Posts Tagged ‘Robert D Flach’

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

Tuesday, December 17th, 2013 by Joe Kristan

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

 

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

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

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

 

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

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Iowa gets a B+:

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

 

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

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

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

 

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

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

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

 

William Perez, IRA Distributions at Year End:

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

Basic, but missed surprisingly often.

 

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

Russ Fox,  Health Care Fraud Leads to Tax Charge

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

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

TaxProf,  The IRS Scandal, Day 222

 

Grab a Tuesday Buzz from Robert D. Flach!

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

 

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Tax Roundup, 12/12/13: Take the $20 million edition. And: Grassley says extenders will pass in 2014.

Thursday, December 12th, 2013 by Joe Kristan

 

20131212-1Next time, take the cash.  A corporation decided a tax deduction from walking away from securities it had paid $98.6 million for would be worth more than the $20 million in cash it had been offered for them.  The Tax Court yesterday told them that they made a big mistake.

Gold Kist, Inc. bought the securities issued by Southern States Cooperative, Inc. and Southern States Capital Trust in 1999.  The issuers offered to redeem the securities from Gold Kist in 2004 for $20 million.  (Gold Kist was later acquired by Pilgrims Pride Corp, which inherited Gold Kist’s tax history.)

Gold Kist believed that it would get an ordinary loss deduction if it simply abandoned the securities, vs. a capital loss on the sale.  Ordinary losses are fully deductible, while corporate capital losses are only deductible against capital gains, and they expire after five years.    A $98.6 million ordinary loss would be worth about $34.5 million in tax savings, which would be worth more than $20 million cash and a capital loss, which can only offset capital gains, and only those incurred in the nine-year period beginning in the third tax year before the loss.

Unfortunately, the Tax Court found a flaw in the plan: Sec. 1234A.  It reads:

§ 1234A – Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—

(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,

shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

The taxpayer said that Sec. 1234A didn’t apply, according to the court:

Petitioner’s primary position is that the phrase “right or obligation with respect to property” means a contractual and other derivative right or obligation with respect to property and not the inherent property rights and obligations arising from the ownership of the property. We disagree.

The taxpayer said the legislative history of the section supported their argument.  The Tax Court thought otherwise:

In our view Congress extended the application of section 1234A to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer or would be if acquired by the taxpayer, including not only derivative contract rights but also property rights arising from the ownership of the property. 

The taxpayer also said that if that’s what Congress meant, the IRS would have revised Rev. Rul. 93-80, which allows an ordinary loss on certain abandonments of partnership interests.  The Tax Court responded:

The ruling makes clear that, if a provision of the Code requires the transaction to be treated as a sale or exchange, such as when there is a deemed distribution attributable to the reduction in the partner’s share of partnership liabilities pursuant to section 752(b), the partner’s loss is capital. Rev. Rul. 93-80, supra, was issued four years before section 1234A was amended in 1997 to apply to all property that is (or would be if acquired) a capital asset in the hands of the taxpayer. As we previously stated, the Commissioner is not required to assert a particular position as soon as the statute authorizes such an interpretation, whether that position is taken in a regulation or in a revenue ruling. 

So it’s a capital loss only for the taxpayer.

Presumably the Gold Kist board didn’t decide to go for the ordinary loss on its own.  Somewhere along the way a tax advisor told them that this would work.  That person can’t be very happy today for advising the client to walk away from $20 million in cash.

Cite: Pilgrim’s Pride Corp, 141 TC No. 17.

 

Grassley-090507-18363- 0032Quad City Times reports Grassley predicts tax credits extensions, but not until 2014:

 There won’t be any extension before Christmas, Grassley predicted, but not because of political opposition to the credits. Based on past performance, he said, Congress will return after the New Year and approve four dozen or more tax credits.

“There are a lot of economic interests” represented in the tax credits, he said. Those interest groups collectively “put a lot of pressure on Congress to re-institute the credits.”

The delay, Grassley said, can be attributed to the ongoing discussion about “massive tax reform.”

Senator Grassley has more insight about what will happen than I do, but I can”t share his faith that the lobbyists will overcome Congressional dysfunction.  I had hoped any extenders would be included in the budget deal announced this week, and they weren’t.

Actually, I would prefer that the extenders not be extended at all rather than passed temporarily once again.   The whole process of passing temporary tax breaks is a brazen accounting lie.  Congressional budget rules score temporary provisions as if they will really expire, even when they have been extended every time they expire.  Once again, behavior that would lead to prison in the private sector is just another day in Congress.

 

Roberton Williams, Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More:

The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes. 

 

David Brunori, States Should Just Say No to Boeing (Tax Analysts Blog):

Boeing is acting rationally — politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.

Well, it would be hard to respect them less.

 

 

Source: The Tax Foundation

Source: The Tax Foundation

William McBride, Obama: Cut the Corporate Tax Rate to Help the Poor (Tax Policy Blog):

Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere?

Corporate rate cuts would be a good thing, but don’t forget that most business income nowadays is reported on individual returns.

 

Joseph Thorndike, Congress Is Making a Bad Deal on the Budget, but One Republican Has a Better Idea (Tax Analysts Blog)

It’s amazing what passes for success in Washington these days. Budget negotiators on Capitol Hill have delivered a non-disaster, cobbling together a pathetic half-measure that pleases no one and accomplishes almost nothing.

True, it allows Democrats and Republicans to avoid abject failure, which is no small thing, given recent history. These days, just keeping the wheels from flying off qualifies as statesmanship.

Considering what happens when Congress “accomplishes” something (Obamacare, anyone?), let us praise them for doing as little as possible.

 

Robert D. Flach has wise counsel for clients:  PUT IT IN WRITING.

So if you have a tax question you want to ask your preparer, instead of picking up the phone submit the question in an email, with all the pertinent facts.  And if you receive a notice from the IRS or your state, mail it to your tax pro immediately.

Yes.

 

William Perez, Donating Appreciated Securities to Charity as a Year-End Tax Strategy

Paul Neiffer, Is it Time for an IC-DISC.  If you produce for export, an IC-DISC can turn some ordinary income into dividend income, taxed at a lower rate.

Tony Nitti, IRS The Latest To Send Manny Pacquiao To The Mat: Boxer Reportedly Owes $18 Million

Kyle Pomerleau, Senator Baucus’s Plan for Cost Recovery Heads in the Wrong Direction

TaxProf, The IRS Scandal, Day 217

Cara Griffith, Improving the Transparency of New York’s Tax Collection Process (Tax Analysts Blog)

Jack Townsend, Are Brady Violations Epidemic?  A federal appeals judge says prosecutors routinely withhold evidence that would help defendants.

 

News from the Profession: The PCAOB Is Grateful To The PCAOB For the PCAOB’s Work (Going Concern)

 

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Tax Roundup, 12/11/13: Iowa DOT restricts revenue cameras. And: whither extenders?

Wednesday, December 11th, 2013 by Joe Kristan


gatso
Department of Transportation enacts tax reduction.  
From the Des Moines Register:

Cities and counties would have to prove the need for traffic enforcement cameras on major highways under rules approved Tuesday by the Iowa Transportation Commission.

The new rules — which could take effect as early as February — would force a re-evaluation of all speeding and red-light cameras now placed on interstate highways, U.S. highways and state highways and require any new cameras to first win the Department of Transportation’s approval.

It’s not clear what effect this will have on the revenue cameras, like the one on Eastbound I-235 by Waveland Golf Course, but given the howls from the affected municipal pickpockets who profit from the cameras in the runup to the rules, I suspect it means fewer cameras.   The municipalities like their tax on passing motorists, at least those who aren’t “special.”

Of course they always invoke safety, in spite of inconclusive or contradictory evidence.  But if it really were about safety, you would see them experimenting with other solutions, like all-red phases at red lights and longer yellows.   When they have to say it’s not about the money, it’s about the money.

 

Howard Gleckman,  Whither the Tax Extenders? (TaxVox):

If published reports are correct–and if the deal does not fall apart–Congress would partially replace the hated automatic across-the-board spending cuts (the sequester) with more traditional targets for each federal agency. In effect, it would freeze discretionary spending at about $1 trillion-a-year for the next two years. Without a new agreement the 2014 level would be $967 billion.

The deal would replace the sequester cuts with a grab-bag of other reductions in planned spending and a bunch of increased fees for airline travelers and others.

But the “t” word will go unspoken in this agreement. There will reportedly be no tax hikes in the bargain. But neither will there be a continuation of expiring provisions. And there is no chance they will be extended in any other bill in calendar 2013.

That likely means no action on the “expiring provisions” until after the 2014 elections.  That means we might not know whether a bunch of tax breaks we have gotten used to will be extended into 2014 until next December, or maybe even later.  A few of the biggies:

  • The Section 179 limit on expensing otherwise depreciable property falls to $25,000 next year, from the current $500,000, absent an extender bill.
  • 50% bonus depreciation goes away.
  • The research credit disappears, as do a bunch of biofuel and wind credits.
  • The current five-year “recognition period” for built-in gains in S corporations goes back to ten years, from the current five-year period.

My money is still on an extension of these provisions, effective January 1, 2014, even if enacted later, but my confidence is wavering.

 

20121220-3William Perez, Selling Profitable Investments as Part of a Year-End Tax Strategy. “Taxpayers in the two lowest tax brackets of 10% and 15% may especially want to consider selling profitable long-term investments.”  Why?  Zero taxes on capital gains, as William explains.

Tony Nitti, Tax Geek Tuesday: Tax Treatment of Commuting Costs   

Kay Bell, Standard tax deduction amounts bumped up for 2014

Jana Luttenegger, 2014 Mileage Rates (Davis Brown Tax Law Blog)

Jason Dinesen, Philosophical Question About Section 108, Principal Residences and Cancelled Debt  “My question is. what if the homeowner moves out before the foreclosure process is complete?”

TaxGrrrl, You’re A Mean One, Mr. Grinch: Christmas Tree Tax Proposal Returns 

Russ Fox,  Bank Notice on IRS Tax Refund Fraud.  ”While I salute the IRS (and the banks) for doing something, this effort is equivalent to patching one hole in a roof that has over a hundred leaks.”

Robert D. Flach offers SOME GOOD CONVERSATIONS ON TAX PROFESSIONAL ISSUES

 

 

Leslie Book,  TEFRA and Affected Items Notices of Deficiency (Procedurally Taxing).  ”In this post, I will attempt to give readers a map as to how IRS can move from shamming a partnership-based tax shelter to assessing tax against the partner or partners that were attempting to game the system.”

 

Kyle Pomerleau, High Income Households Paid an Effective Tax Rate 16 times Higher than Low Income Households in 2010 (Tax Policy Blog).  He provides more commentary on a recent Congressional Budget Office report (my emphasis):

In 2010, the average effective tax rate for all households was 18.1 percent. This is the average combined effective rate of individual income taxes, social security taxes, corporate income taxes, and excise taxes. The top income quintile paid an average effective tax rate of 24 percent.  The lowest quintile had an average effective rate of 1.5 percent. The top quintile’s effective tax rate of 24 percent is 16 times higher than 1.5 percent for those in the lowest quintile.

cbo rates by income group

This is why any federal tax cut “disproportionately benefits the wealthy.”  You can only cut taxes for people who pay taxes.

