weese. Prosecutors say Brouse paid the couple $10,500 in cash for the trailer, but he claimed it cost twice that amount in a statement for tax credits given to the Iowa Film Office.

The state auditor’s report on the Iowa Film Office showed a lot of creative accounting for Changing Horses, including the claim of a $1 million expense for non-cash “sponsorship” considerations. I am guessing that they are going after the trailer case because there are e-mails from the Iowa Department of Revenue blessing the “in-kind” expense concept. I’m pretty sure that there is no such endorsement of doubling expenditures.

 

Roger McEowen, Top 10 Agricultural Law and Taxation Developments of 2014 (ISU-CALT). The impact of Obamacare is #1.

20121120-2Alan Cole rings in the new year with New Year, New Individual Mandate Penalty and New Year, New Employer Mandate (Tax Policy Blog). What new individual mandate penalty?

However, it’s also worth remembering that the penalty will be doubled (or more than doubled) for 2015. 2014’s penalty is $95 or 1% of your household income, whichever is higher. 2015’s penalty is $325 or 2% of your household income, whichever comes higher.

And the employer mandate? It’s the penalty on taxpayers with 100 or more “full-time equivalent” employees. A blog post can’t really do it justice:

The IRS has issued a truly epic 56-question FAQ to help explain the even-more-epic final regulations for the employer shared responsibility provision. In case you are wondering, those final regulations total to over seventy thousand words – similar in size to the novel Harry Potter and the Sorcerer’s Stone.

It will get more epic if the Supreme Court rules that the individual tax credit only applies in the 14 states that have established their own ACA exchanges. The employer mandate only applies if an employee has qualified for the credit, and the individual mandate penalty will not apply to taxpayers whose insurance becomes “unaffordable” if the credits go away.

 

Robert Wood, Think Filing Taxes Was Tough Before Obamacare? Just Wait. “This year for the first time, the Affordable Care Act has created a trickier tax season. It is more expensive too, as virtually all Americans filing tax returns will have to consider the law’s impact on them and their taxes.”

Annette Nellen, ACA – Affordability of health insurance and age

William Perez, Directory of tax extensions for each state

Russ Fox, 1099 Time (2015 Version). “It’s time for businesses to send out their annual information returns.”

 

Kay Bell, Cigarettes are a bigger state tax target than booze. I think that explains the hostility of state governments to e-cigs.

Jason Dinesen, 5 Things You Didn’t Know About EAs, #4: The SEE Isn’t a Tax Prep Exam

Peter Reilly, IRS Revokes Exempt Status Of Faux Veterans Groups

 

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Renu Zaretsky, Cap and Trade Plans, Tax Deadlines, and Rate Drops. The TaxVox headline roundup covers gas taxes, dynamic scoring, and an insane plan in Washington state for a state-only “cap and trade” carbon program.

TaxProf, The IRS Scandal, Day 606

News from the Profession: Celebrate the New Year with Accounting Salaries Charted by Company Type, Role, Service Line and More (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 12/30/14: Is prepaying taxes a good bet even without AMT? And: CoOportunity failure ripples.

Tuesday, December 30th, 2014 by Joe Kristan

I’ll gladly pay you today for part of a hamburger tomorrow. In our zeal to pile deductions into this year’s return, it’s easy to overdo it. If you aren’t subject to alternative minimum tax, you can get a 2014 tax benefit by mailing your estimated 2014 state balance due by tomorrow. But does it really make sense to pay a dollar of tax now to get a 35-cent benefit on April 15? at the 35% bracket, the answer would be yes, but for lower brackets, the numbers don’t work as well.

The chart below shows compares the time value lost by sending $1,000 to the government early to the present value of the tax benefit received, using a 2% discount rate.

Green numbers show a present value benefit for prepaying 12/31/14 vs. the statutory due date indicated.

Green numbers show a present value benefit for prepaying 12/31/14 vs. the statutory due date indicated.

Every situation differs. This table should be used with caution. It does provide some tentative rules of thumb for individuals, assuming you will be in the same bracket in 2014 and 2015, that you itemize, and that AMT does not apply:

– It always makes sense to pay your fourth quarter state estimates in December instead of January.

– If you are an Iowa taxpayer, it makes sense to prepay fourth quarter federal payments at any bracket, but it never makes sense to pay your April 15 balance due in December.

– It only makes sense to prepay your state balance due for April 15 2015 by tomorrow only if you are in at least the 33% bracket, which kicks in for joint filers and $226,850 of taxable income, and for single taxpayers at $$186,350. For Iowa taxes due April 30, it’s about a push, or even a small present value loss.

– It makes sense for taxpayers in the 25% bracket ($73,500 joint, $36,900 single) to prepay their March 1 property tax installments.

– It never makes sense to prepay your September property taxes nine months ahead.

As we discussed yesterday, AMT can make prepayments a much larger blunder, so don’t do anything without running some numbers.

 

cooportunity logoThe failure of Iowa’s federally-funded CoOportunity health care insurance company is drawing national attention. The Wall Street Journal opines in Fannie Med Implodes: “Call it the Solyndra of ObamaCare.”

Meanwhile, Iowans covered by CoOportunity have to deal with the consequences. Des Moines Register, CoOportunity’s crisis could cost members thousands:

Customers who switch out of CoOportunity coverage won’t be able to start their new policies until Feb. 1, because Dec. 15 was the national deadline for obtaining insurance policies that start Jan. 1. In the meantime, many customers would have to start meeting CoOportunity’s annual deductibles and out-of-pocket maximums for 2015. Then, when they switch insurers in February, “they would have to start over, unfortunately,” Commissioner Nick Gerhart said Monday.

If you like your plan…

CoOportunity Health’s troubles could affect whether small Iowa employers can qualify for 2015 tax credits toward workers’ insurance premiums.

Employers with fewer than 25 full-time workers making an average of less than $50,000 are supposed to be eligible for the tax credits, which can amount to 50 percent of the cost of premiums. However, starting in 2015, those credits are to be applied only to policies that are sold on the employer side of the public marketplace, healthcare.gov. In Iowa, CoOportunity was the only carrier selling health policies to Iowa employers on the marketplace. The company has ceased selling new policies because of its financial crunch.

Iowa Insurance Commissioner Nick Gerhart said he’s checking with federal officials to see if there’s another way to let small Iowa employers obtain the tax credit.

The IRS has let taxpayers in some counties without a SHOP provider take the credit. We will see if they grant a similar waiver here.

Related: Hank Stern, SHOP Chop.

 

Robert Wood, 3 Quick Year End Steps Pay Off Big April 15old walnut

Kay Bell, 5 tax-saving moves you can make by Dec. 31

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2014: #1-Obamacare Endures Additional Attacks. Aw, poor thing.

Russ Fox, IRS Announces Tax Season to Start on January 20th

Robert D. Flach, THE YEAR IN TAXES 2014. “Once again the year ended with the idiots in Congress waiting until literally the last minute to pass an extension of all of the expired ‘tax extenders’.”

Melanie Migliaccio, 9th Cir. Rejects IRS’s Transferee Status Recharacterization Argument (Tax Litigation Survey)

 

Iowa Public Radio, Rep. Grimm To Resign After Guilty Plea On Tax Charge.

TaxProf, The IRS Scandal, Day 600

Alan Cole, Au Revoir to the Millionaire’s Tax (Tax Policy Blog). “The French government will quietly allow its millionaire’s tax to expire.”

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If you think I’m unsympathetic to Commissioner Koskinen’s pleas of IRS povertycheck out No Fat to Cut at the IRS? So Take a Chainsaw to the Rest of the Beast. (J.D. Tuccille, Reason.com):

Of course, Koskinen framed it in terms of customer service, and friendly media outlets immediately parroted the message that a $346 million cut, bringing the IRS budget down to $10.9 billion, inevitably means longer wait times on the phone for distraught taxpayers seeking answers for their pressing tax questions.

