Posts Tagged ‘Peter Reilly’

Tax Roundup, 10/12/15: Broken Arrow (Trucking) nets CEO 7 1/2 years. And: Last week of tax season!

Monday, October 12th, 2015 by Joe Kristan

Accounting Today visitors, click here to go to the YMCA story.

Last Week! Extended 2014 1040s are due Thursday. That’s it, no more extensions are available.  It should be all over by now, but it’s not. Don’t put your preparer off until Thursday because there might be a $25 charitable contribution you missed, and you are just too darned busy to find it today.


ice truckWrecked. A weird and strange payroll tax crime case wrapped up last week when James Douglas Pielsticker was sentenced to 7 1/2 years in prison.

Mr. Pielsticker was CEO of Arrow Trucking when it failed spectacularly, leaving hundreds of its drivers stranded:

December 24, 2009

Hundreds of truckers nationwide are stranded and trying to get home before Christmas after their company shut down operations with little notice.

Arrow Trucking, based in Tulsa, suspended operations and laid off employees. Arrow is among the largest trucking companies in the nation.

About 900 truckers were left stranded across the country. Many drivers learned that the company had folded only after filling up their rigs and discovering the company’s fuel credit cards would not work.

There was no money to get the drivers home because Mr. Pielsticker was using it for… other things. From the Department of Justice press release (my emphasis):

According to the plea agreement and other court records, in 2009, Pielsticker and others conspired to defraud the United States by failing to account for and pay federal withholding taxes on behalf of Arrow Trucking Company and by making payments to Pielsticker outside the payroll system.  Pielsticker and others withheld Arrow Trucking Company employees’ federal income tax withholdings, Medicare and social security taxes, but did not report or pay over these taxes to the IRS, despite knowing they had a duty to do so. 

The conspirators paid for Pielsticker’s personal expenses with money from Arrow Trucking Company and submitted fraudulent invoices to TAB to induce the bank to pay funds to Arrow Trucking Company that were not warranted.  In total, the conspiracy caused a loss to the United States totaling more than $9.562 million.

What sort of personal expenses? According to the government’s sentencing memorandum, they included:

…expenses related to his Bentley and Maserati automobiles, and trips on private jets…  In 2007, Arrow paid at least approximately $361,000 for Pielsticker’s benefit; in 2008, it was at least approximately $753,000; and in 2009, Arrow paid approximately $1,300,000 for Pielsticker’s benefit in addition to his normal salary. 

The company collapsed under the weight of the looting, and the drivers were left hanging. Fortunately, other drivers and industry players came to their rescue to get them home, showing a lot more consideration than Mr. Pielsticker.

Employment tax fraud is a very stupid crime (not that there are a lot of smart ones). Jack Townsend reports that the government has recently updated its procedures for prosecuting payroll tax fraud, a sign that this is an enforcement priority. Don’t fail to remit withheld taxes. It’s not just a bad financial move; it could get you in criminal trouble.


Pielsticker Criminal Information Document

CEO Gets 7 1/2 Years Prison Over Employment Taxes, Owes $21M In Restitution (Robert Wood)




Call me when you start using the tools you have. We keep hearing how “common sense” preparer regulation is needed to keep us tax pros in line. Yet the IRS Return Preparer Office isn’t even using the authority it actually has, according to a report by the Treasury Inspector General for Tax Administration:

However, the RPO does not revoke PTINs from tax return preparers who are not compliant with their tax filing and payment obligations. In January 2015, the RPO identified 19,496 preparers with PTINs who were potentially noncompliant with these obligations. These preparers had over $367 million in tax due as of January 26, 2015. In addition, the RPO identified 3,055 preparers who failed to file required tax returns for one or more tax years and eight tax return preparers who failed to file required tax returns for five years.

Our review of PTIN holders as of September 30, 2014, identified 3,001 preparers who self reported a felony conviction on their application; 87 reported a crime related to Federal tax matters. Lastly, processes do not ensure that PTINs assigned to prisoners or individuals barred from preparing tax returns are revoked. Specifically, the RPO did not revoke the PTINs assigned to 65 of 445 confirmed prisoners and 15 of 87 individuals who the IRS identified as barred from preparing tax returns.

This supports the case that preparer regulation is more about driving out competitors of the big national tax franchises than it is about promoting quality tax compliance.




Russ Fox, Gilbert Hyatt Goes to Washington…Again:

Back in 2002, the Supreme Court ruled that Gilbert Hyatt could sue the Franchise Tax Board in Nevada. That was after the FTB rummaged through his trash. The FTB was then hit with over $400 million in damages. However, the Nevada Supreme Court threw out much of the decision, though the court upheld that the FTB committed fraud against Mr. Hyatt.

Sauce for the Gander is excellent tax policy. We should get to assess the same penalties against the government that they assess against us.

Mitch Maas, Netting Tax Savings Found to be a Goal of Many NHL Free Agents (Davis Brown Tax Law Blog).

Kay Bell, Computer scientists’ tax code algorithm could make it easier for IRS to catch partnership tax cheats. If nothing else, visit Kay to check out her slick new site design.

Paul Neiffer, How Much Does Section 179 Cost the Government? Or, how much does it save the taxpayer?

Jason Dinesen, Iowa Taxation of Retirement Income

Jim Maule, A Federal Income Tax on Everybody? How Would That Work?

Peter Reilly, Jindal Tax Plan Creates A Wonderland Of Dodging



Scott Hodge, Biggest Challenge To Tax Reformers: Overcoming Our Progressive Tax Code. “But as many of the presidential candidates have found in crafting their tax reform plans, the extreme progressivity of the individual tax code makes broadening the base and lowering the rate an exercise in raising taxes on the poor and cutting taxes on the rich—hardly a winning political message.”

This chart says a lot:

20151011 effective rate chart tax foundation


It’s hard to have an income tax reform that doesn’t disproportionately benefit the folks who pay the tax in the first place.


TaxProf, The IRS Scandal, Day 884Day 885Day 886. The votes are in:



Richard Auxier, Taxes penalize hockey teams? That’s a bad call, eh?

Career Corner, Would You Work for Revenue Share? (Chris Hooper, Going Concern). Well, I sort of do.



Tax Roundup, 10/8/15: Your tax preparer has to protect your confidential info. IRS, not so much. And more!

Thursday, October 8th, 2015 by Joe Kristan

TIGTAIRS Basically Plastering Your Social Security Numbers on Billboards Now, Because Why Not? (Peter Suderman,

The IRS continues to recklessly print Social Security Numbers (SSNs) on hundreds of millions of notices and letters, despite warnings that this practice dangerously exposes sensitive personal information, and years of pressure to reduce the use of SSNs on documentation.

In fact, the tax agency doesn’t even have procedures in place to fully track its use of SSNs, according to a report by the Treasury Inspector General for Tax Administration (TIGTA), a tax agency watchdog.

This is a problem because of the identity theft epidemic. Every document from IRS sitting untended in your mailbox that has your Social Security number is an ID theft vulnerability. Private parties have changed their practices to protect ID numbers. One example is the adoption of secure password-protected web portals to send anything with an SSN. Another is the decline of the practice of identifying tax returns on the outside of mailing envelopes. The increased risk of attracting an ID thief outweighs the risk a taxpayer might not bother opening an unmarked envelope.

Yet TIGTA says IRS is behind the curve. From their press release:

TIGTA found that as of January 2015, the IRS estimates that it has removed SSNs from 58 (2 percent) of the 2,749 types of letters and 93 (48 percent) of the 195 types of notices it issues.

“A person’s Social Security Number is the most valuable piece of personal data identity thieves can obtain.” said J. Russell George, Treasury Inspector General for Tax Administration. “The fact that the IRS does not have processes and procedures to accurately identify all correspondence that contain Social Security Numbers remains a concern.”

Businesses have to be careful with taxpayer information because we could lose business, or be sued, or worse. The IRS doesn’t have that motivation, and it shows.


20151008 tax incidenceTaxProf, Who Benefits From State Corporate Tax Cuts? Firm Owners (40%), Workers (35%), Landowners (25%). The Prof links to a study of “tax incidence,” or who “really” bears the burden of the corporation tax. While politicians and activists like to talk about corporations as tax-avoiding fat cats, it’s a fact that corporations ultimately don’t pay any tax; it comes out of the pocket of an actual human somewhere. Economists will endlessly debate whether its owners, customers or workers who bear the burden. Whoever it is, it’s not a free lunch for the tax man.


Russ Fox, Tax Relief for South Carolinians. “Note that the relief is automatic; impacted taxpayers need not do anything.”

Robert Wood, Skimming Cash — Even From Yourself — Can Mean Prison For Tax Fraud:

Prosecutors said the Horners owned Topcat Towing and Recovery Inc., a towing business in Georgia. Between 2005 and 2008, they skimmed $1.5 million in cash from the businesses, depositing into their personal bank account without disclosing the income on their corporate or personal tax returns filed with the IRS. They tried to conceal their cash deposits from the government by “structuring,” splitting up cash deposits that exceed $10,000.

Unwise. Banks have great incentive to report “structuring,” and they do.


Jason Dinesen, Glossary: Audit (Of Financials)

Leslie Book, Senate Again Takes Aim at Improper Payments in Federal Programs. The government wants to use the IRS inability to stop issuing fraudulent payments as an excuse to regulate preparers.

Jack Townsend, U.S. Senators on Senate Finance Committee Probe the Tax Aspects of the Volkswagen Debacle. “As often in tax-related and other potential criminal settings, the prosecutor has a panoply of provisions to choose from.”

Kay Bell, NHL players’ goal: Play in low or no income tax states


Jared Walczak, How Much Does Your State Collect in Taxes Per Capita? (Tax Policy Blog).



Iowa is #20.


Cara Griffith, Why Is It So Hard to Fund Schools? (Tax Analysts Blog). This article actually highlights the dangers when judges meddle in the appropriation process.

Renu Zaretsky, Questions, Subsidies, Deductions, and Profits. Today’s TaxVox headline roundup has stories on whether Volkswagen’s emission test rigging got them clean air tax credits, questions on the need to subsidize wind turbines, and much more.


TaxProf, The IRS Scandal, Day 882

Peter Reilly, Paul Caron’s Day By Day IRS Scandal Has Jumped The Shark – Conclusion. “I fear that the series which serves as a great resource is in danger of having its quality diluted.” I worry that the administration will succeed in running out the clock on the outrageous IRS misconduct.

Tax Justice Blog, New CTJ Report: 358 or 72% of Fortune 500 Companies Used Tax Havens in 2014, Alternate headline: 72% of Fortune 500 Companies try not to squander shareholder value.


Finally: Arrieta, Cubs ace Wild Card test vs. Bucs

Not tax related? Oops.



Tax Roundup, 10/7/15: Iowa Dept. of Revenue proposes sound policy, protests erupt. And: skating to a low-tax state.

Wednesday, October 7th, 2015 by Joe Kristan

20150122-1The Iowa Department of Revenue proposes broad definitions for industrial sales tax exemption. The chief Democratic taxwriter in the Iowa Senate is unhappy.

The Des Moines Register reports:

State legislators will consider a proposal next week that would reduce the tax burden for manufacturers by up to $46 million in a move critics say bypasses the legislative process.