 

The Critical Question: When Does the Conspiracy End? (Jack Townsend)

News from the Profession: Deloitte Associate Exercises Powers of Persuasion; Scores Firm-Subsidized Xbox One (Going Concern)

 

20131211-1Atlanta county gives money to prosperous media company.  Cobb County, Future Home of the Atlanta Braves, Strikes Out (Elia Peterson, Tax Policy Blog, my emphasis):

The county is projected to have to finance around $300 million for the development.  This includes a one-time $14 million transportation improvement subsidy, a $10 million commitment from the Cumberland Community Improvement District (CID), and payments worth $276 million of a bond issue. The bonds are financed by redirecting funds from two existing taxes (hotel & property taxes) and creating three new revenue sources (a rental car tax, a property tax in the Cumberland CID, and a hotel fee) combined to the tune of $17.9 million annually for the next 30 years.

Liberty Media, the owner of the Braves, despite being a very successful company (owning stakes in SiriusXM, Barnes & Noble, and Time Warner) had their investment subsidized by Cobb County taxpayers. Liberty Media retains most of the rights to the stadium and profits while Cobb County gets next to nothing except the promise of “surefire” economic development (the city won’t even be allowed access to the stadium they built except for special occasions).

Build it and you can’t come!

 

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Tax Roundup, 12/9/2013: Denison! And 56 cents a mile for 2014.

Monday, December 9th, 2013 by Joe Kristan

The Tax Update is in sunny, but very cold, Denison, Iowa today.

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I’m participating in the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School here.  The only remaining session is in Ames next Monday, so register now!

 

The IRS has issued updated standard mileage rates for 2014:

- 56 cents for business travel (down from 56.5 cents for 2013);

- 23.5 cents for medical travel;

- 14 cents for charitable travel.

Gas is down.  (Notice 2013-80)

Related: Paul Neiffer, IRS Almosts Eliminates the 1/2 cent

 

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

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

Mickey Kaus, Big Obamacare payoff for tax cheats?:

Doesn’t Obamacare create a big new incentive to fudge your income on your tax returns? The subsidies available on the health care exchanges seem to be based on adjusted gross income (line 37 on Form 1040)– and there’s a huge, conspicuous difference between the subsidy available at, say, a $25,000 income and a $46,000 income. (The subsidy cutoff of is $45,960 for a single person). In California, for the “bronze” policy I’m interested in, at $46,000 I’d pay $507 a month. At $25,000 I’d pay … $63. A difference of $444 a month.

I have mentioned quite often the high hidden marginal rates caused by the phase-out of the earned income tax credit.  The Obamacare subsidy phase-outs worsen this.  The government pays you to stay poor, or to cheat on your taxes if you aren’t poor anymore.  You get what you pay for. (via Instapundit)

William Perez,  Year End Review of Choice of Business Entity. “There is definitely no one-size-fits-all answer when it comes to deciding on an appropriate tax structure for a business.”

Margaret Van Houten, What our Estate Planning Clients Need To Know – What are Digital Assets? (Davis Brown Tax Law Blog).  On the importance of including “digital assets” in your estate planning.

Kay Bell,  Freezing? Home improvements provide warmth, tax savings

Jason Dinesen, Colorado Tax Guidance for Same-Sex Marriage 

Tony Nitti, IRS Addresses Deductibilty Of Organizational And Start-Up Costs Upon Partnership Technical Termination 

 

 

Lyman Stone, Missouri Gives In With $2 Billion Incentive to Boeing.  Missouri taxes its residents and existing businesses to give cash to an insider with good lobbyists.

How do you know that the new proposed 501(c)(4) regulations are designed to silence right-side speech?  The left-side advocacy groups have dropped their lawsuit demanding the IRS enact regulations to silence right-side speech (Huffington Post).

TaxProf, The IRS Scandal, Day 214 and Smith: The Latest IRS Power Grab

Robert D. Flach, HERE’S A THOUGHT – A FEW MORE CENTS ON A VOLUNTARY CREDENTIAL FOR TAX PROS.  ”If the IRS does not decide to go ahead with a voluntary RTRP program after it loses the appeal of Loving v IRS, I have proposed an independent industry-based organization to administer a voluntary RTRP-like tax preparer credential in my ACCOUNTING TODAY editorial ‘It’s Time for Independent Certification for Tax Preparers. ”  It would be an improvement over the IRS system.

Peter Reilly, Cigarette Importer Sees $300M Deduction Go Up In Smoke   

 

 

Greg Mankiw, The Progressivity of the Current Tax Code :

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Jack Townsend,  Swiss Banks Scrambling to Commit to Participation in U.S.Swiss Bank Initiative

TaxGrrrl, IRS To Rapper: It’s Hammertime!  Remember M.C. Hammer?  The IRS does, even if you don’t.

 

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Tax Roundup, 12/5/2013: Branstad floats optional income tax without federal tax deduction. And: is IRS hiding something?

Thursday, December 5th, 2013 by Joe Kristan
If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

Iowa Alternative Maximum Tax proposal revived?  Governor Branstad may push an optional income tax with lower rates and no deduction for federal taxes.  This plan looks like an attempt to improve Iowa’s byzantine income tax without provoking the wrath of Iowans for Tax Relief, the Muscatine-based advocacy group that strongly opposes efforts to do away with the deduction.  KJAN.com reports:

Iowa’s income tax rates higher when compared to most other states because Iowa offers a deduction that’s offered in only five other states. That deduction allows Iowans to subtract their federal income tax liability from their income before calculating their state income taxes.  “We don’t want to erode federal deductability,” Branstad says, “and that’s why we’re saying: ‘Give ‘em the option.’” By giving taxpayers the option to file their income taxes under the current system with that major deduction or under a new system with lower and flatter rates, Branstad might avoid the firestorm he faced from his fellow Republicans in the late 1980s when he proposed doing away with that deduction.

The Governor appears to plan to add a new twist to the plan, reports Kathie Obradovich:

Branstad indicated that he wouldn’t allow Iowans to “game the system” by changing their form every year. That means taxpayers who give up the federal deduction would have to stick with the choice even if the other option would result in lower taxes in a given year.

That means the new system would be a one-way street.  It no longer would be an “alternative maximum tax,” where taxpayers would always compute their tax both with and without the federal deduction and choose the lower amount.  That makes it even worse than the version passed by the Iowa House of Representatives last year, which would have allowed taxpayers to make the choice annually.  Unless the new system provides significantly better results in the great majority of circumstances, most taxpayers would want to retain the option to use the federal deduction.  That would stall the (presumably) desired transition to a simpler system.  Both the Branstad plan and the House plan significantly add to the complexity of the tax law.

While Iowa’s high stated tax rates — individual and corporate — don’t help, the ridiculous complexity of Iowa tax law is the real problem.  Iowa has a bunch of penny-ante credits and deductions that don’t apply for federal purposes.  These are too small to make a significant difference to taxpayers but also too small for the Department of Revenue to police.  There are also dozens of special-interest tax credits and deductions that take dollars from the rest of us on behalf of people with connections at the Statehouse.

It’s not in his nature, but the Governor ought to go bold and embrace the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  It strips the Iowa tax law to a very few deductions and repeals Iowa’s highest-in-the-nation corporation income tax while drastically lowering personal rates.  The Iowa Senate is unlikely to pass the Governor’s half-baked half-measure anyway; why not change the terms of the debate with a plan that actually makes sense?

Related:  The Iowa flat tax proposal: a good deal for middle class and up, but not for lower incomes.

 

taxanalystslogoChristopher BerginTax Analysts v. IRS: What Are They Hiding? (Tax Analysts Blog):

Back in August, I wrote about the lawsuit Tax Analysts had filed against the IRS seeking documents under the Freedom of Information Act. The documents being sought were training materials used to instruct and guide IRS personnel in the IRS exempt organization determinations office in Cincinnati. The big story then, and now, was generated by former EO director in the IRS Tax-Exempt and Government Entities Division Lois Lerner’s admission that the agency had used inappropriate means to determine which organizations qualified for tax-exempt status as social welfare organizations. The organizations singled out for extra scrutiny were mostly, if not entirely, conservative. Tax Analysts felt compelled to seek relief from the courts because we were getting nowhere with the IRS – other than the big stall – even though it had promised expedited treatment on our original request.

Several months later, the big stall continues — to the point that I have to ask myself whether the IRS just made a stupid mistake in targeting those organizations or whether something much worse is going on. 

They are using the “taxpayer confidentiality” excuse for their standard big stall.  Christopher isn’t buying it:

But I’ll say it again: Training materials, really? Why on earth would the IRS try to keep those secret? You’d think the training manuals would all be in a file cabinet somewhere, which hardly would require a search party of 100 lawyers and a scouring for tax return information.

Could it be that this time something is different? Could there be a smoking gun here? I’m not saying there is. I’m just saying it may be time to start asking that question. Because even for the IRS, this is darned peculiar behavior.

Congress should amend the taxpayer confidentiality rules to keep the IRS from using them as an excuse to hide its own dirty laundry.  It shouldn’t require a federal lawsuit to get the IRS to publicize internal non-taxpayer documents.

 

 

20130121-2Whither the Registered Tax Return Preparer Program?  Robert D. Flach argues that the RTRP designation that was part of the nearly-dead IRS preparer regulation power grab should be administered by the IRS on a voluntary basis.  I disagree.

Robert would like a way to distinguish the better class of “unenrolled” preparers from less-professional seasonal preparers.  I can understand that, but I don’t think that the IRS is the agency that should do this.  It would divert already strained IRS resources to do something the preparer industry could do on its own.  I agree with Jason Dinesen that if preparers want a government designation, they should take the Enrolled Agents exam, which is much more difficult than the RTRP literacy test.  The EA designation is sadly underappreciated in the market, and adding a new IRS-run designation would only make that worse.

 

The IRS reminds us that the “savers credit” can help lower-income taxpayers who contribute to a retirement plan.  This is a non-refundable credit of up to 50% of the amount contributed to IRAs or deferred to a 401(k) plan.  For parents, funding a young adult offspring’s retirement plan contribution is a tax-efficient way to help build a nest egg.

 

Don’t try this with your tax deadlines.   TIGTA: IRS Is Seven Years Past Statutory Deadline for Providing Online Account Access to Taxpayers (TaxProf).  From the TIGTA report:

The RRA 98 required the IRS to develop procedures to allow taxpayers filing returns electronically to review their account online by December 31, 2006. The IRS did not meet this requirement, and we determined that the IRS has not made adequate progress in allowing taxpayers to access tax accounts. Currently, taxpayers cannot review account information electronically.

In fact, the IRS is getting worse, having cut back electronic access for tax professionals.  That makes resolving even a simple IRS notice a tedious multi-week snail-mail slog.

 

Tony Nitti, The Definitive Questions And Answers On The New Net Investment Income Tax [Updated For Final Regulations] 

amazonCara Griffith It’s a Bird, It’s a Plane…It’s Amazon Prime Air? (Tax Analysts Blog).  Sales tax by drone.

Alan Cole, Report: Obamacare Premium Subsidies Will Need Fraud Protection (Tax Policy Blog).  No kidding.

TaxProf, The IRS Scandal, Day 210

 

Kay Bell, Tax e-filing continues to grow, hitting 122 million in 2013

TaxGrrrl, Will Congress Drive Up Gas Taxes In 2014?   

 

Um, because most commuters drive?  Why Does the Tax Code Favor Commuters that Drive? (Tax Justice Blog)

Going Concern, IRS’ Improved e-File System Is a Total Success Except For Two Jerks Who Foiled It

 

Don’t trust tax collectors, if you’re a tax collector:

The former tax collector of Plainville, who is also former treasurer of the Connecticut Tax Collectors Association, was arrested Monday morning and charged with first degree larceny, after being under investigation for possible embezzlement since June.