This is an all-hands-on-deck spin on IRS cuts, with National Taxpayer Advocate Nina Olson (who is theoretically on the victims’ side, despite her government paycheck) recruited to caution that the IRS is “chronically underfunded” with unfortunate implications for taxpayer service and assistance.

Then again, that might not be so horrible an outcome, given that IRS assistance involved giving taxpayers bad advice 22 percent of the time back in 1987, 41 percent of the time in 1989, 22 percent of the time in 2002, and 43 percent of the time in 2003. And no matter the advice dispensed by the tax collectors themselves, taxpayers are on the hook for getting it right.

Via Wikipedia

Via Wikipedia

I can’t help thinking that the cuts to service are an IRS version of the Washington Monument Strategy, where the government responds to budget cuts by closing the most popular and visible tourist attractions. I would find Commissioner Koskinen’s pleas of poverty more convincing if he weren’t spending money on the new “voluntary” preparer program to end-run the Loving decision that shut down the preparer regulation power-grab. It would also be a good signal to put the 200 IRS employees who spend their working days doing union work on the phones instead.

Related: Cromnibus cuts IRS budget, delays extender vote.

 

Career Corner. What If Your Job Title Were Brutally Honest? (Adrienne Gonzalez, Going Concern). I don’t suppose it would be easy to fit “Chronic Blogger Who Does Taxes to Finance It” on a business card.

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Tax Roundup, 12/26/14: Bad SHOP-ing day: Iowa SHOP health insurance provider goes into receivership.

Friday, December 26th, 2014 by Joe Kristan

cooportunity logoSmall businesses wanting to provide health insurance coverage for their employees got a lump of coal in their stocking Christmas Eve with the announcement that CoOportunity Health, Inc. was placed in receivership by the Iowa Insurance Division. The Omaha World Herald reports:

CoOportunity Health, the two-year-old Iowa health insurance cooperative set up with federal loans under the Affordable Care Act, is running out of money and may be liquidated, which raises questions for other health insurance cooperatives nationally.

The company’s 120,000 individual and group customers, most of them in Nebraska and the rest in Iowa, are still covered if they signed up before Dec. 15 and should continue paying premiums to keep coverage in effect, said Nick Gerhart, Iowa’s insurance commissioner.

When the insurance division takes over an insurer, their policies remain in force while the insurer is either reorganized, sold or liquidated. But that doesn’t apply to brand-new enrollees. From the Herald:

But he recommended that policyholders switch to other insurance companies during open enrollment, which ends Feb. 15. People who enroll in new health plans by Jan. 15 would have that coverage in place by Feb. 1.

People who signed up for the first time with CoOportunity after Dec. 15 will not have coverage and should find other insurers, he said. CoOportunity, one of 24 health insurance cooperatives set up under the federal health care law, cannot sell or renew policies.

CoOportunity provided coverage on both the individual healthcare.gov marketplace and the “SHOP” marketplace for small businesses. A FAQ (.doc format) from the Iowa Insurance Division on the takeover has this for small businesses looking for coverage:

If I want to remain in the marketplace and change insurance companies, where do I go?

Contact your agent or broker or go to www.Healthcare.gov.

In central Iowa the website isn’t much help. In our coverage area, CoOportunity was the only SHOP provider, as far as I can tell. I have entered sample information in the SHOP marketplace for our 50309 zip code, and I get this result:

shop plans 20141224

This makes life complicated for small businesses that don’t currently have “grandfathered” coverage. The “marketplace reforms” of the ACA have a long list of requirements for qualifying coverage. If you provide coverage that fails to meet these rules, you incur an insane penalty of $100 per day, per employee. You need to make sure your broker knows if you don’t qualify for a grandfathered plan.

This also causes problems for employers wishing to take the 50% tax credit for providing employee coverage, as the credit is only available for plans purchased through the SHOP.

Roth & Company considered a plan offered by CoOportunity at our renewal last fall. It was slightly cheaper than our current plan (for which we had a 30%+ premium increase), but we stuck with our grandfathered plan, thinking the disruption to our employees wasn’t worth the minor savings. Bullet dodged.

More coverage:

Des Moines Register, CoOportunity Health falters, taken over by state.

Bob Vineyard, Another One Bites the Dust (InsureBlog).

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Peter Reilly, Tax Court Rules Wounded Warrior Can Take His Time With The Trash – Merry Christmas. Peter discusses a wonderful Tax Court case from earlier this week that treats a disabled veteran as “materially participating” in maintaining three rental properties as a real estate professional. His handicaps, which make his caretaking a slow process, actually helped him achieve better tax results, as Peter explains.

TaxGrrrl offers A Christmas Day Look At Santa’s Tax Bill.

Kay Bell, Merry Christmas 2014

Paul Neiffer, Merry Christmas – 2014

Jason Dinesen, From the Archives: You Won a Home! Now What? Part 3 of the Series

Jim Maule, Enact Tax Laws But Break Them?:

Even if Representative Michael Grimm eventually gives in to the calls for his resignation or is removed in some way from holding office, his failure to step down as part of the plea is an affront to hard-working Americans who do their best to comply with the tax law.

Heck, it’s even an affront to lazy Americans.

 

buzz20141017Robert Wood, IRS Hid Conservative Targeting Until After 2012 Presidential Election. Smidgen Corrupt?

Stephen Olsen, Summary Opinions. It’s the Procedurally Taxing roundup of recent tax procedure developments.

Many folks are taking today off, but Robert D. Flach is Buzzing away with his usual good stuff from around the tax world.

TaxProf, The IRS Scandal, Day 596

 

William McBride, Japan Plans to Cut Corporate Tax Rate, Leaving U.S. Further Behind (Tax Policy Blog):

Japan currently has a corporate tax rate of 37 percent, the second highest in the developed world after the U.S., which has a corporate tax rate of 39.1 percent (federal plus state). With this cut, Japan would be roughly tied with France for the second highest corporate tax rate in developed world, at 34.4 percent.

Iowa has the highest corporate rate in the U.S., which makes us Number 1 in a not-good way.

Howard Gleckman, House GOP Leadership Would Require Dynamic Scoring of Some Tax Bills. Will It Matter?

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Scott Sumner, The French experiment: Laffer >>>>>>> Piketty. (Econlog). France imposed a 75% top rate. Mr. Sumner observes:

Even if you are not a devout supply-sider (and I am a moderate supply-sider, who believes tax increases usually lead to more revenue) it would be hard to deny that this particular tax increase cost revenue, after accounting for the impact of French economic growth.

There are people who seriously insist that a 75%-90% top tax rate would be a good thing. France is Exhibit A.

 

The Cavalcade no longer moves on. The Cavalcade of Risk, the long-running roundup of insurance and risk-management posts is ending. It’s guiding light, Hank Stern, posts the final edition, which includes his own contribution Green Mountain State Blues, on the demise of their attempt at single-payer coverage in one state.

 

 

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

Thursday, November 20th, 2014 by Joe Kristan

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

 

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

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

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

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

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

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

20121120-2From Ms. McArdle on Twitter:

Any chance it won’t be that bad?

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

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

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

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

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

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

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

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

 

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

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

Jack Townsend, Another UBS/Wegelin Related Indictment in SDNY

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

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

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

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

 

TaxProf, The IRS Scandal, Day 560.

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

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

 

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

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

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

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

 

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

 

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

Tuesday, November 18th, 2014 by Joe Kristan

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

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

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

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

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

 

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

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

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

 

 

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

Robert D. Flach discusses TAX EFFICIENT INVESTING

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

 

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

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

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

 

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

TaxProf, The IRS Scandal, Day 558

 

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

 

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Tax Roundup, 11/10/14: DOL nixes many employer health reimbursement setups. And: Sheldon!