In an effort to avoid a “double tax,” current law exempts from taxation some items used during the manufacturing process and instead taxes the final product. The proposal would expand the number of items that qualify for that exemption.

The policy behind the exemption is sound. As David Brunori points out,

Only bad things happen when businesses pay sales tax. First, the businesses paying the tax pass the burden on to their customers in the form of higher prices. But the tax is hidden. People do not know they are paying it. Politicians, and perhaps the New York Times, may like that lack of transparency, but it is awful government policy. Second, the higher priced products purchased by consumers are often subject to tax. This gives rise to a tax on a tax. That is awful tax policy. Finally, taxation of business inputs artificially keeps sales tax rates low. People think the sales tax rate is lower than it actually is. None of this is good.

Whether the Department has overstepped its authority is a separate question from the tax policy. From the Register story:

But state Sen. Joe Bolkcom, D-Iowa City, pointed out the fiscal effects of the legislation on Monday.

“We’ve been told repeatedly by this governor that we can’t afford to educate our kids, and here he goes again with another big tax cut for Iowa’s largest corporations and putting their needs ahead of our kids,” Bolkcom said. “It’s wrong.”

“I don’t remember ever tax policy being made by the rules committee or being made by the executive branch without the consent of the Legislature,” Bolkcom said. “This is a huge tax policy change that (Gov. Branstad) has unilaterally decided.”

Iowa businesses have long complained about the restrictive definition of “equipment” and “property directly and primarily used in processing.” It seems to me that the new definitions are more in line with business reality and the intent of the exemption. Still, I haven’t seen a fight over proposed regulations like this, so I have no idea how this will play out.

Link: Proposed new Iowa rules.




TaxGrrrl, Hockey Players Ice High Tax Teams In Favor Of Tax Savings:

With teams located in Canada and in the United States, high performing hockey players may be able to negotiate their tax home with their team home in order to choose a more favorable tax result. That is, according to a new report released jointly by the Canadian Taxpayers Federation (CTF) and Americans for Tax Reform (ATR), exactly what’s happening.

According to the report, 54% of the 116 Unrestricted Free Agents (UFA) and 60% of players with no-trade clauses who changed teams picked teams with lower taxes.

Sports free agency is an unusual natural experiment on whether state taxes matter. There are always other factors than taxes in choosing a team.  Winning is worth something. Still, it’s pretty much the same job, just with different taxes. The resulting low-tax preference is what you would predict.


Kay Bell, Fantasy sports: Gambling or just good, clean online fun?  Either way, taxes are due, but deduction options differ.

Jack Townsend, Swiss Asset Manager Settles Up with DOJ Tax. A $295,000 fine. Another example of second prong of the IRS approach to international tax compliance — shoot the jaywalkers so you can slap the big offenders on the wrist.

Tony Nitti, Tax Geek Tuesday: A Buyer’s Best Friend – Understanding The Section 338(h)(10) Election. “What if a buyer could acquire a target’s stock for legal purposes — thereby keeping the target alive and preserving its non-transferable assets — but acquire the target’s assets for tax purposes, giving the buyer the stepped-up basis in the asset it seeks?”


Jim Maule, Putting More Tax Information “Out There” for the Tax Database Thieves:

Until and unless the protection of online data is heightened to a point of 99 percent confidence, the IRS should not create yet another vulnerability, another door through which the robbers can force their way in. In the meantime, why not focus on the problem rather than the symptoms? The underlying cause of some noncompliance is the complexity of the tax laws. Treating the symptoms does not cure the illness.



Stephen Olsen, Summary Opinions for 8/31/15 to 9/11/15. Procedurally Taxing rounds up recent developments in tax procedure, “heavy on estate and gift this week.”




David Brunori, North Carolina Tax Changes — Sort of Good, Kind of Bad (Tax Analysts Blog):

On the good side, the state lowered the personal income tax rate from 5.75 percent to 5.49 percent. Lowering rates is usually good for the economy and for the people paying taxes. I believe that people know how to spend their money in ways that improve the economy much better than the government does. The state also expanded the no-tax exemption to $15,500, providing more relief for low-income taxpayers. In general that is a good thing.

On the super-negative front, the legislature is giving Hollywood moguls $30 million in each of the next two years to make films in North Carolina. I guess they haven’t read any of the studies showing that film credits don’t work. But why let facts stand in the way of policymaking?

It’s probably only a matter of time before they realize the wisdom of Iowa’s enlightened approach to hosting filmmakers.


Joseph Henchman, California Supreme Court Hears Arguments in MTC Case (Tax Policy Blog).

Roberton Williams, New Estimates Of How Many Households Pay No Federal Income Tax (TaxVox). “We now figure it is 45.3 percent, nearly 5 percentage points higher than our 2013 estimate of 40.4 percent.”  Mitt Romney, call your office.


TaxProf, The IRS Scandal, Day 881. Quoting Victor David Hanson: “What now constitutes actionable criminal behavior in the scandals at the IRS, EPA, ICE and a host of other alphabet agencies are not treated as per se violations of the law. Rather, they are judged according to whether the offender and his crime were deemed progressive and well-intended—or reactionary and thus prosecutable.”

Peter Reilly, Paul Caron’s Day By Day IRS Scandal Has Jumped The Shark – Part 1. Sometimes I think the TaxProf has to reach deep to have something to run every day, but his continued focus on the outrageous IRS behavior is a public service. I’m not sure Peter thinks there is a scandal in the first place.


Career Corner. Do PwC Employees Really Like the New Student Loan Perk? (Caleb Newquist, Going Concern). No word on whether the spiff is available in cash for those thrifty students who got by without loans.



Tax Roundup, 10/6/15: Tax Fairy fails to show up for Kansas ESOP. And: lots of other tax stuff.

Tuesday, October 6th, 2015 by Joe Kristan

tax fairyThe ESOP Tax Fairy Cult has long had Midwest adherents. The Tax Court told gave a Kansas believer the bad news yesterday — there is no tax fairy.

A successful Kansas orthopedic surgeon, a Dr. Prohaska, set up a new corporation, DNA Prof Ventures, with his wife. The surgeon and his wife were the only DNA employees. On the day it was incorporated, DNA created an employee stock ownership plan for its employees.

Problems arose. Tax Court Judge Dawson tells the story:

On December 31, 2008, DNA issued 1,150 shares of class B common stock to the trust with a par value of $10 per share. The trust then allocated the 1,150 shares of DNA stock to Dr. Prohaska’s ESOP account in 2008.

During 2008 DNA did not pay any salaries, wages, or other officer’s compensation. For 2009 DNA issued separate Forms W-2, Wage and Tax Statement, to Dr. and Mrs. Prohaska reporting the respective amounts of $4,500 (during its fourth quarter beginning October 1). DNA issued Forms W-2 for 2010 to Dr. and Mrs. Prohaska reporting the respective amounts of $3,000.

DNA deducted a $1,350 retirement plan contribution on its Form 1120, U.S. Corporation Income Tax Return, for 2009.

Although DNA was the sponsor of the ESOP, it did not file any Forms 5500, Annual Return/Report of Employee Benefit Plan, for plan years 2008, 2009, and 2010.

The IRS examiners found problems with this and other aspects of the way the ESOP was run (my emphasis):

    In this case, the ESOP had two separate failures to follow its plan document during 2008. First, the ESOP sponsored by DNA Pro Ventures allowed Dr. Daniel J. Prohaska and Amy Prohaska to participate in the ESOP as of the plan year ending December 31, 2008, in violation of the terms of the ESOP plan document regarding eligibility and participation. Second, the ESOP plan document required the ESOP to use appraisal rules substantially similar to those issued under I.R.C. sec. 170(a)(1) when it obtained annual appraisals for the same plan year. The ESOP, however, failed to obtain any appraisal for the 2008 plan year or for any plan year.

That led to a bad result:

For the reason stated above, it is determined that the ESOP is not qualified under I.R.C. sec. 401(a) for the plan years ending December 31, 2008 and all subsequent plan years. As a result, the Plan is not exempt from taxation under I.R.C. sec. 501(a) for trust years ending December 31, 2008 and all subsequent plan years.

A Google search reveals that the ESOP reported net assets of nearly $400,000 at the end of 2012. That would mean that much additional income for the ESOP participants over the term of the ESOP.  That’s an expensive sacrifice to the tax fairy. As the ESOP was set up the same day as the corporation, it appears likely that the purpose of the corporation was to feed the ESOP. Iowa has been a hotbed for bad ESOPs. While there is no evidence showing that this is linked to any other bad ESOPs, I note that the corporation had an Iowa mailing address.

The Moral: ESOPs aren’t easy. They can be useful under the right circumstances, but they require appraisals and careful compliance with the plan document an ESOP rules. They aren’t an easy tax shelter, and there is no ESOP Tax Fairy.

Cite: DNA Pro Ventures Inc. Employee Stock Ownership Plan, T.C. Memo 2015-195.




It’s Tuesday, so it’s Buzz-day for Robert D. Flach. He rounds up news ranging from the developments in the Section 105 $100-per-day penalty (Tax Update coverage here) to the ongoing problems in keeping EITC from squirting all over the place.

Kay Bell, IRS says ‘No’ to tax-exempt status for pet care group offering heated spa, massages and other animal amenities. My beagle would approve this exemption.

Jason Dinesen, Glossary: MACRS. “MACRS refers to “modified accelerated cost recovery system,” which is the default depreciation method used for tax purposes.”

Russ Fox, Well, That’s One Way to Avoid ClubFed. But fatal heart attacks have serious non-tax drawbacks.

Peter Reilly, Boston Bernie Backers Probably Not Bashing Bruins



Joseph Thorndike, The ‘Cadillac’ Tax Shows Why Obamacare Was Never Built to Last (Tax Analysts Blog). “All of which suggests that Obamacare will be in trouble for a long time.”

TaxProf, The IRS Scandal, Day 880

Joseph Henchman, California Supreme Court to Decide Fate of 48-Year-Old Multistate Tax Compact. (Tax Policy Blog). “Maybe it’s time we accept that the MTC isn’t working, and the Gillette case might be the first step of that realization.”

Renu Zaretsky, Evasion, Cuts, Hikes, and Drops. Today’s TaxVox headline roundup covers a planned “global crackdown” on tax evasion, business tax cuts in New Hampshire, and much more.

Leslie Book, District Court Hands IRS Loss in its Bid to Exclude Discretionary Treaty Benefits From Judicial Review (Procedurally Taxing).

Robert Wood, As IRS And DOJ Hunt Offshore Accounts, Banks Pony Up.


News from the Profession. Oh Great, Public Accounting Discovered the Selfie Stick (Caleb Newquist, Going Concern)



Tax Roundup, 10/5/15: Cool implosion, but no tax break. And more tax fairy tales!

Monday, October 5th, 2015 by Joe Kristan

This happened in Downtown Des Moines over the weekend:

YouTube Video Courtesy star105

Preservationists wanted to save the building, the old YMCA. I never understood this. Some beautiful buildings have been lost in Des Moines, but this isn’t one of them. If you aren’t willing to buy a building and fix it up yourself, it doesn’t seem right to tell the owners that they have to do it with their own money.