Debra Guerrette, of Bristol, was placed on administrative leave from Plainville’s Revenue office in June after Bristol police informed the town Guerrette was involved in a criminal investigation.

After an analysis of the financial records for the Connecticut Tax Collectors Association, and also Guerrette’s financial records, police said she had “misappropriated funds in excess of $50,000” between 2008 and 2013, into her personal account.

Will there be a special assessment of the collectors to make up the difference?

 

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Tax Roundup, 12/3/2013: Tax Court says no vesting, no K-1. And: gas tax fever!

Tuesday, December 3rd, 2013 by Joe Kristan

20120511-2Who pays, partner?  A Tax Court decision yesterday held that an executive of a partnership holding a non-vested capital interest should not be considered a “partner” for allocation of taxable income and loss before the interest vests.

The taxpayer was an executive of Crescent Holdings, LLC, a Georgia real estate partnership.  According to the Tax Court, he received a 2% capital interest in the partnership that was subject to forfeiture if he failed to stay in the job for three years.  He resigned before the interest vested, so he got nothing.  The partnership had allocated income to him on a K-1 for the period up to his resignation — and gave him some cash to pay taxes on the income —  but he argued that because he was non-vested, he shouldn’t receive any K-1 allocation.

Tax Court Judge Ruwe agreed:

Since petitioner forfeited his right to the 2% interest before it substantially vested, he never owned the interest. Petitioner never received any of the economic benefits from the undistributed partnership income allocations to the 2% interest. Requiring petitioner to recognize the partnership allocations in his income is inconsistent with the fact that he received no economic benefit from the allocations.

“His” 2% was allocable instead to other partners.

Non-vested stock or partnership interests subject to “a substantial risk of forfeiture” are not includible in income until the forfeiture risk lapses, unless the taxpayer makes a timely Section 83(b) election to include the value in income on receipt in spite of the risk.

This decision tells partnerships preparing 2012 returns that they shouldn’t allocate taxable income to partners with unvested interests.  I suspect some partners and partnerships may file amended returns for open years as a result.  It’s not entirely clear, but I read the opinion as saying that a timely Section 83(b) election would change this result.

Cite: Crescent Holdings LLC et al. v. Commissioner; 141 T.C. No. 15

 

Because he really, really wants the money.  Branstad declines to issue gas-tax veto threat (Iowa Farmer Today):

“The goal would be over the next couple of months: Does a consensus develop around something or not? And, I guess time will tell whether that happens,” Branstad said. If an agreement emerges, he said he would include a recommendation on how to address a projected annual shortfall of $215 million for critical road and bridge repair needs during his Condition of the State address Jan. 14.

The “shortfall for critical road and bridge repair” has become a mantra at the statehouse, which means they really want to get into your wallets some more.  The $215 million number comes from an Iowa Department of Transportation report.  No politicians seem willing to challenge a self-serving number from the agency that would benefit from more transportation money.  Compared to other states, Iowa isn’t doing so bad.  For example from the most reason Reason Foundation survey of state highway conditions:

Iowa Highways 2009

Many states are getting less gas revenue from gas taxes as cars become more efficient.  There is a case that some adjustment of the tax makes sense.  Still, Iowa is 17th nationally in per-mile spending, and it doesn’t seem like we are doing badly compared to the rest of the country.  And no matter how much they jack up the gas tax, I suspect they’ll continue to tell us we have crumbling infrastructure anyway.

 

Seventh Circuit: Inherited IRA not exempt from creditor claims. That’s a different result that would apply to bankrupt’s own IRA.  Cite: Clarke, CA-7, Nos. 1241 and 12-1255.

 

Tony Nitti, Final Net Investment Income Regulations: Self-Charged Interest, Net Operating Losses, And More

Paul Neiffer,  Bonus Payments Are Ordinary Income – Not Capital Gains. A Tax Court case involving an upfront oil and gas lease bonus payment.

 

nfl logoJeremy Scott, NFL Encourages Localities in Race to the Bottom (Tax Analysts Blog)  So does NASCAR.

William McBride, Baucus Offers Ways to Pay for a Lower Corporate Tax Rate (Tax Policy Blog)

The shopping season that never ends.  Shopping for Tax Extenders (Clint Stretch, Tax Analysts Blog) “Of the 55 tax provisions that will expire at the end of the year, all but a few have expired before. Taxpayers will have to be satisfied with retroactive reinstatement again.”

TaxProf, The IRS Scandal, Day 208

 

 

Robert D. Flach has your Tuesday Buzz!

Kay Bell, States still getting stiffed on sales taxes on Cyber Monday

Celebrate!  Cyber Monday: It’s The Most Wonderful Tax Evasion Day Of The Year!  (TaxGrrrl)

Going Concern: According To This Paper, It Takes Cojones To Commit Fraud

 

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Tax Roundup, 12/2/2013: Remember the January 15 property tax credit deadline! And: final 3.8% tax regs.

Monday, December 2nd, 2013 by Joe Kristan

20130117-1There’s a new deadline this year for Iowa business owners with real property.   Iowa business owners have a January 15, 2014 deadline to apply for the business property tax credit enacted in this year’s legislative session.  Many have yet to apply, reports gazette.com:

Commercial property owners have been slow to apply for a new property tax credit designed to give a little boost to small businesses.

Most business owners who own the property in which the business operates are eligible for the Iowa Business Property Tax Credit.

A $50 million pool of money is available for the first year of the new tax credit. The state legislature included the credit in an historic property tax relief bill signed into law on June 12.

“It is important they get them in now so we can process them,” said Cedar Rapids City Assessor Scott Labus.

Businesses can find the form online here.  It should be filed with the local county assessor’s office. The gazette.com article says the maximum credit for the coming assessment year is $523.

 

Paul Neiffer,  Final Net Investment Income Regs Have Good News For Farmers:

In Final Regulations issued earlier this week, the IRS changed their interpretation of this rule and have now indicated that any self-rented real estate or rental real estate that has been properly grouped with a material participation entity will not be subject to the tax.  In even better news, any gain from selling this type of property will also be exempt from the tax.

Good news not just for farmers, but for any business where the owners rent property to a corporation they control.

 

Tony Nitti, IRS Issues Final Net Investment Income Tax Regulations: A First Look And More   It was a dirty trick to issue them over Thanksgiving, when I wasn’t watching.   I will be posting on some key issues.

 

20130419-1Illinois storm victims get filing relief (IRS news release):

The President has declared the counties of Champaign, Douglas, Fayette, Grundy, Jasper, La Salle, Massac, Pope, Tazewell, Vermilion, Wabash, Washington, Wayne, Will and Woodford a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Nov. 17, and on or before Feb. 28, 2014, have been postponed to Feb. 28, 2014.

The IRS is also waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Nov. 17, and on or before Dec. 2, as long as the deposits are made by Dec. 2, 2013.

You don’t have to be damaged to qualify, you just have to be located in the affected area.

 

No, that’s not the real threat.  The Muscatine Journal mistakes the painkiller for the ailment:

Tax breaks for wind-power producers are set to expire in a little more than a month, threatening hundreds of manufacturing and energy jobs in the state if nothing is done.

In Iowa, much of the attention has focused on the federal Renewable Fuel Standard in which the federal government guarantees a market for biofuels. But for Iowa’s turbine manufacturers and power companies, it’s the federal production tax credit that takes precedence.

It’s not the loss of the tax credits that threatens these industries.  It’s their inability to survive without subsidies or, in the case of ethanol makers, their inability to sell their product unless people are forced by law to buy it.  The subsidies only dull the recipients awareness of their real ailment.

 

David Brunori, Confusing Tax Cuts with Tax Reform (Tax Analysts Blog):

But increasing or decreasing tax burdens should not be confused with tax reform. Tax reform should mean something. I define tax reform as meaningful changes to the tax system that comport with the general notions of sound tax policy. The goal should be to make the system fairer, neutral, more efficient, and more stable. The changes should also increase economic development and job growth. And they should ensure that the government raises enough revenue to meet the public service demands of the citizenry. Changing the rates or tinkering at the margins is not reform.

Nor is giving tax spiffs to influential or sympathetic constituencies, but that’s been the Iowa way for some time now.

 

20120529-2Lyman Stone, Missouri Considering “Massive” Incentives for Boeing (Tax Policy Blog):

This is bad tax policy in spades. Governor Nixon rejected a flawed, but still broad, tax cut on the grounds that taxes don’t matter much for businesses, but government services do. Now Missouri policymakers may try to attract one specific company with a “massive” and narrowly-targeted tax break, despite lack of evidence that incentives lead to economic growth, and ample evidence that they create problems.

It’s all about directing funds to insiders with good lobbyists.

 

Cara Griffith, A Change of Culture (Tax Analysts Blog).  She talks about the natural tendency of tax authorities to conceal information and make tax practice an insiders’ game.  She notes that North Carolina doesn’t release private rulings and hasn’t updated public corporate directives since April 2012.  Iowa is better, but they haven’t updated their “What’s new” website since August.

 

William Perez, Updated Form W-9.  With the additional rules of FATCA piled on top of existing foreign withholding rules, you should make sure to get a W-9 from your vendors, depositors and ownership groups.

 

Jason Dinesen reminds us of the Iowa Insurance Premium Deduction

Trish McIntire reminds us that Refund Advances are really expensive loans.

Robert D. Flach, TO PER DIEM OR NOT TO PER DIEM – THAT IS THE QUESTION.

 

Kay Bell offers some Tax-saving moves to make by Dec. 31, 2013

Howard Gleckman,  Obama Will Try to Clarify the Role of Tax-Exempt Groups in Politics.  Your new role in furthering public debate?  Shut up!

TaxProf, The IRS Scandal, Day 207

Tax Justice Blog: This Holiday, The Tax Justice Team Is Thankful For…  In other words, watch your wallets, folks.

The Critical Question: Do We Need A Clergy Tax Simplification Act Of 2014?    (Peter Reilly)

Going Concern, 10 Things Accounting Professionals Should Be Thankful For This Year

TaxGrrrl, This Man’s Nuts: Plan To Sell Testicle For New Car Is Taxable   As if there weren’t enough non-tax arguments against this plan.

 

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Tax Roundup, 11/22/13: Baucus proposes end of depreciation as we know it; also targets LIFO, cash-method farming.

Friday, November 22nd, 2013 by Joe Kristan
Max Baucus

Max Baucus

Baucus aims at LIFO, depreciation.  Senator Max Baucus has issued a tax reform proposal that slows depreciation and eliminates LIFO.  While it is a long way from becoming law — and certainly won’t become law in its current form — it will help shape the next round of tax reform.  Some key points:

-Depreciation for non-real estate assets would be computed not asset by assets, but in “pools,” with a set percentage of the amount of assets in each pool deducted during the year.  If the pool goes negative with dispositions, income is recognized.  There would be four “pools” with varying recovery percentages.

- Buildings would be depreciated under current rules, but over 43 years.

- The annual Section 179 limit would be $1 million, but with a phaseout starting at $2 million of assets placed in service.

- Research expenses would be capitalized and amortized over five years.

- LIFO would be repealed.

- Advertising costs would only be half deductible currently with the rest amortized over 5 years.

- Farmers would lose their exemption from accrual-basis accounting.

I think this goes the wrong way, adding complexity and lengthening lives.  I would prefer more immediate expensing.  LIFO repeal, and maybe the farm rule,  are the only proposals that seem to actually simplify anything.  The rest seem like high-toned revenue grabs.  If the revenue all goes to reduce rates, that wouldn’t be so bad, but I doubt that’s the idea.