Monday, November 10th, 2014 by Joe Kristan

Good morning from beautiful, if frigid, Sheldon, Iowa, where I am on the Day 1 panel of the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. A good crowd has braved the brisk north winds and forecasts of snow — so now it’s up to us to make them glad they did.

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Elections are over I. Branstad says Iowa road funding a top priority, raising fuel tax on the table (Omaha.com)

Elections are over II. FAQs about Affordable Care Act Implementation (Part XXII) The Department of Labor has issued new guidance on small-employer plan arrangements. The guidance, issued just after the election, puts strict limits on the ability of employers to bypass group plan rules by reimbursing premiums or using Health Reimbursement Arrangements under Section 105. As plans doing that have been marketed to small employers in Iowa and elsewhere, this could be an expensive development for employers; violating these rules carries a $100 per day penalty for each affected employee.

The FAQ discusses premium reimbursement arrangements: (my emphasis):

My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Securi20121120-2ty Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.(6)

This means that employers cannot have employees submit their insurance bills for reimbursement; doing so is considered a disqualified group insurance plan. The closest the employer can do is give an employee a raise without restriction, giving the employee the option of buying insurance.

The FAQ pretty much embalms Sec. 105 plans as substitutes for group plans.

A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage. Is this permissible?

No. The Departments have been informed that some vendors are marketing such products. However, these arrangements are problematic for several reasons. First, the arrangements described in this Q3 are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan. DOL guidance indicates that the existence of a group health plan is based on many facts and circumstances, including the employer’s involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash.(12)

DOL LogoSecond, as explained in DOL Technical Release 2013-03, IRS Notice 2013-54, and the two IRS FAQs addressing employer health care arrangements referenced earlier, such arrangements are subject to the market reform provisions of the Affordable Care Act, including the PHS Act section 2711 prohibition on annual limits and the PHS Act 2713 requirement to provide certain preventive services without cost sharing. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code.

It is difficult to determine the policy reasons behind this. As best I can tell, it seems to be that the DOL wants employees to be covered either under traditional group plans set up under the small business exchanges, or on individual plans purchased through the regular exchanges. Whatever the policy justification, it’s bad news for any employers using such arrangements, as the rules are already in effect for 2014.

Paul Neiffer has more at DOL Plays Hardball (Don’t Shoot the Messenger)!

If you are dealing with any vendor offering Section 105 plans that are attempting to make payment of health insurance premiums for more than one employee deductible by the employer and exempt from payroll taxes, be extremely careful.  As you can see from this Q #3, the DOL takes a dim view of these arrangements.

One last area of concern that was not addressed by the DOL is what happens with S corporation shareholders who have health insurance premiums reimbursed.  Under the self-employed health insurance deduction rules, there is a requirement for reimbursement; under the DOL Q&A, these reimbursements may run afoul of the ACA requirements.  If we get further clarity on this, we will let you know.

I understand this as restricting S corporation 2% owners to group plans, without a reimbursement option, but I suspect clarification is forthcoming.

Additional coverage from ISU-CALT: Updated! Heal.th Reimbursement Plans Not Compliant with ACA Could Mean Exorbitant Penalties.

 

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Sheldon scene, 2013. It’s slightly less cold this year.

William Perez, What You Need to Know about Reporting Payments Using Form 1099-MISC

Kay Bell, IRS taxpayer service outlook, short- and long-term, is bleak

Robert Everett JohnsonIRS Seizure of Assets Using Anti-Structuring Laws (Procedurally Taxing). It is a guest post by an attorney for the heroic Institute for Justice, which is defending the Arnolds Park, Iowa resturaunteur whose cash was stolen by the IRS.

TaxGrrrl, IRS Warns Taxpayers To Be Diligent As Identity Thieves Add New Twist To Phone Scam.

Russ Fox, Since the Dead Vote, Why Can’t They Get Tax Exemptions? “Cook County has begun to make sure that seniors are truly alive when taking the exemption.”

 

TaxProf, The IRS Scandal, Day 550. Todays links hit heavily on the failure of the agency to even look for the missing Lois Lerner e-mails in its servers or backup tapes. Yet Commissioner Koskinen just doesn’t understand why Republican appropriators don’t want to entrust him with a bigger budget.

Career Corner. Gentlemen, If Your Firm Offers Paternity Leave, Take All Of It (Caleb Newquist, Going Concern). Yes, it gives you lots of time to interview for that new job you’ll be needing.

 

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Tax Roundup, 10/1/14: Another court says Obamacare tax credits limited to state exchanges. Also: the Iowa Tollway.

Wednesday, October 1st, 2014 by Joe Kristan

oklahoma logoState means state. A U.S. District Court in Oklahoma has joined the D.C. District in holding that the tax credit subsidies for health insurance are limited to the 14 states that have established a health insurance exchange under the ACA. Other states let the feds set up exchanges.  Michael Cannon reports:

Noting that Obama administration wants to issue Exchange subsidies in states with federal Exchanges even though the PPACA (quoting Halbig) “unambiguously restricts the [Exchange] subsidy to insurance purchased on Exchanges ‘established by the State,’” Judge White argues that the government’s interpretation (quoting the Tenth Circuit in Sundance Assocs., Inc., v. Reno) “leads us down a path toward Alice’s Wonderland, where up is down and down is up, and words mean anything.” As evidence, White quotes the concurring opinion in King: “‘[E]stablished by the State’ indeed means established by the state – except when it does not[.]”

The D.C. District decision was upheld by a D.C. Circuit appeals panel, but has been vacated pending a rehearing by the full panel of judges.  The Fourth Circuit Court of Appeals has sided with the government, holding that the subsidies apply to all exchanges.  The issue is almost certainly going to be decided by the U.S. Supreme Court.

Both the ACA employer mandate and individual mandate penalties depend on how the decision comes out.  The employer mandate only applies if an employee gets a tax credit subsidy, so the Oklahoma rule would exempt employers in 36 states from the mandate. The tax credits are also key for determining whether insurance is “affordable” in computing individual penalties for not buying insurance; if the credits are unavailable, penalties would go away for millions of taxpayers in the 36 states using federal exchanges.

Related:

Whither Halbig and the ACA.

Obamacare tax credits get a reprieve.

Cite: Pruitt v Burwell. DC-OK, No. CIV-11-30-RAW

Peter Reilly, Court Rules Oklahoma ObamaCare Not OK

 

 

20120703-2Many economists say highway tolls are a sound way to finance road improvements. While Iowa has no official tollways, our state troopers are taking matters into their own hands, according to a report in today’s Des Moines Register:

 Two California poker players are refusing to fold in a legal battle against the state, claiming Iowa State Patrol troopers unlawfully seized their $100,020 gambling bankroll.

Troopers with the State Patrol’s criminal interdiction team — which works to catch drug traffickers and other criminals along interstates — used unfair procedures that target out-of-state drivers and cast suspicion on nonthreatening motorists, according to a lawsuit filed this week in federal district court on behalf of professional gamblers William “Bart” Davis and John Newmer­zhycky.

The men were traveling in a rented car from a poker event in Illinois with their bankroll.  They were pulled over on a pretext of not signalling a lane change — a pretext seemingly debunked by the patrol car dash cam recording — and ended up having their $100,000 seized.  They were also charged with having “drug paraphernalia.”

The state has returned $90,000, but the state has kept $7 million in seized funds from other out-of-state motorists, often without bothering to file charges.  A state spokesman defends the indefensible practice, which hits hardest people who are least likely to be able to afford to take the state to court, by saying it hurts criminals. You could probably catch some criminals and raise some cash by stopping and frisking everyone leaving the Harkin Steak Fry too, but that would hardly justify doing so.