But did they get a tax break for the implosion? Did they get to write off the cost of the building when they brought it down? It would seem logical — obviously the building is a total loss. But no, it doesn’t work that way. Internal Revenue Code Section 280B is pretty clear:

In the case of the demolition of any structure—
(1) no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for—

(A) any amount expended for such demolition, or
(B) any loss sustained on account of such demolition; and

(2) amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.

So not only is there no write-off of the building, the cost of the demolition itself is capitalized, along with any remaining basis in the building — to be recovered only when the land is sold someday. So the income tax law doesn’t encourage implosions. Pretty much the opposite.




Jack Townsend, IRS Makes FOIA Disclosures to Tax Analysts Regarding OVDP and Streamlined Processing. “One point that was already known to practitioners is that rejection of the transition streamlined relief inside OVDP is not a determination of wilfulness so that, upon opt out, the wilfulness penalty is pre-determined.”

Peter Reilly, Rand Paul Suffers Setback In Foreign Reporting Lawsuit


Kristine Tidgren, Let the Motions Begin: Drainage Districts Seek Partial Summary Judgment. Des Moines Water Works is suing upstream drainage districts for not keeping nitrates out of the river. 

Annette Nellen, Obamacare – can pieces be removed? “Obamacare has too many complicated tax provisions in addition to many complicated non-tax provisions.”

Kay Bell, Time to make your flexible spending account choices

Sonya Miller, Freezing the Refunds of Our Guests (Procedurally Taxing). “We are aware of a group of nonresident taxpayers (taxpayers that fall under the rules for aliens temporarily present in the United States as students, trainees, scholars, teachers, researchers, exchange visitors, and cultural exchange visitors) who had their 2014 refunds frozen.”

TaxGrrrl, Treasury Sends Dire Warning To Congress: We’re Running Out Of Money Faster Than Expected.



TaxProf, The IRS Scandal, Day 877878879. They’re still talking about impeaching Koskinen. If the administration really wants to build trust in the IRS, they’ll dump him. Until they do so, we can assume his stonewalling and stiff-arming of the GOP appropriators is the behavior the administration wants out of him.

Scott Greenberg, New Study Shows that Tuition Deduction Does Not Increase College Attendance (Tax Policy Blog):

 Last year, Bulman and Hoxby published a similar study of three federal education credits, which concluded that all three have a “negligible” effect on college attendance. This finding was in stark contrast to the Obama administration’s claim that the expansion of the American Opportunity Tax Credit made it possible for 12 million more students to earn a college degree.

The increase in subsidies over the years coincides with wild increases in tuition costs. I don’t believe that’s a coincidence.


Renu Zaretsky, Hope’s Limits, Math, and Cuts. Today’s TaxVox headline roundup talks about the apparent death of an international tax reform effort and efforts to improve IRS verification of earned income tax credit eligibility.


Russ Fox, There Is No Magic OID Process. Just like there is no Tax Fairy.

Me, Chasing the Tax Fairy. My latest at, the Des Moines Business Record business professionals’ blog. I discuss four manifestations of the Tax Fairy cult – The ESOP Fairy, the Home-based Business Fairy, the Pennies-on-the-dollar Fairy, and the Classic 105 fairy that Hank Stern spotted.




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

Thursday, October 1st, 2015 by Joe Kristan

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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


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



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

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

Kay Bell, Federal government funded for 10 more weeks




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

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

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


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

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




Tax Roundup, 9/30/15: Taking from rich doesn’t give to the poor; state incentives favor the big.

Wednesday, September 30th, 2015 by Joe Kristan

Today we have two instances where policy tanks that I usually disagree with make important tax policy points.

TPC logoFirst, The center-left Tax Policy Center, a project of the Brookings Institution (which I castigate below), makes an important observation about the overrated problem of income inequality in their paper, Would a significant increase in the top income tax rate substantially alter income inequality? The summary (my emphasis):

The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate. We conduct a simulation analysis using the Tax Policy Center (TPC) microsimulation model to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest.

I have zero hope that politicians will heed this. Just because you take from the rich doesn’t mean it goes to the poor. It goes to the well-connected, as in the next item.

Second, the not-so-center-left Good Jobs First takes the side of the angels in the battle against state tax incentives, with a survey of small businesses called In Search of a Level Playing Field:

A national survey of leaders of small business organizations reveals that they overwhelmingly believe that state economic development incentives favor big businesses, that states are overspending on large individual deals, and that state incentive programs are not effectively meeting the needs of small businesses seeking to grow. 

I think they have this exactly right. It’s not start-ups that get the big deals from the legislature and the Economic Development bureaucrats. It’s the well-connected and wealthy companies that know how to work the system. The rest of us get to pay for it.




Jason Dinesen, The Iowa School Tuition Organization Tax Credit. “Iowa offers dozens of obscure tax credits. The one I get asked about most is the tax credit available for donations to a ‘school tuition organization’ or STO.”

Kay Bell, Maryland issuing court-ordered county tax credit refunds. If you don’t want to repay illegal taxes, don’t collect illegal taxes.

Russ Fox, How to Wynne Your Money Back in Maryland

Paul Neiffer, IRS Provides List of Counties Eligible For Additional Extension on Livestock Replacement

Jim Maule, Taxation of Prizes, Question Two. He quotes a post from a sweepstakes message board:

 I won concert VIP tickets, there is no value on the tickets, so I can’t sell them. If no value is on them, why am I paying taxes on them? 

Mr. Maule explains that there is a value. If there isn’t, then why didn’t the winner give them away?





InsureBlog, Yes, The New York Obamacare Co-op [squandered*] $340 Million. *The actual headline uses a more colorful term.

Robert Wood, Hillary Backs Cadillac Tax Repeal


TaxProf, The IRS Scandal, Day 874. Today’s edition features IRS agents abusing their power on everyday taxpayers. But we can trust them to regulate their tax preparer adversaries, right?

Arnold Kling, Hypocrisy and Cowardice at Brookings. Arnold addresses the firing by the Brookings Institution of Robert Litan, a scholar accused by Senator Elizabeth Warren of “writing a research paper to benefit his corporate patrons.” He is appalled:

1. Robert Litan is one of the most decent individuals in the whole economics profession.

2. Giving Litan’s scalp (sorry for the pun) to Elizabeth Warren does nothing to bolster the integrity of Brookings. It amounts to speaking cowardice to power.

There’s more. The episode is appalling, and it shows the totalitarian tendencies that are barely beneath the surface of Senator Warren’s populism.




Alan Cole, Donald Trump’s Tax Plan Will Not Be Revenue-Neutral Under Any Circumstances (Tax Policy Blog)

Jeremy Scott, Trump’s Tax Plan Is Pretty Much GOP Orthodoxy (Tax Analysts Blog)

Matt Gardner, How Donald Trump’s Carried Interest Tax Hike Masks a Massive Tax Cut for Wealthy Money Managers (Tax Justice Blog)

Peter Reilly, Trump Tax Plan Would Increase Deficit By Over $10 Trillion

Tony Nitti, Love Trump, Hate Romney, But Their Tax Plans Are One And The Same

Renu Zaretsky, Thirty days, goodbye September, shutdown talks—maybe in December. Today’s TaxVox headline roundup covers shutdown politics, plans to use reconciliation procedures to pass bills repealing pieces of Obamacare, and tax Trumpalism.


See you at Hoyt Sherman Place tonight!



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

Tuesday, September 29th, 2015 by Joe Kristan

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

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

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

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

Estonia gets the best scores:

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

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




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

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

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

That’s a reliable way to attract IRS attention.

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

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




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

TaxProf, The IRS Scandal, Day 873


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

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

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


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



Tax Roundup, 9/28/15. IRS logic: A and B are part of set X. A is part of Set X, so B isn’t. And: Blood Moon!

Monday, September 28th, 2015 by Joe Kristan


Flickr image by Sage under Creative Commons license

Flickr image by Sage under Creative Commons license

On further review, it’s silly. I’ve had a weekend to think about last weeks IRS “Action on Decision” to continue trying to collect self-employment tax on Conservation Reserve Program payments in the Eighth Circuit. It’s a poke in the eye of the court, and one that will probably not help the IRS when it inevitably has to defend itself before the Eighth Circuit Court of Appeals.

The gist of the IRS position is that because legislation was enacted in 2008 that specifically stated that CRP payments are payments for renting real estate, and therefore, not self-employment income, to taxpayers collecting Social Security, they suddenly become self-employment income to everyone else.

The Eighth Circuit majority ruled in Morehouse that CRP payments to non-farmers pre-2007 were real estate rentals. Logically, saying that a subset of those payments are real estate rentals shouldn’t by itself make other payments something else. But that’s what the IRS argues.

Unfortunately, the IRS has now made uncertain a seemingly-settled area of the tax law. They did so by taking a position that, if taken by a taxpayer, might trigger negligence penalties. It really is another example of the need for a “Sauce for the Gander” rule that would make the IRS liable to taxpayers for penalties for faulty IRS positions in the same way taxpayers have to pay penalties for bad positions to the IRS.

Prior Coverage at IRS: Post-2007 CRP payments remain self-employment income unless you collect Social Security.


Scott Sumner has posted an outstanding set of tax policy observations: Our bizarre system of taxing capital (Econlog). You really should read the whole thing, but I’ll give you a taste:

It’s difficult to think of a more bizarre and foolish policy than the practice of taxing capital. Consider:

1. If it were appropriate to pay taxes on capital gains, why wouldn’t it be appropriate to pay negative taxes on capital losses? Economic theories tend to be symmetrical. And yet capital losses do not result in negative taxes, except in certain limited cases. And why only those cases?

2. Economic theory suggests that two people with essentially identical economic outcomes should pay identical taxes. But consider two people who both bought 1000 shares of Apple stock for $50/share at the beginning of the year. One sold the shares on November 9th at $100 and bought them back 5 minutes later at the same price. Both held 1000 Apple shares at year-end. To an economist those two outcomes are essentially identical. But one person must pay a large tax on capital gains, while the other does not. Why?

A fan of capital gain taxes would say that just means we should tax unrealized capital gains. Mr. Sumner is not such a fan:

A simpler and fairer solution would be to abolish all taxes on capital, and start over.

But because that would help “the rich,” it isn’t happening. Nothing is too stupid or counterproductive to do to them.


"Blod moon" photos by Jose Guerrero, taken in Columbia. Used by permission.

“Blood moon” photos by Jose Guerrero, taken in Colombia. Used by permission.



A client should not take the finished returns from his/her tax professional and just sign and mail without actually looking at them. The client should carefully review all the forms and schedules that make up the returns before signing the return, and ask the preparer if there is something that he/she does not understand.

And that is the problem with clients who wait until the very last minute — I mean October 15, when no further extensions are available — to finish their tax information. They obviously aren’t going to give the return a good review when they have to immediately sign the e-file authorization or run it to the post office. But if there is something seriously wrong, the IRS isn’t going to take “I didn’t have time to review before filing” as an excuse.


Kay Bell, Electric vehicle tax credits favor the wealthy. You don’t see many Teslas, or for that matter Chevy Volts, in poor neighborhoods.

Paul Neiffer, Involuntary Conversion of Livestock. “If a farmer sells livestock because of consequences of a drought, the payment of income tax on the taxable gain from the sale may be postponed.”

Jason Dinesen, How to Calculate an RMD. If you don’t start withdrawing from your IRA when you hit 70 1/2, the penalties pile up.