 

Victor Fleischer, Tax Proposal for an Economy No Longer Rooted in Manufacturing:

The Baucus proposal aims to make the tax system match economic reality, removing the tax distortions from the equation. It would group tangible assets into just four different pools, with a fixed percentage of cost recovery applied to the tax basis of each pool each year, ranging from 38 percent for short-lived assets to 5 percent for certain long-lived assets.

It would be hard to make the case for giving the priority to tangible assets, and yet that is precisely what current law does by allowing rapid depreciation. At a minimum, the tax depreciation system should strive for neutrality and not discourage investment in intangibles and human capital.

That’s true.  Yet it’s hard to see how the Baucus proposal to require R&D costs to be amortized over five years, or the proposal to require 20-year amortization of intangibles instead of the current 15 years, encourages investments in intangibles and human capital.

Via Lynnley Browning’s Twitter feed.

The TaxProf has a roundup of the plan:  Senate Finance Committee Releases Depreciation and Accounting Tax Reform Plan 

William Perez, Draft Tax Reform Proposals from the Senate Finance Committee

Paul Neiffer, MAJOR Farm Tax Law Changes Proposed by Senate

Leslie Book, Senator Baucus Releases Proposals to Reform Administration of Tax Laws (Procedurally Taxing.

 

St. Louis loses another preparer.  From a Department of Justice Press Release:

A federal district judge in St. Louis has permanently barred defendants Joseph Burns, Joseph Thomas and International Tax Service Inc. from preparing federal tax returns for others, the Justice Department announced today…

According to the complaint, the defendants repeatedly fabricated expenses and deductions on customers’ returns and falsely claimed head of household status for customers who were married in order to illegally understate their customers’ federal tax liabilities and to obtain fraudulent tax refunds. The complaint also alleged that the defendants falsely claimed that some of their customers earned income from businesses that the defendants fabricated or increased the amount of business income their customers earned in order to illegally claim the maximum earned income tax credit on customers’ returns.

The IRS has certainly given their clients’ returns a good going over.  That’s the risk of going with a preparer whose results are too good to be true.

 

Scott Hodge, Andrew Lundeen, America Has Become a Nation of Dual-Income Working Couples (Tax Policy Blog)

20131122-1

Though its a brave man who tells the stay-at-home she’s not “working” after a day spent between taking care of an elderly parent and little kids.

 

Jason Dinesen,  Life After DOMA: What if You Amend One Year But Not the Next?

TaxGrrrl, When Mom and Dad Move In: The ‘Granny-Flat Tax Exemption’ For the Sandwich Generation 

Jana Luttenegger, Electronic Signatures, What’s Next? (Davis Brown Tax Law Blog).  E-filing of wills?

Phil Hodgen, U.S. brokerage accounts after you expatriate

Russ Fox, It’s All Greek to Me. Don’t gamble in Greece, seems to be the point.

 

20121120-2Kay Bell, Ways & Means’ tax plays in GOP anti-Obamacare game plan

Howard Gleckman,  How Washington May Turn June Into Fiscal February (TaxVox).  Yes they’ll be running out of our money again soon.

Christopher Bergin, The End of the Era of Multinationals (Tax Analysts Blog)

Tax Justice Blog, Scott Walker’s Tax Record Will Be on the Wisconsin Ballot Next Year.  Shockingly, TJB doesn’t like Walker.

Tony Nitti, International Tax Reform For Dummies 

Visit Robert D. Flach for fresh Friday Buzz!

 

News from the Profession: New Audit Associate Looking For Prank Ideas, Possibly a New Job in Near Future (Going Concern)

Oh, one more thing: Magnus!

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Tax Roundup, 11/19/13: Sub-zero edition! And the dark side of non-recourse debt forgiveness.

Tuesday, November 19th, 2013 by Joe Kristan

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Tax Court says you can’t go below zero.  At least not in computing penalties.

A taxpayer filed a return showing no tax, but claiming refundable tax credits that generated a refund of $7,327.  That’s why refundable credits are such a sweet deal — you can get a refund of taxes without ever paying them through withholding or estimated taxes.  They are really a form of welfare.

The IRS issued the refund as claimed, but then thought better of it.  The IRS recomputation was that the taxpayer should have showed a positive tax balance of $144.  That meant the taxpayer was supposed to repay the $7,327 refundable credit plus the $144 tax due, for a total of $7,471.  The IRS assessed the difference, plus a 20% penalty on the $7,471 “underpayment.”  The taxpayer didn’t think refunding the refundable credit counted as an “underpayment, and the case went to Tax Court.

The tax imposes an “accuracy related” penalty on deficiencies, based on how much the taxpayer underpays the “tax required to be shown on the return.”  The IRS said the underpayment was the whole $7,471.  The Tax Court said that refundable credits can’t take the tax below zero for this purpose, so the “underpayment” is only $144 for computing the penalty.

 

This seems wrong.  Refundable credit fraud — especially Earned Income Tax fraud — is a multi-billion-dollar problem.  If there is no monetary penalty for claiming bogus credits, the only deterrent for gaming the system is criminal penalties, and given the limits on the IRS ability to prosecute EITC fraud, it’s an empty threat.

The Tax Court seems to agree:

We note that our conclusion breaks the historical link between the definitions of a deficiency and an underpayment; however, it was Congress that made that break.

If the case holds up on appeal, Congressional action is all that can fix it.

Cite: Rand, 141 T.C. No. 12.

 

Peter Reilly, IRS Letter To Senator Boxer On Short Sales Not Good News For Everybody

I hate to spoil a nice celebration, but I am going to risk it.  The position that the IRS outlined in the ruling is probably good news for most people affected by it.  It may not be good news for everybody, though.  In order to understand why you have to understand the IRS reasoning.  Here is the deal.  When debt is secured by property, it is either recourse or non-recourse…

The effect of that section is to make just about all California home mortgages non-recourse…  There are various exceptions to recognizing debt discharge income, such as the insolvency exception.  These will no longer be available.  

When you give up a house for non-recourse debt, you are considered to sell it for that amount.  That can be a bad thing.   If you don’t qualify for the residential gain exclusion — say, because you haven’t used it as a residence long enough to qualify, or you bought the house to rent — you can have taxable gain, no cash, and no available debt forgiveness exclusion.

 

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

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

 

Alan Cole, High Implicit Marginal Tax Rates Make Life Difficult for the Poor (Tax Policy Blog):

The CBO did a great study on this a year ago. It found that the implicit marginal tax rates on some poor folk are frequently above 50%, and sometimes above 80%. That is to say, that when they figure out how to increase their income by a $100, they lose $50 or more in new taxes or lost benefits. 

That’s exactly the sort perverse effect that results from the increase in Iowa’s earned income tax credit, which by itself can put low income taxpayers in a 50%+ bracket.  Take away other benefits and you can see how it could get to 80% or more.

 

Sioux City Journal, Branstad declines to issue a gas tax veto threat.  Probably because he’d like a higher gas tax, even though he likes being re-elected too much to push for one.

 

Ben Harris,  Sorting Through The Property Tax Burden (TaxVox):

Using self-reported American Community Survey data, we find that residential property taxes tend to be close to $1,000 per year, with a small share of households paying substantially more, especially in Connecticut, New Jersey, New York and New Hampshire. In recent years, 48 percent of homeowners paid between $750 and $1,750 in property taxes. About one-third—31 percent—paid less than $750 and 21 percent paid more than $1,750.  Just 3 percent paid more than $4,000, with a miniscule share of homeowners (0.2 percent) paying more than $8,000. 

That seems low, but my clients probably aren’t a representative sample.

 

Jason Dinesen, Missouri Guidance on Same-Sex Marriage

 

Kay Bell, Missouri recognizes same-sex marriages for tax filing only20130121-2TaxGrrrl, Black Market Tax Preparers Continue To Defy IRS :

The solution for tax preparers who didn’t want to register and pay the fee? They simply don’t sign the returns.

And yes, that’s against the rules. But a number of paid tax preparers do it anyway. They are referred to in the business as “black market preparers” or sometimes, “ghost” tax preparers.

And that will happen no matter what regulations the IRS imposes on honest preparers.

 

William Perez, Tax Provisions Expiring at the End of 2013

Tony Nitti, House Republicans Put Tax Reform On Hold To Revel In Obamacare Struggles

I really don’t expect to receive tips from clients–it’s not the norm for tax preparation. I definitely don’t expect to receive $1,458,905 in such gratuities.  

I can’t say I expect that either.  But I would be OK with it!

TaxProf, The IRS Scandal, Day 194

Robert D. Flach brings the Tuesday Buzz!

 

The Critical Question: Are Jamaican Credit Unions The Next Tax Haven?  (Brian Mahany)

AOL? Prodigy? Attorney’s License to Practice Law Is Suspended for Failing to Maintain an Email Account  (TaxProf)

 

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Tax Roundup, 11/15/2013: Trains, Zeppelins and Fertilizer edition.

Friday, November 15th, 2013 by Joe Kristan

 

20121226-1What, no zeppelin port?   A candidate for Iowa governor proposes a gas tax increase for, well, a bunch of stuff, reports QCTimes.com:

Democratic gubernatorial hopeful state Sen. Jack Hatch is proposing to phase in a 10-cent gas tax increase to pay for overdue road and bridge improvements, build passenger rail links, construct flood protection, reduce the backlog of school construction projects and expand broadband service in rural Iowa.

The increase would amount to less than $50 a year for most Iowans, he said.

Infrastructure, in all of its forms, is one of the most basic parts of state and local government, Hatch said Thursday in announcing his Building a Better Iowa infrastructure plan.

The idea of a continuing “infrastructure crisis” is a standard political assertion, even though it isn’t true.   If it were, though, you’d stop the list of crisis projects after “bridge and road improvements.”   The idea that blowing millions to construct an unneeded and money-losing passenger rail system is an infrastructure priority is laughable.  Local school districts can finance improvements whenever their voters think they’re worth a bond issue.  And rural broadband, supplied by the government?  Because satellites don’t cover rural Iowa?

 

20120906-1

Using your wife’s money to buy drinks for your new girlfriends.  Sen. Hatch wants to run against Governor Branstad next November, who has some economic issues of his own.  These are spotlighted by the Governor’s selection as “Politician of the Year” by Site Selection Magazine.

Based on its website, Site Selection Magazine seems to be the trade journal of the little industry of fixers and middlemen who harvest taxpayer money for clients choosing to relocate or expand. Governor Branstad was “honored” for giving over $80 million of tax credits to the Orascom fertilizer plant in Southeast Iowa to build a plant they were probably going to put there anyway.  The credits add up to around $500,000 per “permanent” job.

These sorts of giveaways are great for the companies that can play the system to milk the fisc, but they aren’t so great for the rest of us who pay for them.  They are the government equivalent of the guy who takes his wife’s bar to the bar to buy drinks for the girls.  He may think he’s doing great things, but it’s neither impressive to the girls nor helpful to the wife.

Somebody out there is saying, “but what about the jobs?”  Even if you assume that the spending is responsible for the jobs — a stretch — that money wasn’t just conjured up.  It comes from the rest of us, who would have used it to create jobs through spending or investing.  If you think the state can wisely allocate investment capital, I have a nice film credit program to discuss with you.  You shouldn’t talk about the jobs you attract by giving away money without talking about the jobs that you lost.