Dallas County Sheriff took the practice a little too far; he was convicted of stashing seized funds in his garage (in a case where no charges were filed against the motorists whose cash was confiscated). Even when the troopers don’t help themselves to the cash, civil forfeiture without conviction of a crime is a corrupt and lawless practice that is overdue for reform.

Related: Steven Dunn, Nothing Civil About Asset Forfeiture

Update: From Jacob Sullum (Reason.com), Iowa Troopers Steal $100,000 in Poker Winnings From Two Players Driving Through the State

 

20121022-1William Perez, What You Need to Know About the Penalty for Not Having Health Insurance

TaxGrrrl continues her excellent “back to school” series with Back To School 2014: Educational Assistance Benefits

Kay Bell, Tax evasion charges are never fashionable. But tax cheating never seems to go out of style.

Jason Dinesen, Letting My Hair Grow Back: DIY is Not Always Better. Doing your own hair can be a bad idea; this also often applies to tax returns.

Or expatriations: There is no DIY green card abandonment (Phil Hodgen). 

 

Howard Gleckman, The Public Wants Clear Rules About Campaign Giving Through Tax-Exempts. Is It Possible? Yes, just the other day waiting in line at Hy-Vee, I heard a lady flipping through the People magazine say “Yes, they really need to do something about 501(c)(4) abuse.” She then apparated without even replacing the magazine.

 

TaxProf, The IRS Scandal, Day 510

Sebastian Johnson, State Rundown 9/30: The Gas Tax Cometh? (Tax Justice Blog). Better than taking cash from random travelers, anyway.

Joseph Henchman, State Inflation-Indexing of Gasoline Taxes

News from the Profession. Prospective Intern Wants to Know if Firm Will Let Him Go on Vacation During Internship (Adrienne Gonzalez, Going Concern).

 

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Tax Roundup, 8/6/14: Telemarketing isn’t an airplane. And: inversion hysteria, always in style.

Wednesday, August 6th, 2014 by Joe Kristan

20120529-2Is your airplane any of your business?  The Tax Court yesterday dealt with a problem that will arise a lot as taxpayers struggle with the new 3.8% Obamacare Net Investment Income Tax: what “activities” can be considered to be part of a single business?

The issue comes up because “passive” activities are subject to the tax, while non-passive activities are exempt.  It is especially important when S corporations are involved because their K-1 income is also exempt from the 2,9 Medicare tax and the .9% Obamacare Medicare surtax.  The status of activities as “non-passive” usually depends on the amount of time spent working in the activity; if you can combine activities they are less likely to be passive.

Tax Court Judge Buch outlines yesterday’s case:

 Mr. Williams is an aviation buff who owns a business that is unrelated to aviation. He purchased an airplane that he made available for rent, used for personal purposes, and used in his other business. On the Williams’ joint tax returns, they offset losses related to the ownership of the airplane against their income from the other business. Respondent disallowed those offsets… 

Passive losses cannot offset non-passive income under the 1986 passive loss rules; they carry forward to offset future income until the activity is sold.  Mr. Williams reported the airplane expenses as part of his business of training telemarketers.  The court reviews the rules on combining activities (footnotes omitted; my emphasis):

Section 1.469-4(c), Income Tax Regs., sets rules for determining what constitutes a single “activity”. That regulation provides: “One or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.” Whether activities constitute an “appropriate economic unit” depends on the facts and circumstances, giving the following five factors the greatest weight:

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographic location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records.)

The judge said the airplane wasn’t part of the same “economic unit” as Mr. Williams’ other business, called WPP:

The fact that there was no meaningful interdependence between the ownership of the airplane and the business of WPP is evidenced in part by the fact that Mr. Williams would rent another airplane for travel because he could earn more from renting WPP’s airplane to other pilots or pilot trainees than he would pay if he or WPP rented another airplane for a trip. Further, most of the airplane’s use and income came from renting the airplane outside WPP, which had no effect on the business of WPP. Likewise, there is no indication that the airplane activity depended on WPP; it was only an occasional user of the airplane. There is no evidence that WPP and the airplane activity had any of the same customers or that the two activities were integrated in any meaningful way.

When the airplane activity was separated his other business, Mr. Williams was unable to muster enough hours to reach “material participation,” making the airplane losses passive and non-deductible.

What does this mean in planning for the NIIT?  Taxpayers get to revisit their activity groupings for 2013 and 2014 returns.  Taxpayers with multiple businesses will want to ponder what things they can realistically combine.  Just because you own both businesses doesn’t mean the tax law will consider them an “appropriate economic unit.”

Cite: Williams, T.C. Memo 2014-158

 

20140805-3Paul Neiffer, IRS Provides Two Optional Methods for SE Health Insurance Deduction.

Jack Townsend, Whistleblower Award for FBAR Penalties?

Jason Dinesen, Kudos to NAEA for Promoting EAs.  Not to sound dumb, but isn’t that what the National Association of Enrolled Agents is supposed to do?

Russ Fox, The IRS Apparently Thinks They Won the Loving Case.  “In Loving v. IRS, the IRS was permanently enjoined from the Registered Tax Return Preparer designation. One would think that the IRS would realize this and remove the designation from forms.”

Keith Fogg, How Bankruptcy Can Create a Pyrrhic Victory out of a Tax Court Win (Procedurally Taxing)

 

Peter Reilly, FAIR Tax Abolishes IRS – Then What?  I have long thought the fair tax was half-baked gimmick, deceptively marketed.  If you want to move to a consumption tax, move to a real consumption tax.

Adam Michel, What is the Consumed Income Tax?  (Tax Policy Blog)

 

 

Allison Christians, Regulating Return Preparers: A Global Problem for the IRS:

The problem of regulating all foreigners in service of U.S. citizenship taxation plagues FATCA in the details, and it will plague the project of tax return preparer regulation as well. It won’t be easily solved unless Congress can accept that the universally practiced norm of residency-based taxation is really the only viable option in a globalized world. If not, as the world adjusts to the ongoing expansion of U.S. regulatory power through more — and more complex — financial regulation, everyone will have to accept that virtually every tax move Congress makes has global implications.

Via the TaxProf.

Just what the world needs: more IRS.

 

nra-blue-eagleDavid Brunori, Keep the Inversion Hysteria Out of the States (Tax Analysts Blog).  “A company’s decision to invert is no different from an individual’s decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break.”  But, but, what about your loyalty oath?  You must hate America!  Or, worse, Iowa!

Scott Hodge, More Perspective on Inversions: Not a Threat to the Tax Base but the Face of U.S. Uncompetiveness (Tax Policy Blog)

Bob McIntyre, Statement: Despite Walgreens’ Decision, Emergency Action Is Still Needed to Stop Corporate Inversions (Tax Justice Blog, where inversion hysteria is always in style).

Eric Toder, How Political Gridlock Encourages Tax Avoidance (TaxVox)

 

Joseph Thorndike, The Origination Clause? Let It Go (Tax Analysts Blog).  Since the courts allow the Senate to strip any house bill of its text and replace it with revenue provisions, it’s pretty much dead already.  And that’s a shame.

 

Your legislators at work: 

Chicago lawmaker pleads to misdemeanor; faced 17 felonies. ““I’m sorry I underestimated my taxes.”

Fattah Jr. released on bail following U.S. indictment on theft, fraud and tax-evasion charges.  The son of a Congresscritter has tax issues? The apple doesn’t fall far from the tree.

 

TaxProf, The IRS Scandal, Day 454

Career Corner.  Career Limiting Moves: A Beginner’s Guide (Leona May, Going Concern).

 

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Tax Roundup, 7/29/14: Whither Halbig and the ACA. And lots more!