Jim Maule, Taxation of Prizes, Question One. “So a person wins a prize, tells the company awarding it that the winner cannot accept it because it will be taxed, creating a liquidity problem, and the company spokesperson says, in effect, ‘Not a problem, it’s not in cash, we won’t send a Form 1099.'”

Peter Reilly, A Slick Estate Planning Trick And Intimations Of Mortality. “The Tax Court decision in the case of Jean Steinberg is a great example of planners taking a rule that is meant to prevent taxpayers from getting away with something and using it to, well, get away with something.”

Russ Fox, Neymar Tax Evasion Investigation Continues; Judge Freezes $48 Million of Assets. Considering how impossible Brazil’s tax system is, it would be surprising if somebody there weren’t guilty of a tax crime.


brazil chart 2


Tony Nitti, House Bill Would Give Tax Deduction, Credit In Exchange For Learning Science And Math. The tax law. Is there anything it can’t do?


Jack Townsend, GE Asks the Supreme Court to Screw Up Again to Bless a BS* Tax Shelter. *Expletive deleted.

Leslie Book, Fifth Circuit Tackles Intersection of TAO Rules and Statutes of Limitation (Procedurally Taxing). “Earlier this week in Rothkamm v US, the Fifth Circuit issued an opinion that considered whether a wife’s application for a Taxpayer Assistance Order (TAO) concerning a recovery of funds levied from her bank account to satisfy her husband’s tax debt tolled the nine-month wrongful levy statute of limitations.”




David Brunori on historic preservation credits ($link): “Nothing says boondoggle like giving rich folks tax dollars to fancy up old buildings.”

TaxProf, The IRS Scandal, Day 870Day 871Day 872. Including musings about how the IRS gagged on Tea Party gnats but swallows Clinton Foundation camels.

Scott Greenberg, Senate Democrats’ Bill Would Overhaul the Treatment of Energy in the Tax Code (Tax Policy Blog):

Currently, nearly every source of energy is subsidized to some extent by the federal government. This means that the U.S. economy is more energy-heavy than it would be under normal market conditions, leading to an inefficient allocation of resources. The Senate Democrats’ bill would continue to heavily subsidize energy production in the United States.

In general, tax expenditures, such as energy subsidies, leave the federal government with less revenue, requiring higher tax rates overall on individuals and businesses.

Anybody who thinks Congress will wisely allocate these subsidies to create our optimal energy use mix for the country hasn’t been paying attention in recent decades.

Renu Zaretsky, A Resignation, and… Resignation. Today’s TaxVox headline roundup covers the implications of Speaker Boehner’s resignation, a politician promising more tax credits! and the sublime awfulness of trying to pay business taxes in Brazil.


News from the Professon. Deloitte Dabbles in Orwellian Tracking Devices (Greg Kyte, Going Concern). “The gadget looks and works like what you would expect if an ID badge had sex with an iPhone.”



Tax Roundup, 9/25/15: IRS: Post-2007 CRP payments remain self-employment income unless you collect Social Security.

Friday, September 25th, 2015 by Joe Kristan

binIRS says not farming is just like farming, for self-employment tax purposes. Last year the Eighth Circuit Court of Appeals ruled that non-farmers are not subject to self-employment tax on conservation reserve program payments received for not planting land. The IRS yesterday announced (AOD 2015-02) that it disagrees with the decision. It said that it will follow the decision only within the Eighth Circuit, and even there only for pre-2008 payments.

The Eighth Circuit panel said that CRP payments are properly treated for non-farmers as rentals from real estate, which are not subject to SE tax. The IRS says it still disagrees, and it said that a 2008 law change “clarified” things (my emphasis):

In addition, the 2008 amendment to section 1402(a)(1) to treat CRP payments made to Social Security recipients as rentals from real estate effective for tax years beginning after December 31, 2007, served to clarify that other CRP payments are not excluded as rentals from real estate. Congress neither enacted a blanket exclusion with respect to CRP payments (or CRP payments made to non-farmers) nor evidenced any disagreement with the analysis of the Sixth Circuit in Wuebker. Although the statutory amendment does not apply to the years at issue in Morehouse, the implication is that prior to the amendment, CRP payments to farmers and non-farmers alike are not excludible from self-employment income as rentals from real estate. If these payments were already excluded as rental payments then the amendment would have been unnecessary. After the amendment, the implication is that CRP payments to farmers and non-farmers alike are not excludible from self-employment income unless made to Social Security recipients.

That conclusion may not go unchallenged. Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation had a different take after the Eighth Circuit decision came down:

For CRP rents paid after 2007, the question is whether the recipient is a materially participating farmer.

That means the IRS can be expected to reject refund claims for SE tax paid by those not receiving Social Security payments. From the AOD:

We recognize the precedential effect of the decision in Morehouse to cases appealable to the Eighth Circuit. Accordingly, we will follow Morehouse within the Eighth Circuit only with respect to cases in which the CRP payments at issue were both (1) paid to an individual who was not engaged in farming prior to or during the period of enrollment of his or her land in CRP and (2) paid prior to January 1, 2008 (i.e., the effective date of the 2008 amendment to section 1402(a)(1)). We will continue to litigate the IRS position in the Eighth Circuit in cases not having these specific facts. We will also continue to litigate the IRS position in all cases in other circuits.

This means the whole issue will assuredly end up back in the courts sooner or later. For now, though, we are on notice that the IRS considers current CRP payments to be subject to SE tax in all circuits.

Robert D. Flach has a fresh Friday Buzz roundup of tax bog posts, with items including the awfulness of the coming tax season, state tax fairness, and the savers tax credit.

TaxGrrrl, 7 Budget & Tax Related Reasons We May Be Headed Towards A Government Shutdown.

Kay Bell, Bartering is a great — and taxable — way to buy and sell. A lack of cash doesn’t mean a lack of tax.

Jim Maule, In What Year Should a Prize Be Reported as Gross Income?. “The question is simple. When a person wins a prize, in what year should the person report the income on the federal income tax return?”

Sheldon Kay, “Judging Litigating Hazards – Another View” (Procedurally Taxing). “He [Keith Fogg] also suggests that Appeals officers “with little or no knowledge of litigation” cannot properly analyze evidentiary questions or properly evaluate hazards of litigation. I respectfully disagree with his assessment.”

Annette Nellen, Challenges of base broadening


Alan Cole, Cadillac Tax Working as Planned on Auto Workers (Tax Policy Blog). ”

The situation above is not a mistake in the Affordable Care Act; rather, it is the Cadillac tax fulfilling both of its intended goals.

The first goal is to encourage substitution from employer health benefits back towards ordinary compensation, like wages and salaries…

The second goal of the Cadillac Tax is to raise revenue.

By delaying the painful parts, the bill fooled enough people long enough to get enacted. Now the rubes are catching on, but it’s too late.

Robert Wood, Bernie Sanders And Republicans Both Urge Cadillac Tax Repeal




TaxProf, The IRS Scandal, Day 869

Norton Francis, The Trouble with State Tax Triggers (TaxVox). “Here’s how a tax trigger works: A state cuts taxes over a period of years. There may be an initial tax cut that takes effect right away but future reductions are tied to some other benchmark, typically (but not always) achieving an overall revenue target.”

Sebastian Johnson, Maine Republicans Double Down on Tax Cut Fervor (Tax Justice Blog).


If only he had been regulated by the IRS. Oh, wait… IRS Agent Busted for Extorting Money From Marijuana Dispensary Owner (High Times, Via the TaxProf)



Tax Roundup, 9/24/15: Small partnership, big late-filing penalties. And: tax tips from the Duke and the Yogi.

Thursday, September 24th, 2015 by Joe Kristan

20150813-1Didn’t file that 1065? The penalties can add up, even for small partnerships. Congress decided a few years ago that late-filed partnership returns could be an IRS profit center. They imposed a penalty of $195 per partner for returns filed even one day late — a penalty repeated for each additional month the return is late. Needless to say, a ten-person partnership can rack up a big bill.

When Congress enacted that penalty, it left in place an escape hatch. Back in 1984, the IRS issued a ruling providing a standard exemption from the late filing penalty for “small partnerships.” Rev. Proc. 84-35 allows partnerships composed only of individuals with straight-up allocations of income and loss to be excused from the late filing penalty. But there’s a catch: the penalties are excused only:

…provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.

A Federal Court in South Dakota this week ruled that this catch means a late-filing small partnership is at the mercy of its least responsible partner to avoid penalties. One late-filing partner can cause penalties for the whole partnership.

Battle Flat, LLC filed its 2007 and 2007 Form 1065s over six months late. It requested a penalty waiver based on Rev. Proc. 84-35. Unfortunately, none of the six partners filed a timely 1040 for 2007, and three of them also filed their 2008 returns late — four years late in one case. The IRS denied the penalty relief because the partnership was unable to demonstrate “that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.”

The partnership argued that the requirement for timely-filed partner returns isn’t a requirement that the statute allows. On brief, the partnership argues:

Congress did not impose or even mention an intent to require that each individual partner’s (sic) must timely file his or her individual return in order for the partnership to qualify for a “reasonable cause” forgiveness of a late filing penalty. But, the IRS has engrafted such a requirement in Revenue Procedure 84-35.

20140321-4The IRS disagrees, and so does the Federal Judge (citations and footnotes omitted, emphasis added):

The IRS’ position is persuasive. Although § 6698 does not expressly impose a timeliness requirement by which partners in a “small” partnership must file their personal income tax return in lieu of filing a partnership tax return, this is exactly the type of interpretative question left to the discretion of the IRS in implementing our nation’s tax laws. The IRS’ interpretation that partners in a “small” partnership timely file their personal income tax returns is reasonable and is a highly practical aid in its assessment of the tax consequences of a partnership for a given year and on a year-over-year basis. IRS’ interpretation is consistent with the legislative history of § 9968 in that it strains credulity to characterize a personal income tax return filed years after the reporting deadline as an adequate, full reporting of each partner’s share of the partnership’s income and deductions.

Conversely, Battle Flat’s interpretation that § 9968’s “reasonable cause” exception is satisfied so long as the partners in a “small” partnership file their personal income tax returns at some unspecified future date is unreasonable. The interpretation would result in a system where the tax consequences of a “small” partnership would go unassessed for years at a time. Furthermore, under Battle Flat’s interpretation, the IRS would be required to track the status of each partner’s personal income tax return until every partner’s tax return was received before it could accurately calculate the annual tax consequences of the partnership.

At least one commentator appears to argue that small partnerships are excused from annual 1065 filing requirements. That’s not how the judge ruled in this case. While this case may be appealed, partners should consider this a warning that the IRS and at least one federal judge aren’t on board with a blanket filing exemption for small partnerships. Considering how fast that $195 per partner, per month penalty can add up, filing timely 1065s for small partnerships seems like a prudent bet.

Cite: Battle Flat, LLC (USDC-SD, No. 5:13-5070-JLV)

Related: Roger McEowen, The Small Partnership Exception – A Possible Way to Avoid Failure to File Penalities, but Not Complexity


Liz Malm, Does Your State Levy a Capital Stock Tax? (Tax Policy Blog):


“In broad economic terms, capital stock taxes (referred to as franchise taxes in many states) are destructive because they disincentivize the accumulation of additional wealth, or capital, which distorts the size of firms.”