 

Arnold Kling, It’s Implementation, Stupid:

The problems with implementation are under-rated and always have been. The Obama Administration has spent 3 years bulldozing the individual market in health insurance. Now, they expect the health insurance companies to rebuild it in 30 days.

This will not end well.  But while I expect enormous changes in the ACA law, given its evident failure, I don’t expect repeal of the new 3.8% net investment income tax or .9% additional medicare tax to happen.  Clearing the wreckage will be expensive.

Des Moines Register,  136 Iowans buy private health plans through online marketplace.  Not looking good.

Why not just kill me now?  Why Not Use Tax Preparers as a Portal to Health Exchanges?  (Howard Gleckman, TaxVox)

 

TaxProf, Number of Taxpayers Who Renounced U.S. Citizenship Skyrockets to All-Time Record High.  This doesn’t strike me as a good thing.

 

Kay Bell,  EITC claim issues prompt IRS letters, visits to tax pros.  If you prepare a lot of EITC claims, your documentation needs to be meticulous.

Jack Townsend, IRS Indian Initiative for Persons Outside OVDP; Also on Quiet Disclosures

Linda Beale, IRS will issue summonses for offshore bank account info

William Perez,  How Much Government Do People Get Compared to How Much Taxes They Pay?

 

TaxGrrrl, Braves New World? Taxpayer Funding Remains A Concern As Atlanta Rushes Towards New Stadium.  If I were an Atlanta taxpayer, I’d be concerned.

Tony Nitti, Did The Sale Of Stan Musial’s Memorabilia Give Rise To A Hefty Tax Bill?   

 

Kyle Pomerleau, Don’t Forget the Facts If You Want to Raise Taxes on the Rich (Tax Policy Blog)

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Christopher Bergin, The IRS: A Greek Tragedy (Tax Analysts Blog)  ”I mostly also agree with Olson that much of the impairment at the IRS is caused by Congress continuing to force the agency to do more with less.”

TaxProf, The IRS Scandal, Day 190

Robert D. Flach has your Friday Buzz!

News from the Profession:  Perhaps Comparing the CPA Exam to Actual War Isn’t The Best Idea (Going Concern)

 

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Tax Roundup, 11/11/13: Sheldon edition. And: masterminds!

Monday, November 11th, 2013 by Joe Kristan

 

Greetings to our Veteran readers for Veteran’s day!  Though perhaps “greetings” doesn’t summon the best memories.

The Tax Update comes to you today from sunny Sheldon, Iowa:

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Well, it’s sunny indoors at Northwest Iowa Community College, where I am participating in the Sheldon Session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School.  I’m the “urban” part.  Seats at the remaining schools are going fast, so register today!

 

Joseph Henchman, FBI Says California State Senator Accepted Bribes to Support Film Tax Credits (Tax Policy Blog).  He cites the LA Times:

 According to the affidavit, posted on Al Jazeera’s website, [State Senator Ronald] Calderon [D-Montebello] allegedly accepted $60,000 in bribes from an undercover FBI agent posing as a movie executive and $28,000 more from a medical company owner in exchange for efforts to affect legislation on tax credits for the film industry and on workers’ compensation claims.

That tells you that California is a little more sophisticated than Iowa.  The California guy (allegedly) required money to deliver the keys to the treasury to the film industry.  All the Iowa legislature required was a few autographs and photo-ops with starlets.  Iowa has learned from its mistakes, a little, and now favors jailing filmmakers to subsidizing them.

More from Russ Fox, Another Film Tax Credit Scandal

 

"Fez" Ogbasion, Instant Tax Service CEO.

“Fez” Ogbasion, Instant Tax Service CEO.

TaxGrrrl, Fourth Largest Tax Prep Business In The Country Shut Down By Feds  ”U.S. District Judge Timothy S. Black found that ITS had a culture of “fraud and deception.”

My coverage of Instant Tax Service here.

 

Phil Hodgen,  Distributions from foreign grantor trusts and U.S. paperwork.  ”This is a Form 3520 “research in a box” blog post for you, BP. Because you asked.”

William Perez, Social Security Wage Base Increases for 2014

Kay Bell, 12 charitable groups that would love to take your tax-deductible Typhoon Haiyan relief donations

Fiduciary Income Tax Blog, Federal Unified Credit for 2014.  $5,340,000.

Jack Townsend, Swiss Bankers Expect to Share Data for Tax Purposes

Robert W. Wood, Lawyer For NFL Players Sidelined Permanently…True Chicago Style?

Annette Nellen, Growing support for lower corporate rate and territorial system.  Good, but remember that the corporate rate doesn’t even cover most business income.

Tax Justice Blog, GE-Sponsored “Territorial” Study Promotes Agenda of Tax Avoidance

Stephen Olsen, Summary Opinions aka Procedure Roundup for 11/08/13.  Excellent roundup for procedure fans.

 

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Robert D. Flach, I HATE K-1s!  Robert adds what I will call Flach’s Iron Law: “All K-1s usually arrive late.”  He then proceeds into a fine rant:

While I have not done any specific calculations, I firmly believe that often the additional costs to properly prepare the federal and state income tax returns for taxpayers with K-1 investments is as much as or more than the actual income, or tax benefits if any, generated from the investment.  If the money invested in these limited partnerships were instead invested in related mutual funds I expect the investor would do better.  His/her tax preparation costs would certainly be less.
 
Of course brokers never tell their clients this when selling them the investment.

While K-1s from closely-held businesses are normal and healthy, Robert is exactly right about the kinds of K-1s often seen in investment accounts.

 

Nicotine withdrawal.  Iowa tobacco tax revenue has declined, report says (KTIV.com)

 

Great moments in economic development.  Miami Replaces Tampa As IRS Tax Fraud Capital

 

The Critical Question.  An Isley Brother In Tax Court – Does Tax Crime Pay?  (Peter Reilly).

 

“Mastermind”?  I think the term is overused.  Example: “Mastermind of tax fraud scheme pleads guilty” (Examiner.net).  How did the prosecutor describe the diabolically clever scheme at issue?

“This scheme was based on a nonsensical formula that any honest person would instantly recognize was patently absurd and fraudulent,” U.S. Attorney Tammy Dickinson said in a statement. “Fortunately, the vast majority of these refund claims were detected by the IRS and denied.”

They need a new term for somebody who organizes a really dumb crime.  Disastermaster? Blunderbrain?  Any ideas are welcome in the comments.

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Tax Roundup, 11/6/13: Relief for the road warrior? And the futile state corporation income tax

Wednesday, November 6th, 2013 by Joe Kristan
Flickr image courtesy Tom Hilton under Creative Commons license

Flickr image courtesy Tom Hilton under Creative Commons license

Relief for the traveling employee?  Tax Analysts reports ($link) that the “Mobile Workforce State Income Tax Simplification Act of 2013″ (S. 1645) was introduced yesterday.  The bill would make the tax lives of employers and employees who cross state lines much easier by preventing states from taxing folks, other than athletes and entertainers, who are in a state for less than 30 days.  From the Tax Analysts:

The bill is “a modernization of everything,” Maureen Riehl, vice president of government affairs for the Council On State Taxation, told Tax Analysts. It is “about supporting the mobility of an economy that has people moving around a lot more often than when the income tax laws went into effect in the states back in the ’30s and ’40s,” she said.

Who would oppose such sensible simplification?

The Federation of Tax Administrators does not share Riehl’s enthusiasm. Deputy Director Verenda Smith said the bill “does not strike an appropriate balance between administrative simplification and necessary tax policies.”

Smith took issue with the safe harbor provision, saying the 30-day threshold “is beyond a level necessary to deal with the vast majority of individuals who would be temporarily in a jurisdiction.”

The states want to tax you on their whim if you sneeze in their jurisdiction.

Still, they should have one more threshold: no state tax if you earn less than some threshold amount in a state, maybe $5,000.  That way they can still pick LeBron’s pocket when he comes to town from his tax-free home in Florida, but a carload of struggling musicians couch-surfing from town to town would be saved the hassle of filing a tax return in every state where they have a gig  – or more likely, saved the need to ignore the filing requirement.

 

Peter Reilly,  Mobile Workforce Act Good Idea But May Need More Limits  ”Over the years I have studied the rules for what invokes state income tax withholding requirement.  It varies substantially from state to state.”

 

Elizabeth Malm, Richard Borean, Map: Share of State Tax Revenues from Corporate Income Tax (Tax Policy Blog)

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Notice that it’s a relatively paltry part of Iowa tax receipts, even in a good year, and even with the highest rate in the nation.  Better to repeal it as part of the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

David Brunori, Feckless Legislators and Corporate Welfare (Tax Analysts Blog)

If I ran a big corporation in Illinois, I would have my lobbyists asking for tax breaks daily. Why not? The tax incentive racket is a profit center for most corporations in Illinois. Is it blackmail? Sure. But it is cold, calculated, rational blackmail.

…if once you have paid him the Dane-geld

You never get rid of the Dane.

 

Tax Justice Blog,  Let’s Face It: Delaware and Other U.S. States Are Tax Havens

 

Paul Neiffer, Crop Insurance Deferral Options.  ”When a crop insurance claim relates directly to a drop in price, those claims cannot be deferred to the next year.”  Paul explains what the choices are if the recovery relates to a yield loss.

Tony Nitti, Shareholder Computes Basis In S Corporation Stock Incorrectly, $1.5 Million Loss Becomes $2 Million Gain

 

Jana Luttenegger, Interactive Form to Assist in Applying for 501(c)(3) Status (Davis Brown Tax Law Blog) 

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

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

William Perez, CBO: Marginal Tax Rates Faced by Low- and Moderate-Income Individuals.  Helping the poor stay that way.

Andrew Mitchel, 2014 Inflation Adjustments for Individuals in the International Tax Arena

Roger McEowen, Inflation Adjusted Amounts for 2014

TaxProf,  The IRS Scandal, Day 181

TaxGrrrl, Bayern Munich Keeps Winning Even As Their Chief Faces Trial For Tax Evasion.

 

Brian Mahany,  More Guidance on Taxation of Same Sex Marriages

Jack Townsend,  Should You Opt Out of OVDI/P?.  He examines Robert Wood’s discussion of opting out of the IRS “amnesty”

Phil Hodgen’s Exit Tax Book: Chapter 7 – Taxation of Deferred Compensation 

 

Joseph Thorndike, Forget Carried Interest–It’s All About Taxing Capital Gains (Tax Analysts Blog).   He’s right when he says “The only issue that really matters is how we tax capital gains.”  Then he goes off the rails in so many ways.  Read Joseph, and then read Steve Landsberg.

 

A Wednesday Buzz from Robert D. Flach!

May you have this problem.  The Tax Treatment of Olympic Gold Medals (TaxProf)

News from the Profession.  Recruiting Season: Salaries and Offers for the Public Accounting Class of 2014 (Going Concern)

 

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Tax Roundup, 11/4/13: The price of being acquitted. And more on the Hatch Iowa tax plan.

Monday, November 4th, 2013 by Joe Kristan

daugerdas.jpg

Chilling effects.  Tax Analysts story ($link) about last week’s conviction of tax shelter figure Paul Daugerdas, and the acquittal of the former chairman of BDO on related charges, has a sobering final paragraph:

Regarding Field, Edward M. Robbins Jr. of Hochman, Salkin, Rettig, Toscher & Perez PC noted the difficulty in obtaining an acquittal in the face of multiple tax-related conspiracy counts in federal court. “I looked at the . . . docket sheet for the entire case and wondered how much it cost Mr. Field for his acquittal,” Robbins said. “I’d say at least a couple of million dollars. That’s what it takes to beat a case like this at trial.”