Tuesday, July 29th, 2014 by Joe Kristan

20121120-2The Big Tax News while I was on vacation was the Halbig decision by the U.S. Court of Appeals for the D.C. Circuit.  The decision holds invalid the IRS decision allowing tax credit subsidies for policies purchased on federal insurance exchanges.  The impact of the decision was offset by a Fourth Circuit decision the same day coming to the opposite conclusion, but it is still a big deal, especially in light of some subsequent events.

The D.C. circuit has national implications because every taxpayer can come under its jurisdiction by litigating through the Court of Federal Claims.  An alert reader corrects me:

Your post today contains an error.  The  D.C. circuit is not the same as the federal circuit.  The court of federal claims is appealable to the federal circuit. The district court for the D.C. circuit is appealable to the D.C. circuit.  Halbig is a big deal in any event because the dc circuit instructed the district court to vacate the rule.  Vacated means that there is no rule anywhere.  In any event, SCOTUS will make the final call here.

As long as that decision stands — and the IRS will certainly ask the 15-member court to reconsider Halbig, decided by a three-member panel — it threatens not only the tax credits for the 37 states without their own exchanges, but it also invalidates the employer mandate tax in those states and takes much of the bite out of the individual mandate.  The South Carolina Policy Council explains why (my emphasis):

The subsidies are also important for their function as triggers of both the individual and employer mandate portions of the ACA. The ACA imposes a $2,000 per employee penalty for companies with more than 50 employees who do not offer “adequate health insurance” to their workers. This penalty is triggered when an employee accepts an IRS subsidy on a plan purchased through an exchange. If individuals in the 36 states without a state-run exchange are ineligible for subsidies, there will be no trigger to set off the employer mandate.

An absence of subsidies would also allow many people to avoid the ACA’s individual mandate, which requires citizens to maintain health insurance covering certain minimum benefits or pay a fine. This is because the ACA exempts citizens from the individual mandate whose out-of-pocket costs for health insurance exceed 8 percent of their household income. If IRS subsidies are removed, insurance plans offered on exchanges would exceed this cost threshold for many people – thereby providing them an exemption from the mandate.

Flickr image courtesy Tim under Creative Commons license

Flickr image courtesy Tim under Creative Commons license

This would devastate the already shaky economics of Obamacare.

The key ruling in Halbig is its finding that statutory language allowing tax credits through exchanges “established by a State” doesn’t cover the federal exchanges that are used in the 36 states without exchanges.   Critics of Halbig say that Congress couldn’t have been that stupid.  For example, Jonathan Gruber, an architect of the ACA, says“Literally every single person involved in the crafting of this law has said that it`s a typo, that they had no intention of excluding the federal states.”

That assertion has been challenged by a number of observers, notes Megan McArdle.  She cites a January 2012 speech by one Jonathan Gruber, an architect of the ACA:

Only about 10 states have really moved forward aggressively on setting up their exchanges. A number of states have even turned down millions of dollars in federal government grants as a statement of some sort — they don’t support health care reform.

Now, I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of a state are costing state residents hundreds and millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat, is, will people understand that, gee, if your governor doesn’t set up an exchange, you’re losing hundreds of millions of dollars of tax credits to be delivered to your citizens. [emphasis added] 

The 2012 Jonathan Gruber repeated the story that only state-established exchanges qualify for credits in other forums.   It’s remarkable that two ACA architects named Jonathan Gruber have such divergent views of what the bill does.  It’s even more remarkable that they are the same guy.  This seems like strong support for the D.C. Circuit’s approach.

supreme courtIf the ACA were just another tax bill, it would be pretty easy to predict that the Supreme Court would go with the D.C. Circuit’s approach, based on prior rulings involving statutes that reached results the IRS didn’t care for.  In the Gitlitz case, which arguably provided an unintended windfall for S corporation shareholders when the S corporation incurred non-taxable debt forgiveness income, the Supreme Court said in an 8-1 decision (footnotes and citations omitted, emphasis added):

Second, courts have discussed the policy concern that, if shareholders were permitted to pass through the discharge of indebtedness before reducing any tax attributes, the shareholders would wrongly experience a “double windfall”: They would be exempted from paying taxes on the full amount of the discharge of indebtedness, and they would be able to increase basis and deduct their previously suspended losses.  Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.

In other words, if Congress doesn’t like what it has done, it’s up to Congress to fix it, not the IRS.  Congress did just that with the Gitlitz result within a year of the decision.

Of course, the ACA isn’t typical tax legislation.  Chief Justice Roberts tied himself in knots to find a way to uphold Obamacare in 2012.  Politics makes it unlikely that the Gitlitz approach will be followed by the left side of the Supreme Court, and who knows how Justice Roberts will rule.  But it does appear at least possible that Halbig will be upheld.

What should taxpayers do?  My thought is to assume the mandates remain in effect and pay tax (or reduce your withholding) accordingly.  Then be prepared to file a refund claim if Halbig is upheld by the Supreme Court.  Plan for the worst and hope for the best.

At least one thoughtful commentator says that ultimately if Halbig is upheld, holdout states will fall into line and establish exchanges.  For the reasons laid out here, I don’t think that will happen, and Congress will be forced to clean up its mess.

 

Paul Neiffer, ACA Subsidies: One Court Strikes Down, Another Upholds

Kristy Maitre, IRS Releases Additional ACA Revenue Procedures and Draft Forms  (ISU-CALT)

 

20140729-2Jason Dinesen, Don’t Be “That” Business Owner.  “I see too many with preconceived notions of what they can “get by with.” I’ve seen and read about too many people whose life got turned upside-down when they ended up NOT “getting by with it” after all.”

Russ Fox,  2:42.  “That’s how long I spent on hold on the IRS Practitioner Priority Service (PPS) yesterday–two hours, forty-two minutes.”   It’s a good thing Practitioners are a “Priority,” or who knows how long he’d have been on hold.

Phil Hodgen, Green card holders, treaty elections, and exit tax

Stephen Olsen, Ct. of Fed. Claims Holds Merger Results in “Same Taxpayer” for Net Zero Interest Rate (Procedurally Taxing)

Peter Reilly wonders if it is Time To Let Kent Hovind Go Home?  Peter thinks the former owner of a theme park based on the idea that hominids and dinosaurs co-existed may have suffered enough for his tax misdeeds.

Robert D. Flach brings the fresh Tuesday Buzz!

Well, these things are never tidi.  Spanish Court Moving Forward With Messi Tax Evasion Case  (TaxGrrrl)

 

taxanalystslogoDavid Brunori, Who Wants to Tax a Millionaire? Lots of People (Tax Analysts Blog).  This is full fo good observations about the unwisdom of states soaking the “rich.”  Highlights include:

States do not (and should not) do a lot of redistributing to the very poor.

When states jack up taxes on the “rich,” the money doesn’t exactly go to people sleeping under bridges, as David explains (my emphasis):

I have written about this before.  I noted that “the real beneficiaries of most government spending, certainly at the state level, never come up. No one ever says that we need higher taxes because my friends in the construction business want new contracts. No one ever says that they want new taxes to expand bloated public employee union bureaucracies. Yes, crony capitalism and union bosses drive most calls for higher taxes.” My right-wing friends often criticize liberals calling for higher marginal taxes as delusional. But they know exactly what they’re doing. Often they want higher taxes just so they can give money to their friends.

The money taken from “the rich” goes to the well-connected.  Iowa’s highest-in-the-nation system fleeces those without pull to pay rich subsidies to well-connected politicians and corporations.  Better to throw out the crony subsidies and lower rates for the rest of us — like The Tax Update’s Quick and Dirty Tax Reform Plan would do.

 

Elaine Maag, The “Helping Working Families Afford Child Care Act” Would Help, but Doesn’t Solve the Timing Mismatch (TaxVox).  “Making the CDCTC refundable and increasing allowable expenses is a huge step in improving child care assistance for low-income families.”