If you receive a balance due notice from the IRS or a state tax agency DO NOT AUTOMATICALLY PAY THE AMOUNT REQUESTED!

In my 40+ years of preparing tax returns I have found that more often than not (actually in my experience it is more like 75% of the time) a balance due notice from “Sam” or your state is wrong. And, again in my experience, notices from a state tax agency (at least when it comes to NJ and NY) are wrong more than ones from the IRS.

Robert speaks wisely. As scammers are getting more sophisticated — sometimes even mailing authentic-looking “IRS notices” — this advice becomes even more important.


Jason Dinesen, When Do I Have to Take My RMD? If you don’t start withdrawing from your retirement accounts on time, penalties can be ugly.

Tony Nitti, Tax Court: Drop In Property Value Does Not Create Deductible Loss. You usually have to sell out, as a real estate investor  learned the hard way this week in tax court.


TaxGrrrl, Profiting From Star Wars, Michael Jackson & Taylor Swift Memorabilia: There’s A Tax On That

Russ Fox, Are Turf Rebates Taxable?

Robert Wood, Why Churches Are The Gold Standard Of Tax-Exempt Organizations


Stephen Olsen, Summary Opinions for the Week Ending 8/21/15. It’s the Procedurally Taxing roundup of recent developments in the tax procedure world.

Kay Bell, How charitable are you and your neighbors? “Overall, ALEC’s analysis found that for every 1 percent increase in a state’s total tax burden, there is a 1.16 percent decrease in the state’s rate of charitable giving.”

Peter Reilly, Yogi Berra’s Sayings Worked Their Way Into Tax Decisions.



Renu Zaretsky, A lawmaker’s work is never done. Today’s TaxVox headline roundup ranges from Russian tax revenue problems to improper EITC credits, plus much more.

TaxProf, The IRS Scandal, Day 868


He was a quiet guy, but he seemed a little odd. Peculiar Man Indicted for Tax Evasion (Kansas City InfoZine). “Tammy Dickinson, United States Attorney for the Western District of Missouri, announced that a Peculiar, Missouri, resident has been indicted by a federal grand jury for tax evasion.”



Tax Roundup, 9/23/15: Certified mail > And more!

Wednesday, September 23rd, 2015 by Joe Kristan


certifiedTiming is everything. While electronic filing solves proof of filing questions for many returns, not everything is e-filed. While the IRS “mailbox rule” holds that things mailed by the due date are considered filed on time, it’s up to the taxpayer to prove timely mailing. I recommend Certified Mail with a post office postmark and return receipt requested, though a shipping slip from a “qualified private delivery service” also works.

But not a postmark. A taxpayer sent a petition to the Tax Court, which does provide for electronic filing of petitions. The taxpayer used certified mail, and the date on the mark was on time, but the petition arrived late. That went badly (my emphasis):

In the instant case, the “sender’s receipt for certified mail” was not postmarked by a USPS employee but rather was handwritten by an employee of petitioner’s counsel. Therefore, sending the petition by certified mail afforded petitioner no guarantee of a timely postmark, and he assumed the risk that the postmark would bear a date on or before the last day of the 90-day period prescribed for filing the petition. Unfortunately for petitioner, the “postmark” upon which he relies is superseded by USPS Tracking data, which tracking data serves as a postmark, see Boultbee v. Commissioner, T.C. Memo. 2011-11, and is therefore conclusive in determining whether the petition was timely mailed, see sec. 301.7502-1(c)(1)(iii)(B)(3), Proced. & Admin. Regs. In the instant case, USPS Tracking data demonstrates that the petition was not timely mailed.

The Moral: you want to protect yourself using certified mail, you should make a trip to the post office. Marking the certified mail slip in the office mailroom doesn’t do the job; neither does a postage meter or

Cite: Tilden, T.C. Memo. 2015-188.





I’ve read so many blog posts taking victory laps on Obamacare, but surely something is wrong when our most scientific study of the question rather effortlessly coughs up phrases such as “but most uninsured will lose” and also “Average welfare for the uninsured population would be estimated to decline after the ACA if all members of that population obtained coverage.”  The simple point is that people still have to pay some part of the cost for this health insurance and a) they were getting some health care to begin with, and b) the value of the policy to them is often worth less than its subsidized price.

-Tyler Cowen (Marginal Revolution), The incidence of the ACA mandates

Alan Cole, The Cadillac Tax is Still Probably Raising Deductibles (Tax Policy Blog).  “The news website Vox today covered the issue of rising deductibles in the U.S. health care market. As with their past coverage of the issue, there is a curious omission from the piece: the Cadillac tax.”


Jason Dinesen, The Difference Between Not-for-Profit and Tax-Exempt. “Not-for-profit is a legal term,” but “Tax-exempt is a federal tax term.”

Robert Wood, Who Pays Tax On Business Sale? Ask Warren Buffett. Warren likes taxes paid by other people.

TaxGrrrl, 2015 Tax Season ‘Miserable’ For Many Taxpayers: Will It Get Better In 2016?

Russ Fox, Kiplinger’s Tax-Friendly and Least Tax-Friendly States: Bring Me (Mostly) the Usual Suspects. Iowa’s somewhere in the middle. Delaware is rated best, California worst.


Kay Bell, Senators seek Treasury Secretary’s help in hiking IRS budget. I’m sure they’ll get it.

Peter Reilly, Tax Rules Forbid Churches From Endorsing Candidates, Will IRS Take Action? “If Pope Francis starts “feeling the Bern” will the taxman show up at St. Patrick’s Cathedral?”

Robert D Flach, IT’S NOT ALL OR NOTHING AT ALL. “Once again the idiots in Congress have put off dealing with the now infamous ‘tax extenders’. And once again these idiots will probably extend the entire lot for at least one more year at year-end.”




TaxProf, The IRS Scandal, Day 867

David Brunori, Don’t Be Fooled — Services Should Be Subject to Sales Tax (Tax Analysts Blog) “Most services aren’t subject to sales tax in most states. From a tax policy perspective, that’s no good. The sales tax should fall on all final consumption — preferably at a very low rate. So everything we buy should be subject to tax.”

Howard Gleckman, Senate Democrats Would Take Some Small Steps To Clean Up Energy Tax Breaks (TaxVox) “The government is still picking winners and losers—it is subsidizing clean energy—but at least it would no longer hyper-manage the process by creating one set of subsidies for hydrogen and another for solar panels.”

Matt Gardner, It’s Not the Real Thing: Coca-Cola Hit with $3.3 Billion Tax Bill for Fake “Foreign Income” (Tax Justice Blog).


Cause: The Most (Montana) And Least (Washington) Fair State & Local Tax Systems (TaxProf)

Effect: Crackdown On Luxury Car Owners Dodging Taxes With Montana Registration (CBS Minnesota)


The Dangers of Video Games. PAC man says 1MDB left US$975m loan off the books, suggests fraud (Malaymail Online)


Speak for yourself, buddy. Your Firm’s Website Sucks; How to Help Improve It and Boost Your Career at the Same Time (Brian Swanson, Going Concern).





Tax Roundup, 9/22/15: A resounding call to document your mileage. And: preparer regulation, IRS service, lots more!

Tuesday, September 22nd, 2015 by Joe Kristan


No Walnut STYou know you’re having a bad day in Tax Court when:

After concessions, the remaining issue relating to deductions claimed on petitioner’s Schedule A is whether she is entitled to deduct an additional $1,616 of mileage expense that she claimed as part of her unreimbursed employee business expense deduction. The answer is a resounding no.

I’m pretty sure that the Tax Court judges never read their opinions out loud, so I don’t think it was literally resounding. Still, it’s fun to imagine Judge Marvel calling the court into session, calling out a booming “NO!” and then adjourning.

The “no” may hae been resounding because of a little error the Judge detected in the taxpayer’s evidence. The taxpayer claimed mileage deductions for going between work locations. Travel expenses have to meet the special substantiation requirements of Sec. 274(d), where the taxpayer maintains evidence, such as calendars or mileage logs, to prove the deduction. This taxpayer went through a lot of effort generating a log from her work history. However…

Petitioner testified at length regarding how she prepared the reconstructed log. She testified under oath that she had worked for both ATC and MSN throughout 2007 and carefully explained her work assignments for each employer, including her work assignments for ATC from January through September 2007. Unfortunately for petitioner, the document that ATC provided to her summarizing her work history with ATC shows that she did not start her employment at ATC until October 2007. That document demolished any credibility that petitioner’s reconstructed log and her sworn testimony might otherwise have had. [emphasis added]

The Moral? No matter how much effort goes into reconstructing your unreimbursed work mileage, it doesn’t help you if you didn’t actually have the job.

Cite: Spjute, T.C. Summ. Op. 2015-58




Bryan Camp has a long piece in Tax Notes today ($link) arguing that the IRS can and should “cut and paste” its way into a new preparer regulation regime. I won’t argue the legalisms, though I think if the IRS thought it plausible, it would have tried it already.

I will point out that in an article with 101 footnotes, there is no discussion of additional costs to the taxpayers, or whether the benefits exceed those costs. He discusses evidence that “unregulated” preparers make more errors, and he assumes that regulation will fix the problem. That’s not necessarily so. It’s hard to imagine the perfunctory examination and CPE requirements of the old RTRP program would improved preparation. You can make somebody take a test, but you can’t make them competent.

Mr. Camp also ignores the unintended but predictable effects of the inevitably-increased price of preparation on the quality of tax returns received by IRS. If prep price goes up, more taxpayers will do their own returns, almost certainly at a higher error rate than from paid-for preparation. Other taxpayers will drop out of the system rather than pay higher prep costs.

In short, regulation advocates assume regulation will solve the problems of inaccurate returns. That’s unproven but unlikely. It is likely, though, that it will increase taxpayer costs and push customers away from paid preparers, which creates a new set of problems.

Related: Leslie Book, AICPA Defends CPA Turf and Challenges IRS Efforts to Regulate Unenrolled Preparers (Procedurally Taxing)


buzz20140909Robert D. Flach has fresh Buzz today, with links ranging from silly tax proposals to silly home office deductions.

Paul Neiffer, What About Those AFRs? “Periodically I will get a question from a client asking me ‘How much interest they have to charge on a loan to their child or some other related party?’. ”

Kay Bell, Meet Obamacare deadlines or pay the higher tax price. “If you don’t file last year’s return, you won’t be able to claim an advance premium tax credit to help you pay for your 2016 Obamacare coverage.”

William Perez, What Tax Documents to Bring to Your Accountant?


Tony Nitti, Tax Geek Tuesday: Making Sense Of Partnership Book-Ups. A primer on adjusting capital accounts to reflect the price paid when partners enter or leave a partnership.

Russ Fox, We Don’t Need No Stinkin’ Phone Calls.

So let’s translate this into reality. In the 2013 fiscal year, 22,363,345 phone calls were attempted to various IRS toll-free lines; 15,609,615 were answered (69.8%). In the 2015 fiscal year, 22,013,468 phone calls were attempted to various IRS toll-free lines; 8,277,064 were answered (37.6%). As for the time on hold allegedly decreasing to 23.5 minutes, perhaps that’s after excluding all the time some of the 7 million people who called but whose calls were dropped or who hung up spent on the phone.