It doesn’t help at all when the government freezes your assets before trial, as they did here.  And if justice can only be had for $2 million, what chance does somebody have who lacks the the kind of wealth these defendants have?

TaxProf, Daugerdas (Jenkens & Gilchrist) Convicted, Field (BDO) Acquitted in Tax Shelter Case

Jack Townsend,  On Retrial, Daugerdas Convicted and Field Acquitted

 

Source: The Tax Foundation

Source: The Tax Foundation

Kathie Obradovich:  Hatch tax-cut proposal has winners, losers (Des Moines Register):

The second thorny issue is that Hatch has decided to raise taxes significantly for the highest income groups. For people making between $250,000 and $1 million, the percentage increase is in the range of 33 percent to 45 percent. That’s a major sticker shock for high-income Iowans. That’s less than 5 percent of taxpayers. But even if it were 1 percent or less, Hatch loses the ability to argue that he won’t raise Iowans’ taxes.

Hatch says he’s trying to make Iowa’s income tax fairer, not just lower. The highest wage-earners are paying a lower percentage of their income, he said. His plan also increases the per-child deduction from $40 to $500 and gives married couples who are both employed a credit of $1,000.

That’s attractive, to be sure, but a plan that at least held higher-income Iowans harmless would have broader political appeal. The arguments about the wealthy paying their fair share just don’t resonate the same way during a time of budget surpluses as they do on the national level in the face of enormous debt.

Of course, a tax on “the rich” means a tax on “business.”  A 33 to 45 percent increase on taxes on Iowa businesses doesn’t promise much in the way of either “fairness” or employment growth in Iowa.

It could be a good thing to have Iowa’s horrible income tax system be a big campaign issue.  It would be nice to get a mandate for serious tax reform, like the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  Probably too much to hope for.

 

Andrew Lundeen, Scott HodgeTop One Percent Pays Twice Income Tax Rate of All Taxpayers (Tax Policy Blog):

20131104-1Despite conventional wisdom that the Bush-era tax cuts disproportionately benefited the wealthy, the reality is that the tax burden on the bottom 99 percent has been falling for more than two decades. Indeed, the average tax rate for the bottom 99 percent of taxpayers is now below 10 percent—well below the average for all taxpayers—thanks to years of targeted tax cuts aimed at the middle class. Meanwhile, the top 1 percent of taxpayers still pays an effective tax rate that is roughly twice the average for all taxpayers.

But politicians insist that raising taxes on “the rich” is always somehow “fairness.”

 

#Paul Neiffer,  Some Thoughts on Section 179 & Bonus Depreciation:

Remember that Section 179 is allowed for new AND used equipment, while bonus is only on NEW equipment.  You cannot take Section 179 on trade-in basis of old equipment, but can use it for bonus.  Section 179 applies to farm equipment and single purpose farm structures and land improvements.  Bonus applies to all farm assets including buildings.

I give about a 60% chance of 2013 bonus depreciation being extended into 2014, and about 80% on Sec. 179.  For planning purposes, though, it’s wise to try to get the assets in service in 2013 if you can.

 

Peter Reilly,  When Planning Never Forget The Alternative Minimum Tax:

I’m hoping that I get some commenters who tell me that they keep meticulous track of all AMT carryovers for their clients and do a detailed reconstruction whenever they take on a new client.  I bet they floss regularly too.

Well, yes and yes.

Tony Nitti, The Definitive Questions And Answers On The New Net Investment Income Tax   

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TaxGrrrl, 11 Uses For Leftover Halloween Candy (And The Resulting Tax Consequences)

Russ Fox, Bubba Paris Sacked, Pleads Guilty to Not Filing a Tax Return

Robert D Flach, 2014 INFLATION-ADJUSTED NUMBERS.  Also, his Friday Buzz last week went up late, but is always worth the wait!

 

Phil Hodgen’s series on expatriate taxation: Chapter 5 – Mark-To-Market Taxation 

Janet Novack, IRS Says Race Car Driver Juan Pablo Montoya Used Sham To Wrongly Deduct Millions

TaxProf, The IRS Scandal, Day 179

Tax Justice Blog, Paul Ryan Says No to Any Revenue Increase, Again.  Good.

 

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Tax Roundup, 11/1/13: Unhappy Halloween for tax shelter maven. And: clunk!

Friday, November 1st, 2013 by Joe Kristan

 

tax fairyGuilty again.  Former Jenkens and Gilchrist tax shelter wizard Paul Daugerdas was again convicted on tax crime charges yesterday arising out of the great tax shelter frenzy of the Clinton and Bush II years.   A previous conviction was overturned on grounds of juror misconduct.  Bloomberg Businessweek reports that he was convicted on seven of 16 counts.

A co-defendant, former BDO Seidman CEO Denis Field, was acquitted.

Mr. Daugerdas built a fortune around tax shelters with clever names like “HOMER,” “CARDs” and “BLISS.”  The shelters typically involved offsetting investment positions, with losses allocated to shelter customers and gains allocated to tax-indifferent offshore entities.  The shelters have fared poorly on exam and in the courts, with a nearly unbroken record of failure in litigated cases.

Mr. Daugerdas built a fortune around selling access to the Tax Fairy, the magical sprite who waves her wand to make tax problems go away.  The news that there is no tax fairy proved costly to his clients, and probably also to him.

Link: Prior Tax Update Daugerdas coverage.

 

20121212-1Clunk.  Cash for Clunkers was an expensive boondoggle, reports the Brookings Institution.  The study estimates that the program cost $1.4 million per “job created” while destroying thousands of perfectly good vehicles and raising transportation costs for those who rely on used cars.

Related:  Braley: “Cash for Clunkers” phenomenally successful (Radio Iowa)

Kyle Pomerleau,  Cash for Clunkers: Not Much of a Stimulus (Tax Policy Blog)

 

TaxGrrrl, IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More   

 

Paul Neiffer,  Calculating Cost Basis Wrong Can Be Costly!

Peter Reilly,  Actuary In Tax Court Beats Northwestern And IRS On Accuracy Of 1099-R.

Janet Novack, Top Social Security Tax To Rise 2.9% In 2014; Benefits Going Up 1.5%

Tax Trials, IRS Resumes Field Exams & Collections.  The shutdown is truly over.

Phil Hodgen’s  series on the expatriate exit tax continues with Chapter 4 – Are You A Covered Expatriate?

TaxProf,  The IRS Scandal, Day 176

Robert D. Flach is celebrating his 60th birthday with a sale.

 

Howard Gleckman,  As Budget Talks Start, Beware the Bogus Revenue Hikes (TaxVox) “But behind the scenes, Washington’s wink-and-nod crowd thinks it has a solution: Raise new tax revenue—at least on paper—without actually increasing taxes. In fact, some of the gimmicks on the table create even darker Halloween magic.”

Tax Justice Blog, Kansas: Dispatches from a Failing Experiment

 

Going Concern,  Career Conundrum: Is a Master’s Degree Worth It?  It’s all relative.  To me it was, because my it was in Accounting, while my  B.A. was in History — a noble field, but one with grim employment prospects.  If you have an undergrad degree, I’m not so sure it’s worth forgoing a year or two of salary.  If you don’t have a job anyway, it may be the edge you need.

 

Kay Bell, A colorful way to ease IRS notice fears:

Adam Chodorow, however, has an idea of how to ease such tax correspondence induced panic attacks.

Chodorow, a professor at Arizona State’s Sandra Day O’Connor College of Law, suggests color-coding so that taxpayers will immediately know the amount of tax trouble they are in. This, he says, could abate taxpayer stress.

If the IRS could be relied on to issue accurate notices, that would be lovely, but incorrect “red” notices would probably induce a rash of taxpayer heart episodes.

 

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Tax Roundup, 10/31/13: A scary Iowa tax proposal, just in time for Halloween!

Thursday, October 31st, 2013 by Joe Kristan

 

hatchJack Hatch’s income tax plan would raise taxes on all but very small businesses.  

It’s all in the spin.  My headline is just as accurate as the headline in the Des Moines Register on the tax plan announced by Senator Jack Hatch, a Democratic candidate for Iowa Governor.  The Register’s article, though, spins the way the candidate would like: “Jack Hatch’s income tax plan would give break to all but most wealthy Iowans.”  From the article:

Hatch’s plan would get rid of federal deductibility, which allows taxpayers to deduct federal taxes from their state return. His plan would also raise filing thresholds. It would raise the per-child tax credit from $40 to $500. Married couples who are both employed would get a new $1,000 a year tax credit.

And Iowa’s eight rates and brackets, which range from 0.36 percent to 8.98 percent, would be reduced to four.

The top rate would fall slightly to 8.8 percent, although the income at which that rate begins would be raised by 26 percent, according to an analysis of Hatch’s plan by the nonpartisan Legislative Services Agency. The lowest rate would be 3 percent.

Taxes would go up for Iowans who make an adjusted gross income above $200,000, the Legislative Services Agency analysis says. The wealthiest taxpayers would see a small drop in the highest marginal tax rate, but their taxes would go up because they’d lose federal deductibility.

There are two things I hate about this plan and the way it is covered.  First, it makes no mention that a tax on “the wealthy” is really a tax on business.  Most business income is now reported on individual returns:

Source: The Tax Foundation

Source: The Tax Foundation

 

And 72% of that is reported by taxpayers with AGI over $200,000:

20131031-2

Cutting through the soak-the-rich stuff, what he’s really proposing is a great big tax increase on business.  How that helps Iowa’s economy isn’t explained — I suppose because it doesn’t.

The other part I hate is the whole idea that hurting “the rich” on behalf of “the middle class” is presumed to be just fine.   Heck, let’s go shoplifting at Wal-Mart, they have plenty of money — and it’s for the middle class!

 

I suppose I couldn’t expect Sen. Hatch to embrace the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  I suspect it makes too much sense for any politician to embrace it.

 

This would be a good thing for Iowa: The Benefits of Independent Tax Tribunals (Cara Griffith, Tax Analysts Blog):

States are increasingly turning to independent tax tribunals. Most states now have either a judicial-branch tax court or an administrative-level tax tribunal that is independent of the state’s tax authority. Taxpayers and practitioners have pressed states for independent decision-making bodies for several reasons, including that the judges or administrative law judges who write decisions are impartial and knowledgeable in tax issues and that the opinions should more consistently and transparently apply the tax law because they will be published. 

Iowa, unfortunately, has only administrative tribunals and regular courts.  The judges know little about taxes, especially income taxes, and tend to defer to the State, even when it tortures law and logic.

 

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

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

TaxProf, NY Times: The Marginal Tax Rate Mess.  Even the New York Times is noticing the high implicit marginal tax rates on means-tested welfare programs, like the earned income tax credit:

As a result of losing eligibility for means-tested benefits, low-income and middle-income families sometimes experience much higher marginal effective tax rates (sometimes exceeding 90 percent) than those at the top of the income distribution. Phase-outs for any one program may not be large, but participation in several programs creates a cumulative effect. 

They “help the poor,” as long as they stay that way.

 

 

 

 

59pdhyef59pdhyefJoseph Henchman, Remembering the Deceased Iowa Pumpkin Tax You Helped End (Tax Policy Blog).