 

20140729-1Joseph Thorndike, The Corporate Income Tax Will Never Be ‘Fixed.’ And That’s OK. (Tax Analysts Blog):

Again, I think the corporate income tax is on the way out. But that’s a long-term problem. It doesn’t mean we should throw in the towel right away. The corporate tax may, as McArdle suggests, be an “insane, unwinnable chess game” pitting lawyers against tax collectors. But for the time being, the game is still worth the candle.

I think Megan McArdle has the better case, that the corporation income tax needs to go away, one way or the other.   I like the idea of doing so via a corporation dividends-paid deduction, combined with an excise tax on dividends for otherwise-exempt stockholders, as a way to get there.

Scott Hodge, More on Inversions and the Effective Tax Rates of Foreign-Owned Firms.   “The administration may want to think twice about taking unilateral action without considering the consequences.”

Clint Stretch, Dreams of Tax Reform (Tax Analysts Blog).  Patsy Cline is invoked.

 

TaxProf, The IRS Scandal, Day 446

 

Greg Kyte, Clarifying Sex and Auditor Independence After the EY and Ventas Affair (Going Concern).  Can an auditor be “independent” while sleeping with a CFO?  Well, auditors are supposed to have hearts of stone…

 

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Tax Roundup, 5/30/15: Antidumping edition. And: permanent bonus depreciation advances.

Friday, May 30th, 2014 by Joe Kristan

20121120-2Iowa Public Radio, Can Employers Dump Workers On Health Exchanges? Yes, For A Price:

The latest tweak from the Internal Revenue Service essentially prohibits employers from giving workers tax-free subsidies to buy policies in the online public marketplaces created by the health law. The New York Times first reported the rule.

But the headline on the story, “I.R.S. Bars Employers From Dumping Workers Into Health Exchanges,” overstates the case. Nothing stops employers from canceling company plans and leaving workers to buy individual policies sold through the exchanges — as long as the companies pay the relevant taxes and penalties, said Christopher Condeluci, a Venable lawyer specializing in benefits and taxes. Those would vary according to a company’s size and circumstances.

The ACA requires employers with more than 50 “full-time equivalent” employees to provide “adequate” coverage.  The IRS says that subsidizing employees to use the ACA exchanges doesn’t work.  This, of course, is the same IRS that arbitrarily and unlawfully just waived the requirement in the first place through 2014, and for those with under 100 employees through 2015.  Some laws are more equal than others.

It’s fascinating that the Administration refers to the practice of sending employees to buy policies on the exchanges as “dumping.”  The exchanges are a centerpiece of Obamacare, touted as an important step in making affordable coverage available for everyone.  Suddenly they are a “dump.”  Obamacare fines individuals for not patronizing that very dump.

 

20130422-2Permanent bonus depreciation advances in House.  Tax Analysts reports  ($link, my emphasis)):

Camp said the extenders the committee considered had been renewed enough times that most of them have been or soon will have been extended for at least 10 years, the budget window period. “If we’ve extended something for 10 years, let’s call it what it is, [and] that’s permanent policy,” he said. “We shouldn’t have to raise taxes other places in the economy to keep current tax law.”

The costliest bill the committee approved was H.R. 4718, introduced by Ways and Means Committee member Patrick J. Tiberi, R-Ohio. That bill would permanently extend bonus depreciation, allowing businesses to immediately deduct 50 percent of qualified purchased property. The bill, passed on a 23-11 vote, would expand the definition of qualified property to include owner-occupied retail stores. It would lift restrictions to allow for more unused corporate alternative minimum tax credits, which businesses can claim in lieu of bonus depreciation, to be used for capital investment.

Expiring provisions are a lie.  Any extension of an “expiring” provision should be counted as permenent under budget rules, as they pretty much are.

Related: Dave Camp’s Great Bonus Depreciation Flip-Flop (Howard Gleckman, TaxVox);  Negative GDP Growth Illustrates the Need for Bonus Depreciation (Alan Cole, Tax Policy Blog)

 

Wind turbineOne of these is not like the other.  The Des Moines Register coverage of last night’s Iowa GOP Senate Primary debate has something I never expected to see in a story about a candidate for statewide office:

Whitaker stands out because he doesn’t support the Renewable Fuel Standard, or any tax breaks for any energy source. “If we don’t believe in mandates for health care, we shouldn’t believe in mandates as it relates to energy,” he said.

All other candidates in both parties genuflect to the Renewables Subsidy idol.  In Iowa, ethanol apostasy is rare; more typical is the GOP governor who is all about picking winners and losers, when the winners are an influential local constituency.

Related: Governor’s press conference praises construction of newest great pyramids.

 

The IRS needs to regulate these people to stamp out fraud.  “Tammy Dickinson, United States Attorney for the Western District of Missouri, announced today that six former employees of the Internal Revenue Service have pleaded guilty to receiving unemployment benefits while they worked at the agency.” (Department of Justice press release)

Robert D. Flach serves up your Friday Buzz.  “Who would have guessed that I would agree with a group of CPAs?”

TaxProf, The IRS Scandal, Day 386

 

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And now they’ve proved it.  A Minneapolis husband and wife who ran a website called imarriedanidiot.com were convicted last week on federal tax charges.” (TwinCities.com)

Across the road, of course.  Where are all the Chickens?  (Paul Neiffer)

News from the Profession.  This Big 4 Firm Just Ruined Selfies for Everyone (Going Concern)

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Tax Roundup, 5/19/14: The Roth dilemma. And: risks in enlisting the bookkeeper in your tax crimes.

Monday, May 19th, 2014 by Joe Kristan

IRAIs it better to get a tax benefit now and pay taxes later on retirement income, or vice-versa?  Bloomberg econobogger Megan McArdle ponders the question in To Roth, or Not to Roth:

In theory, the calculation is easy: Figure out whether your tax rate is likely to be higher now or in the future. If you’re young, the answer is likely to be “future”; if you’re in your peak earnings years, you’re probably looking at a lower tax rate when you’re retired.

But while the theory is simple, in practice, things are considerably more complicated. Personal finance is less about math than psychology . . . and tax policy, in this case. What will the tax rate on your income be when you retire — higher or lower than your current tax rate?

“Roth” IRAs and 401(k)s offer no current tax reduction, but if the account is left untapped long enough, there is never an income tax on the earnings.  It’s not always a tough choice.  Many young people face a marginal income tax rate of zero.  To the extent a low-earning young taxpayer benefits from a 401(k) plan or saves in an IRA, you might as well go with a Roth version, as there is little or no current benefit anyway.

As you climb the income ladder, it quickly becomes a more difficult decision.  When my company first had a Roth option, I opted in for a year.  Then it occurred to me that I was making a bet on much higher tax rates in the future at much lower income levels.  That seemed like a losing bet (but see this) and I switched back to the traditional 401(k) with current tax savings.

Megan also notes a real, if hard to quantify, problem with betting on future benefits (my emphasis):

We’re running some substantial deficits, and we’ve made some big promises to retirees. Those obligations will have to be paid for somehow, and by “somehow,” I mean “With higher taxes on someone.” What are the chances that you’ll be that someone? Pretty high, if you save a lot for retirement.

That makes a Roth sound like a pretty good bet. But unfortunately, the same logic that suggests higher income taxes in the future also suggests that a hungry-eyed Congress might settle on all those fat tax-free retirement accounts as a way to balance the books. What Congress giveth, Congress can taketh away. Can you really count on that income being tax-free when it’s finally time to collect it?

If you think no politician would be so brazen, just remember:  “If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.

 

20121120-2Good thing the ACA solved the problem of the uninsured.  Report: 230,000 Iowans still lack health care coverage (Des Moines Register).  Good thing we destroyed the health insurance industry and imposed a whole series of punitive and complicated taxes.