I think the IRS cuts in customer service are a sort of “Washington Monument Strategy” of cutting the most visible and useful aspects of taxpayer service to pressure Congress into providing more funds. I’ll believe the IRS is serious about its customer service issues when the IRS takes its 200 employees who spend all of their time doing Treasury Employee Union work and puts them on the phones.

Robert Wood, Let’s Tax Churches. I’m sure that won’t be controversial…

Peter Reilly, The Tax Code Explained & Why It Matters In This Presidential Race (No, It’s Not 70K Pages)

Jack Townsend, Wyly Brothers Seek Bankruptcy Relief from Disgorgement Order from Offshore Shenanigans




TaxProf, The IRS Scandal, Day 866

Martin Sullivan, Donald Buffett? (Tax Analysts Blog). Looking for tax wisdom in all the wrong places.

Renu Zaretsky, Inversions, Schools, and Supermarkets. Today’s TaxVox roundup covers the ground from tax increases in Chicago to tax favors for supermarkets in Baltimore.


Sebastian Johnson, Progressive Era Reform Can Be Anything But Progressive (Tax Justice Blog). “Supermajority requirements and tax and spending limits, two frequently proposed ballot measures, are not designed to promote the well-being of states.”

The point isn’t the well being of the state; it’s the well-being of the citizens.


News from the Profession. Accountant Hiding on the Appalachian Trail Has the Mugshot to Prove It (Caleb Newquist, Going Concern). “If you were an accountant accused of making off with about $9 million of your employer’s money, I can think of few places better to hide than the wilderness.”



Tax Roundup, 9/21/15: If you step away from the Iowa business, Iowa rules say sell within five years.

Monday, September 21st, 2015 by Joe Kristan

20150811-1When you get out of the business, Iowa wants you to really get out.  Iowa has a tough tax environment for business, consistently ranking in the bottom 20% in the Tax Foundation’s Business Tax Climate Index. But there’s a pot of gold at the end of the road for entrepreneurs tough enough to stick it out for at least ten years.

The Iowa Capital Gain Deduction excludes from Iowa tax the capital gains on the sale of the assets of a business, or on real estate used in a business, if the business was held for at least ten years and the taxpayer “materially participated” in the business for ten years at the time of sale. And that’s the catch.

This rule tripped up a Johnson County, Iowa couple this month in the Iowa Court of Appeals. The couple ran a rooming house in Iowa city and ran it full-time from 1981 to 1994 — safely longer than ten years. In 1994 they contracted out the daily operation of the business. The couple continued to pay bills, approve major expenditures and renovations, and perform some maintenance activities. They sold out in 2005.

The “material participation” rules are the same as the federal “passive loss” rules under Section 469. Most of these rules are based on time spent in the business during the year. For example, if you spend 500 hours working in a non-rental business during a year, that means you materially participate.

Several material participation rules apply when a taxpayer retires from the business. One applies only to farmers: if you retire at the time you start collecting social security, and you have materially participated otherwise in at least five of the prior eight years, you are considered to materially participate for the rest of your life. Once you participate in a “personal service” business for three years, your material participation is set for life.

For all other businesses, you are considered to materially participate if you have met one of the hour-based requirements in five of the prior ten years. As a practical matter, that means a retiring entrepreneur who continues to own the business is still materially participating for five years after stepping down.

That’s where the taxpayers here failed the material participation tests. While they easily met the requirement to hold the property for ten years, they were not material participants at the time of the sale. The court held that they failed to prove material participation after 1994. That would mean they would have until 1999 to sell and still be material participants. After that, they failed the five-of-the-last-ten-years test.

The Moral: Taxpayers who step back from an Iowa business shouldn’t wait too long to sell if they want to avoid Iowa capital gains tax. If you meet the ten-year holding period and material participation requirement, you have five years to find a buyer.

Cite: Lance, Iowa Court of Appeals No. 14-1144 (9/10/2015).

Roger McEowen has an excellent discussion of this case for Tax Place subscribers. If you practice Iowa tax regularly, the $150 annual subscription is a great bargain.


Iowa Capital Gain Deduction: an illustration





Hank Stern of Insureblog discusses some Dubious 105 Tricks:

Here’s the concept in a nutshell (emphasis on “nut”):

My employer claims that signing up for this “105 Classic Plan” will allow me to make %30+ of my income tax free. The jist [sic] of it is that they will take $560 per (bi-weekly) pay period out of my check, somehow “make it tax free” and refund most of it back through some vague “loan” that I apparently don’t have to pay back.

This will reduce my income taxes pretty massively… but not only that, the company making my money untaxable claims it will pay 75% of all my out of pocket medical expenses up to $12,000.

It’s sort of an underpants gnome tax plan:

  1. Take money out.
  2. ?
  3. Tax free!

It of course doesn’t work. There is no Tax Fairy.


Russ Fox, A 0% Chance of Success Didn’t Deter Him! “Well, one fact that I’ve mentioned in the past is that IRS Criminal Investigations looks at all allegations of employment tax fraud. The reason is obvious: The IRS doesn’t like the idea of people stealing from them.”

Kay Bell, How do fantasy sports differ from gambling? As far as I can tell, gambling takes less time.

Robert D. Flach, REQUIRED NEW YORK STATE CONTINUING EDUCATION FOR TAX PREPARERS. “To be perfectly honest all of the four-hours of sessions were a total waste of my time.” Senators Hatch and Wyden want to spread the time-waste nationwide.

Peter Reilly, Presidential Race – Let’s Talk Religion Politics And The IRS.

Robert Wood, IRS Delays FATCA To Help Banks, But Offshore Account Disclosures Continue




TaxProf, The IRS Scandal, Day 863864865


TaxGrrrl, Coca-Cola Says IRS Wants $3.3 Billion In Additional Tax Following Audit

Caleb Newquist, Coca-Cola Can’t Beat the Feeling That Its Taxes Are Just Fine (Going Concern). “Coca-Cola Co. is learning that the IRS side of life includes a challenge to its transfer pricing method.”



Tax Roundup, 9/14/15: Hatch, Wyden sneak preparer regulation into ID theft bill. And more!

Monday, September 14th, 2015 by Joe Kristan

No Walnut ST“Bipartisanship” means they’re ganging up on you. UtahPolicy reports: Hatch, Wyden Announce Markup of Bipartisan Bill to Prevent Identity Theft and Tax Refund Fraud. In the 20-item summary of the “Chairman’s Mark,” this is buried as item 15 (my emphasis):

In June 2011, the IRS issued final regulations that established a new class of tax practitioners known as “registered tax return preparers” that it sought to regulate for the prepared by these now unregulated tax return preparers. There is substantial evidence indicating that incompetent and unethical tax return preparers are harming both their clients and the government. Most of the tax returns that involve refundable tax credits are prepared by unregulated tax return preparers.

Since 2011, the D.C. District Court (and the D.C. Circuit affirming on appeal) has prevented the IRS from enforcing these regulations on the grounds that the IRS’ authority to regulate practitioners is insufficient to permit regulation of tax return preparers who do not practice or represent taxpayers before an office of the Treasury Department.

The provision provides the Treasury Department and the IRS with the authority to regulate all aspects of Federal tax practice, including paid tax return preparers, and overrides the court decisions described above.

Preparer regulation wouldn't have bothered Rashia.

Preparer regulation wouldn’t have bothered Rashia.

Of course, increasing preparer regulation does absolutely nothing to fight identity theft.  People don’t go to unregulated preparers to arrange to have their identities stolen. Paid preparers aren’t the people who steal identities. That nasty work is done by others. It’s done by organized crime gangs in the old Soviet Union. It’s done by semi-literate street grifters in Florida. It’s done by street gangs. It’s even done by IRS agents.

Fighting ID theft by regulating preparers is like fighting pickpockets by regulating laundromats. Making tax preparers take a competency literacy test won’t touch the ID theft problem. Nor will crooks stop claiming bad refunds because the IRS wants them to take a test.

Fortunately, a powerful senator makes an impassioned argument against giving the IRS more power over preparers:

“Protecting the private information of taxpayers at the Internal Revenue Service should be of highest importance to the agency and Congress. Unfortunately, as we learned this year, highly valuable information housed at the agency is susceptible to cybercriminals.  Since this threat will not end, Congress should take appropriate bipartisan action to implement needed legislative policies that will better protect taxpayers and shield taxpayer dollars from thieves.”

Oh, I’m sorry, that’s Senator Hatch arguing that this incompetent agency should get more power over preparers. Does he even read his own stuff?

The IRS already has tools to deal with bad preparers, as the weekly parade of injunctions and indictments of preparers attests. What the IRS wants is more power and less of that annoying due-process stuff. It’s supported in this by the large tax prep franchise outfits, one of whose executives wrote the rules that the courts struck down. The big tax prep outfits want to increase barriers to entry to grow their own market share. Big companies can spread the cost of regulatory compliance over a large base of business; a sole practitioner has to absorb the cost alone. An IRS paperwork glitch that can ruin a single preparer does nothing to H&R Block. Regulation always favors the big.

The President’s recent report on excessive occupational licensing notes:

There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing.

They certainly aren’t doing so here. They plan to mark up the bill Wednesday morning. Contact your senator and representative to oppose this IRS power grab on behalf of its friends Henry and Richard.


TaxProf, The IRS Scandal, Day 856Day 857Day 858. Yes, let’s give these people more power over preparers, they’ve shown we can trust them.




Kay Bell, Congress faces a crowded year-end legislative schedule. Not too crowded to find time to help out Henry and Richard.

William Perez, 5 Tips for the 3rd Estimated Tax Payment of 2015. It’s due tomorrow!

Robert D. Flach, MAKE YOUR LIFE EASIER AT TAX TIME BY SAVING ALL COLLEGE INFO NOW. “FYI – beginning with tax year 2016 (for returns to be prepared in 2017) you must have a Form 1098-T in order to claim an education credit or deduction on your Form 1040 (or 1040A).”

Russ Fox, Defalcations Send Randolph Scott to ClubFed. An estate tax attorney decides he needs the money more than the IRS does.

Jason Dinesen, Iowa Society of EAs to Host CPE Extravaganza. October 19 and 20, West Des Moines. “This seminar is open to any tax pro who needs CPE, so CPAs and attorneys are welcome to attend.”

Annette Nellen, Tell me – hot state tax issue of 2015?

Peter Reilly, Jeb Bush Tax Plan Could Disrupt Real Estate And Small Business. “Bush tax plan calls for elimination of business interest deductions.”

Robert Wood, Marijuana Taxes Go Up In Smoke For One Day In Colorado. Isn’t that the point?




Scott Greenberg, Yahoo Spinoff of Alibaba Sheds Light on Problems with the Corporate Tax System (Tax Policy Blog):

These three obstacles – double taxation, legal complexity, and regulatory uncertainty – are present in many areas of corporate tax law, not just Yahoo’s spinoff of Alibaba. And all three significantly hinder American business operations, slowing down economic growth. The ongoing saga of Yahoo is one more example of why fixing the corporate tax code must be a priority of the federal government.  

I would add that Yahoo also ran into a politicized IRS that was under pressure to kill the deal.

Elaine Maag, Tax Subsidies for Childcare Expenses Target Middle-Income Families, Missing Many Poor Parents. (TaxVox)


News from the Profession. This CPA’s Mugshot Will Haunt Your Dreams. (Caleb Newquist, Going Concern).