59pdhyefTaxGrrrl,  Social Security Benefits Will Not Keep Pace With Tax Contributions In 2014 

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Jana Luttenegger, Social Security Benefits to Increase in 2014 (Davis Brown Tax Law Blog)

Robert D. Flach,  HAPPY HALLOWEEN – SOME TREATS FROM THE SOCIAL SECURITY ADMINISTRATION

Phil Hodgen, Chapter 3 – Paperwork for Expatriates and Covered Expatriates

Kay Bell, Colorado taxpayer group files lawsuit to overturn candy tax

Me, IRA is to startup funding as dynamite is to kindling.  My new post at IowaBiz.com, the Des Moines Business Record Business Professionals Blog.

 

Christopher Bergin, What’s a UDITPA? (Tax Analysts Blog)

Andrew Lundeen, Scott Hodge,  The Income Tax Code Is More Progressive than It Was 20 Years Ago (Tax policy Blog).  ”The top 1 percent of taxpayers pay a greater share of the income tax burden than the bottom 90 percent combined, which totals more than 120 million taxpayers. In 2010, the top 1 percent of taxpayers—which totals roughly 1.4 million taxpayers—paid about 37 percent of all income taxes.”

Tax Justice Blog, Bruce Bartlett Is Wrong: New Conclusions on the Corporate Income Tax Change Nothing.  Nothing ever changes at TJB!

Government officials defend increased funding for their agencies.  Iowa police chiefs defend traffic cameras (KWWL.com)

 

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Tax Roundup, 10/30/2013: Beggars night day edition! And why IRAs are scary as start-up investors.

Wednesday, October 30th, 2013 by Joe Kristan
MST3K-2 lantern

Stop by for treats tonight. You can find us by Son’s MST3K-themed pumpkin.

The Des Moines area has an unusual tradition for trick-or-treating on October 30, rather than October 31.   On our “Beggars Night,” it’s customary for the little monsters to tell a joke.  A perennial favorite:

What’s a pirate’s favorite restaurant?

Aaaarghh-bys!

So drive carefully tonight!

 

Speaking of scary, think of having your IRA disqualified and taxed currently, with penalties, for engaging in a prohibited transaction.  That’s what happened to a Missouri man in Tax Court yesterday.

The taxpayer, a Mr. Ellis, rolled $320,000 out of his 401(k) and put it into a self-directed IRA.  The IRA than bought 98% of a corporation (an LLC that elected to be taxed as a corporation) to open a used-car lot, where he began working as the general manager.  It went badly.  From the Tax Court opinion:

In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business. Mr. Ellis would operate this business and use it as his primary source of income by paying himself compensation for his role in its day-to-day operation. Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that section 4975 was enacted to prevent.

The result? $163,000 of taxes and penalties on the $320,000 invested in the used car lot — which, of course, may well not be very liquid, seeing that it’s all invested in a closely-held corporation.

This case has an interesting twist to those of us who follow tax cases too closely.  The IRA plan was apparently the work of  a Kansas City law firm whose attempt to make their practice income largely tax-exempt by funneling it through an ESOP-owned S corporation was shot down in Tax Court in 2011.  I’m just guessing here, but the IRS may have taken a look at that firm’s clients after seeing how aggressive the firm was in using retirement plans to shelter business income.

It’s tempting to have your IRA invest directly to avoid the current tax and 10% penalty that can apply to an early withdrawal.  The results, though, can be a lot scarier than any trick-or-treater.

Cite: Ellis, T.C. Memo 2013-245.

 

59pdhyefMore scary.  Econoblogger Arnold Kling has thoughts on whether Healthcare.gov might be saved:

My opinion of the distribution of likely outcomes is that it is bimodal. There is a high probability that the exchanges will be working at the end of November. I think that there is an even higher probability that they will be working never.

The public pledge where the new savior of the site impresses Mr. Kling, but he thinks the design issues might be intractable.

Andrew Lundeen, Scott Hodge,  The Income Tax Burden Is Very Progressive (Tax Policy Blog):

About half of the nation’s income is reported by taxpayers who make less than $100,000, and half is reported by taxpayers who make more. However, taxpayers who make less than $100,000 collectively pay just 18 percent of all income taxes while those who make more pay over 80 percent of all income taxes.

They have a chart, of course:

20131030-2

 

Howard Gleckman, Who Benefits from Muni Bonds? It’s More Complicated Than You Think (TaxVox) “…while most of the benefit of the tax-exemption goes to high-income investors, lower-income households who hold taxable bonds in their 401(k)s also receive some advantage.”

 

But they’re ready to regulate preparers! TIGTA: IRS Cannot Account for 23% of its IT Assets (TaxProf).

 

Jason Dinesen asks Is There a Way to Protect Yourself from Tax Return Identity Theft?   Use common sense — but if someone in your family dies, ID thieves may be able to get government-published information enabling them to steal the deceased’s identity no matter what you do.

TaxGrrrl, Somebody’s Watching Me: IRS Criminal Investigations Ramp Up Efforts To Thwart Tax ID Thefts   

 

David Brunori offers Tax Advice for State Legislators of All Parties (Tax Analysts Blog).  There’s a lot there, including this:

Both parties should also give serious thought to greater reliance on the property tax. Yes, I know people hate that tax. I also know that politicians find it advantageous to attack it. But the property tax revolts of the late 1970s and the 1980s have badly damaged the fiscal structure of state and local governments.

Don’t expect either party to heed the advice.

 

William Perez,  47% of Individual Taxpayers Earn Under $30,000

TaxProf, The IRS Scandal, Day 174

High-fiber diet.  Tax identity thief who ate debit card evidence is convicted (Kay Bell)

From Phil Hodgen’s series on expat taxes: Chapter 2 – Are You An Expatriate?

Carlton Smith, Byers v Comm’r – CDP Venue In Courts Of Appeals May Be Upended (Procedurally Taxing)

 

Joseph Thorndike, It’s Time to Give Up on Tax Reform (Tax Analysts Blog):

Tax reform? Don’t bet on it. Not this year, and probably not next year either. Tax reform, like everything else in Washington, is on hold pending the resolution of a broader, highly polarized debate about the role of government in American society.

 

Robert D. Flach has his Tuesday Buzz on Wednesday this week.

 

 

20131025-237-yard month penalty for former Eagle Mitchell.  The sentence was handed down yesterday in a Florida federal courtroom, reports the Orlando Sentinel.

The former NFL wide-receiver blamed brain injuries suffered on the field after pleading guilty to a plot where he helped convince Milwaukee Bucks player to use a Florida preparer to file a refund claim, which would be split between the NBA player, Mr. Mitchell, and the preparer.  The claim was fraudulent, and the NBA player wasn’t charged.  Mr. Mitchell also allegedly used an LLC to conceal other fraudulent tax claims.  Brain injuries are funny things.

 

News from the Profession: Dancing Accountant Nearly Thrown Out of a Bank For Dancing To “Money, Money, Money”  (Going Concern)

 

 

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Tax Roundup, 10/29/13: The case against the research credit. And no tax break for bike-shares.

Tuesday, October 29th, 2013 by Joe Kristan
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Flickr image courtesy Windy_ under Creative Commons license

Martin Sullivan, ‘Extortion’ and the Research Credit (Tax Analysts Blog) is the first prominent tax commentator I’ve seen who sees the research credit the much the way I do (my emphasis):

The problem is not with the theory of the credit but with its execution. I have been around a while and have researched the research credit since its inception in 1981. My take is that the essential problem of the credit has only grown worse: It is impossible to find a practical definition of subsidy-worthy research in the 21st century. It is less clear than ever where corporate research ends and other innovation-inducing functions like design and software development, begin. There is little empirical work regarding why, in this modern economy in which investment spending defies categorization, some business-building activity should be subsidized and others not. This inability to target incentives to where they should go means scarce resources are inappropriately and arbitrarily assigned to certain activities, certain businesses, and certain industries while others are left in the cold. What was intended as an incentive for productive activity by clever scientists and engineers turns out to be an incentive for totally unproductive activity by clever lawyers, accountants and lobbyists.

So true — though the accountants do use clever engineers to help turn stuff businesses do anyway into “research.”  I’m convinced that the credit is almost entirely harvested by businesses doing what they would do anyway.

Repeal of the research credit could fund a reduction of approximately 1 percentage point in the corporate tax rate. The benefits of the credit as it works in practice are questionable. In contrast, a reduction in the corporate rate would undoubtedly be a big plus for America’s competitiveness.

That’s right.  The IRS is institutionally incapable of distinguishing between worthwhile “research” and other spending.  If the IRS can’t competently police a tax spiff, get rid of the spiff and lower the rates for everyone.

 

Andrew Lundeen, Scott Hodge,  About Half of Tax Returns Report Less than $30,000 (Tax Policy Blog)

The median taxpayer earns roughly $33,000. This means that half of the 145 million tax filers (about 72 million or so) earn less than $33,000 and half earn more. While only about 14 percent of taxpayers earn more than $100,000, they pay the vast majority of all income taxes in America today.

 20131029-1

Compare that with who pays:

20130530-1

In other words, The bottom half of the distribution’s income tax burden is actually negative.

 

TaxGrrrl,  10 Things You Need To Know About Getting Married & Taxes

Kay Bell, A clearer look at maximizing medical tax deductions

Paul Neiffer,  Setup Your Deferred Payment Contracts Now:

The election is on a contract by contract basis so it is important to have at least a couple contracts in the $20-30,000 range to allow for the correct amount of adjustments to income.  If you have only one contract for $150,000, that may not give you the best flexibility.   

It’s one of those sweet tax planning tools that would be bizarre and subject to penalties for most of us, but is just Tuesday for farmers.

 

20131029-2

Flickr image courtesy Galpalval under Creative Commons license

Robert W. Wood, Bike Share Programs Are Not Tax-Free, Says The IRS  (Via the TaxProf).  The IRS says bikes borrowed from rent-a-bike stands, like those in downtown Des Moines, can’t be a reimbursed as a “qualified transportation fringe benefit.”  In contrast, expenses of personally-owned bikes qualify.

 

Phil Hodgen is running a series on the tax effects of expatriating.  He’s gotten ahead of me, so I’ll start at the beginning and add a link every day, starting with  Chapter 1 – A Quick Overview of the Exit Tax.

Jack Townsend, Does Our Criminal Justice System Find Truth Well And What is the Tolerance for Error?  “The question is whether our traditional criminal justice system for finding truth by triers of fact — usually juries but sometimes judges — really do it well and how much confidence can we have that they do it well.”

 

Jeremy Scott, Revenue Divide Will Likely Derail Conference Committee (Tax Analysts Blog)

TaxProf,  The IRS Scandal, Day 173

Tax Justice Blog, PricewaterhouseCoopers Report Quietly Confirms Low Effective Tax Rates for Corporations But Directs Attention to Irrelevant Figures

Linda Beale,  Carried Interest — a tax privilege for the rich whose end time has come.  Except it’s not just for “the rich,” and it would do more harm than good.

 

Keith Fogg, Vince Fumo: IRS Finding of Jeopardy (Procedurally Taxing)  ”As mentioned in a previous post, the Service recently invoked the rarely used jeopardy assessment procedure against former state Senator Vince Fumo in connection with the activities leading to his criminal conviction.”

Robert D. Flach says it’s TIME FOR YEAR-END PLANNING.

 

News from the Profession:  “Is the CFO’s quitting time after 3 pm?” Coming to an Auditor’s Questionnaire Near You (Going Concern)

 

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Tax Roundup, 10/25/13: No production deduction for direct-mailer. And: the brain-damage excuse.