 

Russ Fox, Deadlines for Us, But Not for Them (Part 2), “Later this week it will be seven months since my reply was received. Another nine-week hold has been put on collection activities as the IRS admits that there is correspondence waiting to be reviewed. If we go nine more weeks it will be over nine months since I responded.”

Another reason for a sauce-for-the-gander rule, applying the same rules to the IRS that they apply to us.

Robert D. Flach has a similar state-level example from New Jersey in THE DFBs!

We are told (highlight is mine) –
“New Jersey wrongly notified about 2,000 taxpayers that they underpaid their 2013 taxes, but the state won’t notify them about the error unless the taxpayer asks, possibly causing taxpayers to send the state money that wasn’t owed.”

Tar and feathers.

 

20140507-1Peter Reilly, Real Estate Dealer Or Investor – Can’t Switch At Drop Of Hat.  ” One of the more challenging questions in income taxation of real estate transactions is whether a taxpayer is a dealer or an investor.”  Investors get capital gains, dealers don’t.

TaxGrrrl, Tax Extenders Bill Stalled In Senate.  The latest move in the dance to the inevitable last-minute re-extension of the perpetually-expiring tax breaks.

 

Jack Townsend, Booker Variances are More Common in Tax Crimes. Why? And Do They Disproportionately Benefit the Rich?   He discusses variations from federal sentencing guidelines, including the shockingly-light sentence given Beanie Babies tycoon Ty Warner.

TaxProf, The IRS Scandal, Day 375

William McBride, Top 10 things to Know about Investment and Tax Policy.  (Tax Policy Blog).

Number 2: “Investment in the U.S. has yet to fully recover from the recession and remains near a record low.”

Number 10: “Of the ways to change tax policy to improve investment, expensing generally provides the greatest “bang-for-the-buck” because it applies strictly to new investment.”

 

Renu Zaretsky, Tax Mistakes, Collections, and Breaks.  Today’s TaxVox headline roundup covers a proposal to revive the use of private collectors in federal tax collection and “Affordable Care Act subsidy mistakes now could mean huge tax confusion later.”

Annette Nellen asks What’s missing from Camp’s tax reform proposal?  She has suggestions.

 

20120517-1The new Cavalcade of Risk is up at Waterwayfinancialgroup.com.  The venerable roundup of insurance and risk-management posts includes Hank Stern on the possible perils of ride share. There is risk in letting other people use your car, as anyone who has seen Animal House knows, and those risks may not be covered under your car policy.

 

 

News from the Profession.  Another EY Associate Taking a Stab at Reality TV (Going Concern)

Honor among fraudsters.  Owners of a nostalgia-themed restaurant chain in Pennsylvania and New Jersey went up the river on tax charges last year.  Now comes word that the inside accountant who (allegedly) helped them cheat on taxes also (allegedly) helped himself.  From Philly.com:

An indictment unsealed today charges 58-year-old William J. Frio, of Springfield Township, with conspiracy, filing false returns, loan fraud, and aggravated structuring of financial transactions.

Prosecutors say Frio, who has been providing accounting services to Nifty Fifty’s since 1986, conspired with the popular chain’s owners in a scheme that used skimmed cash to help themselves and associates avoid paying taxes.

He also allegedly used his role as Nifty Fifty’s accountant to embezzle hundreds of thousands of dollars from the organization.

Aside from the obvious risk of going to jail, there are other complications that arise when businesses cheat on their taxes.  Unless your business is tiny, you need some help from your accounting staff.  When your bookkeeper is willing to defraud the government, don’t be shocked if he isn’t perfectly honest with you.

 

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Tax Court decision cuts 3.8% Obamacare Net Investment Income Tax for many trusts.

Friday, March 28th, 2014 by Joe Kristan

20120511-2The Tax Court reduced 2013 income taxes for a lot of trusts yesterday.  The court ruled that trustees can “materially participate” in rental real estate activities, and by extension in other activities.  If a taxpayer “materially participates” in an activity, it is not subject to the Obamacare 3.8% “Net investment Income Tax” on that activity’s income.

This is a big deal for trusts because they are subject to this tax at a very low income level — starting at $11,950 in 2013.  The IRS has said that it considers it nearly impossible for trusts to materially participate.  Yesterday’s decision flatly rejects the IRS approach.

The IRS had stated its position in a ruling involving an “Electing Small Business Trust,” which is a type of trust that can hold interests in S corporations — and which tend to get hit hard by the NII tax.  The IRS said that a president of the corporation who was also a trustee of the ESBT was participating in the business not “as trustee,” but as a corporation employee — and therefore the trust didn’t materially participate.  The Tax Court disagreed with IRS thinking yesterday:

The IRS argues that because Paul V. Aragona and Frank S. Aragona had minority ownership interests in all of the entities through which the trust operated real-estate holding and real-estate development projects and because they had minority interests in some of the entities through which the trust operated its rental real-estate business, some of these two trustees’ efforts in managing the jointly held entities are attributable to their personal portions of the businesses, not the trust’s portion. Despite two of the trustees’ holding ownership interests, we are convinced that the trust materially participated in the trust’s real-estate operations. First, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was not a majority interest — for no entity did their combined ownership interest exceed 50%. Second, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was never greater than the trust’s ownership interest. Third, Frank S. and Paul V. Aragona’s interests as owners were generally compatible with the trust’s goals — they and the trust wanted the jointly held enterprises to succeed. Fourth, Frank S. and Paul V. Aragona were involved in managing the day-to-day operations of the trust’s various real-estate businesses.

That would seem to put to rest the IRS “as trustees” catch-22.

The Tax Court decision doesn’t make the NII go away for all trusts.  Trusts with only “investment” income, like interest and dividends, are not helped by this decision.  Also, the decision by its terms only covers situations in which the trustee is materially participating in the trust activity; “We need not and do not decide whether the activities of the trust’s non-trustee employees should be disregarded.”  In this respect the Tax Court doesn’t go as far as a Texas U.S. District Court did it the Mattie Carter Trust case, which counted participation of trust employees in determining whether the trust materially participated in an activity.

Still, even with limitations, the case is a big taxpayer win.  It will especially help ESBTs avoid tax on operating income from S corporations when a trustee is also a corporation employee.  Also, while the case doesn’t say that non-trustee employees can give trusts material participation, it doesn’t rule it out, either.  That means bold trusts with employees that manage trust operations may be able to avoid the 3.8% tax, should the Tax Court adopt the Mattie Carter Trust approach.  Future litigation will have to settle the issue.  The IRS is also likely to appeal this case.

An aside: The IRS asserted its usual outrageously-routine 20% “accuracy-related” penalty — and it lost on its underlying argument.  In a just tax system, the IRS would have to write a check to the taxpayer for the amount of the asserted penalties whenever this happens.   The IRS assertion of penalties is far too routine, and should be reserved for cases in which the taxpayer is actually taking a flaky position, or doesn’t bother to substantiate deductions.  When it asserts a penalty and the taxpayer actually wins on the merits, the IRS loses nothing under current law.  Tax Analysts hosted a seminar yesterday on a Taxpayer Bill of Rights.  Any bill worthy of the name would have a “sauce for the gander” rule that would make the IRS — and even IRS employees — as liable as taxpayers are for flaky positions.

Cite:  Frank Aragona Trust et al. v. Commissioner; 142 T.C. No. 9

Related: Self-rental, business sales benefit from new Net Investment Income Tax regulations.

Also: Paul Neiffer, Taxpayer Victory in Frank Aragona Trust Case, on the implications for farm interests held in trust.

A summary of “material participation” rules is below the fold.

(more…)

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Tax Roundup, 3/20/14: An optional mandate? And: baseball-tax convergence!