Tax Roundup, 9/8/15: One Week to the 15th. And: First-world tax payment problems.

Tuesday, September 8th, 2015 by Joe Kristan

20150803-1September 15 is one week away. If you have extended partnership, corporation or trust returns, time is running short. There are many reasons to file on time:

  • Tax elections made on a late return, including automatic accounting method changes, may not count. With all of the “repair regulation” method changes this year, that could be a big deal.
  • If you owe money, late filing turns a 1/2% per month late-payment penalty into a 5% per month (up to 25%) late filing penalty.
  • If you have a pass-through entity, late-filing triggers a $195 per K-1 per month penalty.

Remember to e-file, or to document timely paper filing via Certified Mail, return receipt requested, or with a shipping bill from an authorized private delivery service.


Gretchen TegelerDART: A property tax funded amenity ( Disturbing trends on the inability of the Des Moines-area public transportation service to cover its operations through fares: does appear the service expansions are generating more ridership  However, as was noted last year, property taxes are basically covering the cost of these additional riders. Total operating revenue was 10.1 percent below projections for the year that closed June 30th, 2015; with fixed route operating revenue being 8.65% percent short of budget.

The overall trends have not changed much from a year ago. Total operating revenue is still less than it was four years ago despite substantial service expansions and improvements since that time. Basically, as it weighs future improvements for DART, the community will need to decide if it is willing to continue to raise property taxes to fund them.

The post includes this chart:


That doesn’t include the cost of the recently-completed $18 million Palace of Transit.


TaxGrrrl, Mega-Mansion Attracts Notice By Feds, Results In Criminal Charges:

According to local sources, federal agents flying in and out of Pittsburgh noticed the size and scope of a mansion belonging to Joe Nocito, Sr., and started asking questions. Those questions eventually led to a guilty plea last week from Ann E. Harris, the personal assistant, secretary and bookkeeper for Nocito, in a tax evasion scheme thought to involve as much as $250 million.

If you are a tax evader, it’s unwise to flaunt your wealth, especially to the point of attracting attention from passing aircraft. But maybe that would take the fun out of the thing.




Russ Fox, The Family that Commits Tax Evasion Together Goes to ClubFed Together. “This is yet another reminder for everyone who uses a payroll service to join EFTPS and make sure your payroll deposits are being made. Trust but verify is excellent practice in payroll.”

Kay Bell, Labor Day tax tip: Union dues might be tax deductible

Scott Greenberg, This Labor Day, How High is the Tax Burden on American Labor? (Tax Policy Blog). “In 2014, the average wage worker saw his or her labor income decrease by 31.5 percent due to federal, state, and local taxes, according to the OECD.”

Tony Nitti, Tax Geek Tuesday: Excluding Gain On Sale Of Home, And Recognizing Gain On Repossession

Jason Dinesen, From the Archives: Tax Implications of the Unlicensed Daycare Provider

Jim Maule, “Who Knows Taxes Better Than Me?” Professor Maule notes that Donald Trump’s understanding of tax law and economics might not be all that Mr. Trump thinks it is.

Peter Reilly, From Russia With Built In Losses. “There is a certain irony to the whole thing as it seems like financiers were too focused on looting the US treasury with phony shelters to see the probably larger upside of distressed Russian assets.”

Robert D. Flach, DONALD TRUMP FOR PRESIDENT IS A LOT LIKE OBAMACARE, That isn’t meant as a compliment.




Leslie Book, Tax Court Opinion Reaffirming Validity of Regulations Addressing Foreign Earned Income Exclusion Illustrates Chevron Application (Procedurally Taxing)

Robert Wood, IRS Gets Tax Data From India As Black Money Hunt Hits Americans Too

Jack Townsend, IRS and DOJ Tax Conferences Before Indictment. That doesn’t sound like fun at all.

TaxProf, The IRS Scandal, Day 849850851852


Renu Zaretsky, Deals, Dreams, and Data. Today’s TaxVox headline roundup covers the ground from A (Amazon’s sweet Illinois tax credit deal and Apple’s Irish strategy) to Zaretsky.

Cara Griffith, Why Is It So Hard to Find Information on the Sharing of Taxpayer Information? (Tax Analysts Blog). “Taxpayers are expected to blindly provide massive amounts of information to tax authorities, but are then not allowed to know the process through which one state or municipality shares information with another.”


I’ll make sure not to have this problem when I file in April:

Effective January 1, 2016, the IRS will not accept any payment greater than $99,999,999.00. Two or more checks will be required, or we recommend that the taxpayers use Fed Wire to make their payments.

If I did owe more than $100 million, I would be tempted to write one of the checks for $99,999,999.01, just to see if they are serious. Not to give away my income secrets, but I’m pretty sure my 2015 taxable income will spare me the temptation.

Cite: Announcement 2015-23.



Tax Roundup, 9/4/15: Labor day and the Earned Income Tax Credit. And more three-day weekend goodness!

Friday, September 4th, 2015 by Joe Kristan

20140711-2Happy Labor Day!  While getting ready to put in your token appearance at work today before you head for the lake, you may want to ponder the hot “labor” issue of the moment — the minimum wage and its alternatives.

In spite of claims otherwise by supporters, a minimum wage has to cause job losses for the least skilled and connected. That’s part of what it was originally meant to do. If raising the price of wages didn’t affect how much labor is purchased, you could set a $100 per hour minimum wage. That, is, of course, absurd. So advocates have to argue that somehow small increases in the minimum wage are worth the job losses because of the benefits for those who keep their jobs, or that there are no job losses.

Recognizing the weakness of these arguments, many economists argue that an increased Earned Income Tax Credit is a better way to support the working poor.   For example, in The minimum wage versus the earned income tax credit for reducing poverty, Cornell University economist Richard V. Burkhauser states:

Introducing or increasing a minimum wage is a common policy measure aimed at reducing poverty. But the minimum wage is unlikely to achieve this goal. While a minimum wage hike will increase the wage earnings of some poor families and lift them out of poverty, some workers will lose their jobs, pushing their families into poverty. In contrast, improving the earned income tax credit can provide the same income transfers to the working poor at far lower cost. Earned income tax credits effectively raise the hourly wages only of workers in low- and moderate-income families, while increasing labor force participation and employment in those families.

The argument for a perfect earned income tax credit is compelling, but the credit is far from perfect. It is estimated that around 25% of the Earned Income tax credit paid out is paid improperly, including billions in fraud. Earned income tax credit fraud is a big part of the business of corrupt preparers. Many other taxpayers who could properly claim it fail to because of its complexity.

Even if the waste and fraud problem could be solved or overlooked, a properly-functioning EITC is still a poverty trap. The credit phases out as incomes rise, creating a high effective marginal tax rate on each additional dollar earned by a low-income family. It provides help at low income levels, but it discourages improving those income levels.

eic 2014

The marginal tax rates get even worse when phase-outs of other income-based benefits are taken into account.

welfare benefits marginal rate

Chart via the Mises Institute


Arnold Kling is a proponent of a “Universal Benefit” providing everyone a basic amount of income in place of the current array of welfare benefits:

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

I’m not entirely convinced that giving everyone a benefit is wise, but it may be a better idea than what we have. It deserves consideration before we concede that a fraud-ridden and complicated EITC is the best we can do for the working poor.


Jared Walczak, Location Matters: Effective Tax Rates on Call Centers by State (Tax Policy Blog). California is a surprisingly cheap place for this.




buzz20150804Robert D. Flach brings today’s Buzz roundup from the National Association of Tax Professionals Tax Forum in Philadelphia. Today he links to posts about small business survival tips and the flight of taxpayers from New York state.

Jason Dinesen, Glossary: Hobby Loss Rules, “This is important because deductions for hobbies are limited, whereas deductions are (generally) unlimited for business activities engaged in with a for-profit motive.”

William Perez, What the Recent Uber Worker Classification Ruling Means for Tax Professionals. It has tax implications that William ably discusses, but what it really means is that the government wants to protect well-connected taxi monopolies.

Kay Bell, Uncle Sam to pay $133 million to protect OPM hack victims. But at least they won’t send you a 1099 for the “value” they provide.

Robert Wood, IRS Offshore Account Penalties Increase, Hunt Continues. Offshore bank account secrecy is pining for the fjords.

Jack Townsend, Another Swiss Bank Obtains NPA Under DOJ Swiss Bank Program

Peter Reilly, Presidential Candidate Tax Plans Coming In Slow.


TaxProf, The IRS Scandal, Day 848. Today the prof links to a John Hinderaker post that includes this:

So someday–not any time soon–the IRS will finally be forced to answer the question that Koch Industries asked it five years ago, in 2010. The Obama administration’s strategy is always the same–stonewall, assert every possible theory, no matter how frivolous, and try to run out the clock. Whether an honest answer to the question will be given, years after the fact, is of course another question.

It’s worked for the IRS and the administration so far.




Howard Gleckman, Why Individual Tax Revenues Will Grow Even If Congress Doesn’t Raise Taxes (TaxVox):

Since 1985, income tax brackets have been adjusted for inflation so that someone whose annual raise tracks the Consumer Price Index is not thrown into a higher tax bracket. However, that adjustment doesn’t fully protect rising income from higher taxes.

In part, that’s because some key parts of the income tax are not indexed. They include the child tax credit, the surtax on net investment income, and the income ceiling for making contributions to Individual Retirement Accounts. But the real problem is that when income grows faster than inflation, it is pushed into higher tax brackets.

When they say the want to just soak the rich, that’s just to fool the rubes. It’s your pocket they want to pick.


Jenice Robinson, H&R Block Uses Corporate Lobbying Might to Make Sure the Poor Use Its Services. (Tax Justice Blog)Earned Income Credits are involved.


Career Corner. Please Don’t Be Like This Accountant Who Got Scammed Over Email (Caleb Newquist, Going Concern). “Yeah, it’s a little sloppy that a single email from a CEO along with a lone signature over a company seal would be enough to wire $737k.”



Tax Roundup, 8/31/15: Low income taxes don’t mean high excise taxes. And: planning for President Bernie.

Monday, August 31st, 2015 by Joe Kristan


I would expect states without an income tax to have high excise taxes, but it’s not so. Liz Malm, How Much Does Your State Collect in Excise Taxes Per Capita? (Tax Policy Blog).


Minnesota, with ridiculously high tax rates, also is the third biggest excise tax collector. South Dakota, with no income tax, is only the 26th highest.


TaxProf, The IRS Scandal, Day 842843844. There is a lot about the current administration’s approach to transparency. An administration that promised to be “the most transparent in history” resists every information request, even when there is no obvious reason to do so. It is cynical and effective. If after a long fight they finally turn over information that shows no evidence of wrongdoing, they make the investigators look silly. And when wrongdoing does come out, the administration says it’s “old news” — because they did their best to make it so.

More on this from John Hinderaker, Obama’s Stonewall Tactics: A Case Study (Powerline Blog), on the ongoing effort to determine whether administration officials illegally accessed the tax information of the Koch brothers for political reasons.

Related: Russ Fox, Sergeant Schultz to the Rescue!