Friday, October 25th, 2013 by Joe Kristan


199
Direct mail operator fails to qualify for “Domestic Production Activity Deduction.”  
One of the sillier parts of the tax law is the 9% deduction for nothing given to “producers” of manufactured, constructed, raised or mined property.  If all you do is manufacture, you get 9% off the top of your taxable income under Section 199.

In a modern interconnected economy, distinguishing between “manufacturing” and other activities is silly.  The law is made more silly because it has special interest provisions allowing some architects and engineers to take the deduction.  Sure you need them for a construction project, but just try getting a building up without lawyers and accountants, too.

The law’s unwise distinction between “production” activities and other activities encourages taxpayers to try to qualify, and forces the courts to try to draw distinctions.  That happened yesterday when the Tax Court looked at a direct mail operator’s Section 199 deduction.  From the Tax Court opinion:

 During 2005, 2006, and 2007, ADVO distributed direct mail advertising in the United States. Direct mail advertisers such as ADVO distribute advertising material through the U.S. Postal Service (USPS) to residential recipients, who are the targeted potential customers for the products and services sold by ADVO’s clients, the advertisers. The advertising material can be either “solo direct mail” or “cooperative direct mail”. For solo direct mail, the printed advertising material of a single advertiser is delivered in a stand-alone envelope or as a postcard to a residential recipient. For cooperative direct mail, also known as a shared mail package, the printed advertising material for several different advertisers is consolidated into a single delivery mechanism (such as an envelope or sleeve) and delivered as a single unit to residential recipients.

The court had to go through an elaborate analysis of whether ADVO was a “manufacturer.”  Judge Wherry concluded:

After careful review of all of the aforementioned factors in the light of the specific facts and circumstances of this case, we find that ADVO did not have the benefits and burdens of ownership while the advertising material was printed.

This implies ADVO was a “contract manufacturer,” and that its customers might have qualified.  It also implies that if ADVO had structured its paperwork differently, it might have won.  If this deduction is repealed in return for lower rates for everyone, we’ll all win.

Cite: ADVO, Inc. and Subsidiaries, 141 T.C. No. 9

Related: TREASURY ISSUES ‘PRODUCTION DEDUCTION’ PROPOSED REGULATIONS and LINK TO SECTION 199 POWERPOINT SLIDES

 

Iowa announces business property credit applications open.  From a Department of Revenue Press Release:

Applications for credit against 2013 property tax assessments must be received by the county or city assessor by January 15, 2014.  The actual amount of credit each property unit will receive depends in part upon the total value of all property units and the average consolidated rates in each unit.  The credit calculation is designed to spend ninety-eight percent of the amount appropriated by the Legislature to the Business Property Tax Credit Fund.  For the first year of the credit $50 million was appropriated to the Fund.  The Legislative Services Agency has estimated that the maximum first year credit amount will be approximately $523.

It applies to “certain commercial, industrial, and railroad properties.  More information here.

 

Careful fiscal stewardship.  A judge awarded $7 million in attorney fees for the legal team that forced Des Moines to refund $40 million in illegally-collected taxes.  The city fought the refund to the supreme court, so they incurred hefty legal fees on top of those they are paying for the plaintiffs.   Well done, Des Moines!  It could have been worse, as the attorneys requested twice the amount — and some attorneys in the story linked above think they may get it on appeal.

It will be interesting to see whether this is an issue in next month’s city elections.

 

Andrew Lundeen,  Income Taxes Account for the Largest Share of Federal Revenue (Tax Policy Blog):

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Paul Neiffer, 180 Months Means 180 Months!:

In Estate of Helen Trombetta vs. Commissioner, the Tax Court essentially ruled creating a grantor trust with retained interests having a term of 180 months, you better make sure you live for at least 181 months if you want to save on estate taxes.

Hang in there, in other words.

 

Jason Dinesen, Insolvency and Canceled Debt: Make Sure You Can Prove It!  You really have to be tapped out to exclude debt-cancellation income from taxes.

TaxProf, The IRS Scandal, Day 169

Christopher Bergin, Loving You Is Easy (Is It?) (Tax Analysts Blog).  He unwisely thinks IRS regulation of tax preparers will do more good than harm.

Oh, boy.  New Comprehensive Tax Reform Plan from Citizens for Tax Justice (Tax Justice Blog)

Jana Luttenegger, Estate Planning Awareness Week, Oct 20-26 (Davis Brown Tax Law Blog)

Kay Bell, Obamacare to blame for the 2014 tax filing season delay?

Jack Townsend, Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes  Given the alternatives, confinement to Switzerland isn’t the worst thing that could happen.

 

Quotable.  David Henderson:

By preventing insurance companies from pricing for pre-existing conditions, Obama has almost destroyed the market for individual insurance. He has taken one of the few parts of the health care that worked pretty well–the market for individual insurance–and badly wounded it. Unless this part of ObamaCare is repealed, we will still have a mess on our hands.    

Sadly, that magical thinking provision will be the hardest to undo.

 

Catch your Friday Buzz from Robert D. Flach!

 

TaxGrrrl,  Vatican Suspends ‘Bishop Of Bling’ Over $40 Million Home Renovation.  How?  ”In Germany, churches are largely funded by taxes – there is no direct prohibition between mixing Church and State as there is in the United States.”

 

News from the Profession: McGladrey Tax Associate Opts for Pedantry in His Farewell Email (Going Concern)

 

20131025-2My brain made me do it.  Former football star says brain injury spurred tax evasion.  WFTV.com reports:

That former football star, Freddie Mitchell, hoped an Orlando federal judge would show him mercy Tuesday.

Mitchell, a retired Philadelphia Eagles wide receiver, was convicted in an elaborate tax fraud scheme in which he cheated the government out of millions of dollars.

AccountingWeb.com reports that Mr. Mitchell pleaded guilty to help recruit an NBA player for whom a co-conspirator claimed false refunds, which Mr. Mitchell claimed a share.  He allegedly claimed over $2 million in other false refunds through an LLC.

So the brain was damaged enough to commit crime, but not so much that it kept him from a drawn-out plan to defraud people and to use an LLC to do it.  It’s funny how nobody ever blames brain injuries for, say, giving their life savings to charity.

 

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Tax Roundup, 10/18/13: IRS is back, but the lines may be busy. Happy Fall Friday!

Friday, October 18th, 2013 by Joe Kristan

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The Tax Court had two weeks to work on it, and they issued no decisions yesterday.  Slackers.

So audits resume, notices come out again, and the IRS can resume giving 20%-accurate answers to taxpayer questions.  Some reports from the re-opening:

Kay Bell, IRS employees are back, but temporary shutdown deal could mean 2014 tax filing season trouble:

But I fear that come Jan. 16, we’ll be back in a federal government shutdown situation that could pop today’s celebratory grand federal facilities’ reopening balloon. 

And while a government shutdown, even a partial one, is a problem for almost every one at any time, it will be major hassle for millions of taxpayers in January.

That’s the month that that federal tax filing season begins.

Yet another reason to dread next tax season.

 

TaxGrrrl, IRS Asks Taxpayers For Patience As They Tackle Shutdown Backlog   

William Perez, The IRS is Open Again.

Howard Gleckman, One Modest Path to a No-Drama Budget Deal (TaxVox)

Tax Justice Blog, Shutdown Ends with Deal Creating Yet Another Budget Panel.  TJB wants them to just get on with another tax increase.

 

20120830-1Joseph Henchman, Elia Peterson, Oregon Changes Tax Structure for Most Businesses (Tax Policy Blog)

Driven by rhetoric about cutting taxes for small businesses but in reality just adding more complexity and non-neutrality to the tax code, these changes make Oregon the third state to adopt a special income tax system for pass-through businesses. Kansas offers a complete exclusion for all pass-through business income, resulting in a non-neutral situation where income from corporate profits is taxed twice, wage income is taxed once, and most small business is not taxed at all. Ohio has enacted a 50 percent exclusion for the first $250,000 of pass-through income, adding complexity to an already non-neutral carveout. Oregon’s is more transparently an effort to tax corporations while reducing tax burdens for some (but not all) pass-through entities.

The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would repeal the corporate income tax altogether and allow S corporations the option of being treated as C corporations for Iowa purposes.

 

Jack Townsend,  Quiet Disclosures Increasingly on IRS’s Radar Screen.  He notes a Tax Analysts article ($link) that says the IRS is looking closely at taxpayers with foreign accounts who come in from the cold without going through “Offshore Voluntary Compliance Initiative.”

Brian Mahany, Lawyer Indicted For Estate Fraud And Tax Evasion

Keith Fogg, Erroneous Refund Case Reveals the Intersection of Bankruptcy and Tax Procedure (Procedurally Taxing). “The first thing that caught my eye here was the timing of the refund.  It was issued more than 14 years ago. ”

I almost forgot! Robert D. Flach has your Friday Buzz!

 

William McBride, JCT: Corporate Tax Falls Partly on Labor (Tax Policy Blog):

While this is progress, it does not in fact reflect the middle range of the current economic literature. At least since the 1990s, most economists have recognized that the burden of corporate taxes fall mainly on labor in the long run. 

You can’t tax the boss without taxing his employees.

 

 

Going Concern: This TaxMasters Video Is of the Devil.  It truly is.

Peter Reilly, Study Shows Taxpayers With Balance Due More Likely To Cheat.   The prospect of writing a check is apparently more of a motivator than the lure of a fraudulent refund.

News from the Profession: Michigan CPA Charged with Murdering Michigan CPA (Going Concern)

 

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Have a great weekend!

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Tax Roundup, 10/15/2013: Do or die day. And so long, 2009!

Tuesday, October 15th, 2013 by Joe Kristan


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Today is it.
 Extended 2012 1040s are due today.  If you are still digging for that last charitable deduction or waiting on that last K-1, give it up.    It’s better to file an imperfect return on time than a perfect one late.  You only have one day left to file on-time, but you have three years to file an amended return if you need to.  As Robert D. Flach reminds us, that’s true even if you owe money but lack the cash to pay up.

If you can, you should e-file.  That removes all doubt about whether you have filed on time.

If you are paper-filing, you can prove timely filing by using certified mail, return receipt requested, and getting a postmarked mailing receipt at the post office.  Some people scoff, but it works.  Just this year a client avoided a nearly $10,000 late filing penalty by saving the Certified Mail receipt.

If you prefer, or if you don’t finish up before the post office closes, you can go to your late night FedEx or UPS Store and use a receipt from a designated private delivery service to document your timely filing.  If you use a private delivery service, be sure to send it to the Service Center’s street address, and be sure to use the right product from the delivery service.

 

Today is not just the deadline for extended 2012 returns.  It’s also the last possible day to claim a refund from an extended 2009 return filed at the deadline for that year.   The “mailbox rule” — timely-mailed is timely-filed —  also applies here, and you’d be foolish to not use certified mail for a last-day refund claim.

It’s also the last day the IRS can assess additional tax for 2009 extended returns.  Thanks, shutdown!  The statute remains open for 2009 in the case of a “substantial understatement,” which has a six-year statute of limitations.  The statute for assessment never closes when fraud is involved.

 

William Perez, IRS Shut Down, Week 3

TaxProf, The IRS Scandal, Day 159

Kay Bell, Wyoming, 5 other western states have best business taxes

Jack Townsend, For Tax Evasion, Is the Element “Tax Deficiency” or “Tax Due and Owing”. ”The crisp answer to the question is ‘yes.’”

 

News you can use.  Shutdown Gives Tax Scammers New Opportunities To Steal (TaxGrrrl)

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