Thursday, March 20th, 2014 by Joe Kristan


20121120-2
Is the Obamacare individual mandate penalty now optional?  
 A couple of weeks ago the Wall Street Journal editorial page published ObamaCare’s Secret Mandate Exemption; HHS quietly repeals the individual purchase rule for two more years.  That’s a pretty bold statement, especially because the Administration has adamantly rejected calls for a delay in the individual mandate, after having delayed the business mandate twice.  If there is no mandate, Obamacare will likely lead to huge losses for insurers (to be subsidized by taxpayers), who need the forced patronage of the healthy to cover the sick that they can no longer exclude or charge risk-adjusted premiums.  Did they really do that and not tell anyone?

Here’s what WSJ says happened:

But amid the post-rollout political backlash, last week the agency created a new category: Now all you need to do is fill out a form attesting that your plan was cancelled and that you “believe that the plan options available in the [ObamaCare] Marketplace in your area are more expensive than your cancelled health insurance policy” or “you consider other available policies unaffordable.”

This lax standard—no formula or hard test beyond a person’s belief—at least ostensibly requires proof such as an insurer termination notice. But people can also qualify for hardships for the unspecified nonreason that “you experienced another hardship in obtaining health insurance,” which only requires “documentation if possible.” And yet another waiver is available to those who say they are merely unable to afford coverage, regardless of their prior insurance. In a word, these shifting legal benchmarks offer an exemption to everyone who conceivably wants one.

Did this really happen? The IRS has just issued Tax Tip 2014-04, The Individual Shared Responsibility Payment – An Overview.  It says:

You may be exempt from the requirement to maintain qualified coverage if you:

  • Have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income,

  • Have a gap in coverage for less than three consecutive months, or

  • Qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement.

So what kind of “hardship” would that involve?  The list of eligible hardships at Healthcare.gov provides a long list of qualifying hardships, including “You recently experienced the death of a close family member.”  I’m sure you can come up with one, but if that doesn’t work, try “You experienced another hardship in obtaining health insurance.”  Like, “Healthcare.gov” crashed, for example?  It’s your word against — whose?

So how do you claim “hardship?”  The first way is “You can claim these exemptions when you fill out your 2014 federal tax return, which is due in April 2015.”   

So somebody fills out the form and finds out the government wants hundreds of dollars in penalties for not buying insurance.  I bet they’ll come up with either a loss in the family or a hardship in a hurry.  There will be tens of thousands of these.  The IRS can’t possibly police this.

It appears the Wall Street Journal is on to something.  Considering the high cost of policies on the exchanges, a struggling young single really would incur hardship buying mandated coverage.  And if you feel it’s a hardship, they are practically inviting you to opt out.  It’s hard to see this ending well.

This also poses ethical issues for practitioners, which I’ll address another time.

 

IRS Bars Appraisers from Valuing Facade Easements for Federal Tax Purposes for Five Years (IRS Press Release):

The appraisers prepared reports valuing facade easements donated over several tax years. On behalf of each donating taxpayer, an appraiser completed Part III, Declaration of Appraiser, of Form 8283, Noncash Charitable Contributions, certifying that the appraiser did not fraudulently or falsely overstate the value of such facade easement. In valuing the facade easements, the appraisers applied a flat percentage diminution, generally 15 percent, to the fair market values of the underlying properties prior to the easement’s donation.

There’s a lot of interesting things here.  For example, they never mention the name of the appraiser group.  It would seem like that would be useful information to taxpayers.  Sometimes people who seem to be barred from a line of work apparently neglect to mention that to prospective clients.

It also shows that you can’t count on a too-good-to-be-true result just because a lot of other people have gotten it.  They just might not have been caught yet.  You can be sure the IRS is working its way down the appraisal group’s client list.

 

Principal Park, as seen from my office window.

Principal Park, as seen from my office window.

Baseball-Tax Convergence.  Over at Cubs Fan site Bleacher Nation, Proprietor Brett yesterday posted The Chicago Cubs Financial Story: the Payroll, the Debt, and the Syncing of Baseball and Business Plans.  A lawyer by training, Brett digs deep into the leverage partnership deal where the Ricketts family bought the Cubs in a way structured to defer taxes to the Tribune Company:

In a leveraged partnership, a “seller” partners with a “buyer” to form a new entity, which takes on the assets and distributes cash to the “seller.” In its formation, the partnership takes on a great deal of debt, which is guaranteed by the seller. Doing so allows the “seller” to receive the cash distribution, and defer the taxes associated with the sale of the asset. 

At least that’s the idea. Brett notes that the IRS doesn’t have to agree, and that they didn’t when the Trib tried a similar trick when it sold Newsday.  After tax season, and after I wander down to Principal Park for the noon I-Cubs game on April 16, I’ll try to explain this.

 

Tony Nitti, What Are The Penalties For Failing To File Your Tax Return On Time? .  A lot more than failing to pay.  It’s worth getting that extension in, even if you can’t pay right now.

Kay Bell, Missing your 2010 tax refund? Claim deadline is 4-15-2014

William Perez, Tax Reform Act of 2014, Part 1, Tax Rates

Russ Fox, IRS Releases New Forms W-8BEN and W-8ECI.  Important if you find you are doing business with an offshore payee.

Iowa Public Radio, State Tax Laws ‘A Mess’ For Same-Sex Couples And Employers.  That’s where specialists like Jason Dinesen can really help.

TaxProf, The IRS Scandal, Day 315

Bloomberg, Buffett Cuts Tax Bill, Tells Others Not to Complain.  He’s tired of hearing you complain about subsidizing him, peasant. (Via TaxProf)

Chris Sanchirico, As American as Apple Inc. (TaxVox).  A complaint that Apple doesn’t voluntarily increase its own taxes.

ThinkAdvisor offers 8 Tax Evaders Who Should’ve Known Better — public servants biting the hand that feeds them.

 

Scott Drenkard, Richard Borean, Cigarette Smuggling Across the States (Tax Policy Blog) “Smuggled cigarettes make up substantial portions of cigarette consumption in many states, and greater than 25 percent of consumption in twelve states.”

 

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Almost one in five Iowa smokes are smuggled.

 

Cara Griffith, City of Tacoma Considers Contingent-Fee Auditors (Tax Analysts Bl0g) It’s a bad idea, but it’s hard to see where it’s any different from red-light cameras, where the camera companies collect a bounty of their own.

TaxGrrrl, 10 Tips For Making The Most Of March Madness  My strategy is to ignore it.

 

The Critical Question. Can the IRS Tell a Good Story? (Susan Morse, Procedurally Taxing)

 

 

20130419-1You lied to the IRS all these years, but you’re telling me the truth?  Sometimes business owners get away with tax evasion for years.  Then they try to sell their business.

A Henderson, Nevada auto body shop owner decided it was time to cash out.  KTNV reports:

Robert E. D’Errico, 64, was sentenced Wednesday morning to six-months in federal prison for tax evasion.

According to the plea agreement, D’Errico owned Sunset Collision Center in Henderson. In 2009, he began listing the business for sale on small business listing sites and with small business brokers. D’Errico stated in his listings that, “Seller states that his discretionary take-home cash is $150,000 per year and has receipts to prove it.”

When contacted by a potential buyer, D’Errico re-iterated, “Seller’s discretionary cash take home beyond stated net income is approx. $150,000 avg. per year and is verifiable with receipts.”

During a meeting with a potential buyer, D’Errico stated he stopped accepting checks and was taking cash deductibles from customers, as well as selling excess inventory for cash. 

Either the “potential buyer” ratted him out, or he was an IRS secret shopper.  The IRS got a search warrant, found the real ledgers, and things got ugly.  

Tax returns are sometimes the only financial statements a small business has.  Buyers naturally want to see them, and it can be awkward trying to convince a buyer that they aren’t the “real” financial statements.  But it can get a lot more awkward than that.

 

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