Peter Reilly ponders Tax Planning For The Risk Of A Bernie Sanders Win. He makes the Vermont socialist sound moderate with this:

The funniest thing about the tax proposals is that this candidate who is as far left as you can go without getting into Green Party territory is promoting a  tax package that would pretty much bring us to the second half of the Reagan administration  when it comes to income and estate tax.

So Bernie Sanders favors a maximum 28% individual rate? No evidence for this in the article. In fact, his campaign, like most of them, offers little specific in the way of tax policy. What it does offer is awful — taxing offshore earnings of U.S. companies, confiscatory estate tax rates, and a financial transactions tax that will only drive trading overseas while making markets less efficient and more costly. I started tax practice in the second half of the Reagan administration, and I’m pretty sure that a Sanders administration tax system would not dramatically lower individual tax rates.

That said, Peter’s article does offer some sound tax planning tips, many of which are worth considering regardless of who wins the White House next year.


Jason Dinesen, Due Date of Iowa Partnership and Corporate Tax Returns Unchanged. The Department of Revenue says these will be Due April 30, despite federal due date changes.

Kay Bell, Cadillac tax repeal on Senate’s post-recess to-do list.

Keith Fogg, Time Stands Still for Snow – Expanding Section 7503 on the Last Day to Timely Complete a Task. The issue in this case is interesting: whether a Tax Court petition is considered late if it is delivered late because the Tax Court is closed for weather. It also reinforces the importance of buying the correct delivery method when using an authorized private delivery service.




Robert Wood, Trump As Tax Code King And Hedge Fund Slayer. He’s a floor wax. He’s a dessert topping. He’s whatever you hallucinate him to be.

TaxGrrrl, Ho, Ho, Oh No! Santa’s Office Threatened With Closure Due To Tax Woes. Well, I never understood his business model.

Jack Townsend, Interest and Penalties Issues At Sentencing


Renu Zaretsky, Thirty Days Hath September: Stay tuned for tax plans to remember? The TaxVox headline wrapup talks about taxes in the election campaign and Brazil abandoning a planned financial transaction tax. Brazil is a leftist country with a soul-sucking business tax system. Even they realize a transaction tax is unwise, making them more sensible than Bernie Sanders.




Tax Roundup, 8/26/15: The Twins defeat the IRS, so IRS may try to change the rules. Also: EITC fraud, and more!

Wednesday, August 26th, 2015 by Joe Kristan

20150826-2The Minnesota Twins have won five in a row. Six, if you count a recent IRS victory by the family that owns the ballclub. It is recounted by Ashlea Ebeling, Estate Of Late Minnesota Twins Owner Carl Pohlad Settles With IRS (via the TaxProf):

The main issue in the estate tax case was how to value Pohlad’s stake in the Minnesota Twins at the time of Pohlad’s death in January 2009 (he was 93). The Pohlad estate valued it as just $24 million for tax purposes, while IRS auditors pegged it at $293 million. Pohlad used typical wealth transfer techniques to limit estate taxes: splitting ownership and control of assets to theoretically reduce what an unrelated buyer would pay for them. 

But the administration doesn’t approve of valuing split interests based on their actual value:

Estate planning with family entities (family limited partnerships and limited liability companies) and the accompanying availability of valuation discounts is in the spotlight. Advisors have been warning clients all summer that the Treasury Department may be coming out with proposed regulations curtailing discounts by next month, and that the new rules could be effective immediately.

That will surely lead to litigation, as it isn’t clear the IRS has that power. It does add great uncertainty to succession planning, which is uncertain enough to begin with.




The St. Louis Post Dispatch reports on tax preparers indicted on allegations of earned income tax credit fraud. The charges say the operators of a business known as Tax King are alleged to have:

…trained Tax King employees how to falsify certain information to maximize returns.

Clients, for example, were allegedly encouraged to fill in false business information in order to qualify for earned income credits. They were allegedly also instructed to submit false education expenses, as well as inaccurate information regarding fuel taxes in order to qualify for tax credits.

Up to 25% of earned income tax credits are paid “improperly.” We are regularly assured that “improperly” doesn’t mean “fraudulently.” Taxes are hard, and all that. Well, if they aren’t stolen, it’s not for lack of effort.


William Perez, What to Do if You Contributed Too Much to Your Roth IRA. “There are four ways to fix this problem that are all pretty straightforward.”

TaxGrrrl, Making Sure You Eat: Paying Yourself As A Small Business Owner

Tony Nitti, Tax Geek Tuesday: Understanding Partnership Distributions, Part II –The Mixing Bowl Rules. “If a partner contributes property with a built-in gain or loss to a partnership and the partnership later distributes the property to a partner other than the contributing partner within seven years of the contribution, the contributing partner recognizes gain or loss equal to the built-in gain or loss…”

Kay Bell, NRA lawsuit takes aim at Seattle’s new gun and ammo taxes. A “gun violence” tax on guns and ammo makes as much sense as “drunk driving tax” on all alcohol purchases. It doesn’t tax what it purports to tax.

Peter Reilly, About That Kenneth Copeland Mansion You Saw On John Oliver. On abusive parsonage allowances.

Carl Smith, Tenth Circuit Hook Opinion: Interest and Penalties Must Also Be Paid to Satisfy Flora Full Payment Rule (Procedurally Taxing).  You can’t sue for a refund of a tax you haven’t paid.

Jack Townsend, Category 2 Banks under DOJ Swiss Bank NPA Program. A listing of the Swiss banks that have cut deals with the U.S. tax authorities.



Scott Greenberg, Four Tax Takeaways from the Most Recent CBO Report (Tax Policy Blog).

Over the last fifty years, on average, the federal government has collected 17.4% of GDP in revenues. Yet over the next ten years, the federal government is expected to take in 18.3% of GDP in revenues, nearly a whole percentage point higher than the historical average. The CBO forecasts that, in 2016, the federal government will collect 18.9% of GDP in taxes, higher than any year since 2000.

I don’t think that’s a good thing.


Howard Gleckman, Should College Endowments Be Taxed? (TaxVox).

But why not just make the endowments taxable and use some of the huge revenue windfall to boost tuition assistance and other supports for those students who really need it?

Maybe taxing amounts that aren’t used to reduce tuition. A rich university shouldn’t be saddling its students with debt — or asking for more federal subsidies — while its money managers are living high.


TaxProf, The IRS Scandal, Day 839. Toby Miles figures prominently.

Robert Wood, IRS Reveals Lois Lerner’s Secret Email Account Named For Her Dog.


The dangers of premature tweeting:


Oops. An hour later, the Dow closed down another 204 points.


Jim Maule, A Rudeness Tax?:

Modern American tax policy, which is in tatters, is of such a wrecked nature that it is only a matter of time before someone proposes a refundable politeness credit. The form would be fun, would it not? “How many times during 2017 did you hold a door open for another person?” Even better, the audits and the Tax Court litigation.

Prof. Maule is right: not every problem is a tax problem. Yet the politicians propose a tax solution for every problem anyway.



Tax Roundup, 8/25/15: Capital losses, your portfolio disaster silver lining. And: Introducing Toby Miles!

Tuesday, August 25th, 2015 by Joe Kristan
Flickr Image courtesy donjd2 under Creative Commons License.

Flickr Image courtesy donjd2 under Creative Commons License.

So how’s the market doing? Recent days have been unkind to many stock portfolios. Can you make tax lemonade out of the sour lemons in your portfolio?

Let’s make clear that I am in no way saying you should sell your losing stocks right now. If I were smart enough to call the market, you wouldn’t find me doing tax returns in Des Moines in January, as lovely as it is. But I can explain what stock losses do to your income taxes, and how to do it.

First, tax losses are generally useful only when they occur in a taxable account. If your IRA or 401(k) portfolio takes a hit, you are normally out of luck.

Second, you have to actually sell the losing stock to deduct a loss. Just as you don’t pay taxes on appreciated stocks you don’t sell, you don’t get to deduct losses on shares you don’t cash out.

Third, you can’t buy back the shares you sell at a loss for 30 days, under the “wash sale” rules. So if you think that loser is going to bounce back right away, you can’t just buy back other shares of the same stock you sold at a loss if you want the deduction. Nor can you buy the other shares of the same stock in the 30 days before you take the loss. The IRS says buying the offsetting shares in a nontaxable IRA account also triggers wash-sale disallowance.

Finally, individuals may only deduct their capital losses to the extent of capital gains (long-term or short-term), plus $3,000 ($1,500 for married-filing-separately taxpayers). That means you get no tax benefit from overdoing taking losses; the excess of losses of $3,000 carries forward to offset future taxable gains.

But if you have cashed out gains already in your taxable portfolio, it may make sense to sell enough losers to offset the gain, if you have them. Otherwise, you are in effect paying tax on the gains voluntarily — assuming you can live without the loser stock for 30 days.


TaxGrrrl, As Stocks Tumble, Understanding When A Loss Isn’t Really A Loss, Topic 409 – Capital Gains and Losses



Toby Miles, IRS.

Toby Miles, IRS.

TaxProf, The IRS Scandal, Day 838. Today’s installment links to revelations of another Lois Lerner personal account used to conduct official business:

“In addition to emails to or from an email account denominated ‘Lois G. Lerner‘ or ‘Lois Home,’ some emails responsive to Judicial Watch’s request may have been sent to or received from a personal email account denominated ‘Toby Miles,’” Mr. Klimas told Judge Emmet G. Sullivan, who is hearing the case.

It is unclear who Toby Miles is, but Mr. Klimas said the IRS has concluded that was “a personal email account used by Lerner.”

The linked Washington Times story also has this:

The use of secret or extra email accounts has bedeviled the Obama administration, which is has tried to fend off a slew of lawsuits involving former Secretary of State Hillary Rodham Clinton and her top aides, the White House’s top science adviser, top Environmental Protection Agency officials and the IRS.

That’s not quite right. It’s not the use of the email accounts that has “bedeviled” the administration. Enough have come to light to make clear that such use is standard operating procedure. It’s the getting caught that does the bedeviling.




Paul Neiffer, IRS Delays New Inherited Property Reporting Requirements Until February 2016. Statements showing the basis of inherited property will not have to be filed with the IRS before the end of February, 2016, at the earliest.

Russ Fox, How to Commit Tax Fraud 101. “Until the IRS makes it far more difficult for the fraudsters, this epidemic will continue. As I’ve said, why rob banks?”

Robert D. Flach, TRY TO REMEMBER . . . End of summer tips on home mortgage interest, alternative minimum tax, and more.

Robert Wood, 10 Ways Trump Is Right About Taxes. When you say random things without regard to other random things you’ve already said, you are likely to be right occasionally. Unlike Mr. Wood, I think the “hedge fund loophole” talk is foolish nonsense.

Kay Bell, Trump trashes tax breaks for ‘paper pushing’ money managers. Featuring the Trump Squirrel.

Peter Reilly, Sending IRS Against Phony Churches Is Bringing A Knife To A Gun Fight. “Fundamentally the IRS cannot base its enforcement actions on the content of an organization’s beliefs.”



Stephen Olsen, Summary Opinions for July (Procedurally Taxing). Coverage of recent happenings in tax procedure.

Jason Dinesen, Does a Sole Proprietorship Need a Balance Sheet? Technically, no, but it’s foolish not to keep one.

Career Corner. Former Ryan Principal Made a Helluva Career Limiting Move (Caleb Newquist, Going Concern).